PixArt Imaging Inc Annual Report-English...2、Financial Analysis over the Last Five Years ..... 45...

OTC Code:3227

PixArt Imaging Inc

2009 Annual Report

Taiwan Stock Exchange Market Observation Post System: http://newmops.twse.com.tw PixArt annual report is available at http://www.pixart.com.tw

Printed on March 31, 2010

Notice to Readers: The reader is advised that the annual report has been prepared originally in Chinese. The English version is directly translated from Chinese version.

I、Spokesperson：

Name：Mei-Wei Lo Title:：Senior Department Manager, Finance & Accounting Dept. TEL：886-3-579-5317 E-mail：[email protected]

II、Deputy Spokesperson： Name：Stella Tsai Title:：Deputy Manager, Finance & Accounting Dept. TEL：886-3-579-5317 E-mail：[email protected]

III、PixArt Imaging Inc. Address & Telephone Number： Headquarters Address：5F, No.5, Innovation Road I, Hsinchu Science Park, Taiwan, R.O.C. 300 TEL：886-3-579-5317

IV、Securities Dealing Institute: Company Name：Horizon Securities Co., LTD. Address：3F, No.236, Sec. 4, Xinyi Rd, Taipei, Taiwan, R.O.C. TEL：886-2-2326-8818 Website：www.honsec.com.tw

V、Names of Independent Auditors for Financial Statements in Recent Years, Their Office Name, Address, Website and Telephone Number： Office：Ernst & Young Names：Yi-Hui Huang、Hsin-Min Hsu Address：9F, No.333, Keelung Road, Sec. 1, Taipei, Taiwan, R.O.C. TEL：886-2-2720-4000 Website：www.ey.com/tw/zh_tw

VI、Name of Overseas Securities Dealers and Methods to Inquire about Overseas Securities：Nill

VII、PixArt Website：www.pixart.com.tw

ANNUAL REPORT 2010

TABLE OF CONTENTS

I、Letter to Shareholders ........................................................................................................................ 1

II、Company Profile ................................................................................................................................ 2

1、Date incorporated ..................................................................................................................... 2

2、Milestones .................................................................................................................................... 2

III、Corporate Governance..................................................................................................................... 4

1、Organization................................................................................................................................ 4

2、Directors and Supervisors and Officials ................................................................................... 6

3、Corporate Governance Report ................................................................................................ 14

4、Disclosure of Auditing Fees...................................................................................................... 19

5、Changes in Independent Auditors ........................................................................................... 19

6、PixArt’s Chairman, President, CFO, or Director of accounting division working in the accounting firm of the appointed independent auditors or the related parties within the past year................................................................................................................. 19

7、Changes in shareholding of directors, supervisors, officers and major shareholders holding more than 10% shares for the preceding year to the date of the annual report printed .......................................................................................................................... 20

8、The relationship between any of the Company’s top ten shareholder................................. 21

9、Long-Term Investment Ownership......................................................................................... 22

IV、Capital Raise ................................................................................................................................... 23

1、Capital and Shares .................................................................................................................... 23

2、Status of Corporate Bonds ....................................................................................................... 29

3、Status of Preferred Stocks........................................................................................................ 29

4、Status of GDR/ADR.................................................................................................................. 29

5、Status of Employee Stock Option ............................................................................................ 30

6、Status of New Share Issuance in Connection with Mergers and Acquisitions.................... 31

7、Financing Plans and Implementation ..................................................................................... 31

V、Business Activities ............................................................................................................................ 33

1、Business Scope........................................................................................................................... 33

2、Market and Sales Overview ..................................................................................................... 37

3、Employees .................................................................................................................................. 41

4、Environmental Protection Expenditure.................................................................................. 41

5、Labor Relations......................................................................................................................... 41

6、Important Contracts ................................................................................................................. 42

VI、Financial Information .................................................................................................................... 43

1、Condensed Balance Sheet and Income Statement ................................................................. 43

2、Financial Analysis over the Last Five Years .......................................................................... 45

3、Supervisors’ Review Report..................................................................................................... 46

4、Financial Statements................................................................................................................. 47

5、Consolidated Financial Statements ......................................................................................... 98

6、The Effect of Insolvency of the Company and Affiliates on the Financial Status of the Company.................................................................................................................................. 146

VII、Financial Status, Operating Results and Status of Risk Management .................................. 147

1、Financial Status....................................................................................................................... 147

2、Operating Results.................................................................................................................... 148

3、Cash Flow Analysis ................................................................................................................. 149

4、The Effect of Major Capital Expenditure on Financial Position and Operation ............. 149

5、Direct Investment Policy, Reasons for Profit or Loss, Correction Plan and Investment Plan for the Coming Year .................................................................................................. 149

6、Risk Management ................................................................................................................... 149

7、Other Important Notice.......................................................................................................... 151

VIII、Special Notes .............................................................................................................................. 152

1、Profiles of Affiliates and Subsidiaries ................................................................................... 152

2、Status of Private Placement Securities.................................................................................. 156

3、Acquisition or Disposal of PixArt shares by Subsidiaries ................................................... 157

4、Other Necessary Supplement................................................................................................. 157

5、Events regulated in Article 36-2-2 of the Securities and Exchange Laws ....................... 157

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I. Letter to Shareholders Dear Shareholders：

PixaArt Imaging Inc. posted total revenue of NT$3.75 billion in 2009, a 21.9% decrease from 2008 (NT$4.85 billion). The net income decreased by 37.6% to NT$848 million from NT$1.36 billion in 2008. Earnings per share was NT$6.72 in 2009 while return on equity was 15.6%.

2009 was a difficult year in which the financial crisis led to a global slowdown. PixArt Imaging’s products were, to varying degrees, adversely affected, particularly in the first half of the year. That impact in 1H’09 was the main reason behind the decline in both revenue and net income compared the previous year. Of PixArt’s products, toys and gaming-related products were affected the most. In spite of the unfavorable market conditions, PixArt still showed solid profitability and positive cash flow with the effort of its tireless staff. In addition, certain product lines demonstrated resilience in difficult economic conditions. For example, computer mice posted historical highs in terms of both shipment and sales. Positive results were also seen in terms of new product research and development. While more competitive products were introduced in the existing product lines, optical touch products went into the mass production phase in 3Q2009. It is also worth mentioning that PixArt ranked 75 out of 100 in patent applications by domestic companies according to the Ministry of Economic Affair’s Intellectual Property Office, which demonstrates PixArt’s dedication and efforts in the area of research and development.

As the global economic gradually recovers, PixArt began to see positive signs in the end-user market in the second half of 2009, particularly in the emerging markets. Various economic indicators also show that the global economy began to stabilize and is on its way to recovery. On the other hand, unemployment rates remain high and consumer confidence remains low in developed markets. PixArt must remain cautious in the face of uncertain economic trends. In the coming year, PixArt will continue its efforts to bolster its core competitiveness, improve product quality, diversify and strengthen its product lines, and enhance customer satisfaction. Through rigorous output control, PixArt aims to manage inventory more effectively, improve yield rate, and lower cost. At the same time, PixArt will maintain its competitive edge in terms of wafer processing and delivery through cooperations with wafer foundries and IC packaging houses. As for innovation, in addition to improving current product lines, PixArt will continue to develop a wide range of HMI (human-machine interface) products by leveraging its technological competitiveness in order to fuel its long-term growth. On the marketing front, PixArt will continue its tradition of providing customer-centric complete solutions with a strong emphasis on high quality customer service and build a win-win partnership with our customers. More importantly, PixArt will continue to create shareholder value through its practical and sound approach to business and its commitment to improving its competitiveness.

We would like to thank the shareholders for their continued support and good will and also wish them continued health and happiness!.

Chairman Sen-Huang Huang

- 2 -

II. Company Profile

1.Date incorporated Jul 13, 1998

2.Milestones J u l . 1 9 9 8 Company was founded with a registered capital NTD 500 million

Apr. 1999 Acquired 100% ownership of Condorvision Technology, Inc. (renamed to PixArt Technology,

Inc.later), an U.S. company specializing in CMOS Sensor design.

May. 1999 Obtained the permission to enter into Hsinchu Science Park from the Science-Based Industrial

Park Administration.

J u l . 1 9 9 9 Received grant for "Minimized CMOS Image Sensor Product Development" from the Small

Enterprises R&D Project of Industrial Development Bureau of Ministry of Economic Affairs.

J u l . 2 0 0 0 Successfully developed 0.35μm color/mono CIF Sensor.

J an . 2 00 1 Successfully developed 0.35μm color/mono VGA Sensor.

Apr. 2001 Successfully developed ultra-low power color/mono QQVGA

Nov. 2001 Received ISO9001:2000 certification with total quality system installation in place.

Dct . 2001 Successfully developed color/mono QQVGA with Twin-Turbo 8032 SOC chip.

Mar. 2002 Successfully developed the wired and wireless optical mouse chips.

Apr. 2002 Successfully developed 0.25μm 1.3 M pixel CMOS Image Sensor.

Otc . 2002 Stocks issued publicly.

Apr. 2003 Successfully developed CIF PC-Camera SOC IC.

J u l . 2 0 0 3 Elected two Independent Directors and one Independent Supervisor

J u l . 2 0 0 3 "QQVGA Sensor with Twin-TURB 08032 Micro Processor" received The Sixth Outstanding

Photonics Award.

J u l . 2 0 0 3 Listed as Emerging Stock on Gretai stock market, under the ticker of 3227.

Aug. 2003 Successfully developed 0.25μm color/mono CSP VGA Sensor.

Sep . 2003 Successfully developed high-performance optical mouse chip.

Feb . 2004 Successfully developed 0.25μm 480*640 VGA Sensor

Feb . 2004 Successfully developed0.25μm VGA YUV Sensor.

Apr. 2004 Successfully developed PS2 optical mouse SOC chip.

J u l . 2 0 0 4 Successfully developed 0.18um, 1/3 inch, 1.3M pixel & 0.25um, 1/2 inch, 2.1M pixel CMOS

Image Sensor chips

J u l . 2 0 0 4 Successfully developed VGA PC-Camera SOC chip.

Sep . 2004 Successfully developed USB optical mouse SOC chip.

Sep . 2004 Successfully developed 0.18μm 1/3 inch, 3M pixel CMOS Image Sensor for camera phone

devices.

N o v . 2 0 0 4 Awarded "The 2004 R&D Accomplishment Award" by the Science-Based Industrial Park

Administration.

J an . 2 00 5 Awarded "The 3rd Annual Golden Root Award" by Taiwan Industrial Technology Association.

J an . 2 00 5 Successfully developed multi-objects tracing chip for game platform application.

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J an . 2 00 5 Successfully developed VGA DSP chip for mobile phone application.

F e b . 2 0 0 5 Successfully developed Pixart’s first laser mouse chip.

Mar. 2005 Successfully developed 1.3M pixel DSP chip for mobile phone application.

Jun . 2005 Awarded "The Eighth Outstanding Photonics Product Award" for 1/3 inch 3M pixel CMOS

Image Sensor for mobile phone application.

Jun . 2005 Exclusively licensed for high-technology laser optical mouse and image tracing technology by

OPDI, Denmark.

Dec. 2005 Awarded "The 12th Small & Medium Enterprises Innovation Award" for composite audio and

video multimedia PC-Cam SOC IC by Ministry of Economic Affairs, R.O.C.

Mar. 2006 Introduced customized multi-objects tracing chip for Nintendo Wii.

May. 2006 Listed on GreTai security market, under the ticker of 3227.

Jun . 2006 Introduced 4T 0.3M CMOS Image Sensor. Successfully upgrade to 4T technology.

J u l . 2 0 0 6 Shipping over 100 million pieces of optical mouse chip.

J u l . 2 0 0 6 Concluded patent license agreement with Avago with respect to optical mouse related patents.

Sep . 2006 Awarded "The 14th Industrial Technology Advancement Award-Excellent Enterprise".

Dec. 2006 Received Certificate of Green Product Management System.

Mar. 2007 Introduced 4T 2M CMOS Image Sensor.

Mar. 2007 Introduced 0.18μm VGA PC-Cam SOC with built-in microphone.

Aug. 2007 Introduced PC-Cam USB 2.0 Controller.

Oc t . 2007 Awarded "R&D Accomplishment Award 2007" by the Science-Based Industrial Park

Administration.

Oct . 2007 Introduced 2M pixels DSP chip with Audio/Video codec for mobile phone application.

Dec. 2007 Accumulated sold optical mouse chips reached 200 million units.

Feb . 2008 Introduced small-form-factor Laser mouse.

Mar. 2008 introduced small-form-factor USB/PS2 Laser mouse SOC.

Apr. 2008 Introduced optical gaming mouse.

J u l . 2 0 0 8 Mass production of NB Camera Sensor IC.

Sep . 2008 Introduced LED gaming mouse.

Sep . 2008 Introduced Optical Finger Mouse.

Jun 2009 Introduced Optical Touch Sensor for Quanta Computer.

Jun 2009 Licensed for patented touch technology from SMART Technologies.

Jun 2009 Cooperation with customer on developing Distance Measure Sensor technology.

Dec 2009 Successfully developed Human Sensing Device.

- 4 -

Chairman & President

R & D Manufacture Engineering

Finance & Accounting Dept.

Administration Dept.

Supervisors

Shareholders’ Meeting

Board of Directors

Sales & Marketing Div.

Internal Auditor

III. Corporate Governance

1. Organization (1)Organization Chart:

- 5 -

(2)Business of Key Departments：

Department Business

Chairman & President

a. Plan the Company’s business operations and all related mattersb. Plan the Company’s product development and all related

matters, such as execution and coordination c. Oversee business operations from all departments and

coordinate resource allocation for each department d. Responsible for legal matters, patent filing, and management e. Responsible for IT system maintenance and management

Manufacture Engineering

a. Responsible for problems related to product engineering b. Responsible for matters related to manufacturing outsourcing c. Collect and analyze data on quality d. Handle customer complaints e. Implement and ensure quality control f. Shipment management

R & D

a. Responsible for new product and technology developments b. Responsible for ASIC product design an development for

customers c. Responsible for CAD and layout process for product design

Sales & Marketing Div.

a. Product marketing and market development b. Marketing strategy and planning c. Gather market information d. Handle customer complaints

Finance & Accounting Dept.

a. Accounting and budget management b. Fund management c. Tax-related issues d. Stock-related affairs

Administration Dept.

a. Stipulate policies and procedures for human resources b. General procurement and general affairs. c. Employee training and recruitment d. Employee welfare management

Internal Auditor

a. Responsible for inspecting and evaluating the reliability and effectiveness of the Company’s data on business operations and internal control

b. Make suggestions for improvement for the betterment of business operations

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2. Directors and Supervisors and Officials： (1)Profiles of Directors and Supervisors

a. Director and Supervisors’ information table Apr. 11, 2010 / Unit: Share

Shareholding whenelected Current shareholding

Spouse and underage children

shareholding

Shareholding under

the names of other parties

Other executives, directors or

supervisors who are spouse or relative within the second degree of kinship Title Name Date

elected Term Date firstelected

shares

%

shares

%

shares

%

shares

%

Education and experience

Other positions in the Company and in other

companies

Title

Nam

e

Relation

Charirman Sen-Huang Huang 2008.06.13 3 yrs 1998.07.02 2,294,423 1.96% 2,418,686 1.85% - - - --BS, Electronic Engineering, National Taiwan University

-Director of MFG Div., UMC.

-President, PixArt -Chairman of Yuan Xiang Investment Corp. -Chairman of Yuan-Feng Investment Corp-Chairman of PrimeSensor Technology Inc.

- - -

Director Jason Lu 2008.06.13 3 yrs 2007.07.27 826,914 0.71% 971,933 0.74% 49,789 0.04% - -

-MS,Electronic Engineering, National Chiao Tung University

-Director of Sales & Marketing Div., PixArt.

-Vice President, PixArt -Director of Yuan Xiang Investment Corp.-Director of Yuan-Feng Investment Corp -Director of PrimeSensor Technology Inc.

- - -

Company represented by

Jason Lu Fortune Venture Capital Corp.

2008.06.13 3 yrs 2002.09.25 14,188,389 12.10% 13,102,238 10.02% - - - - - - - - -

Director Victor Hsu 2008.06.13 3 yrs 2008.06.13 - - - - - - - --MBA, The city University of the New York,USA

- Manager of Finance Div., UMC. -Manager of Finance Div, Unimicron - - -

Company represented by

Victor Hsu Unimicron Technology Corp.

2008.06.13 3 yrs 2008.06.13 2,209,432 1.88% 1,640,716 1.25% - - - - - - - - -

Director Ming-De Li 2008.06.13 3 yrs 2005.06.27 - - - - 50,494 0.04% - - -BS, Chemical Engineering, Chinese Culture University

-Chairman of Ying Jiu EnterpriseCorp and YingTong Enterprise Corp. -Director of YingFa Industrial Corp.

- - -

Director Kuan Chun 2008.06.13 3 yrs 2008.06.13 - - - - - - - --MBA, Southern New Hampshire University-Director of Finance Div, UMC

-Director of Finance Div, AUO

-CFO, KYEC -Independent director of IC Plus Corp. - Independent director of Subtron Technology Corp. -Independent director of ITE Tech Inc. -Supervisor of Materials Analysis Technology Inc.

- - -

Supervisor Sheng-Cheng Chou 2008.06.13 3 yrs 2007.01.02 - - - - - - - - -National Taipei College of Business -Manager of Finance Div, Novatek - - - Company

represented by Sheng-Cheng

Chou

Novatek Microelectronics Corp.

2008.06.13 3 yrs 2005.06.27 2,068,705 1.76% 2,172,708 1.66% - - - - - - - - -

Note：Current shareholding % is caculated based on 130,786,914 issued shares。

- 7 -

b. Major shareholders of PixArt’s director or supervisor that is a juristic person shareholder Apr.11.2010

Director or Supervisor Major Shareholder of the Director or Supervisor Sharholding (%) Fortune Venture Capital Corp. United Microelectronics Corp. 99.99%

United Microelectronics Corp. 19.08% Nanshan Life Insurance Co.,Ltd. 2.08% Public Service Pension Fund 2.71% Cathay Life Insurance Co.,Ltd. 1.84% Labor Pension Fund (New System) 1.83% Cathay Ragonet Investment Trust Fund 1.82% Bureau of Labor Insurance 1.79% Chunghwa Post Co.,Ltd. 1.57% Allianz Global Investors Selections RCM Little Dragons Fund 1.44%

Unimicron Technology Corp.

(The shareholdings are as of Aug. 6,2009)

Domestics fund A 1.35% United Microelectronics Corp. 10.44% Chunghwa Post Co.,Ltd. 2.62% Zhen-Fu, Li 2.04% Trustee account of JP Morgan Chase Bank-ABP Pension Fund Investment 1.95%

Public Service Pension Fund 1.56% Tai-Shung ,Ho 1.43% Nanshan Life Insurance Co.,Ltd. 1.38% Hontai Life Insurance Co.,Ltd. 1.35% Labor Pension Fund (New System) 1.29%


(The shareholdings are as of Aug. 11,2009)

Labor Pension Fund 1.20% Major shareholders of director’s or supervisor’s major shareholder that is a juristic person

Name Major Shareholders Shareholding %

Citicorp Financial Service Ltd., as representative of holders of the ADRs

8.84%

Hsun Chieh Investment Co., Ltd. 3.40% Silicon Integrated Systems Corp. 2.43% Deutsche Bank AG 2.14% AllianceBernstein International Value Fund 1.30% Sanford Bernstein Emerging Markets Value Portfolio 1.00% Administrative Committee, Yao Hua Glass Co., Ltd. 0.84% Chunghwa Post Co.,Ltd. 0.82% Dimensional Emerging Markets Value Fund Inc. 0.82%

United Microelectronics Corp.

(The shareholdings are as of Jun 10,2009)

JPMorgan Chase Bank N.A. Taipei Branch in custody for ABU DHABI Investment Authority

0.71%

- 8 -

c.Directors and Supervisors’ Professional Qualifications and Independence Analysis：

With five or more years of experience and the following professional qualifications Independence Status (Note 5)

Qualifications

Name

Lecturer or above of business, law

, finance, accounting or other subject related to com

pany activity in a junior college or above

Qualification of

Justice, Procurator, A

ttorney, CPA,

Specialist or Technician of N

ational Exam

ination in Corporate Business Related Fields

Work experience in

business, law,

finance, accounting or otherst related to com

pany activity

1 2 3 4 5 6 7 8 9 10

Number ofCompaniesalso Serves

as Independent

Director for

Sen-Huang Huang 0 Jason Lu （Note 1） 0 Victor Hsu （Note 2） 0

Ming-De, Li 0 Kuan,Chun 3 Sheng-Cheng Chou （Note3) 0

Note 1：The representative of Fortune Venture Capital Corp.. Note 2：The representative of Unimicron Technology Corp. Note 3：The representative of Novatek Microelectronics Corp. Note 4：For those directors and supervisors who match the condition listed below during and two years before assuming period, “ ” is marked in the appropriate space.

(1) Not an employee of the Company or any of its affiliates; (2) Not a director or supervisor of the Company or any of its affiliates. The same does not apply, however, in cases

where the person is an independent director of the Company, its parent Company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares;

(3) Not a natural-person shareholder who holds shares, together with those held by the person's spouse, underage children, or held by the person under others' names, in an aggregate amount of 1 % or more of the total number of issued shares of the Company or ranking in the top 10 in holdings;

(4) Not a spouse, relative within the second degree of kinship, or lineal relative within the fifth degree of kinship, of any of the persons in the preceding three subparagraphs;

(5) Not a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total number of issued shares of the Company or that holds shares ranking in the top five in holdings;

(6) Not a director, supervisor, officer, or shareholder holding 5% or more of the shares, of a specified Company or institution that has a financial or business relationship with the Company;

(7) Not a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, Company, or institution that, provides commercial, legal, financial, accounting services or consultation to the Company or to any affiliate of the Company, or a spouse thereof;

(8) Not having a marital relationship, or a relative within the second degree of kinship to any other director of the Company;

(9) Not been a person of any conditions defined in Article 30 of the Company Law, (10)Not a governmental, juridical person or its representative as defined in Article 27 of the Company Law.。

- 9 -

(2) Managers’ Information Apr. 11, 2010 / Unit: Share

Shareholding

Spouse and underage children

shareholding

Shareholding under

the title of a third party

Managers who are spouse or second-

degree relative Title Name Date appointed

Shares % Shares % Shares %

Experience & Education Serves concurrently as

Title Name Relation

President Sen-Huang Huang 1998.06.01 2,418,686 1.85% －－－－

-BS, Electronic Engineering, National Taiwan University

-Director of MFG Div., UMC

-Chairman of Yuan Xiang Investment Corp.-Chairman of Yuan-Feng Investment Corp -Chairman of PrimeSensor Technology Inc.

－－－

Vice President Jason Lu 2006.01.16 971,933 0.74% 49,789 0.04% －－ -MS,Electronic Engineering, National Chiao Tung University

-Director of Sales & Marketing Div., PixArt

-Director of Yuan Xiang Investment Corp. -Director of Yuan-Feng Investment Corp -Director of PrimeSensor Technology Inc.

－－－

Director Vincent Yen 2008.02.26 143,210 0.11% －－－－ -Ph,D of ,Electronic Engineering, National Chiao Tung University

-R&D Vice Director, Fitipower Integrated Technology Inc

－－－－

Director Ming-Tsan Kao 2008.12.16 65,343 0.05% －－－－

-MS, Electronic Engineering, San Clara University，USA

-R&D Manager, Imagia Technology Co., Ltd. －－－－

Senior Department Manager, Finance & Accounting Dept.

Mei-Wei Lo 2007.07.27 15,953 0.01% －－－－ -MBA, National Chengchi University

-Administration Dept. Vice Director,Aimtron

Technology Corp.

-Director of Yuan Xiang Investment Corp. -Director of Yuan-Feng Investment Corp -Director of PrimeSensor Technology Inc.

－－－

Note：Shareholding % is caculated based on 130,786,914 issued shares。

- 10 -

(3) Remunerations Paid to Directors, Supervisors, President and Vice President： a. Remunerations Paid to Directors：

Dec.31.2009；Unit: K Shares / NT$1,000 Remunerations paid to directors Compensations earned as employee of PixArt or affiliates of PixArt

Salary(A) Retirement Pension (B)

(Note 3)

Compensation from profit sharing

(C) (Note 4)

Allowance(D) (Note 5)

(A+B+ C+ D) as % of 2009 Net

Income Salary, bonus

and etc. (E) Retirement Pension (F)

(Note 3) Employee profit sharing (G)

(Note 4) Employee Stock Option

(H)

(A+B+C+D+E+F+G) as % of 2009 Net Income

Compen-sation from Other PixArt

Investee Compan

-ies

PixArt Consolidated

Entities of PixArt

Title Name

PixArt

Consolida

ted Entities of

PixArt

PixArt

Consolidated Entities of

PixArt

PixArt


PixArt

PixArt


PixArt

PixArt


PixArt

PixArt


PixArt

PixArt


PixArt Cash Stock Cash Stock

PixArt


PixArt

PixArt


PixArt

Chairman / President Sen-Huang Huang

Director Jason Lu (Note1) Company represented by Jason Lu

Fortune Venture Capital Corp. (Note 1)

Director Victor Hsu(Note 2) Company represented by Victor Hsu

Unimicron Technology Corp.(Note 2)

Director Ming-De Li Director Kuan Chun

－－－－ 5,786 5,786 45 45 0.69% 0.69% 5,926 5,926 202 202 30,382 － 30,382 － 401 401 4.99% 5.00% None

Name of Directors

Compensations paid to directors (A+B+C+D) Compensations paid to directors (A+B+C+D+E+F+G) Scale of remunerations to directors of

the Company PixArt Consolidated Entities of PixArt PixArt Consolidated Entities of PixArt

Less than NT$ 2,000,000 Note 6 Note 6 Fortune Venture Capital Corp.、Unimicron Technology

Corp、Ming-De Li、Kuan Chun

Fortune Venture Capital Corp.、MediaTek Capital Corp、Unimicron Technology Corp、Ming-De Li、

Hui-Hsuan Yang、Kuan Chun NT$ 2,000,000～NT$ 5,000,000 - - - - NT$ 5,000,000～NT$ 10,000,000 - - - - NT$ 10,000,000～NT$ 15,000,000 - - - - NT$ 15,000,000～NT$ 30,000,000 - - Sen-Huang Huang、Jason Lu Sen-Huang Huang、Jason Lu NT$ 30,000,000～NT$ 50,000,000 - - - - NT$ 50,000,000～NT$ 100,000,000 - - - - NT$ 100,000,000 above - - - - Total - - - -

Note 1：The representative of Fortune Venture Capital Corp., director’s remuneration is entitled to Fortune Venture Capital Corp.. Note 2：The representative of Unimicron Technology Corp., director’s remuneration is entitled to Unimicron.。 Note 3：Pixart didn’t pay pension to any director in 2009. The numbers shown in the table were what PixArt appropriated for retirement in 2009. Note 4：Director’s remuneration has been approved by the Board of Directors but not by Shareholders’ Meeting yet Note 5：Director allowance of NT$45,000 was transportation allowance. Note 6：All the Director remunerations belong to this scale.

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b. Remunerations Paid to Supervisors： Dec.31.2009；Unit: K Shares / NT$1,000

Remunerations paid to supervisors

Salary A) Retirement Pension (B) Compensation form profit sharing (C)(Note 3) Allowance(D)(Note 4)

(A+B+C+D) as % 2009 Net Income

Titla Name

PixArt

Consolidated

Entities of PixArt

PixArt

Consolidated

Entities of PixArt

PixArt

Consolidated

Entities of PixArt

PixArt

Consolidated

Entities of PixArt

PixArt

Consolidated

Entities of PixArt

Compen-sation from Other

PixArt Investee Compan-ies

Supervisor Sheng-Cheng Chou(Note 1)

Company represented by Sheng-Cheng

Chou

Novatek Microelectronics

Corp.(Note 1)

Supervisor Grace Tseng (Note 2)

Company represented by Grace Tseng

ZhiHong Investment Corp.(Note 2)

－－－－ 1,845 1,845 30 30 0.22% 0.22% None

Name of Supervisors

Total compensations paid to supervisors (A+B+C+D) Scale of remunerations to supervisors of the Company PixArt Consolidated Entities of PixArt

Less than NT$ 2,000,000 Note 5 Note 5 NT$ 2,000,000～NT$ 5,000,000 - - NT$ 5,000,000～NT$ 10,000,000 - - NT$ 10,000,000～NT$ 15,000,000 - - NT$ 15,000,000～NT$ 30,000,000 - - NT$ 30,000,000～NT$ 50,000,000 - - NT$ 50,000,000～NT$ 100,000,000 - - NT$ 100,000,000 above - - Total - -

Note 1：The representative of Novatek Microelectronics Corp., supervisor’s remuneration is entitled to Novatek. Note 2：The representative of Zhihong Investment Corp., supervisor’s remuneration is entitled toZhihong Investment. Supervisor Grace Tseng(The representative of Zhihong Investment Corp.) had been discharged on Jul.16.2009.

the supervisor’s remunerations is paid on days of office duty. Note 3：Supervisor remuneration has been approved by the Board of Directors but not by Shareholders’ Meeting as of the date of printing of this annual report. Note 4：Supervisor allowance was transportation allowance, NT$30,000. Note 5：All the Supervisor remunerations belong to this scale.

- 12 -

c. Remunerations Paid to President and Vice President： Dec.31.2009；Unit: K Shares / NT$1,000

Salary(A) Retirement Pension (B) （Note 1） Salary, bonus and etc.(C) Employee profit sharing(D)

（Note 2） (A+B+C+D) as % 2008 Net Income

Employee Stock Option

PixArt Consolidated Entities of PixArt

Title Name PixArt


PixArt PixArt

Consolidated Entities of PixArt

PixArt Consolidated

Entities of PixArt Cash Stock Cash Stock

PixArt Consolidated

Entities of PixArt

PixArt

Consolidated

Entities of

PixArt

Compen-sation from Other PixArt

Investee Compan

-ies

President Sen-Huang Huang

Vice President

Jason Lu

4,905 4,905 202 202 1,021 1,021 30,382 － 30,382 － 4.30% 4.31% 401 401 None

Name of president and vice president Scale of remunerations to president and vice president of the Company

PixArt Consolidated Entities of PixArt

Less than NT$ 2,000,000 - - NT$ 2,000,000～NT$ 5,000,000 - - NT$ 5,000,000～NT$ 10,000,000 - - NT$ 10,000,000～NT$ 15,000,000 - - NT$ 15,000,000～NT$ 30,000,000 Sen-Huang Huang、Jason Lu Sen-Huang Huang、Jason Lu NT$ 30,000,000～NT$ 50,000,000 - - NT$ 50,000,000～NT$ 100,000,000 - - NT$ 100,000,000 above - - Total - -

Note 1：The numbers shown in the table were what PixArt appropriated, not paid, for retirement in 2009. Note 2：2009 Earnings distribution proposal has been approved by the Board of Directors but hasn’t been approved by Shareholders’ Meeting as of the date of printing of this annual report. The numbers are estimated bonuses.

- 13 -

d. Employee Bonus Paid to Officers：(Note 1)

Dec.31.2008；Unit: K Shares / NT$1,000

Titla Name Stock bonuses Cash bonuses Total % of 2008 net income


Vice President Jason Lu

Director Vincent Yen

Director Ming-Tsan Kao Senior Department Manager, Finance & Accounting Dept Mei-Wei Lo

－ 42,449 42,449 5.00%

Note 1：2009 Earnings distribution proposal has been approved by the Board of Directors but hasn’t been approved by Shareholders’ Meeting as of the date of printing of this annual report.

The numbers shown above are estimated bonuses.

(4). Comparison of compensation for the Company’s directors, supervisors, president, and vice-present in the past two years and details of

the compensation’s policy, standards, components, process, and its relationship to performance

Compensation for the Company’s directors, supervisors, president, and vice-present are paid for by the Company. There is no additional compensation given to them from any of the subsidiaries in the Company’s consolidated financial statements. Total compensation accounted for 4.1% and 5.2% of the Company’s net income in 2008 and 2009, respectively. Compensation to the directors and supervisors include transportation allowance and remunerations from earnings distribution. Transportation allowance given by the Company to its directors and supervisors is in line with the industry average and is paid out according to actual attendance to the Board of Directors meetings. The remunerations from earnings distribution is given in accordance to the Company’s Articles of Incorporation, which is first proposed by the Board of Directors and approved at the Shareholders’ Meeting and takes into account the actual number of days served. Compensation to the president and the vice-president include salary, bonus, employee stock bonuses, employee stock options, etc, and is determined based on the position, responsibility, the Company’s profitability, and industry norms.

- 14 -

3.Corporate Governance Report：

(1) Board of Directors’ Meeting Status： The Board of the Company has held 6 meetings in 2009, the attendance of the directors and supervisors are shown in the following table:

Title Name Attendance in Person By Proxy Attendance Rate (%) Notes

Chairman Sen-Huang Huang 6 0 100 %

Director Fortune Venture Capital Corp. Representative：Jason Lu 4 0 67 %

Director Unimicron Technology Corp. Representative：Victor Hsu 2 4 33 %

Independent Director Ming-De Li 5 1 83 %

Independent Director Kuan Chun 6 0 100 %

Supervisor Novatek Microelectronics Corp. Representative：Sheng-Cheng Chou 6 － 100 %

Supervisor ZhiHong Investment Corp. Representative：Grace Tseng

2 － 50 % There were 4 meetings the supervisor may attend in 2009 before the supervisor was discharged on Jul. 16, 2009.

Other disclosures： (I). If any Independent Director objects to or expresses reservations about the matters listed in Article 14-3 of the

Securities and Exchange Act,, the following items shall be recorded: date of Board of Directors’ meeting, type of meeting, proposal, board resolution and the company’s response to the opinion(s): no such occurrence.

(II). If a Director recuses himself from a proposal due to conflict of interest, the following items shall be recorded: name of Director, proposal, reason for recusal and voting record: no such occurrence.

(III). Goals for strengthening Board of Director accountability (such as establishing an audit committee, improving transparency, etc): The Company elected two independent directors and fully implement the rules governing the Board of Directors’ meeting.

- 15 -

(2) Audit Committee Status or Status of Supervisor’s Participation in Board of Directors’ Meeting

a. Audit Committee Status: Not Applicable. b. The Board of the Company has held 6 sessions in 2009, the attendance of the supervisors

are shown in the following table:

Title Name Attendance in Person Attendance Rate (%) Notes

Supervisor Novatek Microelectronics Corp. Representative ：Sheng-Cheng Chou

6 100 %

Supervisor ZhiHong Investment Corp.Representative ：Grace Tseng

2 50 %

There were 4 meetings the supervisor may attend in 2009 before the supervisor was discharged on Jul. 16, 2009.

Other disclosures：

(I). Supervisors and responsibilities：

(a) Communication between Supervisors and employees, shareholders (such as communication channels and methods, etc)： If necessary, supervisor(s) can communicate with employees and shareholders through the telephone, letters, and other methods.

(b) Communication between Supervisors and auditors and accountants (on topics such as the company’s finances, business operations; communication channels ,methods, results etc)： The Company’s internal auditors provide reports to the Supervisors on a regular basis. The external auditors , when necessary, may submit information to the Supervisors for reference. The Supervisors can also contact the internal auditors or external auditors at any time.

(II). If any Supervisor makes a statement of opinion during the Board of Directors meeting, the following items shall be recorded: date of Board of Directors’ meeting, type of meeting, proposal, board resolution and the company’s response to the statement: no such occurrence.

(3) Corporate Governance Status

Items Status

The Reasons for the Differences between the Company’s Governance

and Recognized Corporate Governance

1. Shareholding Structure & Shareholders’ Rights (1) The way of handling shareholders’

suggestions and disputes (2) How the Company regularly

monitorsthe list of key shareholders who have management control of the Company, or those who have ultimate control of key shareholders:

(3) Risk management mechanism and firewall between the Company and its affiliates

(1) The Company’s Spokesperson

and deputy spokesperson are in charge of the related issues.

(2) Related matters are handled by professional stock agency and the Company’s stock agency contact persons.

(3) Business conducted between the Company and its related parties are regulated by related operating procedures in order to comply with risk management.

No material difference

2. Composition and Responsibilities of the Board of Directors (1) Independent Directors (2) Regular evaluation of external

auditors’ independence

(1) The company has elected two independent directors.

(2) The Company’s auditor is one of four major international auditing firms. The auditor’s independence is evaluated regularly and a policy is in place to change the auditor every five years.


- 16 -

Items Status

The Reasons for the Differences between the Company’s Governance

and Recognized Corporate Governance

3. Communication channel with stakeholders

The Company has in place designated personnel and e-mail accounts to handle such issues.


4. Information Disclosure (1) Establishment of a corporate website

to disclose information regarding the Company’s financials, business, and corporate governance status

(2) Other information disclosure channels (e.g. maintaining an English-language website, appointing responsible people to handle information collection and disclosure, appointing spokespersons, webcasting investors conference)

(1) The Company makes up-to-date financial disclosures through its bilingual website at www.pixart.com.tw.

(2) The Company has designated personnel for information gathering and disclosure. A professional spokesperson is also in place to conduct presentations to institutional investors and make full disclosures on the Company’s website in a timely manner.


5. Operations of the Company’s Nomination Committee, Compensation Committee, or other committees of the Board of Directors

The Company has not established Nomination Committee or Compensation Committee, but it has established a Management Committee consisted of two independent directors and one Director as the committee member. The Management Committee is designed to strengthen the Company’s corporate governance.

The Nomination Committee and the Compensation Committee will be established based on the Company’s business needs.

6. If the Company has established corporate governance policies based on TWSE Corporate Governance Best Practice Principles, please describe any discrepancy between the policies and their implementation: The Company has not established specific corporate governance policies but has begun implementation in accordance to principles of corporate governance and related rules and regulations.

7. Other important information to facilitate better understanding of the Company’s corporate governance practices (e.g. employee rights, employee wellness, investor relations, supplier relations, rights of stakeholders, directors’ and supervisors’ training records, the implementation of risk management policies and risk evaluation measures, the implementation of customer relations policies, and the purchase of liability insurance for directors and supervisors):

(1) The Company has established the Employee Welfare Committee and has a retirement system. It also encourages employees to attend various training courses and seminars both domestically and abroad. The Company also provides regular health checks and group insurance to its employees. The Company values labor relations and provides equal employment opportunities

(2) The Company has designated personnel for Investor Relations. The Company’s website provides related information for investor. Quarterly investor conference are held to disclose the Company’s business operations to investors.

(3) The Company maintains good communication with its customers and suppliers. (4) Continuing education for Directors and Supervisors: The Company’s Directors and Supervisors all have

professional backgrounds. The Company provides information on continuing education to its Directors and Supervisors for reference.

(5) The Company has purchased liability insurance for its Directors and Supervisors. 8. If the Company has a self corporate governance evaluation or has authorized any other professional organization

to conduct such an evaluation, the evaluation results, major deficiencies or suggestions, and improvements are stated as follows: Not Applicable.

(4) Operations of the Company’s Compensation Committee：Not Applicable. : (5) Fulfillment of social responsibilities：

The Company is committed to elevate the level of social responsibility and environmental awareness. The Company meets the WEEE and ROHS environmental guidelines as well as gives back to the community on a regular basis.

(6) Corporate governance best-practice principles shall be disclosed： The Company has not established corporate governance best-practice principles but may do so when the need arises.

- 17 -

(7) Other important information to further understand the Company’s corporate governance:

None.

(8) Status of Internal Control System 1. Statement of Internal Control：

PixArt Imaging Inc. Statement of Internal Control

Date：Mar.23, 2010PixArt Imaging Inc. has conducted internal audit in accordance with its Internal Control Regulation covering the period from January 1 to December 31, 2009, and hereby declares as follows: I. The Company acknowledges and understands that the establishment, enforcement and

preservation of internal control system are the responsibility of the Board and the managers. The Company have already established such system. The purpose of the systme is to reasonably ensure the effect and efficiency of operation (including profitability, performance and security of assets), the reliability of financial reporting and the compliance with relevant legal rules.

II. Internal control system has its limitation, no matter how perfect the design is. As such, effective internal control system may only reasonably ensure the achievement of the three aforementioned goals. Further, the environment and situation may vary, and hence the effectiveness of the internal controls system. The internal control system of the Company features the self-monitoring mechanism. Once identified, any shortcoming will be corrected immediately.

III. The Company judges the effectiveness of the internal control system in design and enforcement in accordance with the “Criteria for the Establishment of Internal Control System of Public Offering Companies” (hereinafter referred to as “the Criteria”). The Criteria is instituted for judging the effectiveness of the design and enforcement of internal control system. There are five components of effective internal control as specified in the Criteria with which the procedure for effective internal control are composed by five elements, namely, 1.Control environment, 2. Risk Evaluation, 3. Control Operation, 4 Information and Communication, and 5. Monitoring. Each of the elements in turn contains certain audit items, and shall be referred to the Criteria for detail.

IV. The Company has adopted the aforementioned internal control system for internal audit on the effectiveness of the design and enforcement of the internal control system.

V. Based on the aforementioned audit findings, the Company holds that within the aforementioned period its internal control procedures (including the procedures to monitor the subsidiaries), including the effectiveness and efficiency in operation, reliability in financial reporting and compliance with relevant legal rules, and that the design and enforcement of internal control, are effective. The aforementioned goals can be achieved with reasonable assurance.

VI. This statement shall form an integral part of the Company’s annual report and prospectus and will be announced publicly. If there is any fraud, concealment and unlawful practice discovered in the content of the aforementioned information, the Company shall be liable to legal consequences under Article 20, Article 32, Article 171 and Article 174 of the Securities and Exchanges Act.

VII. This statement has been approved by the Board of Directors on Mar 23, 2010 with 5 directors in session under unanimous consent.

PixArt Imaging Inc.

Chairman：Sen-Huang Huang

President：Sen-Huang Huang

2. Disclose the Review Report of Independent Auditors if they are retained for reviewing the

Internal Control System: None.

- 18 -

(9) Description of Violations/Infringement of Regulations and the Company’s Response: None.

(10) Major Resolutions of the Shareholders’ Meeting and Board meeting:

1. Major resolutions of Shareholders’ meeting for ther period from year 2009 to the date of printing of this annual report： a. Acknowledged 2008 Business Report, Financial Statements and Earnings

Distribution proposal. b. Approved the capitalization of 2008 stock dividends and employee stock bonus. c. Approved the amendment made to the Company’s Articles of Incorporation

Articles 5 and 27. d. Approved the amendments for the Company’s “Operating Procedures for

Endorsements and Guarantees,” “Operating Procedure for Loan Made to Others,” and “Procedures Governing the Acquisition or Disposal of Assets.”

e. Approved the private placement of common shares in accordance with Article 43-6 of the Securities Exchange Act.

2. Major resolutions of the Board of Director’s Meeting for ther period from year 2009 to the date of printing of this annual report：

a. Approved 2008 business report, financial statements, earnings distribution proposal and capitalization of earnings.

b. Approved first half of 2009 Financial Statements. c. Approved 2009 business report, financial statements, earnings distribution proposal. d. Approved the private placement of common shares in accordance with Article 43-6

of the Securities Exchange Act. e. Approved the unit price, record date, and the total shares for the cash offering by

private placement. f. Approved the remaining 500,000 shares will not be offered through additional

private placement. g. Approved the amendments for the Company’s “Operating Procedures for

Endorsements and Guarantees,” “Operating Procedure for Loan Made to Others,” and “Procedures Governing the Acquisition or Disposal of Assets.”

h. Approved the amendments for the Company’s “Internal Control Systems”” and “Internal audit implementation rules”.

i. Approved the amendment made to the Company’s Articles of Incorporation Articles 5 and 27.

j. Approved the proposal for adoption of business income tax exemption for the 2009 private placement of 1,500,000 common shares..

k. Approved the by-election of one seat of the 6th term supervisor. l. Approved the change of auditor due to internal job rotation in the auditor’s firm.

(11) Directors’ or Supervisors’ Objections on the Important Resolution of Board Meetings : None.

(12) Information of Resignation or Dismissal of Persons Related to Financial Reports : None.

- 19 -

4. Disclosure of Auditing Fees：

CPA firm Names of auditors (CPA) Year Remark

Ernst & Young Yi-Hui Huang

Hsin-Ming Hsu 2009 The Company did not change

the CPA firm or the auditors.

Unit：NT$1,000 Item

Scale Auditing

Fee Non-

Auditing Fee Total

1 Less than 2,000 V 2 2,000～4,000 V V 3 4,000～6,000 4 6,000～8,000 5 8,000～NT$ 10,000 6 10,000 and above (a) The amount of non-auditing relevant fees charged by the appointed independent auditors

and the related parties reaches 25% of the Company’s annual auditing expenses: Not Applicable.

(b) If there is any change in the appointed independent auditor firm and the Company’s annual auditing expenses decreased simultaneously, information regarding the amount and reasons for the decrease in auditing expenses shall be disclosed: Not Applicable.

(c) Auditing expenses decreased by 15% in comparison to the previous year, information regarding the amount, percentage and reasons for the decrease in auditing expenses shall be disclosed: Not Applicable.

5. Changes in Independent Auditors：

Starting from first quarter of 2010, due to the internal organizational structure change of Ernst and Young, independent auditors were replaced from Yi-Hui Huang and Hsin-Min Hsu to Y i-Hui Huang and JIN-LAI Wang .

6. PixArt Chairman, President, manager (s) who is responsible for financial or accounting

affairs working in the accounting firm of the appointed independent auditors or the accounting firm’s related parties within the past year: None.

- 20 -

7. Changes in shareholding of directors, supervisors, officers and major shareholders holding

more than 10% shares for the preceding year to the date of printing of this annual report (1)Changes in Shareholding and Shares Pledged by Directors, Supervisors,Officers and

Shareholders with 10% or more Shareholding Unit：share

2009 Jan 1. to April 11, 2010

Title Name Net change in shareholding

Net change in

shares pledged

Net change in shareholding

Net change in

shares pledged

Chairman / President Sen-Huang Huang (57,513) - - -Director Jason Lu 48,303 - - -Director represented by Jason Lu and also a major Shareholders with 10% Shareholding or more

Fortune Venture Capital Corp. (920,086) - (300,000) -

Diretcor Victor Hsu - - - -Director represented by Victor Hsu

Unimicron Technology Corp. (597,093) - (60,000) -

Independent Director Ming-De Li - - - -Independent Director Chun Kuan - - - -Supervisor Sheng-Cheng Chou - - - -Supervisor represented by Sheng-Cheng Chou

Novatek Microelectronics Corp. 21,255 - - -

Supervisor Grace Tseng (Note 1) - - - -Supervisor represented by Grace Tseng

ZhiHong Investment Corp.(Note 1) (550,000) - - -

Vice President Jason Lu 48,303 - - -Division Director Ho-Ching Chien (Note 2) (22,056) - - -Division Director Vincent Yen 52,138 - (40,000) -Division Director Ming-Tsan Kao 41,483 - - -Senior Department Manager, Finance & Accounting Dept

Mei-Wei Lo 2,633 - (5,000) -

Note1：Supervisor Grace Tseng (representative of Zhihong Investment Corp.). had been discharged on Jul.16 2009., information disclosed above only cover the period till the discharge.

Note2：Due to duty changed on Dec.25 2009., information disclosed above only cover the period till the change.

(2). If the counterparty of the share transfer or pledge disclosed above is a related party, disclose the relationship and shares transferred or pledged: None.

- 21 -

8. The relationship between any of the Company’s top ten shareholders： April. 11, 2010; Unit: Share/%

SHAREHOLDING SHAREHOLDING UNDER SPOUSE

AND UNDERAGE CHILDREN

SHAREHOLDING UNDER THE

TITLE OF THIRD PARTY

TOP 10 SHAREHOLDERS

WHO ARE RELATED PARTIES TO EACH OTHER

REMARKNAME

Shares % Shares % Shares % Name Relationship Fortune Venture Capital Corp. 13,102,238 10.02% －－－－

PixArt Imaging

Inc. Director －

Representative： Stan, Hung －－－－－－－－－

Investment account of overseas fund A 6,110,000 4.67% －－－－－－－

Investment account of overseas fund B 2,890,000 2.21% －－－－

Sen-Huang Huang 2,418,686 1.85% －－－－ PixArt

Imaging Inc.

The company’s Chairman

－


2,172,708 1.66% －－－－ PixArt

Imaging Inc.

The company’s Supervisor

Representative： Tai-Shung ,Ho －－－－－－

Fubon Life Issurance Co., Ltd. 2,119,854 1.62% －－－－

Representative： Ming-Hsing, Tsai －－－－－－

PixArt Imaging Inc. 1,965,000 1.50% －－－－

Sen-Huang Huang

PixArt’s Chairman

Treasury shares

Representative： Sen-Huang Huang 2,418,686 1.85% －－－－

PixArt Imaging

Inc. PixArt’s

Chairman

PixArt Employees’ share holding trust account with Chinatrust bank

1,879,723 1.44% －－－－－－－

Dreyfus Greater China Fund 1,723,090 1.32% －－－－

Unimicron Technology Corp. 1,640,716 1.25% －－－－

PixArt Imaging

Inc.

The company’s

Director －

Representative： Tzu-Chang, Tseng －－－－－－－－－

Note 1：Shareholding % is calculated based on the company’s total 130,786,914 issued shares. Note 2：The above table disclosed the information that the company is able to collect.

- 22 -

9. Long-Term Investemnt Ownership

Dec.31 2009; Unit: Share / %

Note 1：The investments have not been made. The numbers of shares are authorized shares.

PixArt Investment Investments from Directors,Supervisors, Managers, and Directly or Indirectly Controlled Businesses

Total investments (1) + (2)Investees

share % share % share % PixArt International (BVI) Ltd. (Note1) 500,000 100% - - 500,000 100%

PixArt International (SAMOA) Ltd. 600,000 100% - - 600,000 100% Yuan Xiang Investment Corp. (Note 1) - - 1,000,000 100% 1,000,000 100% Yuan-Xiang Investment Corp 20,000,000 100% - - 20,000,000 100% Yuan-Feng Investment Corp. 5,000,000 100% - - 5,000,000 100% PrimeSensor Technology Inc. - - 5,750,000 38.33% 5,750,000 38.33%YuanXiang Technology (SAMOA) Ltd. 500,000 100% 500,000 100% YuanSheng Investment (SAMOA) Ltd. 175,000 100% 175,000 100% PrimeSensor Technology (SAMOA) Ltd. 210,000 100% 210,000 100% PrimeSensor Japan Inc. 1,000 100% 1,000 100% Hsieh Yung Investment Co., Ltd. 34,686,000 4.55% 242,802,000 31.82% 277,488,000 36.37%

- 23 -

IV、Capital and Shares 1.Capital and Shares

(1) Source of Capital： April.11,2009;Unit:1,000 Shares/NTD1,000

Authorized capital Paid-in capital Remarks Year/month Par Value Shares (in

thousand) Amount (in thousand)

Shares (in thousand)

Amount (in thousand) Source of capital Issuing shares for

assets other than cash Others

Jul.1998 10 50,000 500,000 13,900 139,000 Initial capital - Note 1Dec.1998 10 50,000 500,000 27,220 272,200 Cash infusion - Note 2Jul. 1999 10 50,000 500,000 44,266 442,660 Cash infusion - Note 3Mar. 2000 10 50,000 500,000 50,000 500,000 Cash infusion issuing 2,500 K shares

for technologies Note 4

May 2002 10 50,000 500,000 30,000 300,000 Cancellation of capital - Note 5

Aug.2002 10 50,000 500,000 40,000 400,000 Cash infusion - Note 6Aug.2003 10 50,000 500,000 46,000 460,000 Cash infusion - Note 7Jul 2004 10 100,000 1,000,000 62,046 620,465 Capitalization of

earnings - Note 8

Nov.2004 10 100,000 1,000,000 62,161 621,609 Exercise of stock options - Note 9

Jan. 2005 10 100,000 1,000,000 62,346 623,461 Exercise of stock options

- Note 10

Jun. 2005 10 100,000 1,000,000 63,916 639,157 Exercise of stock options - Note 11

Sep. 2005 10 100,000 1,000,000 75,594 755,945 Capitalization of earnings

- Note 12

Nov. 2005 10 100,000 1,000,000 75,686 756,861 Exercise of stock

options & Cancellation of donated shares

- Note 13

Feb. 2006 10 100,000 1,000,000 77,291 772,912 Exercise of stock options

- Note 14May. 2006 10 100,000 1,000,000 86,974 869,742 Cash infusion - Note 15May. 2006 10 100,000 1,000,000 87,114 871,137 Exercise of stock

options - Note 16

Jun. 2006 10 150,000 1,500,000 103,017 1,030,170 Capitalization of earnings - Note 17

Nov. 2006 10 150,000 1,500,000 103,084 1,030,845 Exercise of stock options

- Note 18

Apr. 2007 10 150,000 1,500,000 104,475 1,044,749 Exercise of stock options - Note 19

May. 2007 10 150,000 1,500,000 104,508 1,045,078 Exercise of stock options

- Note 20

Sep. 2007 10 150,000 1,500,000 116,453 1,164,530 Capitalization of earnings - Note 21

Jan. 2008 10 150,000 1,500,000 117,066 1,170,655 Exercise of stock options

- Note 22

Apr. 2008 10 150,000 1,500,000 117,216 1,172,160 Exercise of stock options - Note 23

Jul. 2008 10 150,000 15,000,000 117,231 1,172,310 Exercise of stock options

- Note 24


Jan. 2009 10 150,000 15,000,000 124,736 1,247,355 Exercise of stock options

- Note 26

Mar. 2009 10 150,000 15,000,000 124,815 1,248,146 Exercise of stock options - Note 27

Jul. 2009 10 150,000 15,000,000 126,315 1,263,146 Cash infusion

through private placement

- Note 28


Jan 2010 10 150,000 15,000,000 129,859 1,298,589 Exercise of stock options

- Note 30

- 24 -

Mar. 2010 10 150,000 15,000,000 130,787 1,307,869 Exercise of stock options - Note 31

Note 1︰Ministry of Economic Affairs ,approval letter No. 08700118692. Note 2：Ministry of Economic Affairs , approval letter No.08700143085. Note 3︰Ministry of Economic Affairs , approval letter No. 08800129427. Note 4：Science Park Administration, approval letter No. 089006039. Note 5︰Science Park Administration , approval letter No.0910013849. Note 6：Science Park Administration, approval letter No.0910022826. Note 7：Science Park Administration, approval letter No.0920029431. Note 8：Science Park Administration, approval letter No.0930025895. Note 9：Science Park Administration, approval letter No.0930030718. Note 10：Science Park Administration, approval letter No.094001771. Note 11：Science Park Administration, approval letter No.0940013752. Note 12：Science Park Administration, approval letter No.0940025399. Note 13：Science Park Administration, approval letter No.0940032366. Note 14：Science Park Administration, approval letter No.0950004179. Note 15：Science Park Administration, approval letter No.0950012496. Note 16：Science Park Administration, approval letter No.0950012496. Note 17：Science Park Administration, approval letter No.0950019346. Note 18：Science Park Administration, approval letter No.0950030340. Note 19：Science Park Administration, approval letter No.0960009440. Note 20：Science Park Administration, approval letter No.0960013206. Note 21：Science Park Administration, approval letter No.0960024414. Note 22：Science Park Administration, approval letter No.0960036141. Note 23：Science Park Administration, approval letter No.0970009341. Note 24：Science Park Administration, approval letter No.0970017916. Note 25：Science Park Administration, approval letter No.0970025605. Note 26：Science Park Administration, approval letter No.0980000522. Note 27：Science Park Administration, approval letter No 0980008205. Note 28：Science Park Administration, approval letter No 0980020540. Note 29：Science Park Administration, approval letter No 0980025234. Note 30：Science Park Administration, approval letter No 0990000338. Note 31：Up to Mar.31 2010, employee stock options have been converted into 928,000 common shares that have not been registered..

April. 11, 2010;Unit:Share Authorized Capital Type of stock

Outstanding shares un-issued sharres Total Remarks

Common shares 130,786,914 19,213,086 150,000,000

Of the issued common shares,1,514,819 shares are private placed shares and the remaining shares are listed common shares.

Note：Of the total outstanding shares, 928,000 shares are unregistered shares which were converted into common shares from employee stock options.

Securities under General Application System Not applicable.

(2) Structure of Shareholders

April 11, 2010 ;Unit:Share Shareholder

structure Quantity

Government agencies

Financial institutions

Other institutions

Individuals

Foreign institions and individuals

Treasury stock Total

Number of shareholders 2 22 98 27,763 164 1 28,050 Shareholding (shares) 730,870 2,681,017 26,505,863 78,370,016 20,534,148 1,965,000 130,786,914Shareholding % 0.56 2.05 20.27 59.92 15.70 1.50 100.00

(3)Distribution of Shareholding

April 11, 2010, Par value of $10

Class of shareholding (shares) Number of shareholders

Shareholding (shares) Shareholding %

1 to 999 7,976 787,894 0.601,000 to 5,000 17,259 30,420,402 23.265,001 to 10,000 1,599 11,601,410 8.87

- 25 -

10,001 to 15,000 463 5,651,820 4.3215,001 to 20,000 234 4,227,666 3.2320,001 to 30,000 191 4,713,972 3.6030,001 to 50,000 146 5,670,051 4.3450,001 to 100,000 94 6,685,264 5.11

100,001 to 200,000 41 5,401,982 4.13200,001 to 400,000 18 4,777,838 3.66400,001 to 600,000 5 2,428,396 1.86600,001 to 800,000 7 5,106,940 3.90800,001 to 1,000,000 4 3,639,114 2.78

More than 1,000,001 13 39,674,165 30.34Total 28,050 130,786,914 100.00

Note: PixArt do not issue preferred stocks.

(4) Major Shareholders: April.11, 2010 Unit：share

ShareholdingName of dominant shareholder Shareholding Shareholding % Fortune Venture Capital Corp. 13,102,238 10.02%Investment account of overseas fund A 6,110,000 4.67%Investment account of overseas fund B 2,890,000 2.21%Sen-Huang Huang 2,418,686 1.85%Novatek Microelectronics Corp. 2,172,708 1.66%Fubon Life Issurance Co., Ltd. 2,119,854 1.62%PixArt Imaging Inc. 1,965,000 1.50%PixArt Employee shareholding trust account with Chinatrust bank 1,879,723 1.44%Dreyfus Greater China Fund 1,723,090 1.32%Unimicron Technology Corp. 1,640,716 1.25%

(5) Market Price, Net value, Earnings and Dividend Per Share and Related Information over the

Last Two Years:： Unit: Share/ NTD1.00

Year Subject

2008 (paid out in 2009)

2009 (paid out in 2010)

High 257.08 331.79 Low 68.40 107.02

Market price per share （Note 1） Average 162.61 223.97

Before distribution 40.93 45.58 Net value per share After distribution (Note 2） 37.21 *

Weighed average outstanding shares 123,531,062 126,278,562 Before retroactive adjustment 11.01 6.72 EPS

EPS After retroactive adjustment（Note 2） 10.90 *

Cash dividend 5.92762342 * Retained earnings 0.09879370 * Stock dividend Capital surplus －－

Dividend per share

Accumulated unpaid dividends －－ P/E ratio (Note 3) 14.92 33.33 P/P ration (Note 4) 27.43 * Analysis of ROI Cash dividend yield (Note 5) 3.65% *

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* : Pending on decision of Shareholders’ Meeting Note 1：Market prices have been retroactively adjusted for stock dividend and employee stock bonus. Note 2：This number has been adjusted based on the resolution of shareholders’ meeting held in the following year. Note 3：P/E ratio=Average price per share of the year/Earnings per share Note 4：P/P ratio=Average price per share of the year/Cash dividend per share Note 5：Cash dividend yield=Cash dividend per share/ Average price per share of the year

(6) The Company’s stock dividend policy and status report a. Stock dividend policy regulated in the Company’s Articles of Incorporation：

Where the Company has a profit at the end of each fiscal year, the Company shall allocate the profit in the following order:

1. Income tax obligation; 2. Offsetting accumulated deficits, if any; 3. Legal reserve at 10% of net income after tax 4. Appropriate or reverse special reserve in accordance with applicable rules and

regulations. 5. Remuneration for directors and supervisors to a maximum of 1% of the remaining

current year’s earnings after deducting for item1 through 4. 6. After deducting for item 1 through 4 above from the current year’s earnings, no

less than 1% of the remaining amount together with the prior years’ unappropriated earnings is to be allocated as employees’ bonus.

7. The remaining, after all the above appropriations and distributions, may be retained or distributed proportionally as shareholders’ bonus. The distribution will be recommended by the board of directors and resolved in the shareholders’ meeting.

The board of directors shall make the distribution proposal in the subsequent year and submit it to the annual shareholders’ meeting for proposal. The proposal should reflect factors such as industry situation, current and future fund requirements, and long-term financial planning. Of the proposal, both dividend and employees’ bonus may be distributed in the form of cash or stock, but cash dividend shall be no less than 10% of the total dividends. Director remuneration shall be distributed in cash.

b. Surplus earnings distribution proposal (approved by Board of Directors and to be discussed in this year’s Shareholders’ Meeting):：

The Board of Directors proposes to distribute the Company’s 2009 surplus earnings as follows：

Expressed in NT DollarsDescriptions Amount Remarks

Net profit of 2009 848,203,786 Less: 10% Legal reserve (84,820,379) Special reserve (238,401) 2009 Earnings Available for Distribution 763,145,006 Plus: Unappropriated retained earnings of previous years 1,597,603,852

Earnings Available for Distribution 2,360,748,858 Distribution Items: 1.Cash Dividend to common shareholders 644,109,570 NT$5 per share

Total Distribution 644,109,570 Unappropriated Earnings 1,716,639,288

The Board of directors also proposes to distribute employee cash bonus in the amount of NT$285,278,411, and Directors’ and supervisors’ remuneration in the

- 27 -

amount of NT$7,631,450. The above distribution and employee bonus is consistent with the 2009 financial statements.

(7) Impact of the capitalization of earnings to the Company’s business operations and earnings per share.

Not Applicable.

(8) Employee bonus and Director/Supervisor remuneration

a. Employee bonus and Director/Supervisor compensation regulated in the Company’s Articles of Incorporation. The execution of employee bonus and Directors’ & Supervisors’ remuneration complied with Article 24 of the Company’s Articles of Incorporation. Please refer to (6) for details regarding the implementation of the Company’s stock dividend policy.

b.Accounting method for differences between accrued and actual employee bonus and

Director/Supervisor remuneration and the method used to accrue employee bonus and Director/Supervisor remuneration: Estimates for employee bonus and Director/Supervisor remuneration are accrued based on the percentages stipulated in the Articles of Incorporation. The total amount is then recognized as operating expenses. If the Shareholders’ meeting resolves to issue employee bonus in the form of common shares, the number of shares is determined based on the closing stock price one day prior to the Shareholders’ Meeting, ex-right/ex-dividend. Any discrepancies between the actual employee bonus as decided by the Shareholders’ Meeting and the estimates would be recognized as profit/loss in the following year.

c.Employee bonuses and Director/Supervisor remuneration proposal approved by the Board

of Directors. （I） Distribution of cash bonuses or stock bonuses to employees, and compensation

for directors and supervisors. If there is any discrepancy between such an amount and the estimated figure for the year these expenses are recognized, the discrepancy, its cause, and the status of treatment shall be disclosed.： The Company will distribute employee cash bonuses in the amount of NT$285,278 thousand, and Director/Supervisor remuneration in the amount of NT$7,631 thousand, as approved by the Board of Directors on April 27th, 2010. The above distribution and employee bonus is consistent with the 2009 financial statements.

（II） The amount of any proposed distribution of employee stock bonuses, and the size of such an amount as a percentage of the sum of the current after-tax net income and total employee bonuses：Not Applicable.

（III） The annual report shall assess the effect upon imputed earnings per share of any proposed distribution of employee bonuses and director/supervisor compensation： The Company has expensed the employee bonus and Director/Supervisor remuneration for fiscal year 2009 since the policy began in 2008. Therefore the pro forma earnings per share is the same as the earnings per share in its financial statements.

d. The actual distribution of employee bonuses and director/supervisor compensation for

the previous fiscal year (with an indication of the number, dollar amount, and stock price, of the shares distributed), and, if there is any discrepancy between the actual distribution

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and the recognized employee bonuses and director/supervisor compensation, additionally the discrepancy, cause, and how it was treated： The actual distribution and the differences for fiscal year 2008 are as follows:

Expressed in NT 1,000

Distribution items

Actual distribution

Amount accrued Difference

Reason and treatment for differences

Shares Issued Share Price

Remuneration of directors and supervisors

12,237 12,240 3 (Note 1) - -

Profit sharing to employees - in

cash

45,000 45,000 0 - - -

Profit sharing to employees - in

stock

411,445 411,445 0 - 2,283,292 shares

180.198 (Note 2)

Note1：This was an estimating difference and the difference was already recognized as expense in 2009. Note2：The price was caculated based on the closing price on the last business day (NT$188 on April 29, 2009)

before 2009 shareholders’ meeting and adjusted the closing price to take the effect of dividends into consideration.

(9) Status of treasury stocks：

April.11 2010

Items First Second Third

Purpose of the buyback Transfer to employee Transfer to employee Transfer to employee

Buyback period 2007.12.28~2008.02.27 2008.10.16~2008.12.15 2008.12.24~2009.02.23

Proposed price range of the buyback (Note)

BetweenNT$ 160 to NT$328

Between NT$75 to NT$190

Between NT$80.9 to NT$152

Number of shares bought back 1,000,000 shares of common stock

965,000 shares of common stock

0 share of common stock

Total cash paid for the buyback (in NTD) NT$ 199,986,047 NT$ 80,847,638 NT$ 0

Number of shares cancelled or transferred 0 share 0 share 0 share

Accumulated holding of treasury stock 1,000,000 shares 1,965,000 shares 1,965,000 shares

Accumulated number of shares as a percentage of total number of outstanding shares（%）

0.76% 1.50% 1.50%

Note: It is allowed to buy back shares even though the market price is lower than the lowest price of the price range.

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2. Corporate Bonds: Not applicable.

3. Preferred Stocks: Not applicable.

4. GDR/ADR: Not applicable.。

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5. Employee Stock Option：

(1) The Status of Employee Stock Options: April.11 2010

ESOP Granted Third Round Fourth Round Approved Date by the Securities & Futures Bureau 8/15/2005 12/24/2007

Issuing Date

11/24/2005 issued 440 units 1/16/2006 issued 110 units 2/24/2006 issued 30 units

4/11/2006 issued 225 units

12/27/2007 issued 5,000 units

Option Duration 6 years 6 years Number of Options Granted 1,000 units 5,000 units Percentage of Shares Exercisable to Outstanding Common Shares (%) 1.06% 4.27%

Source of Option Shares New Common Share Vesting Schedule 2nd Year: up to 50%, 3rd Year: up to 75%, 4th Year: up to 100% Shares exercised 640,000 shares 832,500 shares Value of Shares Exercised (NT$1,000)

6,758 161,422

Shares Unexercised (Note) 77,500 shares 3,192,500 shares

Execrise Price Per Shae(NT$) (Note) 10.00 193.9

Percentage of Shares Unexercised to Outstanding Common Shares (%)

0.06 % 2.41 %

Impact to Shareholders’ Equity

If all unexercised options are exercised, the capital is only increased by 0.06%. The dilution effect is expected to be limited.

The exercise price was equal tothe closing stock price on the date when the ESOP was granted.The exercise price was actually the same as market price. And employees canexercise the options two years or more after the issuing date. If all unexercised options are exercised, the outstanding shares will be increased by 2.41%. Because the excrise price equalsto NT$193.9, which is higher than net value per share, the exercise of options will increase the net value per share.

Note：Numbers expressed in this table are prices after adjustments in accordance with their respective rules

governing stock option issuance and execrise。

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(2) List of Managers and Top 10 Employees (whose execrise amount is higher than NT$ 30,000 thousand) Participating in Employee Stock Option Plan

April.11.2010 Options exercised Options unexercised

Title Name

N u mb e r o f

o p t io ns g r a n t e d ( s h a r es )

% of shares

exercisable

to

outstanding

Common

Shares

Shares exercised

Price of shares

exercised( $ )

Total value of shares

exercised ($K)

% of exercised shares to

outstanding common shares

Shares unexercised

(shares)

Execrise prise ($)

Total exercise

amount of shares

unexercised ($K)

% of unexercised

shares to outstanding

common shares


Vice President Jason Lu

Director Vincent Yen

Director Ming-Tsan Kao

Senior Department Manager, Finance & Accounting Dept

Mei-Wei Lo

751,000 0.57% 40,000

50,000

11.04

10.00942 0.07%

50,000

611,000

10

193.9 118,973 0.51%

Note：There was no employee granted ESOP that exercisable shares accounted for the top 10 and total exercised value was over 30 million.

6. Status of New Shares Issuance in Connection with Mergers and Acquisitions：None.

7. Execution status of Financing：

2009 private placement of common shares. (一) Description of the plan：

(1)Date of Shareholder’s Meeting resolution：On April 30, 2009, the board of the directors of the Company was authorized by the shareholders' meeting to issue no more than 2,000 thousand new common shares by private placement.

(2)Date of posting information regarding private placement to the website specified by the Financial Supervisory Commission：July 23, 2009

(3)The source of funds：issued 1,500 thousand new common shares by private placement with a issuing price of NT$146.02 per share. Total amount received was NT$219,030 thousand.

(4)Items and Fund Utilization Plan ： Items Expected completion

date Total funds required

Research and development, R&D equipment and facilities, working capital

3Q2010 NT$ 219,030,000

(二) Status of implementation：

(1) status of implementation：

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Progress of funds’ application Items

3Q2009 4Q2009 Total

Amount Paid NT$ 38,229,895 NT$ 56,746,550 NT$ 94,976,445 Research and development, R&D equipment and facilities, working capital

Implementation % 17.45 % 25.91 % 43.36 %

Comparison between actual status and the planned schedule

The implementation % was 43.36% till the end of 2009, which was the same as scheduled. This plan is expected to be completed in the third quarter 2010.

(2) Expected benefits：The purpose of the cash offering by private placement is to bring in strategic

partnerships, which would strengthen the Company and improve its competitiveness. All of which can ensure the Company’s long-term growth and development. The funds from the cash offering by private placement would be used in research and development, capital spending for R&D equipments and facilities as well as bolstering the Company’s working capital, which would strengthen the financial health.

(3) Achievement of the expected benefits Unit：NT 1,000，％

Item 2008 2009 Current assets 5,386,431 5,612,533 Current liabilities 1,249,816 1,140,174 Total Liabilities 1,256,722 1,146,484

Financial Information

Fixed assets 247,740 274,534 shareholders’ equity ratio 79.98% 83.61% shareholders’ equity to fixed assets ratio 2,028% 2,130%

Capital Structure

Long-term capital to fixed assets ratio 2,028% 2,130%

Current ratio 430.98% 492.25% Ability to repay debts Quick ratio 404.32% 464.23%

By comparing the financial number above, the differences indicated that the Company’s overall financials and debt-paying ability have all been obviously improved, demonstrating the effectiveness of the plan.

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V.Business Activities

1. Business Scope (1) Business Scope：

a.The main business activities of PixArt include： (I). CMOS Image Sensor

(II). Image processor

(III). Image sensor in single chip Any trade business associated with the aforementioned products

b.Revenue Mix： Unit：NT$ 1,000

2008 2009 YearProduct Amount % Amount % CMOS Image Sensor 4,801,128 99.92 3,730,567 99.36Others 3,743 0.08 23,865 0.64

Total 4,804,871 100.00 3,754,432 100.00

c. Major products and services ： Category Description

CMOS Image Sensor and Application IC

A.Color/Mono Image Sensor B.Optical、Laser and Finger Mouse Chip C.PC and NB Camera SOC Solution D.SOC Sensor with Multi-Object–Tracking (MOT) Engine E.DSP Chip for mobile phone / NB and PC Camera

F.Optical touch solutions

d. New Products Planned for Development：

(a) Integrated sensors for PC/NB.

(b) Sensors for wireless, energy-efficient and integrated optical/laser/touch mice.

(c) Various man-machine interface (MMI) products.

(2) Industry summary：

a. Industry overview and outlook

The application of digital imaging has become more and more prevalent in recent years as evidenced by the popularity of mobile handsets with imaging capabilities, digital cameras, digital video cameras, and digital image/video products. The main component of these products is the image sensor. The two mainstream types of image sensors available in the market are charge coupled devices (CCD) and complementary metal oxide semiconductors (CMOS). CCD Image sensor components have long been dominated by Japanese companies. The manufacturing process for CMOS image sensors is similar to the process for CMOS used for semiconductors. As Taiwan and China’s know-how in the manufacturing process for CMOS semiconductors along with support from both upstream and downstream, CMOS image sensors have become an

- 34 -

important market for Taiwanese and Chinese companies to penertrate into the image sensor industry. In recent years, Taiwan and China’s CMOS image sensor component industry chain has gradually been formed. CMOS image sensors have a wide range of applications, such as PC Mouse, mobile handsets, PC/NB cameras, digital cameras, video conferencing, intelligent security systems, car reverse sensors, gaming consoles, toys, industrial & medical applications, and newly launched products such as optical touch PCs and optical finger mice (OFM). This trend has not only helped drive the rapid growth of the CMOS market, but also provides lots of opportunities for companies to develop application products.

b. Relationship between downstream, midstream, and upstream

The relationship between the downstream, midstream, and upstream players in Taiwan’s IC industry is shown in the following table. The players are upstream IC design companies, midstream IC wafer fabrication companies, and downstream IC packaging and testing companies. Unlike foreign IC companies that undertake the entire process (design, fabrication, packaging, and testing) and IC companies in Southeast Asia that only undertake downstream packaging and testing, Taiwanese IC companies tend to specialize in a specific area of expertise. Each of the three market segments are made up of several competitors and a clear division of labor can be seen as a result.

Breakdown of Taiwan’s IC industry by upstream, midstream, downstream

Structure Function Manufacturing Process Upstream Design Logic design, circuit design, layout

Midstream Mask and

Wafer fabrication

Oxidation, mask house, etching, ion diffusion, ion implant, CVD (chemical vapor deposition), metal sputtering, wafer inspection

Downstream Packing and testing Die saw, pick and place, wire bonder, tray, test

c. Product development trend

(I). Low-power

The mobile application of digital imaging has become a clear trend in recent years, such as in mobile handsets or toys. The two major issues for the mobile application of digital imaging are “size” and “energy consumption, which will also be the determining factors for whether CCD or CMOS becomes mainstream. On this matter, CMOS has an advantage over CCD because of its small size, low-power consumption, low cost, and high level of integration with mobile handsets. Therefore CMOS is perfectly suited for the market needs of mobile handset and toys.

(II). Miniaturization and integration with wiring

Portable imaging products need to be light, thin, short, and small. The miniaturization of CMOS is a major competitive advantage over CCD.

d. Overview of market competition The two mainstream products in the image sensor market are CCD and CMOS. These two technologies have their own niche markets due to their inherent characteristics. CMOS’s main advantages are low-power, low cost, and high level of integration.

- 35 -

Therefore CMOS is used in webcams, intelligent toys with interactive image sensors, and mobile handsets with color imaging, etc. As for CCD technology, the research, development, and manufacturing of CCD technology have been controlled by Japanese companies such as Sony, Sharp, Sanyo, Panasonic, and Fuji. On the other hand, the manufacturing process for CMOS image sensors is similar to the process for CMOS used for semiconductors. As CMOS imaging quality technology advanced, it is not only developing its own application market but also continuing to overtake the markets occupied by CCD technology. We foresee CMOS technology becoming the mainstream product in the industry. The compound annual growth rate for CMOS should be higher than that of CCD. While CMOS technology has been in the hands of European and American companies, Taiwan has made great advances in terms of both the technology and manufacturing process, thanks to strong support from both upstream and downstream companies. We also foresee the rise of competitors from Korea and Mainland China and we should be careful of competition from these new entrants. The competitive landscape for CMOS differs from that of CCD, which mainly consists of Japanese manufacturers. Strong competition comes from the U.S., Korea, Japan, Taiwan, and China, among others with companies such as Aptina, Samsung, Omnivision, Hynix, GalaxyCore, and BYD. More competitors make up a more fierce competitive landscape for CMOS. Competition also varies depending on the type of products.

(3) Technology and R&D：

a. Summary of R&D expenses： Unit：NT$ 1,000

Year Item 2008 2009 Jan.1, 2010 to Mar. 31

2009(un-audited)

R&D expenses 536,738 483,454 132,769

b. R&D accomplishments

R&D Accomplishments Introduced Optical Finger Mouse. Cooperation with customer on developing Distance Measure Sensor

technology. Successfully developed Human Sensing Device.

(4) Short-term and long-term business development plans:

a. Short-term development plan

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(I) Marketing strategy

I-1. Expanding the current marketing channels and exploit potential markets. I-2. Aggressively developing relationships with overseas and domestic customers on

optical mice, PC/NB cameras, and other application products to increase market share.

I-3. Strengthen customer service to current customers in order to maintain long-term relationships.

(II) Manufacturing strategy

II-1. Strengthen relationships with wafer foundries, packaging and testing companies, and other partners both domestically and abroad to secure sufficient capacity.

II-2. Sign cooperative contracts with major wafer foundries both in Taiwan and abroad to secure wafer supplies and provide more options for customers.

II-3. Establish information systems connected to downstream packaging and testing plants in order to monitor and control production quantity and progress.

(III) Product strategy

III-1. Continue to develop high potential products, such as small, high-resolution, and low-power image sensor components and products with human-machine interfaces that utilize CMOS image sensors as the input device.

III-2. Continue to integrate circuit and interface in order to improve the added value of image sensor IC and its application.

(IV) Business strategy

IV-1. Aggressively expand the product line and maintain competitive advantage through superior technology and cost control.

IV-2. Aggressively implement advanced manufacturing process and expand research and development in advanced products with high technology.

IV-3. Aggressively develop channels abroad.

b Long-term development plan

(I) Marketing strategy

I-1. Expand sales channels and strengthen market research (consumption, manufacturing, product trends). Develop strategies that meet international trends in order to raise awareness and market share.

I-2. Aggressively develop professional sales personnel, improve ability for international marketing, and develop sales partnerships with world-class international companies.

I-3. Continue to strengthen professional marketing personnel and aim to gain major international companies and agencies as customers. The ultimate goal is to become a globally recognized brand with a strong global sales network.

(II). Manufacturing strategy

II-1. Provide a timely, precise, and complete virtual manufacturing environment

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through stable outsourcing partnerships with manufacturers. II-2. Continue to maintain cost competitive advantage through adopting advanced

manufacturing process and cost reduction. II-3. Maintain strong working relationships with wafer foundries. Avoid over-

dependency by exploring new partnerships and evaluate the feasibility of investments in wafer foundries.

(III) Product strategy

III-1. Maintain technological advantages through continual investment in research and development of next-generation products.

III-2.Maintain market-leading positions for the existing product lines through advancing technology capabilities.

III-3.Increase the density of IC components, increase the development ratio of mixed-signal ICs, and realize system-on-a-chip technology in order to maintain product line’s competitive advantage. Maintain high levels of growth through continual product innovation.

(IV) Business strategy

Integrate marketing, manufacturing, and product strategy to improve overall business operations to expand business scale. We aim to bcecome an internationally recognized IC design company.

2. Market and sales overview

(1) Market analysis a. Main products by area：

Unit：NT$ 1,000 2008 2009 Year

Region Amount % Amount % Domestic Sales 455,648 9.48 366,864 9.77Export Sales 4,349,223 90.52 3,387,568 90.23合計 4,804,871 100.00 3,754,432 100.00Note: expressed in net sales.

b. Main competitors and market share：

PixArt’s main competitors for its various products include Avago, OmniVision, Aptina, Hynix, Samsung, SETi, Galaxycore, Sonix, Vimicro etc. Our products have a wide range of applications, such as communications, information, and consumer products. Although our 2009 revenue of NT$3.7 billion accounts for a small portion of Taiwan’s overall IC design industry, it is considered one of the leaders in CMOS image sensor market in terms of CMOS-related products, such as mice, games, and optical touch.

c. Supply and demand outlook and growth

The global recession triggered by the 2009 financial crisis certainly impacted the Company＇s products to varying degrees. Fortunately, the global economy has begun to recover as the result of each government＇s recovery programs. The economy has not only stabilized but also begun to grow. Economic indicators show that the semiconductor industry will likely grow rapidly this year. We will take advantage of such growth opportunities and continue to develop various CMOS image sensor application product with our cutting-edge technologies to meet customers＇ needs and

- 38 -

ensure long-term and stable growth.

d. Competitive advantages

(I). Stable material supply

The Company maintains an excellent working relationship with United Microelectornics Corp. (UMC). The Company and UMC have forged a strong partnership after years of working together. The Company also benefits from stable supplies through the support of other Taiwanese packaging and testing companies.

(II). Professional and experienced

The Company has a professional and experienced management team and focuses on our core business . The team is well versed in industry changes, product development, research and manufacturing processes, marketing, among other areas. The management team’s professionalism is reflected in the Company’s steady top-line growth.

(III). Diverse product lines

The Company’s products lines include optical mouse, PC/NB cameras, digital cameras, mobile handset cameras, gaming and toys, etc. and we can provide a lot of products for our customers.

e. Positive and negative factors in our long-term development and coping strategies：

(I). Positive factors

I-1. CMOS technology can be applied in PC/NB cameras, optical computer mice, mobile handsets cameras, digital cameras, and toys with interactive imaging interfaces, etc. These applications range from information, communication, to consumer products which will help diversify the Company’s exposure to specific industries.

I-2. Electronic product manufacturing is centered in the Greater China area, thus Taiwan has a natural competitive advantage over European and American companies in this industry.

I-3. The Company maintains an excellent working relationship with UMC. The Company benefits from stable supplies through the support of UMC and Taiwanese packaging and testing companies.

(II). Negative factors and our coping strategy

II-1. The negative factors facing the industry are: over-competition, threats from DRAM companies, and pricing pressure. We aim to counter these factors by aggressively investing in research and development, shortening the product cycle, establishing technological entry-barriers, strengthening customer service, maintaining the current customer base, and actively lowering our cost.

II-2. The quality of the CMOS image sensor still very much depends on the wafer foundry’s manufacturing technology and capability. Image sensor quality will be limited if wafer foundries can not make a breakthrough in the 4T manufacturing process. The Company has an excellent working relationship with UMC and will continue to work closely with UMC’s engineers in product

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IC design Simulation Layout CAD Tape out

development to enhance products’ competitiveness. II-3. Patent litigation has become a basic strategy for international high-tech

companies. There is a certain level of uncertainty with patent “warfare” due to the lack of transparency in the patent application process. The Company has taken an aggressive stance in this arena. When appropriate, the Company will engage in patent authorization or patent licensing in order to protect the Company’s portfolio of patents.。

(2) Applications of main products and manufacturing processes：

a. Main products’s applications：

Product line Applications

CMOS image sensor components

PC/NB Camera, digital camera, mobile handset camera, consumer imaging toys, optical mouse, wireless optical mouse, laser mouse, game consoles

b. Manufacturing process of main products：

(I) Flowchart of the product’s manufacturing process：

The Company is an IC design house. Wafer fabrication is outsourced to wafer foundries. After preliminary testing in foundries, wafers are sent to be packaging companies to package the chip. The packaged ICs will be then sent to tesing companies for thoroughly functional testing. The manufacturing process is as follows::

(II) Flowchart of design process

IC products originate from IC design. With tools such as CAD, IC design companies can design ICs by circuit design to meet customers’ or their own specifications..

(III) Mask process

Completed IC design is sent to mask companies in the form of database to product masks. The process requires four steps: exposure, etching, inspection, and shipping.

Raw material

Quartz glass

Raw material

Wafer

Raw material

Lead Frame/PCB

Mask CAD Wafer

Foundry Water Testing

Packaging

Package Testing Finished

Goods

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The completed masks are sent to wafer foundries for manufacturing.

(IV) Wafer manufacturing process

Wafer manufacturing is a sophisticated process that involves thin film depoosition, etching, ion implanting and diffusion etc. The product is ready for shipment after it passes the wafer acceptance test (WAT).

(3) Supply of raw materials：

a. Main raw material: wafers. b. Main supplier: United Microelectronics Corporation (UMC). c. Current market status: UMC is a Taiwanese wafer foundry that is well known for its

high quality and strong capability. UMC has met the Company’s needs both in quantity and the level of cooperation.

(4) Major Suppliers and Customers：

a. Major Suppliers Unit：NT$ 1,000

2008 2009

Ranking Supplier Name

Amount Purchased

Proportion of Total

Purchasesfor the Year

(%)

Relations Supplier Name

Amount Purchased

Proportion of Total

Purchases for the Year

(%)

Relations

1 UMC 809,657 75.17%

Related party in

substance UMC 768,845 82.83%

Related party in

substance Others 267,449 24.83% Others 159,389 17.17% Total 1,077,106 100.00% Total 928,234 100.00%

Reason for change: No significant change in major customers over the last two years. b. Major customers：

Unit：NT$ 1,000 2008 2009

Ranking Customer Name Amount

Proportion of Total Sales for the Year (%)

Relations Customer Name Amount Proportion of

Total Sales for the Year (%)

Relations

1 Customer A 2,600,189 54.12 None Customer A 1,327,790 35.37 None 2 Customer B 947,493 19.72 None Customer B 1,045,233 27.84 None 3 Customer C 380,275 10.13 Others 1,257,189 26.16 Others 1,001,134 26.66 Total 4,804,871 100.00 Total 3,754,432 100.00

Reasons for change： The fluctuations in market demand for each product line resulted in changes in sales to customers. Despite of the changes, there was no significant change in our major customers.

(5) Production Volume and Value over the Last Two Years：

Unit: 1,000pcs/NTD1,000 2008 2009 Year

Main Product

ProductionCapacity

ProductionVolume

ProductionValue

Production Capacity

Production Volume

ProductionValue

CMOS Image Sensor - 199,355 2,591,908 - 193,547 2,074,343

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Note: As a result of oursourcing wafer manufacturing and IC packaging and testing, the production capacity is not applicable.

(6) Sales Volume and Value over the Last Two Years：(experessed in net sales) Unit: 1,000pcs/NTD1,000

2008 2009 Domestic Sales Export Sales Domestic Sales Export Sales

Year Main Product Volume Value Volume Value Volume Value Volume ValueCMOS Image Sensor 19,043 453,391 164,669 4,347,737 23,063 359,971 164,402 3,370,596Others ─ 2,257 ─ 1,486 ─ 6,893 ─ 16,972Total 19,043 455,648 164,669 4,349,223 23,063 366,864 164,402 3,387,568

3. Employees Year 2008 2009 As of Mar. 31, 2010

R&D 103 113 112 Managerial, marketing & sales 58 54 59

Manufacturing 7 7 7

Number of Employees

Total 168 174 178 Average age 34 34 34 Average years of service 2.89 3.38 3.31

Doctoral 5% 7% 8% Master 60% 60% 61% University & College 34% 32% 30% Education

High school 1% 1% 1%

4. Environmental spending disclosure

Since the Company is a IC design house that does not engage in any in-house manufacturing, there is no possibility of pollution. The Company has not had any losses as a direct result of pollution for the recent year and this year till the date of the printing of this annual report.

5. Labor relations

(1)Employee welfare, continuing education, training, retirement schemes

a. Employee welfare

(I) PixArt has established an employee welfare committee, which is responsible for supervising and implementing employee welfare related issues.

(II) PixArt has in place group insurance to supplement the labor insurance. The employees, as well as their spouses, parents, and children are eligible for group insurance coverage.

(III) The Company offers health checks for new employees and annual health checks for all current employees. All employees participate in labor insurance and national health insurance. These benefits are implemented in accordance with related policies and procedures.

b. Continuing education and training

The Company has established procedures governing education and training with the goal of elevating its human resources and competitive advantage. Employees are encouraged to attend various training sessions and seminars both domestically and

- 42 -

abroad. The Company firmly believes that continuing education and training is an important part of sustainable development.

c. Retirement scheme and implementation

The Company’s retirement scheme was established in accordance with the Labor Law. The Company established its Supervisory Committee on Labor Retirement Funds in 2000. The committee is responsible for setting aside the labor’s retirement reserve fund each month and depositing the funds in its name to a designated account at the Bank of Taiwan. The management and spending of the funds shall be in compliance with regulations for the Labor Pension Fund. Starting from July 1st, 2005, the Company is required to set aside the labor’s retirement reserve into the individual labor pension accounts for employees who chose the New System.

d. Labor relations

The Company has strived for harmonious labor relations. In order to accomplish that, the Company values employee welfare and a comfortable working environment. Furthermore, the Company has kept the channel of communication open and employees can air their opinions freely with communication mechanisms in place. Thus far, there have been no disputes between the company and labors

(2) Losses for disputes between company and labor from the past year till the date of printing of this annual report: None.

6. Important Contract Nature of

the Agreement

Counter Party Contract Period Description Restrictive term

Patent and Technology Licensing

Avago Technologies General IP(Singapore Pte. Ltd., Avago Technologies ECBU IP (Singapore) Pte. Ltd.

Since 2006.7.14 Cross license Within the scope of usage according to the term

Development Nintendo Co., Ltd., Since 2006.5.17 Jointly develop pointing device Terms compliance required.

Development Nintendo Co., Ltd., Since 2007.4.7 Jointly develop pointing device Terms compliance required.

Patent and technology Licensing

SMART Technologies ULC According to the contract

Procure technology and patent license for the optical touch system integrator

Within the scope of usage according to the term

- 43 -

VI、Financial Information

1. Condensed Balance Sheet and Income Statement (1) Condensed balance sheet

Currency: NTD 1,000 Financial Information for the last five years Year

Account Title 2005 2006 2007 2008 2009 Current assets 2,577,303 4,412,610 5,215,084 5,386,431 5,612,533 Funds and investments - 300,000 309,767 558,968 1,029,006 Fixed assets 156,539 242,968 248,538 247,740 274,534 Intangible assets 63,968 39,798 33,803 41,297 47,273 Other assets 60,960 53,291 49,327 47,584 31,822 Total assets 2,858,770 5,048,667 5,856,519 6,282,020 6,995,168

before distribution

745,042 845,194 886,295 1,249,816 1,140,174 Current liabilities after

distribution 996,713 1,710,997 1,919,459 1,986,914 (Note 2)

Long-term liabilities - - - - - Other liabilities 6,956 5,877 6,452 6,906 6,310

before distribution

751,998 851,071 892,747 1,256,722 1,146,484 Total Liabilities

after distribution

1,003,669 1,716,874 1,925,911 1,993,820 (Note 2)

Capital(Note 1) 772,385 1,044,514 1,170,840 1,247,355 1,298,639 Capital collected in advance

528 236 105 100 79,117

Capital reserve 772,385 1,044,514 1,170,840 1,247,355 1,298,639 before distribution

1,012,013 2,055,770 2,688,498 2,941,539 3,040,360 Retained earnings after

distribution 601,309 1,070,515 1,581,842 2,192,156 (Note 2)

Treasury stock - - (7,245) (280,834) (280,834) Unrealized gain (loss) from financial instruments

- - - - -

Accumulated translation Adjustment

- - - 72 (238)

Loss on unrecognized pension cost

- - - - -

before distribution

2,106,772 4,197,596 4,963,772 5,025,298 5,848,684 Total shareholders’ equity after

distribution 1,855,101 3,331,793 3,930,608 4,699,645 (Note 2)

Financial data of 2005~2009 are audited by CPA. Note 1：The capital includes the capital stock to be registered. Note 2：The distribution of 2009 retained earnings is not yet resolved.

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(2) Condensed Income Statement Currency: NTD 1,000

Financial information over the last five years Year Subject 2005 2006 2007 2008 2009 Revenue 2,968,431 3,989,478 4,676,943 4,804,871 3,754,432Gross profit 1,111,262 1,832,267 2,130,832 2,333,864 1,747,455Incomes from operation 661,486 1,337,385 1,584,862 1,306,758 907,545Non-operating incomes 43,266 174,847 105,358 109,266 20,039Non-operating expenses (65,087) (34,138) (35,864) (9,491) (27,149)EBT from continuing operations 639,665 1,478,094 1,654,356 1,406,533 900,435

Earnings from continuing operations 613,814 1,454,461 1,617,983 1,359,697 848,204

Accumulated adjustment for change in accounting principle

- - - - -

Net income 613,814 1,454,461 1,617,983 1,359,697 848,204Before retroactive adjustment

8.16 14.61 13.89 11.01 6.72 EPS ($) (Note 1) After retroactive

adjustment 5.77 12.22 12.94 10.90 6.72

Financial data of 2005~2009 are audited by CPA. Note 1：Primary earning per share.

(3) Information on CPAs and Auditors’ Opinions：

Year CPA firm Names of auditors (CPA) Auditors’ opinion

2005 Ernst & Young Chien-Kuo Yang、Ting-Ming Chang Unqualified opinions

2006 Ernst & Young Chien-Kuo Yang、Yi-Hui Huang Modified unqualified opinions

2007 Ernst & Young Chien-Kuo Yang、Yi-Hui Huang Unqualified opinions

2008 Ernst & Young Yi-Hui Huang、Hsin-Ming Hsu Modified unqualified opinions

2009 Ernst & Young Yi-Hui Huang、Hsin-Ming Hsu Modified unqualified opinions

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2. Financial Analysis over the Last Five Years： Financial information from 2004 to 2007 Year

Subject of analysis 2005 2006 2007 2008 2009Debt ratio 26.30 16.86 15.24 20.01 16.39Capital

Structure (%) Long-term capital to fixed assets ratio 1,345.84 1,727.63 1,997.19 2,028.46 2,130.40

Current ratio % 345.93 522.08 588.41 430.98 492.25Quick ratio % 299.00 479.62 528.94 404.32 464.32Ability to

repay debts Times Interest Earned(Times) - - - - -A/R turnover (times) 12.73 8.24 9.20 12.51 9.83A/R collection days 29 44 40 29 37Inventory turnover (times) 4.30 4.99 5.20 4.90 5.54A/P turnover (times) 7.12 4.45 4.59 5.36 6.07Inventory turnover days 85 73 70 75 66Fixed assets turnover (times) 20.65 19.97 19.03 19.36 14.38

Operation ability

Total assets turnover (times) 1.24 1.01 0.86 0.79 0.57Return on assets (%) 25.70 36.79 29.67 22.40 12.78Return to shareholders’ equity (%) 33.40 46.14 35.32 27.22 15.60

Income from operation 87.40 129.74 135.38 111.38 69.89Proportion to paid-in capital(%) EBT 84.52 143.39 141.32 112.90 69.34Net profit margin (%) 20.68 36.46 34.59 28.30 22.59

Before retroactive adjustment 8.16 14.61 13.89 11.01 6.72

Profitability

EPS ($)(Note 2) After retroactive adjustment 5.77 12.22 12.94 10.90 6.72

Cash flow ratio (%) 106.83 168.77 195.45 162.45 103.51Cash flow adequacy ratio (%) 153.31 240.33 210.99 195.95 200.18Cash flow Cash reinvestment ratio(%) 32.93 28.06 17.61 19.95 7.47Operation leverage 1.06 1.04 1.03 1.04 1.06Leverage Financial leverage 1.00 1.00 1.00 1.00 1.00

Changes in financial ratios that exceed 20% in the past two years: a. Operation ability and Profitability：

As a result of revenue decrease in 2009, the turnover rates in A/R, fixed assets and total assets as well as profitability rates were all lower than the rates in 2008.

b. Cash flow： The company’s cash flow ratio and cash reinvestment ratio declined in 2009 due to cash inflow for operating activities decreased as a result of lower profit.

Financial data of 2005~2009 are audited by CPA. Note 1：Before(Including) 2008Y financial analysis has not adopted the amendment of R.O.C. Statement of Financial Accounting Standards No.

10, “Accounting for Inventories” Note 2：Primary earning per share.

The equations for financial ratios are stated as follows: 1. Capital Structure (1) Debt ratio= Total liabilities/ total assets (2) Long-term capital to fixed assets ratio= (Shareholders’ equity + long-term liabilities)/ net fixed assets 2. Ability to repay debts (1) Current ratio = current assets/current liabilities (2) Quick ratio= (current assets – inventory-prepayments)/ current liabilities (3) Times interest earned (times) = EBIT/interest expense for the current period 3. Operation ability (1) A/R (including account receivable and business notes receivable) = net sales / average balance of receivables (including account receivable and business notes receivable) (2) Average A/R turnover days = 365 / A/R turnover times (3) Inventory turnover = cost of goods sold/ average inventory balance (4) A/P turnover (including account payable and business notes payable) = cost of goods sold/average balance of payables(including account payable and business notes payable) (5) Inventory turnover days = 365/ inventory turnover times (6) Fixed assets turnover = net sales/ net fixed assets (7) Total assets turnover = net sales/ total assets 4. Profitability (1) Return on assets = [Earnings + interest expenses x (1 – tax rate)]/average total assets (2) Return on shareholders’ equity = Earnings/ net average shareholders’ equity (3) Net profit margin= Earnings /net sales (4) Earning per share = (earning –preferred stock dividend)/weighed average outstanding shares 5. Cash Flow (1) Cash ratio = net cash flow from operation/ current liabilities (2) Cash flow adequacy ratio = net cash flow from operation over the last five years/ (capital spending + increase in inventory+ cash dividend) in the last five years (3) Cash reinvestment ratio = (net cash flow from operation – cash dividend)/ (gross fixed assets + long-term investment+ other assets + working capital) 6. Leverage: (1) Operation leverage = (net income from operation – variable operating cost and expenses)/ income from operation (2) Financial leverage = income from operation/ (income from operation – interest expenses)

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3. Supervisors’ Review Report

Supervisors’ Review Report

The Financial Statements of PixArt Imaging Inc. in fiscal year 2009 have been duly audited by Ernst & Young and are believed to fairly represent the financial status, operation results and cash flows of PixArt Imaging Inc. We, the Supervisors, have duly reviewed the Financial Statements along with the Business Report and proposal for profits distribution and hereby verify that they comply with the requirements of Company Law and relevant regulations. This Report is duly submitted in accordance with Article 219 of the Company Law, and we hereby submit this report.

To PixArt Imaging Inc. 2010 Annual General Shareholders’ Meeting

PixArt Imaging Inc. Supervisor：Sheng-Cheng Chou

(representative of Novatek Microelectronics Corp.)

April 28, 2010

- 47 -

4.、Financial Statements English Translation of a Report Originally Issued in Chinese

Independent Auditors’ Report

To the Board of Directors and Shareholders of PixArt Imaging Inc. We have audited the accompanying balance sheets of PixArt Imaging Inc. as of December 31, 2009 and 2008, and the related statements of income, changes in shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants and generally accepted auditing standards in the Republic of China (R.O.C.). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PixArt Imaging Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with requirements of the Business Entity Accounting Act and Regulation on Business Entity Accounting Handling with respect to financial accounting standards, Guidelines Governing the Preparation of Financial Reports by Securities Issuers, and accounting principles generally accepted in the Republic of China. As discussed in Note 3(2) to the financial statements, effective from January 1, 2008, the Company has adopted Accounting Research and Development Foundation Interpretation No. 2007-052 and recognized employees’ bonuses and remunerations to directors and supervisors as expenses rather than as a distribution of retained earnings. As described in Note 3(3) to the financial statements, effective from January 1, 2009, the Company has adopted the amendment of R.O.C. Statement of Financial Accounting Standards No. 10, “Accounting for Inventories”. The Company has prepared consolidated financial statements as of December 31, 2009 and 2008 and for the years then ended. We have expressed an unqualified opinion with explanatory paragraph and an unqualified opinion on those consolidated financial statements, respectively. Ernst & Young CERTIFIED PUBLIC ACCOUNTANTS February 23, 2010 Taipei, Taiwan Republic of China

Notice to Readers The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail. The accompanying financial statements are intended only to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in the R.O.C. and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the R.O.C.

2009 2008 2009 2008Current assets NT$’000 NT$’000 Current liabilities NT$’000 NT$’000 Cash and cash equivalents 2, 4(1) 4,766,006 4,680,967 Notes payable - 135,383 Notes receivable, net 2, 4(2) 702 - Accounts payable 187,638 120,349 Accounts receivable, net 2, 4(3) 382,459 328,084 Payables to related parties 5 114,992 103,273 Receivable from related parties, net 5 13,560 - Income tax payable 2, 4(22) 84,517 54,131 Other receivables 4(4) 24,454 25,654 Accrued expenses 2, 4(17) 734,857 829,813 Inventories, net 2, 4(5) 274,741 299,432 Other current liabilities 5 18,170 6,867 Prepayments and other current assets 5 44,726 33,750 Total current liabilities 1,140,174 1,249,816 Deferred income tax assets-current 2, 4(22) 4,518 18,544 Held to maturity financial assets-current 2, 4(6) 101,367 - Total current assets 5,612,533 5,386,431 Other liabilities

Accrued pension liabilities 2, 4(12) 5,975 5,975 Funds and investments Deposits received - 931 Investments accounted for using equity method 2, 4(7) 267,747 258,968 Deferred credits 2 335 - Held to maturity financial assets-noncurrent 2, 4(8) 461,259 - Total other liabilities 6,310 6,906 Financial assets measured at cost-noncurrent 2, 4(9) 300,000 300,000 Total liabilities 1,146,484 1,256,722 Total funds and investments 1,029,006 558,968

Property, plant and equipment 2, 4(10) Shareholders' equity Buildings and facilities 230,416 207,960 Capital 4(13) Research and development equipment 64,449 54,135 Common stock 1,298,589 1,245,803 Miscellaneous equipment 78,564 64,556 Capital stock to be registered 50 1,552 Total cost 373,429 326,651 Capital collected in advance 79,117 100 Less : Accumulated depreciation (107,872) (86,748) Capital reserve Add : Prepayments for equipment 8,977 7,837 Additional paid-in capital 4(14) 1,699,702 1,094,772 Property, plant and equipment, net 274,534 247,740 Donated by shareholders 4(14) 3,816 3,816

Long-term investment transaction 4(14) 106 106 Intangible assets 2, 4(11) Employee stock options 4(14), 4(15) 8,016 18,372 Patents 8,078 1,636 Retained earnings Software 39,195 39,661 Legal reserve 4(16) 594,552 458,582 Total intangible assets 47,273 41,297 Undistributed earnings 4(17), 4(22) 2,445,808 2,482,957

Other adjustmentsOther assets Cumulative translation adjustments 2 (238) 72 Leased assets to others, net 2, 4(10) - 20,989 Treasury stock 2, 4(18) (280,834) (280,834) Refundable deposits 2,093 888 Total stockholders' equity 5,848,684 5,025,298 Deferred assets 2 7,518 8,966 Deferred income tax assets-noncurrent 2, 4(22) 19,211 13,741 Restricted deposits 6 3,000 3,000 Total other assets 31,822 47,584

Total assets 6,995,168 6,282,020 Total liabilities and shareholders' equity 6,995,168 6,282,020

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

LIABILITIES AND SHAREHOLDERS' EQUITY Notes

English Translation of Financial Statements Originally Issued in ChinesePixArt Imaging Inc.BALANCE SHEETS

As of December 31, As of December 31,ASSETS Notes

- 48 -

Gross salesLess : Sales returns Sales discounts Net sales 2, 4(19)Cost of goods sold 3(3), 4(5), 4(20), 5Gross profitsLess : Unrealized gross margin from affiliates 2

Realized gross margin

Operating expenses 4(20), 5 Selling expenses Administrative expenses Research and development expenses　 Total operating expensesOperating incomeNon-operating income and gains Interest income Foreign exchange gain, net 2 Rent revenue Other revenue　 Total non-operating income and gainsNon-operating expenses and losses Loss on equity investments, net 2, 4(7) Foreign exchange loss, net 2 Other expenses 2, 4(20)　 Total non-operating expenses and lossesIncome from continuing operations before income taxIncome tax expense 2, 4(22)Net income

Earnings Per Share 2, 4(21) Before After Before After Basic Earnings Per Share (in New Taiwan Dollars) income tax income tax income tax income tax Net income 7.13$ 6.72$ 11.28$ 10.90$

Diluted Earnings Per Share (in New Taiwan Dollars) Net income 6.99$ 6.58$ 10.89$ 10.53$


(17,725)

2,258 4,124

(839,910)

20,039

(9,203)

3,754,432(2,006,642)

1,747,790 (335)

1,747,455

(1,676) (3,731)

16,115

(98,484) (257,972) (483,454)

907,545

75,739

4,804,871

-2,694 -474

2008

4,809,076 NT$’000 NT$’000

English Translation of Financial Statements Originally Issued in Chinese

2009

3,758,802

PixArt Imaging Inc.STATEMENTS OF INCOME

For the years ended December 31,NotesDescription

(1,027,106) 1,306,758

(117,951) (372,417) (536,738)

(2,471,007)

2,333,864 -

2,333,864

(52,231)

(221)

-

848,204

109,266

1,406,533

1,359,697

900,435 (46,836)

-

(9,491) (8,514)

29,262

141

(27,149)

(977)

1,666

- 49 -

NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000

Balance as of January 1, 2008 1,170,655 185 105 1,091,677 3,816 - 16,081 296,784 2,391,714 - (7,245) 4,963,772 Appropriation and distribution of 2007 earnings : Legal reserve - - - - - - - 161,798 (161,798) - - - Directors' and supervisors' remuneration - - - - - - - - (14,562) - - (14,562) Cash paid for employees' bonuses and Shareholders' dividends - - - - - - - - (1,018,602) - - (1,018,602) Capitalization of employees' bonuses 27,000 - - - - - - - (27,000) - - - Capitalization of stock dividends 46,492 - - - - - - - (46,492) - - - Exercise of employee stock options 1,656 1,367 (5) 3,095 - - (2,927) - - - - 3,186 Employee stock options distributed to employees - - - - - - 5,218 - - - - 5,218 Adjustment from changes in the percentage of ownership in investees - - - - - 106 - - - - - 106 Treasury stock repurchased - - - - - - - - - - (273,589) (273,589) Net income for 2008 - - - - - - - - 1,359,697 - - 1,359,697 Cumulative translation adjustments - - - - - - - - - 72 - 72

Balance as of December 31, 2008 1,245,803 1,552 100 1,094,772 3,816 106 18,372 458,582 2,482,957 72 (280,834) 5,025,298 Appropriation and distribution of 2008 earnings (Note) : Legal reserve - - - - - - - 135,970 (135,970) - - - Cash paid for Shareholders' dividends - - - - - - - - (737,098) - - (737,098) Capitalization of stock dividends 12,285 - - - - - - - (12,285) - - - Capitalization of employees' bonuses 22,833 - - 388,612 - - - - - - - 411,445 Issuance of common stock for cash 15,000 - - 204,030 - - - - - - - 219,030 Exercise of employee stock options 2,668 (1,502) 79,017 12,288 - - (12,288) - - - - 80,183 Employee stock options distributed to employees - - - - - - 1,932 - - - - 1,932 Net income for 2009 - - - - - - - - 848,204 - - 848,204 Cumulative translation adjustments - - - - - - - - - (310) - (310)

Balance as of December 31, 2009 1,298,589 50 79,117 1,699,702 3,816 106 8,016 594,552 2,445,808 (238) (280,834) 5,848,684

Retained earnings

Legalreserve

Undistributedearnings

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

(Note) : Profit sharing to employees and bonus to directors in the amount of NT$456,445 thousand and NT$12,240 thousand, had been charged against earnings of 2008.

Treasurystock

Capital stock tobe registered

Long-terminvestmenttransaction

Commonstock

English Translation of Financial Statements Originally Issued in ChinesePixArt Imaging Inc.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Description

Capital reserveCumulativetranslation

adjustmentsTotalAdditional paid-

in capital Donated byshareholders

Employee stockoptions

Capital collectedin advance

- 50 -

2009 2008Cash flows from operating activities : NT$’000 NT$’000

Net income 848,204$ 1,359,697$ Adjustments to reconcile net income to net cash provided by operating activities : Unrealized gross margin from affiliates 335 - Depreciation (including leased assets) 20,668 19,460 Amortization 31,499 30,855 Amortization of financial assets discount or premium 3,138 - Employee stock options distributed to employees 1,932 5,218 Provision (reversal) of allowance for loss on decline in market value and obsolescence of inventories (57,928) 83,871 Net loss on equity investments 17,725 977 Deferred income tax 8,556 (7,823) Changes in operating assets and liabilities: Notes receivable (702) 160 Accounts receivable (54,375) 72,615 Receivable from related parties (13,560) - Other receivables 1,200 (9,492) Inventories 82,619 136,041 Prepayments and other current assets (10,976) (25,325) Notes payable (135,383) (25,193) Accounts payable 67,289 (80,537) Payables to related parties 11,719 (68,082) Income tax payable 30,386 29,461 Accrued expenses 316,489 503,469 Other current liabilities 11,303 4,403 Accrued pension liabilities - 543

　 Net cash provided by operating activities 1,180,138 2,030,318 Cash flows from investing activities :

Increase in investments accounted for using equity method (26,814) (250,000) Increase in held to maturity financial assets (565,764) - Purchase of property, plant and equipment (26,496) (19,365) Proceeds from disposal of property, plant and equipment 23 - Increase in intangible assets (30,102) (31,482) Increase in refundable deposits (1,205) (535) Increase in deferred assets (5,925) (7,399)

　 Net cash used in investing activities (656,283) (308,781) Cash flows from financing activities :

Decrease in deposits received (931) (89) Directors' and supervisors' remuneration - (14,562) Shareholders' dividends (737,098) (906,602) Employees' bonuses - (112,000) Issuance of common stock for cash 219,030 - Exercise of employee stock options 80,183 3,186 Treasury stock repurchased - (273,589) 　 Net cash used in financing activities (438,816) (1,303,656)

Net increase in cash and cash equivalents 85,039 417,881 Cash and cash equivalents at the beginning of the year 4,680,967 4,263,086 Cash and cash equivalents at the end of the year 4,766,006 4,680,967 Supplemental disclosures of cash flow information :

Income tax paid during the year 13,289 25,199 Non-cash activities :

Stock dividends and employees' bonuses capitalized (including additional paid-in capital) 423,730 73,492


English Translation of Financial Statements Originally Issued in ChinesePixArt Imaging Inc.

STATEMENTS OF CASH FLOWS

For the years ended December 31,Description

- 51 -

English Translation of Financial Statements Originally Issued in Chinese PixArt Imaging Inc.

Notes To Financial Statements

- 52 -

1. HISTORY AND ORGANIZATION PixArt Imaging Inc. (the "Company") was incorporated under the Company Law of the Republic of China in July 13, 1998. The numbers of employees as of December 31, 2009 and 2008 were 175 and 168, respectively. The main activities of the Company are in CMOS image sensor and related IC design, research, production, and sales. The Company’s shares were previously registered and traded as the “Emerging Stock” on Taiwan’s GreTai Securities Market (formerly known as OTC Market) starting July 2003 and have been listed and publicly traded on the OTC Market since May 2006.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with requirements of the Business Entity Accounting Act and Regulation on Business Entity Accounting Handling with respect to financial accounting standards, the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, and accounting principles generally accepted in the Republic of China. Significant accounting policies are summarized as follows: Cash Equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity date that they are subject to an insignificant risk of changes in value from fluctuations in interest rates. Commercial papers, negotiable certificates of deposit, and bank acceptances with original maturities of three months or less are considered to be cash equivalents. Foreign Currency Transactions and Translation of Financial Statements denominated in Foreign Currency A. The Company maintains its accounting records in New Taiwan dollars ("NT Dollars" or

"NT$"), the national currency of the R.O.C. Non-derivative transactions denominated in foreign currencies are recorded in NT Dollars using the exchange rates in effect at the dates of the transactions. When a transaction is settled in a subsequent accounting period, the monetary assets and liabilities denominated in foreign currencies are re-measured on the balance sheet date using the exchange rates prevailing as at that date with the resulting exchange gains or losses included in earnings.


Notes To Financial Statements (Continued)

- 53 -

B. The financial statements of foreign operations are translated into New Taiwan Dollars using the spot rates at the balance sheet date for asset and liability accounts. Shareholders’ equity accounts should be translated at the historical rate except for the beginning balance of the retained earnings, which is the translated amount from the last period carried forward. Dividends are translated at the spot rate of the declaration date. The financial statements of foreign operations are translated into New Taiwan Dollars using the weighted average exchange rates for profit and loss accounts. The accumulated exchange gains or losses resulting from the translation, after adjusting for percentage of ownership, are recorded in the cumulative translation adjustment in stockholders’ equity.

Financial Assets and Financial Liabilities A. Financial asset or liability is recognized on the balance sheet when the Company becomes a

party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets are recognized using either trade date accounting on equity instrument or settlement date accounting on debt security, beneficiary certificate and derivative instrument. As to accounting for de-recognition of financial assets and liabilities, the Company adopted the R.O.C. SFAS No. 33, “Accounting for Transfers of Financial Assets and Extinguishment of Liability”.

B. Upon initial recognition of financial assets or financial liabilities, they shall be measured at

fair value. In the case of a financial asset or financial liability at fair value not through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial assets or financial liabilities shall be included as well.

C. Financial assets or financial liabilities are classified as follows:

a. Financial assets measured at cost Unlisted stock, funds, and other securities without reliable market prices are measured at cost. They are either holdings in unquoted equity instrument or emerging stocks that the Company has no material influence on or derivative assets that are linked to and must be settled by delivery of the abovementioned unquoted equity instruments. When objective evidence of impairment exists, the Company recognizes an impairment loss, which cannot be reversed in subsequent periods.



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b. Held-to-maturity financial assets Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity financial assets if the Company has both the positive intention and ability to hold the financial assets to maturity. Investments intended to be held to maturity are measured at amortized cost. The Company recognizes an impairment loss if objective evidence of impairment loss exists. However, the impairment loss may be reversed if the value of asset recovers subsequently and the Company concludes the recovery is related to improvements in events or factors that originally caused the impairment loss. The new cost basis as a result of the reversal cannot exceed the amortized cost prior to the impairment.

c. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as in any of the preceding categories. After initial measurement, available-for-sale financial assets are measured at fair value with unrealized gains or losses being recognized directly in equity. When the investment is derecognized, the cumulative gain or loss previously recorded in equity is recognized in profit or loss. If there is objective evidence which indicates that the investment is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders’ equity; for debt securities, the amount of the decrease is recognized in profit or loss, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized. An available-for-sale financial asset that would have met the definition of loans and receivables may be reclassified as the bond portfolios with no active market if the Company has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The financial instrument shall be reclassified at its fair value on the date of reclassification. Any gain or loss already recognized as adjustment to stockholder’s equity shall be amortized and charge to current income. The fair value of the financial instrument on the date of reclassification becomes its new cost or amortized cost, as applicable.



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The fair value for publicly traded securities or close-ended funds is based on closing prices at the balance sheet date, while those of open-ended funds are determined based on net assets value of the balance sheet date. If a published price quotation in an active market does not exist for a financial instrument in its entirety, but active market exists for its component parts, fair value is determined on the basis of the relevant market price for the component part.

Allowance for Doubtful Accounts An allowance for doubtful accounts is provided based on management’s judgment of the collectibility and aging analysis of accounts and other receivables as at balance sheet date. Inventories Inventories are accounted for on a perpetual basis. Raw materials are recorded at actual purchase costs, while the work in process and finished goods are adjusted to costs using the weighted-average method at the end of each month. Prior to December 31, 2008, inventories were stated at the lower of aggregate cost or market value as of the balance sheet date. The market values of raw materials and supplies are determined on the basis of replacement cost while the market values of work in process and finished goods are determined by net realizable values. Effective January 1, 2009, inventories are valued at the lower of cost and net realizable value item by item. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

Investment Accounted for Using Equity Method A. Long-term investments in which the Company holds an interest of 20% or more or has the

ability to exercise significant influence are accounted for under the equity method of accounting. The difference between the investment cost and the net equity value of the investee (‘investment premium’) at the date of acquisition, if arising from depreciable, depletable or amortizable assets, is amortized over remaining economic useful lives of the assets. The remaining unamortized portion of investment premium arising from the difference between the carrying amount of assets and their fair value is eliminated when the difference between carrying amounts of fair value of the assets disappeared.



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Pursuant to the R.O.C. SFAS No. 25 “Business Combinations - Accounting Treatment under Purchased Method”, investment premiums, representing goodwill, are no longer amortized but assessed for impairment at least on an annual basis. If the fair value of the net identifiable assets of the investee exceeds the investment cost, the excess represents investment discount. Investment discounts generated before January 1, 2006, continue to be amortized over the remaining period. Investment discount generated after December 31, 2005 shall be allocated as a pro rata reduction of the amounts that otherwise would have been assigned to all of the acquired noncurrent assets. If the assigned noncurrent assets are not sufficient to cover the excess, the remaining excess shall be recognized as an extraordinary gain in profit or loss.

B. Adjustment to capital reserve is required when the holding percentage changes due to

un-proportional subscription to investee’s new shares issued. If the capital reserve is insufficient, retained earnings are charged. An investor shall stop to use the equity method from the date that it loses the significant influence over an investee and account for the investment in accordance with the R.O.C. SFAS No. 34 “Accounting for Financial Instruments” from that date. The carrying amount of the investment at the date that it ceases to be an associate shall be regarded as its cost on initial measurement as a financial asset.

C. Unrealized gains and losses arising from transactions between the Company and investees

accounted for under equity method or transactions between investees accounted for under equity method are deferred and recognized when realized.

D. The Company’s consolidated financial statements include the accounts of all directly and

indirectly majority owned subsidiaries of the Company and the account of investee in which the Company has a controlling power over but possesses less than 50% ownership.

Property, Plant and Equipment A. Property, plant and equipment are stated at cost. Significant improvements and replacements

are capitalized and depreciated over their estimated useful lives while ordinary repairs and maintenance are expensed as incurred. Interest expenses incurred in the period of such property, plant and equipment in construction or installation will be capitalized. When property, plant and equipment are disposed of, their original cost and accumulated depreciation are written off. Gains or losses on disposal of property, plant and equipment are reported under non-operating income or expenses. Equipments for lease are reclassified as leased assets to others based on its book value. Depreciation derived from leased assets to others at book value is recorded under non-operating expenses.

B. Property, plant and equipment are stated at cost. Depreciation is provided on the straight-line

basis over the following useful lives (The salvage value of property, plant and equipment that continues to be in use after reaching its originally estimated useful life shall be depreciated over its estimated remaining useful life).



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Buildings and facilities 50 years Research and development equipment 3 years Miscellaneous equipment 2 to10 years Lease Assets 50 years

Intangible Assets A. Software, patents and other separately identifiable intangibles with finite lives are stated at

cost and amortized on a straight-line basis over the following useful lives:

Software 3 to 5 Years Patents and Others 3 to 5 Years The Company will reassess the useful lives and the amortization method of its recognized intangible assets at the end of each reporting period. If there is any change to be made, it will be treated as change of accounting estimation.

B. Expenditures related to research activities as well as those expenditures not meeting the

criteria for capitalization are expensed when incurred. Expenditures related to development activities meeting the criteria for capitalization are capitalized.

Deferred Assets Deferred charges are stated at cost and amortized on a straight-line basis over their estimated economic lives, normally 2 years.

Asset Impairment Pursuant to R.O.C. SFAS No. 35, “Accounting for Assets Impairment”, the Company is required to perform (1) impairment testing on goodwill annually; (2) impairment testing for intangible assets which have indefinite lives or are not available for use annually; and (3) evaluating whether indicators of impairment exist for assets subject to guidelines set forth under the Statement. The Statement requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.



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Impairment losses shall be recognized when the carrying amount exceeds the recoverable amount. Impairment losses on goodwill shall not be reversed subsequently. For assets other than goodwill impaired in prior periods, if the amount of the impairment loss decreases and the decreases is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss can be reversed to the extent of the impaired amount. The reversal may not result in a carrying amount that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. Revenue Recognition Revenue is recognized in accordance with R.O.C. Statement of Financial Accounting Standards No. 32, “Accounting for Revenue Recognition.”

Capital expenditures vs. revenue expenditures An expenditure is capitalized if it increases the future service potential of the assets and the purchase price exceeds a certain monetary threshold. Otherwise, expenditures are expensed as incurred. Pension plan A. All regular employees are entitled to a pension plan that is managed by an independently

administered pension fund committee. Fund assets are deposited in the committee’s name in the Taiwan Bank and, hence, are not associated with or controlled by the Company. Therefore, fund assets are not included in the Company’s financial statements. Pension benefits for employees of the subsidiaries are provided in accordance with the relevant local regulations.

B. The Labor Pension Act of the R.O.C. (‘the Act’), which is accounted for as a defined

contribution plan, became effective July 1, 2005. Employees covered by the Labor Standards Law (“the Law”), which is accounted for as a defined benefit plan, were allowed to either elect the pension calculation under the Act or continue to be subject to the pension scheme under the Law. Those employees who elect to be under the Act will retain their seniority achieved under the Labor Standards Law. Under the Act, the Company will make monthly contributions at no less than 6% of these employees’ monthly wages to the employees’ individual pension accounts.



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C. The accounting for the Company’s pension liability is computed in accordance with R.O.C. SFAS No.18. Net pension costs of the defined benefit plan are recorded based on actuarial valuations. Pension cost components such as service cost, interest cost, expected return on plan assets, the amortization of net obligation at transition, pension gain or loss, and prior service cost, are all taken into consideration. Net transition obligations from the plan assets are amortized using the straight-line method over the employees’ expected average remaining service period of 15 years. The Company recognizes expenses from the defined contribution pension plan in the period when the contribution becomes due.

Income taxes A. The Company adopted R.O.C. SFAS No. 22, “Accounting for Income Taxes” for

inter-period and intra-period income tax allocation. Under the Statement, the tax effects of taxable temporary differences are recognized as deferred income tax liabilities while those of deductible temporary differences, loss carry-forward, and investment tax credits are recognized as deferred income tax assets. A valuation allowance on deferred income tax assets is provided to the extent that it is more likely than not that the tax benefits will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, its classification is based on the expected reversal date of the temporary difference.

B. Income tax (10%) on un-appropriated earnings is recorded as an expense in the year

following current fiscal year on the portion that the shareholders resolve the earnings not to be distributed.

C. According to R.O.C. SFAS No. 12, “Accounting for Income Tax Credits”, the Company

recognizes the tax benefit from the purchase of equipment and technology, research and development expenditure, employee training, and certain equity investment using the flow-through method.

D. The Income Basic Tax Act of the R.O.C. (the IBTA) became effective on January 1, 2006.

Set up by the Executive Yuan, the IBTA is a supplemental 10% tax that is payable if the income tax payable determined under the R.O.C. Income Tax Act is below the minimum amount as prescribed by the IBTA. The IBTA is calculated based on taxable income as defined by the IBTA, which includes most income that is exempted from income tax under various legislations. The impact of the IBTA has been considered in the calculation of the Company’s income tax for the current reporting period.



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Earnings Per Share Earnings per share are computed according to R.O.C. SFAS No. 24, “Earnings per Share.”

Treasury Stock In accordance with R.O.C. SFAS No. 30, “Accounting for Treasury Stock”, treasury stock held by the Company is accounted for under the cost method. When treasury stock is retired, the treasury stock account is credited and all capital account balances related to the treasury shares, including capital reserve - treasury stock transactions, are reduced on a proportionate basis. Any difference, if on credit side, is recorded in capital reserve - treasury stock transactions; if on debit side, retained earnings is reduced.

Employee Stock Option The Company used intrinsic value method to recognize compensation cost for its employee stock options issued between January 1, 2004 and December 31, 2007, in accordance with Accounting Research and Development Foundation interpretation Nos. 2003-070~072. Under the method, the excess of the market price over exercise price at the plan date is adjusted under shareholders’ equity and expensed over vesting periods. Disclosure of pro forma information for net income and earnings per share using fair value method is required. For stock options granted on or after January 1, 2008, the Company recognizes compensation cost using the fair value method in accordance with R.O.C. SFAS No. 39 “Accounting for Share-Based Payment.” In accordance with R.O.C. SFAS No. 39, share-based payment transaction shall be measured by reference to the fair value of the equity instruments at the date when they are granted. The fair value is determined by an external appraisal using an appropriate pricing model. The Company enters into equity-settled share-based payment transaction only with its employees. Pursuant to R.O.C. SFAS No. 39, the goods or services received under such transaction, and the corresponding increase in equity, shall be measured by reference to the fair value of the equity instruments granted. If there is no limitation or condition to the vesting of equity instrument, the equity instrument is deemed to vest at the grant date. The employee compensation costs and a correspondent equity are recognized then. If the equity instrument is vested over a certain period of time, the employee compensation costs shall be recognized over that period with a corresponding increase in equity.



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In valuing the fair value of the equity instrument granted, no account is taken of any vesting conditions other than market conditions. Instead, non-market vesting conditions shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount, so that, ultimately, the amount recognized for goods or services received as consideration for the equity instruments granted shall be based on actual number of equity instruments that eventually vest. For grants of equity instruments with market conditions, the Company shall recognize the goods or services received from a counterparty that satisfies all other vesting conditions, irrespective of whether the market condition is satisfied.

Employee Bonuses and Remunerations Paid to Directors and Supervisors In accordance with Accounting Research and Development Foundation interpretation No. 2007-052 effective January 1, 2008, employee bonuses and remunerations paid to directors and supervisors are charged to income statements at fair value.

3. REASONS AND EFFECTS FOR ACCOUNTING CHANGES

(1) Effective from January 1, 2008, the Company adopted R.O.C. SFAS No. 39, “Accounting for Share-Based Payment” to account for share-based payments transactions. This change in accounting principles has no significant impact on the Company’s net income and EPS for the year then ended December 31, 2008.

(2) Effective January 1, 2008, the Company adopted Accounting Research and Development

Foundation interpretation No. 2007-052 to account for employee bonuses and remunerations paid to directors and supervisors.

(3) Effective January 1, 2009, the Company adopted the newly revised ROC SFAS No. 10,

“Accounting for Inventories”. The main revision is as follows: a. Inventories are valued at the lower of cost and net realizable value item by item; b. Unallocated overheads resulted from low production or idle capacity are recognized as costs

of goods sold in the period in which they are incurred; and c. Abnormal amounts of production cost and loss on decline in the market value of inventories

(or gains on recovery in market value of inventories) are recognized as cost of goods sold. Such changes in accounting principle did not have significant impacts on the Company’s financial statements for the year ended December 31, 2009. The non-operating income of NT$3,085 thousand and the non-operating expense of NT$83,871 thousand for the year ended December 31, 2008 were reclassified to cost of goods sold accordingly.



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4. CONTENTS OF SIGNIFICANT ACCOUNTS (1) Cash and Cash Equivalents

As of December 31, 2009 2008 NT$’000 NT$’000 Cash 50 50 Saving and checking 281,078 153,085 Time deposit 4,160,000 4,200,000 Cash equivalents-CP-Repo 324,878 327,832 Total 4,766,006 4,680,967

(2) Notes Receivable

As of December 31, 2009 2008 NT$’000 NT$’000 Notes receivable 702 - Less: Allowance for doubtful accounts - - Net 702 -

(3) Accounts Receivable

As of December 31, 2009 2008 NT$’000 NT$’000 Accounts receivable 407,853 353,478 Less: Allowance for doubtful accounts (19,570) (19,570)

Allowance for sales discounts (5,824) (5,824) Net 382,459 328,084

(4) Other Receivables

As of December 31, 2009 2008 NT$’000 NT$’000 VAT refundable 15,121 17,900 Interest receivable 5,560 7,751 Other receivables 3,773 3 Total 24,454 25,654



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(5) Inventories As of December 31, 2009 2008 NT$’000 NT$’000 Raw materials 21,939 6,149 Supplies 5,976 10,963 Work in process 166,054 208,192 Finished goods 115,548 189,911 Total 309,517 415,215 Less: Allowance for loss on decline in market

value and obsolescence

(34,776)

(115,783) Net 274,741 299,432

Because of disposal of inventories, the Company recorded a gain of NT$57,928 thousand on recovery of market value of inventories during the year ended December 31, 2009. The inventory loss provision of NT$83,871 thousand for the year ended December 31, 2008 were reclassified for cost of goods sold.

(6) Held to maturity financial assets-current

As of December 31, 2009

Investment items Shares/units

Amounts (NT$’000)

94 Taiwan Power 3A04 corporate bond 100 101,367

(7) Long-term investments accounted for under equity method

Investee Company Shares/unitsAmounts

(NT$’000) Ownership (%) As of December 31, 2009 Pixart International (BVI) Ltd. 500,000 7,519 100.00 Pixart International (SAMOA) Ltd. 600,000 9,999 100.00 Yuan-Xiang Investment Corp. 20,000,000 200,423 100.00 Yuan-Feng Investment Corp. 5,000,000 49,806 100.00 Total 267,747 As of December 31, 2008 Pixart International(BVI) Ltd. 1 - 100.00 Pixart International (SAMOA) Ltd. 300,000 7,948 100.00 Yuan-Xiang Investment Corp. 20,000,000 200,887 100.00 Yuan-Feng Investment Corp. 5,000,000 50,133 100.00 Total 258,968



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a. For the years ended December 31, 2009 and 2008, the Company recognized investment loss accounted for under the equity method in amount of NT$17,725 thousand and NT$977 thousand, respectively, based on the audited financial statements of the investee companies.

b. In February and October 2009, the Company increased its investment in Pixart

International (BVI) Ltd. in total of NT$17,121 thousand.

c. In October 2009, the Company increased its investment in Pixart International (SAMOA) Ltd. by NT$9,693 thousand.

d. The Company set up Yuan-Xiang Investment Corp. by investing cash of NT$200,000

thousand during April 2008 for 20,000,000 common stocks (100% ownership). A subsidiary of Yuan-Xiang Investment Corp. resolved a right offering for cash. Yuan-Xiang Investment Corp.’s interest in the subsidiary changed since it forgave its preemptive right and subscribed nothings of the new offering. As a result, for the year ended December 31, 2008, the Company has recognized an addition in capital reserve of NT$106 thousand.

e. The Company invests in Yuan-Feng Investment Corp. by cash of NT$50,000 thousand

for 5,000,000 shares (100% ownership) in April 2008.

f. Cumulative translation adjustments resulting from the translation of the Company’s foreign investee accounted for under equity method decreased by NT$310 thousand and increased NT$72 thousand for the years ended December 31, 2009 and 2008, respectively.

g. All of the Company’s subsidiaries have been included in the consolidated financial

statements.

(8) Held to maturity financial assets-noncurrent As of December 31, 2009


Amounts (NT$’000)

95 Formosa Plastics Corp. No.2 corporate bond 50 50,640 95 Formosa Plastics Corp. No.1 corporate bond 100 102,160 90 Formosa Petrochemical co. 2B06 corporate bond 100 103,843 95 Taiwan Power 1A corporate bond 100 101,860 95 CPC 1A corporate bond 100 102,756 461,259



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(9) Financial assets measured at cost-noncurrent As of December 31,

Investee Company 2009 Ownership 2008 Ownership NT$’000 % NT$’000 % Shieh Yong Investment Co., Ltd. 300,000 4.55 300,000 4.55

(10) Property, Plant and Equipment

a. No interest was capitalized for the years ended December 31, 2009 and 2008.

b. The Company had leased part of its buildings and facilities since 2005, which were recorded under leased assets as below. The Company cancelled the lease and utilized the underlying buildings and facilities by its own starting July 1, 2009.

As of December 31,

Items 2009 2008

NT$’000 NT$’000 Buildings and facilities - 22,457 Less : Accumulated depreciation - (1,468) Leased assets to others, net - 20,989

(11) Intangible Assets

As of December 31, 2009 Patents Software Total

Original cost NT$’000 NT$’000 NT$’000 Balance at beginning of period 1,900 61,314 63,214 Increase – separately acquired 4,207 25,895 30,102 Decrease – disposed - (9,741) (9,741) Reclassification 6,834 (6,834) -

Balance at end of period 12,941 70,634 83,575 Accumulated amortization Balance at beginning of period 264 21,653 21,917 Increase - amortization 3,460 20,666 24,126 Decrease – disposed - (9,741) (9,741) Reclassification 1,139 (1,139) -

Balance at end of period 4,863 31,439 36,302 Net 8,078 39,195 47,273



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Original cost NT$’000 NT$’000 NT$’000 Balance at beginning of period 47,522 40,959 88,481 Increase – separately acquired 1,900 29,582 31,482 Decrease – disposed (47,522) (9,227) (56,749) Balance at end of period 1,900 61,314 63,214 As of December 31, 2008 Patents Software Total Accumulated amortization NT$’000 NT$’000 NT$’000 Balance at beginning of period 39,602 15,076 54,678 Increase – amortization 8,184 15,804 23,988 Decrease – disposed (47,522) (9,227) (56,749) Balance at end of period 264 21,653 21,917 Net 1,636 39,661 41,297

(12) Pension Fund

a. The Company periodically made contribution to a fiduciary account in Bank of Taiwan for its defined benefit pension plan. The fund balances were NT$10,292 thousand and NT$9,156 thousand as of December 31, 2009 and 2008, respectively. The total pension expenses, including net pension cost under the old Standard Labor Law and the pension expenses under the new Labor Pension Act, totaled to NT$10,488 thousand and NT$9,509 thousand for the years ended December 31, 2009 and 2008, respectively. The pension expenses under the Labor Pension Act amounted to NT$9,659 thousand and NT$7,886 thousand, respectively.

b. Pension cost:

For the year ended December 31, 2009 2008

The old Standard Labor Law NT$’000 NT$’000 Service cost 309 761 Interest cost 215 637 Expected return on plan assets (229) (235) Amortization (385) 460 Net periodic pension cost (90) 1,623

Over-accrual 919 - Net periodic pension cost 829 1,623



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For the year ended December 31, 2009 2008 The new Labor Pension Act Pension expenses 9,659 7,886 Total 10,488 9,509

c. The funding status of pension plan under old regulation, which is accounted for as a

defined benefit plan, was summarized as follows: As of December 31, 2009 2008

Benefit obligation NT$’000 NT$’000 Vested benefit obligation - - Non-vested benefit obligation (5,878) (4,434) Accumulated benefit obligation (5,878) (4,434) Effect on projected salary increase (11,580) (4,179) Projected benefit obligation (17,458) (8,613) Fair value of plan assets 10,292 9,156 Funding status (7,166) 543 Unrecognized net transitional benefit obligation 843 963 Unrecognized loss (gain) 1,379 (7,481) Accrued pension liabilities (4,944) (5,975) Over-accrual (1,031) - Accrued pension liabilities (5,975) (5,975)

d. The vested benefit was nil as of December 31, 2009 and 2008.

e. The actuarial assumptions are as follows:

For the year ended December 31, 2009 2008 Discount rate 2.25% 2.50% Rate of salary increase 5.00% 3.00% Expected return on plan assets 2.25% 2.50%

(13) Common Stock

As of January 1, 2008, the Company’s authorized common stock amounted to NT$1,500,000 thousand, divided into 150,000,000 shares (including 7,500,000 shares reserved for exercises of employee stock options) and each share at par value of NT$10. The Company issued common stock amounted to NT$1,170,655 thousand (including NT$185 thousand which were recorded under Common stock to be registered).



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In the shareholders’ general meeting on June 13, 2008, the Company amended its Articles of Incorporation to increase the reserve for the grant of employees’ options to 10,000,000 shares. The shareholders also approved the capitalization of shareholders’ dividend of NT$46,492 thousand and employees’ bonus of NT$27,000 thousand by issuing 7,349,241 new shares, each share at par value of NT$10. The capitalization date was at August 26, 2008 and the governmental approval has been successfully obtained. Based on the resolution of shareholders’ general meeting on April 30, 2009, the Company resolved to issue 3,511,788 new shares, each share at par value of NT$10, for the capitalization of shareholders’ dividend of NT$12,285 thousand and employees’ bonus of NT$411,445 thousand. The capitalization date was set on September 1, 2009 and the government approval has been successfully obtained. On April 30, 2009, the board of the directors of the Company was authorized by the shareholders' meeting to issue new shares from private placement in total shares at no more than 2,000 thousand shares. The issuance can be at one time or multiple times starting from the approval day. The actual issue date and the issue price can be determined based on the investors and market conditions. Accordingly, on July 22, 2009, the Company issued 1,500 thousand new shares from private placement amounting to NT$219,030 thousand, each at a par value on NT$10 while the private placement price per share was on NT$146.02. The government approval has been successfully obtained. Due to the exercise of employees’ stock options granted, additional 301,722 common shares (including 10,000 shares of capital collected in advance) were issued for the year ended December 31, 2008. The governmental approval has been successfully obtained. For the year ended December 31, 2009, additional 533,598 common shares were issued at par value of NT$10 for the exercise of employees’ stock options granted. As of December 31, 2009, 5,000 shares have been issued but not yet registered. They were recorded under the caption of common shares to be registered at par value of NT$50 thousand. Meanwhile, the Company has received subscription of NT$79,117 thousand from exercise of employee options for 427,000 shares, which was recorded under capital collected in advance as of December 31, 2009 due the underlying shares have not yet been issued.



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As of December 31, 2009, the Company’s authorized common stock amounted to NT$1,500,000 thousand, divided into 150,000,000 shares (including 10,000,000 shares reserved for exercises of employee stock options) each share at par value of NT$10. The Company issued common stock amounted to NT$1,377,756 thousand (including NT$1,298,589 thousand of common stocks, NT$50 thousand recorded under common stock to be registered and NT$ 79,117 thousand recorded under capital collected in advance).

(14) Capital Reserve As of December 31,

2009 2008

NT$’000 NT$’000 Additional paid-in capital 1,699,702 1,094,772 Donated by shareholders 3,816 3,816 Long-term equity investment 106 106 Employee stock option 8,016 18,372

Total 1,711,640 1,117,066

According to the R.O.C. Company Law, capital reserve can only be used for making up losses or reclassifying to paid-in capital using only balances in additional paid-in capital or donated assets. The Company shall not use capital reserve to make up its loss unless legal reserve is insufficient for making good such losses. The Company issued 2,283,292 new shares at par value of NT$10 for the capitalization of employees’ bonus of NT$411,445 thousand and generated paid in capital in excess of par value in amount of NT$388,612 thousand. Please refer to Note 4(13) to the financial statements.

(15) Employee Stock Options

The options are valid for six years and exercisable at certain percentage subsequent to the second anniversary from the granted date. Detailed information relevant to the employee stock options is disclosed as follows:



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Date of grant

Total number of options granted (in thousands)

Total number of options outstanding

(in thousands)

Shares Available for option holders

(in thousands)

Exercise price (NTD)

(Remark)

2005.11.24 440 72.5 72,500 10.0 2006.01.16 110 7.5 7,500 10.0 2006.02.24 30 7.5 7,500 10.0 2006.04.11 225 60.5 60,500 10.0 2007.12.27 5,000 3,888 3,888,000 193.9

Remark: The shares available for option holders are subject to adjustments in accordance with the plan

in the event that changes to the capital structure might occur.

The Company used the intrinsic value method to recognize compensation cost for its employee stock options, which are classified as equity-settled share-based payment transaction and issued between 2004 and 2007, in accordance with Accounting Research and Development Foundation interpretation Nos. 2003-070~072. Employees’ stock options granted between 2005 and 2006 were accounted for under intrinsic value method. Accordingly, the Company provides NT$1,932 thousand and NT$5,218 thousand of compensation expense for the years ended December 31, 2009 and 2008, respectively. Because the exercise price at the plan date for stock option plan of 2007 was close to the market price, the Company provided no compensation expense under the intrinsic value method.

The respective information of the units and weighted average exercise prices for stock option plans of the Company is disclosed as follows:

For the year ended December 31, 2009 Options

(in thousand units) Weighted-average Exercise

Price per share (NTD) Outstanding at beginning of period 4,826.5 192.9 Granted - -

Exercised (542) 148.1 Expired (248.5) 180.9 Outstanding at end of period 4,036 187.2

Exercisable at end of period 1,836

Weighted-average fair value of options granted during the period (in NTD)

-



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For the year ended December 31, 2008

Options (in thousand units)

Weighted-average Exercise Price per share (NTD)

Outstanding at beginning of period 5,622 202.7 Granted - -

Exercised (251.5) 10.7 Expired (544) 192.0

Outstanding at end of period 4,826.5 192.9

Exercisable at end of period 78


-

Information for options granted after January 1, 2004 are as follows:

The fair value of the options outstanding as of December 31, 2009 and 2008 were estimated at the date of grant using the Black-Scholes options pricing model. The Company’s pro-forma information is set forth as follows:

Outstanding Stock Options Exercisable Stock Options

Year

Range of Exercise

Price (NTD)

Options (Unit)

Weighted- average

Expected Remaining

Years

Weighted- average Exercise Price per

share (NTD)

Options (Unit)


share (NTD)

Stock option plan of 2005

10 72.5 0.17 10 72.5 $10


10 75.5 0.49 10 23.0 10


193.9 3,888.0 2.25 193.9 1,740.5 193.9

Total 4,036.0 2.18 187.2 1,836.0 184.3



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For the year ended December 31, 2009 2008 Net income-as reported (NT$’000) 848,204 1,359,697 Basic earnings per share-as reported (NT$) 6.72 10.90 Diluted earnings per share -as reported (NT$) 6.58 10.53 Net income-pro forma (NT$’000) 723,105 1,221,596 Basic earnings per share-pro forma (NT$) 5.73 9.79 Diluted earnings per share -pro forma (NT$) 5.61 9.46

Pro forma information under fair value method using Black-Scholes Option Pricing Model is as follows:

(16) Legal Reserve According to the R.O.C. Company Law, 10% of the Company’s net income, after deducting previous years' losses, if any, shall be appropriated for legal reserve prior to any distribution, until such reserve is equal to the Company’s paid-in capital. When legal reserve has reached 50% of paid-in capital, 50% of such reserve may be distributed to the Company’s shareholders through the issuance of additional common shares.

(17) Earnings Distribution and Dividends Distribution Policy According to the Company's Articles of Incorporation, Current year's earnings, if any, shall be distributed in the following order: (a) Income tax obligation; (b) Offsetting accumulated deficits, if any; (c) Legal reserve at 10% of net income after tax; (d) Special reserve in compliance with the Company Law or the Securities and Exchange

Law;

Employee

stock option

plan in 2005

First employee

stock option plan in 2006

Second

employee

stock option

plan in 2006

Third

employee

stock option

plan in 2006

Employee

stock option

plan in 2007Expected dividend yield 1.58% 1.52% 1.90% 1.58% 3.09%Expected volatility 103.54% 119.69% 131.54% 147.96% 48.40%Risk free interest rate 1.63% 1.63% 1.63% 1.63% 2.625%Expected life 4.25 years 4.25 years 4.25 years 4.25 years 4.25 years



- 73 -

(e) Remuneration for directors and supervisors to a maximum of 1% of the remaining Current year’s earnings after deducting for item (a) through to (d).

(f) After deducting for item (a) through to (d) above from the current year’s earnings, no less than 1% of the remaining amount together with the prior years’ unappropriated earnings is to be allocated as employees’ bonus.

(g) The remaining, after all the above appropriations and distributions, may be retained or distributed proportionally as shareholder’s bonus. The distribution will be proposed by the board of directors and resolved in the shareholders’ meeting.

The policy for dividend distribution should reflect factors such as the current and future fund requirements and long-term financial planning. The board of directors shall make the distribution proposal in the subsequent year and submit it to the annual shareholders’ meeting for approval. Since 2008, the distribution of employee bonus and remuneration for directors and supervisors shall be accrued as an expense at the year the employees, directors and supervisors grant their services. If the accrued amount is modified and proposed to shareholders’ meeting by the board of directors in the subsequent year and the difference is not significant, the Company shall recognize the difference in earnings then. If the accrued or proposed amount is further modified at shareholders’ general meeting held in the subsequent year, the Company shall recognize the difference in earnings then as well. In the case that stock, instead of cash, is to distribute for employee bonus purpose, the number of shares distributed will be computed by dividing the amount of bonuses by the closing price (after considering the effect of cash and stock dividends) of the shares on the day immediately preceding the shareholders' meeting. Shareholders’ dividends may be distributed in the form of shares, cash, or a combination of both. Cash dividends may not be less than 10% of total dividends to be distributed. Remuneration for directors and supervisors’ services is limited to cash only. During the years ended December 31, 2009 and 2008, the amounts of the employee bonuses were NT$285,278 thousand and NT$456,445 thousand, respectively. During the year ended December 31, 2009 and 2008, remunerations to directors and supervisors were NT$7,631 thousand and NT$12,240 thousand, respectively. The employee bonuses and remunerations to directors were accrued in accordance with the Company’s Articles of Incorporation and counted without considering the cost of employee bonus and its related income tax. The accrual was charged to earnings.



- 74 -

Based on the resolution of the board of directors’ meeting on March 10, 2009 and April 24, 2008, the Company resolved the distribution of earnings of 2008 and 2007. The distributions of earnings were approved by the shareholders’ general meetings. Details of the settlement of employees’ bonus and remuneration of directors and supervisors were as follows:

As approved in the shareholders’ meeting held on April 30, 2009

As approved by the shareholders’ meeting

on June 13, 2008 NT$’000 except

otherwise stated NT$’000 except

otherwise stated Remuneration of directors and supervisors 12,237 14,562 Profit sharing to employees - in cash 45,000 112,000 Profit sharing to employees - in stock

Amount 411,445 27,000 Number of shares (par value of NT$10) 2,283,292 shares 2,700,000 sharesMarket price (NT dollar) 180.198(Remark) -

Shareholders’ cash dividends 737,098 906,602 Shareholders’ stock dividends

Amount 12,285 46,492 Number of shares (par value of NT$10) 1,228,496 shares 4,649,241 shares

Remark: The profit sharing to employee in stock of 2,283,292 shares was determined by

the closing price of the Company’s common shares (after considering the effect of dividends) of the day immediately preceding the shareholders’ meeting, each share priced at NT$180.198.

The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of the stockholders’ general meeting held on April 30, 2009 and the minor different amount had been charged against earnings of 2009. The detail is as follows:

Distribution items

Amount resolvedby the board of

directors

Amount recognized in accrued year Difference

Reason of differencesand further procedures

NT$’000 NT$’000 NT$’000 Profit sharing to employees - in cash 411,445 411,445 - - Profit sharing to employees - in stock 45,000 45,000 - - Remuneration of directors and supervisors 12,237 12,240 3 (Remark)



- 75 -

Remark: This was an estimated difference and recognized the change as an adjustment to income of 2009.

The information about the appropriations of profit sharing to employees and bonus to directors is available at the Market Observation Post System website.

(18) Treasury Stock The movement of treasury stock for the years ended December 31, 2009 and 2008 is as follows:

January 1, 2009 Additions December 31, 2009

Reason Shares Amount

(NT$’000)Shares

Amount (NT$’000)

Shares Amount

(NT$’000)Transferring

shares to employees 1,965,000 280,834 - - 1,965,000 280,834



(NT$’000)Shares

Amount (NT$’000)

Shares Amount


shares to employees 30,000 7,245 1,935,000 273,589 1,965,000 280,834

a. According to the Securities and Exchange Law of the R.O.C., total shares of treasury

stock shall not exceed 10% of the Company’s issued stock and the total purchase amount shall not exceed the sum of the retained earnings, additional paid-in capital – premiums, and realized additional paid-in capital. The ceiling of number of shares and the dollar amount of treasury stock that the Company could hold as of December 31, 2009 was 12,986,391 shares and NT$4,741,702 thousand and, respectively.

b. Pursuant to the Securities and Exchange Law, treasury stock shall not be pledged, nor

does it possess voting rights or the rights to receive dividends. Treasury stock shall be transferred to employees within three years from the repurchased date or cancelled.

c. None of the Company’s treasury stock was transferred to employees as of December 31,

2009.



- 76 -

(19) Net Operating Revenue For the year ended December 31,

2009 2008

NT$’000 NT$’000 Sale of goods 3,734,937 4,805,333 Other operating revenue 23,865 3,743 Total 3,758,802 4,809,076 Less: Sale returns (2,694) (474) Less: Sale discounts (1,676) (3,731) Net Operating Revenue 3,754,432 4,804,871

(20) Operating Cost and Expenses


Operating costs

Operating expenses

Total Operating

costs

Operating expenses

Total

NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000Personnel Expense Salary & wage 16,185 482,482 498,667 22,885 666,800 689,685

Insurance - 12,848 12,848 - 10,813 10,813 Pension 344 10,144 10,488 324 9,185 9,509 Other expenses - 2,378 2,378 - 2,127 2,127Total 16,529 507,852 524,381 23,209 688,925 712,134

Depreciation (Remark) 672 19,775 20,447 1,459 17,561 19,020

Amortization 6,663 24,836 31,499 15,051 15,804 30,855

Remark: Depreciations amounted to NT$20,668 thousand and NT$19,460 thousand,

including depreciation expenses of leased assets recorded under non-operating expenses-other losses in amount of NT$221 thousand and NT$440 thousand, for the years ended December 31, 2009 and 2008, respectively.



- 77 -

(21) Earnings Per Share The capital structure of the Company is considered complex since there are stock options outstanding. The Company presents basic and diluted earnings per share for the years ended December 31, 2009 and 2008 since its stock options would have a dilutive effect if they had been fully exercised. For the year ended December 31, 2009 2008 In shares In shares

Common shares outstanding, beginning 124,735,528 117,084,010 Employees' stock options exercised(Remark) 79,075 169,670 Purchase treasury stock(Remark) (1,965,000) (1,071,008) Employee’s bonus in shares on Aug. 26, 2008 - 2,699,687 Stock dividends on Aug. 26, 2008 - 4,648,703 Employee’s stock bonus (Remark) 1,538,876 - Capital increase on July 22, 2009 669,863 - Stock dividends on Sep. 1, 2009 1,220,220 1,211,577 Weighted average of shares outstanding for basic EPS

computation 126,278,562 124,742,639

Potential common share equivalents: The dilutive effect of stock options (assuming fully

exercised) 792,952 429,626

Bonus to employees 1,802,106 4,003,902 Weighted-average of dilutive shares outstanding: 128,873,620 129,176,167

Remark: Computed on a weighted-average basis.

Amount (Numerator) Earnings per share Before tax

(NT$’000) After tax

(NT$’000)Shares

(Denominator) Before

tax(NT$)After

tax(NT$)For the year ended December 31, 2009: Basic EPS

Net income 900,435 848,204 126,278,562 7.13 6.72

Diluted EPS Net income 900,435 848,204 128,873,620 6.99 6.58



- 78 -

(22) Income Taxes

a. Tax authorities have assessed the income tax returns up to the year 2006. However, additional income taxes were levied on the Company in total of NT$73,271 thousand for the years 2004, 2005 and 2006. The Company has fully accrued the additional tax liability while filing administrative appeals to tax authority and courts in light that the discrepancy between the Company’s tax return filings and the authority’s assessment resulted from the different viewpoints on the calculation of tax exemption.

b. Pursuant to the “Statute for Upgrading Industries”, the Company is qualified as a

technical service industry and is therefore entitled to an income tax exemption period for five consecutive years on the income generated from qualifying high technology activities. The Company has elected the tax exemption period to start from the year 2004.

c. As of December 31, 2009, unused tax credits available to reduce future taxable income

are as follows: Year incurred

Total credit amount

(NT$’000) Unused amount

(NT$’000) Expired after

2007 71,079 26,313 2011 2008 56,089 36,324 2012

2009(Estimated) 167,931 167,931 2013 Total 295,099 230,568

Investment tax credits have been included in calculation of deferred income tax assets.

d. Deferred income tax assets and liabilities are as follows: As of December 31,

2009 2008 NT$’000 NT$’000

(a) Total deferred income tax liabilities 267 35 (b) Total deferred income tax assets 314,180 438,386 (c) Valuation allowance against deferred tax assets 290,184 406,066

Amount (Numerator) Earnings per share

Before tax

(NT$’000) After tax

(NT$’000) Shares


tax(NT$)After

tax(NT$)For the year ended December 31, 2008: Basic EPS

Net income 1,406,533 1,359,697 124,742,639 11.28 10.90 Diluted EPS

Net income 1,406,533 1,359,697 129,176,167 10.89 10.53



- 79 -

(d)Temporary differences that generated deferred income tax assets or liabilities: As of December 31, 2009 2008 Amount Tax Effect Amount Tax Effect NT$’000 NT$’000 NT$’000 NT$’000

Unrealized estimated expense 334,506 66,901 281,471 70,368 Unrealized pension expense 5,975 1,195 5,975 1,494 Unrealized inventory provision 34,776 6,955 115,783 28,946 Unrealized bad debt expense 15,407 3,081 16,094 4,023 Allowance on sales returns and

discounts

5,824

1,165

5,824 1,456 Unrealized investment loss under

equity method

18,883

3,776

1,889 472 Unrealized gross margin 335 67 - - Unrealized exchange loss 2,357 472 5,454 1,364 Unrealized exchange gain (1,334) (267) (140) (35)Investment tax credits 230,568 330,263

e. As of December 31, 2009 2008

NT$’000 NT$’000Deferred income tax assets-current 78,641 110,465Valuation allowance-deferred income tax assets-current (73,856) (91,886)Net deferred income tax assets-current 4,785 18,579Deferred income tax liabilities-current (267) (35)Net deferred income tax assets and liabilities-current 4,518 18,544

f. As of December 31, 2009 2008 NT$’000 NT$’000 Deferred income tax assets-noncurrent 235,539 327,921 Valuation allowance-deferred income tax

assets-noncurrent (216,328) (314,180)Net deferred income tax assets-noncurrent 19,211 13,741 Deferred income tax liabilities-noncurrent - - Net deferred income tax assets and liabilities- noncurrent 19,211 13,741



- 80 -

g. According to the newly revised Income Tax Law of the R.O.C. on May 27, 2009, thestatutory tax rate of the Company will be changed from 25% to 20% effective January 1, 2010. Income tax payable and income tax expense are reconciled as follows:

For the year ended December 31,

2009 2008

NT$’000 NT$’000 Tax on pre-tax income at statutory tax rate 225,098 351,263 10% income tax on undistributed earnings 47,435 34,953 Tax exemption (199,299) (372,814)Permanent difference 239 (172)Investment tax credits (21,292) (201,825)Decrease in investment tax credits 65,322 - Change in valuation allowance (96,175) 192,268 Assessed additional income tax 41,886 26,450 Taxation separately 231 509 Change in deferred tax assets and liabilities resulting

from the change of statutory tax rate 1,130 -

Estimative change (12,344) 15,844

Income tax expense 52,231 46,836

h. Integrated income tax information: As of December 31,

2009 2008

NT$’000 NT$’000 Balance of the imputation credit account (ICA) 27,664 31,109


2009 2008

Expected (Actual) creditable ratio 1.68%(Remark) 1.72%

Remark：The ratio was computed based on the amount of actual available shareholders’

tax credits plus estimated income tax payable as of December 31, 2009.



- 81 -

i. Information related to undistributed retained earnings As of December 31, 2009 2008 NT$’000 NT$’000

After 1998 2,445,808 2,482,957

5. RELATED PARTY TRANSACTIONS

(1) Related Parties and Relations with the Company Related parties Relations

United Microelectronics Corporation (“UMC”) Related party in substance UMC JAPAN (“UMC-J”) Related party in substance PrimeSensor Technology Inc. (PrimeSensor) Subsidiary’s equity investee Five people, including Jhih-Hong Lu Directors of the Company Three people, including Sheng-Cheng Chou Supervisors of the Company Two people, including Sen-Huang Huang Vice president and above

(2) Major transactions with related parties

a. Sales: For the year ended December 31, 2009 2008

Name of related parties Amount

(NT$’000) Percentage

(%) Amount


(%) PrimeSensor 17,667 0.47 - - Sales prices to the above related parties were similar to those to third-party customers. For the years ended 31 December, 2009, the payment terms for the related party were 30 days and for third-party customers were 30 to 90 days.

b. Purchases: For the year ended December 31, 2009 2008



(%) Amount


(%) UMC 768,845 82.83 809,657 75.17 UMC-J - - 44,703 4.15 Total 768,845 82.83 854,360 79.32



- 82 -

There is no comparable price available from other suppliers for the purchase price from related parties due to unique product specification and customization. Payment terms for above purchase are 45 days from the date of monthly closing. The total cost of wafer purchased from UMC and used for R&D purpose amounting to NT$13,477 thousand and NT$22,942 thousand were recorded under R&D expenses for the years ended December 31, 2009 and 2008. The Company has paid NT$169 thousand to UMC as prepayment as of December 31, 2009.

(3) Technology License Agreement: The technology patent and license agreement was entered into in November 2009 by and between the Company and PrimeSensor. The Company has received NT$7,500 thousand from PrimeSensor and recorded under other current liabilities as of December 31, 2009.

(4) Accounts resulted from the above transactions: Receivables from related parties As of December 31,

2009 2008

Name of related party Amount


(%) Amount


(%) PrimeSensor 13,560 3.42 - - Payables to related parties As of December 31,

2009 2008



(%) Amount


(%) UMC 114,992 38.00 103,273 28.77

(5) Remunerations paid to directors, supervisors and key managers:


Salaries, reward, compensation, special allowance and bonus 44,325 65,358

The information about the compensation of directors and management personnel is available in the annual report for the shareholders’ meeting. Total compensation expense for the year ended December 31, 2009 includes estimated profit sharing to employees and bonus to directors of the Company that relate to 2009 but will be paid in the following year. The actual amount will be finalized and approved upon the resolution of the shareholders’ meeting in 2010. The total compensation for the year ended December 31, 2008 included the bonuses appropriated from earnings of 2008 which was approved by the shareholders’ meeting held in 2009.



- 83 -

6. ASSETS PLEDGED AS COLLATERAL

As of December 31,

Account 2009

(NT$’000)2008

(NT$’000)

Secured financial

institutions Contents Restricted deposits-Non-Current 3,000 3,000 Custom Custom duty guarantee

7. COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of December 31, 2009 were as follows: a. The Company has paid royalty based on certain rate of selling dollar money or quantity for

certain product.

b. The Company has entered into certain lease agreement for land with the Administrative

Bureau of HSIP for its need of operations. Related minimum rental to be incurred in the future

is as follows:

Lease Period Amount (NT$’000)

2010.01.01~2010.12.31 2,449

2011.01.01~2011.12.31 2,449

2012.01.01~2012.12.31 2,449

2013.01.01~2013.12.31 2,449

2014.01.01~2014.12.31 2,449

2015.01.01~2024.12.31 10,931

Total 23,176

8. SIGNIFICANT DISASTER LOSS

None.

9. SIGNIFICANT SUBSEQUENT EVENT

None.



- 84 -

10. OTHER DISCLOSURES

(1) Financial Instruments a. Fair value of financial instruments:

The Company didn’t engage in certain derivative instruments for the years ended December 31, 2009 and 2008. Fair value of financial instruments in non-derivative instruments is shown as follows: As of December 31,

2009 2008

Non-derivative instruments Book value Fair value Book value Fair value

Assets NT$’000 NT$’000 NT$’000 NT$’000

Cash and cash equivalents 4,766,006 4,766,006 4,680,967 4,680,967

Receivables (Including receivables from related

parties)

396,721 396,721 328,084 328,084

Other Receivables 24,454 24,454 25,654 25,654

Held to maturity financial assets 562,626 561,204 - -

Investments accounted for using equity method 267,747 - 258,968 -

Financial assets measured at cost-noncurrent 300,000 - 300,000 -

Refundable deposits 2,093 2,093 888 888

Restricted deposits 3,000 3,000 3,000 3,000

Liabilities

Payables(Including payables to related parties) 302,630 302,630 359,005 359,005

Income tax payable 84,517 84,517 54,131 54,131

Accrued expenses 734,857 734,857 829,813 829,813

Deposits received - - 931 931

(a) The following methods and assumptions were used by the Company in estimating the

fair value of financial instruments: (i) The fair values of the Company’s short-term financial instruments approximate

to their carrying values at the reporting date due to their short maturities. This method was applied to cash and cash equivalents, receivable (including receivables from related parties), other receivables, payables (including payables to related parties), income taxes payables and accrued expenses.



- 85 -

(ii) The fair values of the Company’s refundable deposits, deposits received and

restricted deposits approximate to their carrying value because the Company predicts the future cash inflows or outflows will be of similar amount to the carrying value.

(iii) The fair values of the Company’s investments accounted for under the equity

method were based on quoted market prices, if available, at the reporting date. If the quoted prices were not available and other valuation method was impractical, the Company did not provide the information of fair values.

(iv) The fair values of held-to-maturity financial assets were based on their quoted

market prices, if available, at the reporting date. If market prices were not available, fair values are determined using valuation techniques. Such techniques use rates of returns from similar financial instruments as discount rates.

(v) Financial assets carried at cost are the shares of private companies held by the Company without significant influence and no fair values were available and presentable either.

(b) How the fair value of financial instruments were determined are shown as follows:

Quoted market Valuation method

As of December 31 As of December 31 2009 2008 2009 2008

Financial Assets NT$’000 NT$’000 NT$’000 NT$’000 Cash and cash equivalents 4,441,128 4,353,134 324,878 327,832 Receivables (including receivables from related parties)

- - 396,721 328,084

Other receivables - - 24,454 25,654 Refundable deposits - - 2,093 888 Restricted deposits 3,000 3,000 - -

Financial Liabilities Payables(Including payables to

related parties) - - 302,630 359,005

Income tax payable - - 84,517 54,131 Accrued expenses - - 734,857 734,857 Deposits received - - - 931



- 86 -

(c) Gain (Loss) recognized for the changes in fair value of financial assets estimated using valuation techniques were nil for the years ended December 31, 2009 and 2008, respectively.

b. As of December 31, 2009 and 2008, financial assets exposed to interest rate risk were

NT$2,237,504 thousand and NT$1,927,832 thousand while financial liabilities exposed to interest rate risk were nil.

c. Interest income recognized from financial assets and financial liabilities that are not at

fair value through profit or loss amounted to NT$16,115 thousand and NT$75,739 thousand for the years ended December 31, 2009 and 2008, respectively.

d. Information of financial risks

The Company held certain non-derivative financial instruments, including cash and cash equivalents. The Company held the financial instruments to meet the need in operating cash and also held other financial instruments such as receivables, payables and financial assets measured at cost-noncurrent. Major risks of financial instruments were summarized as follows:

(a) Market risk

Market risk includes currency rate risk. It comes from the purchases or sales activities which are not denominated in functional currency. Had the US dollar appreciated against the NT dollar for one cent, financial assets would increase in fair values by NT$842 thousand and NT$80 thousand as of December 31, 2009 and 2008, respectively.

(b) Credit risk

The Company’s exposure to credit risk arises from potential default of the counter-party or other third-party. The level of exposure depends on several factors, including concentrations of credit risk, components of credit risk, the price of contract and other receivables of financial instruments. The Company’s credit risk mainly comes from the collectibility of accounts receivable while receivable balances are monitored on an ongoing basis and an allowance for doubtful receivables is provided. Thus, the net book value of accounts receivable are properly evaluated and reflect the credit risk the Company exposes to. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk which arises when counter-party or third-party to a financial instrument fails to discharge an obligation and the Company suffer a



- 87 -

financial loss as a result. The Company evaluated the credit risks in considering whether the financial instruments for any possible counter-party or third-parties are reputable financial institutions, business enterprises, and government agencies. The Company believed that the Company’s exposure to credit risk as of December 31, 2009 was not significant.

(c) Liquidity risk

The Company has sufficient operating capital to meet the need in cash upon the settlement of financial instruments. Therefore, the liquidity risk is nil.

(d) Cash flow interest rate risk

Since the duration of the financial assets exposed to cash flow interest rate risk is short, the cash flow risk from fluctuation in interest rate is minimized.

(2) Other

Certain comparative amounts have been reclassified to conform to the current year’s presentation of financial statements.

11. ADDITIONAL DISCLOSURES

(1) Following are the additional disclosures for the Company: A. Financing provided: None;

B. Endorsement/guarantee provided: None;



- 88 -

C. MARKETABLE SECURITIES HELD AS OF DECEMBER 31, 2009

December 31, 2009

Holding

Company Name

Marketable

Securities Type

Marketable Securities Type

and Name

Relationship

with the

Company

Financial Statement

Account Shares/UnitsCarrying Value

(NT$’000)

Percentage of

Ownership

(%)

Net Asset

Value

(NT$)

Note

Pixart International (BVI) Ltd. SubsidiaryInvestments accounted for

using equity method 500,000 $7,519 100.00 15.04 -

Pixart International (SAMOA) Ltd. SubsidiaryInvestments accounted for

using equity method 600,000 9,999 100.00 16.67 -

Yuan-Xiang Investment Corp. SubsidiaryInvestments accounted for

using equity method 20,000,000 200,423 100.00 10.02 -

Yuan-Feng Investment Corp. SubsidiaryInvestments accounted for

using equity method 5,000,000 49,806 100.00 9.96 -

Stocks

Shieh Yong Investment Co., Ltd. - Financial assets measured

at cost-noncurrent 34,686,000 300,000 4.55 8.33 -

The Company

Bonds 94 Taiwan Power 3A04 corportate bond - Held to maturity financial

assets-current 100 101,367 - 102,400 -

(To be continued)



- 89 -

(Continued)

December 31, 2009

Holingd

Company Name

Marketable

Securities Type


and Name

Relationship

with the

Company

Financial Statement

Account Shares/Un

its

Carrying Value

(NT$’000)

Percentage of

Ownership (%)

Net Asset

Value

(NT$)

Note

95 Formosa Plastics co. No.2 corporate

bond -

Held to maturity financial

assets-noncurrent 50 50,640 - 50,593 -

95 Formosa Plastics co. No.1 corporate

bond -



90 Formosa Petrochemical co. 2B06

corporate bond -



95 Taiwan Power 1A corporate bond - Held to maturity financial


The Company Bonds

95 CPC 1A corporate bond - Held to maturity financial




- 90 -

D. MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2009

Beginning

Balance Acquisition Disposal Ending Balance

Company

Name

Marketable

Securities Type and

Name

Counter

-party

Nature of

Relationship

Financial

Statement Account Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Carrying

Value

(NT$’000)

Gain (Loss) of

Disposal

(NT$’000)

(Remark)

Shares

/Units

Amonut

(NT$’000)

94 Taiwan Power

3A04 corportate

bond

- -

Held to maturity

financial

assets-current

- - 100 101,947 - - - (580) 100 101,367

95 Formosa Plastics

co. No.1 corporate

bond

- -

Held to maturity

financial

assets-noncurrent

- - 100 102,482 - - - (322) 100 102,160

90 Formosa

Petrochemical co.

2B06 corporate

bond

- -

Held to maturity

financial

assets-noncurrent

- - 100 105,156 - - - (1,313) 100 103,843

The

Company

95 Taiwan Power

1A corporate bond - -

Held to maturity

financial

assets-noncurrent

- - 100 102,324 - - - (464) 100 101,860

(To be continued)



- 91 -

(Continued)

Beginning


Company

Name

Marketable

Securities Type

and Name

Counter-

party

Nature of

Relationship

Financial

Statement

Account Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Carrying

Value

(NT$’000)

Gain (Loss)

of Disposal

(NT$’000)

(Remark)

Shares

/Units

Amonut

(NT$’000)

The

Company

95 CPC 1A

corporate bond - -

Held to maturity

financial

assets-noncurrent

- - 100 102,976 - - - (220) 100 102,756

Remark：Amortation of financial assets.

E. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: None;

F. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid-in capital: None;



- 92 -

G. TOTAL PURCHASES FROM OR SALES TO RELATED PARTIES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2009

Transaction Details Abnormal Transaction Notes/Accounts Payable or

Receivable Company Name

Counter

-party Related Party

Purchases/

Sales

Amount

(NT$’000)

% to

Total

Payment

TermsUnit Price

Payment

Terms

Ending Balance

(NT$’000)

% to

Total

The Company UMC Related party

in substance purchase

768,845

(Remark) 82.83 45 days - - (114,992) 38.00

Remark: The total cost of wafer purchased from UMC amounted to NT$782,322 thousand, of which NT$768,845 thousand were recorded

under raw materials and NT$13,477 thousand under R&D expenses.

H. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: None;

I. Information about derivatives of investees over which the Company has a controlling interest: None.



- 93 -

(2) The following are additional disclosures for the Company’s affiliates: A. NAMES, LOCATIONS, AND RELATED INFORMATION OF INVESTEES OVER WHICH THE COMPANY EXERCISES

SIGNIFICANT INFLUENCE AS OF DECEMBER 31, 2009 Monetary unit: US dollars/NT thousand dollars

Original Investment Amount (NT$’000) Balance as of December 31, 2009

December 31, Investor Company Investee Company Location Main Businesses and Products

2009 2008 Shares Percentage of

Ownership (%)

CarryingValue

(NT$’000)

Net Income (Losses) of the Investee (NT$’000)

Equity in the Earnings (NT$’000)

Pixart International (BVI) Ltd. BVI Investment

activities 17,121 $- 500,000 100.00 7,519 (9,401) (9,401)

Pixart International (SAMOA) Ltd. SAMOA Investment

activities 19,460 9,767 600,000 100.00 9,999 (7,592) (7,592)

Yuan-Xiang Investment Corp. Taiwan Investment

activities 200,000 200,000 20,000,000 100.00 200,423 (425) (425) The Company

Yuan-Feng Investment Corp. Taiwan Investment

activities 50,000 50,000 5,000,000 100.00 49,806 (307) (307)

Pixart International (SAMOA) Ltd.

Yuan Xiang Investment Corp.

Republic of Mauritius

Investment activities

- (Remark 1) - 1,000,000 100.00 - - -

Yuan-Xiang Investment Corp.

PrimeSensor Technology Inc. Taiwan IC design 30,000 30,000 3,000,000 20.00 29,474 - (Remark 2)

Yuan-Feng Investment Corp.

PrimeSensor Technology Inc. Taiwan IC design 15,000 15,000 1,500,000 10.00 14,737 - (Remark 2)

PrimeSensor Technology Inc.

YuanSheng Investment

(SAMOA) Ltd. SAMOA Investment

activities 6,077 - 175,000 100.00 4,252 - (Remark 2)


PrimeSensor Technology


activities 6,764 - 210,000 100.00 6,726 - (Remark 2)

(To be Continued)



- 94 -

(Continued)

Original Investment Amount (NT$’000) Balance as of December 31, 2009

December 31, Investor Company Investee Company Location Main Businesses and Products

2009 2008 Shares

Percentage ofOwnership

(%)

Carrying Value

(NT$’000)

Net Income (Losses) of the

Investee (NT$’000)

Equity in the Earnings

(NT$’000)

Pixart International (BVI) Ltd.

YuanXiang Technology


activities USD

500,000 - 500,000 100.00 USD 234,655 - (Remark 2)


(SAMOA) Ltd.

PrimeSensor Japan Inc. Japan

Technical Support activities

USD 358,864 - 700 70.00 USD

260,357 - (Remark 2)

YuanSheng Investment

(SAMOA) Ltd.

PrimeSensor Japan Inc. Japan


USD 153,799 - 300 30.00 USD

111,582 - (Remark 2)

Remark 1: As of December 31, 2009, the investment amounts of Yuan Xiang Investment Corp. (Republic of Mauritius )have not yet been made. Remark 2: The investee company recongnized investment losses and gains under the equity method on the long-term equity investment in

the list of remark 2 which were included in the investee company’s investment losses and gains, respectively.

B. Following are the additional disclosures required for the Company’s investees: a. Financing provided: None;

b. Endorsement/guarantee provided: None;



- 95 -

c. MARKETABLE SECURITIES HELD AS OF DECEMBER 31, 2009 Monetary unit: US dollars/NT thousand dollars

December 31, 2009 Holding Company Name

Marketable Securities

Type


and Name

Relationship with the Company

Financial Statement Account Shares/Units

Carrying Value(NT$’000)

Percentage of Ownership (%)

Net Asset Value(NT$)

Note


Stocks Yuan Xiang

Investment Corp.Investee company of Pixart

International (SAMOA) Ltd.Investments accounted for

using equity method 1,000,000 -

(Remark) 100.00 - -

Yuan-Xiang Investment Corp. Stocks PrimeSenor

Technology Inc.Affiliates

Investments accounted for using equity method

3,000,000 29,474 20.00 9.82 -

Yuan-Feng Investment Corp. Stocks PrimeSenor

Technology Inc.Affiliates


1,500,000 14,737 10.00 9.82 -

PrimeSensor Technology Inc. Stocks YuanSheng Investment

(SAMOA) Ltd.

Subsidiary of PrimeSensor Technology Inc.


175,000 4,252 100.00 24.30 -

PrimeSensor Technology Inc. Stocks PrimeSensor Technology

(SAMOA) Ltd.

Subsidiary of PrimeSensor Technology Inc.


210,000 6,726 100.00 32.03 -


Stocks YuanXiang Technology

(SAMOA) Ltd.

Subsidiary of Pixart International (BVI) Ltd.


500,000 USD 234,655 100.00 USD

0.47 -

YuanXiang Technology (SAMOA) Ltd.

Stocks PrimeSensor

Japan Inc. Subsidiary of YuanXiang

Technology (SAMOA) LtdInvestments accounted for

using equity method 700 USD 260,357 70.00

USD

371.94 -

YuanSheng Investment (SAMOA) Ltd.

Stocks PrimeSensor

Japan Inc.

Investee under equity Investment of YuanSheng Investment (SAMOA) Ltd.


300 USD 111,582 30.00 USD

371.94 -

Remark：As of December 31, 2009, the investment amount has not yet been made.



- 96 -

d. Marketable securities acquired or disposed of at costs or prices of at least NT$100 million or 20% of the paid-in capital: None;

e. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: None;

f. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid-in capital: None; g. Total purchases from or sales to related parties of at least NT$100 million or 20% of the paid-in capital: None;

h. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: None;

i. Information about derivatives of investees over which the Company has a controlling interest: None.

(3) INFORMATION OF INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2009

None.



- 97 -

12. SEGMENT FINANCIAL INFORMATION (1) Revenues from customer representing over 10% of total net sales were as follows:


Customer Name Amount


(%) Amount


(%) A 1,327,790 35.37 2,600,189 54.12 C 1,045,233 27.84 947,493 19.72 D 380,275 10.13 402,837 8.38

Total 2,753,298 73.34 3,950,519 82.22

(2) Export sales

The Company’s export sales amounted to NT$3,387,568 thousand and NT$4,349,223 thousand, representing 90.23% and 90.52% of net sales for the years ended December 31, 2009 and 2008, respectively.


Location 2009 2008 NT$’000 NT$’000 Asia 3,379,927 4,348,629 Other 7,641 594 Taiwan 366,864 455,648 Net Income 3,754,432 4,804,871

(3) Operations in different geographic areas

The Company has no reportable division in overseas geographic areas.

(4) Operations in different industries The main activities of the Company are in CMOS image sensor and related IC design, research, production, and sale. The Company operates predominantly in one industry segment.

- 98 -

5. Consolidated Financial Statements English Translation of a Report Originally Issued in Chinese

Independent Auditors’ Report

To the Board of Directors and Shareholders of PixArt Imaging Inc. We have audited the accompanying consolidated balance sheets of PixArt Imaging Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of China and “Guidelines for Certified Public Accountants’ Examination and Reports on Financial Statements”, which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PixArt Imaging Inc. and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years ended December 31, 2009 and 2008, in conformity with requirements of the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China. As described in Note 3(2) to the consolidated financial statements, effective January 1, 2008, the Company has adopted Accounting Research and Development Foundation Interpretation No. 2007-052, and recognized employee bonuses and remunerations to directors and supervisors as expenses rather than as a distribution of retained earnings. As described in Note 3(3) to the consolidated financial statements, effective January 1, 2009, the Company has adopted the amendment of R.O.C. Statement of Financial Accounting Standards No. 10, “Accounting for Inventories”. Ernst & Young CERTIFIED PUBLIC ACCOUNTANTS February 23, 2010 Taipei, Taiwan Republic of China

Notice to Readers The reader is advised that these financial statements have been prepared originally in Chinese. In the event of a conflict between these financial statements and the original Chinese version or difference in interpretation between the two versions, the Chinese language financial statements shall prevail. The accompanying financial statements are intended only to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in the R.O.C. and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the R.O.C.

2009 2008 2009 2008Current assets NT$’000 NT$’000 Current liabilities NT$’000 NT$’000 Cash and cash equivalents 2, 4(1) 5,135,820 5,045,377 Notes payable - 135,383 Notes receivable, net 2, 4(2) 702 - Accounts payable 188,283 120,349 Accounts receivable, net 2, 4(3) 382,513 328,084 Payables to related parties 5 114,992 103,273 Other receivables 4(4) 25,455 25,812 Income tax payable 2, 4(21) 84,541 54,306 Inventories, net 2, 4(5) 277,081 299,432 Accrued expenses 4(16) 736,132 830,441 Prepayments and other current assets 5 47,626 33,894 Other current liabilities 12,239 6,867 Deferred income tax assets-current 2, 4(21) 4,518 18,544 Total current liabilities 1,136,187 1,250,619 Held to maturity financial assets-current 2, 4(6) 101,367 - Total current assets 5,975,082 5,751,143 Other liabilities

Accrued pension liabilities 2, 4(11) 5,975 5,975 Funds and investments Deposits received 694 931 Held to maturity financial assets-noncurrent 2, 4(7) 461,259 - Total other liabilities 6,669 6,906 Financial assets measured at cost-noncurrent 2, 4(8) 300,000 300,000 Total liabilities 1,142,856 1,257,525 Total funds and investments 761,259 300,000

Property, plant and equipment 2, 4(9) Shareholders' equity Buildings and facilities 230,416 207,960 Shareholders' equity attributable to parent company's shareholders Research and development equipment 65,910 54,135 Capital 4(12) Miscellaneous equipment 78,564 64,556 Common stock 1,298,589 1,245,803 Total cost 374,890 326,651 Capital stock to be registered 50 1,552 Less : Accumulated depreciation (107,980) (86,748) Capital collected in advance 79,117 100 Add : Prepayments for equipment 8,977 7,837 Capital reserve Property, plant and equipment, net 275,887 247,740 Additional paid-in capital 4(13) 1,699,702 1,094,772

Donated by shareholders 4(13) 3,816 3,816 Intangible assets 2, 4(10) Long-term investment transaction 4(13) 106 106 Patents 8,078 1,636 Employee stock options 4(13), 4(14) 8,016 18,372 Software 41,313 39,661 Retained earnings Total intangible assets 49,391 41,297 Legal reserve 4(15) 594,552 458,582

Undistributed earnings 4(16), 4(21) 2,445,808 2,482,957 Other assets Other adjustments Leased assets to others, net 2, 4(9) - 20,989 Cumulative translation adjustments 2 (238) 72 Refundable deposits 3,350 1,162 Treasury stock 2, 4(17) (280,834) (280,834) Deferred assets 2 7,518 8,966 Total stockholders' equity of parent company 5,848,684 5,025,298 Deferred income tax assets-noncurrent 2, 4(21) 19,211 13,741 Minority interests 103,158 105,215 Restricted deposits 6 3,000 3,000 　　Total shareholders' equity 5,951,842 5,130,513 Total other assets 33,079 47,858

Total assets 7,094,698 6,388,038 Total liabilities and shareholders' equity 7,094,698 6,388,038


LIABILITIES AND SHAREHOLDERS' EQUITYAs of December 31,

English Translation of Financial Statements Originally Issued in ChinesePixArt Imaging Inc. And SubsidiariesCONSOLIDATED BALANCE SHEETS

As of December 31,ASSETS Notes Notes

- 99 -

Gross salesLess: Sales returns

Sales discounts Net sales 2, 4(18)Cost of goods sold 3(3), 4(5), 4(19), 5Gross profitsOperating expenses 4(19), 5 Selling expenses Administrative expenses Research and development expenses　 Total operating expensesOperating incomeNon-operating income and gains Interest income Foreign exchange gain, net 2 Rent revenue Other revenue　 Total non-operating income and gainsNon-operating expenses and losses Foreign exchange loss, net 2 Other expenses 2, 4(19)　 Total non-operating expenses and lossesIncome from continuing operations before income taxIncome tax expense 2, 4(21)Consolidated net incomeAttributable to: Shareholders of the parent Minority interests Consolidated net income

Earnings Per Share 2, 4(20)Basic Earnings Per Share (in New Taiwan Dollars) Before tax After tax Before tax After tax Consolidated net income 7.12$ 6.70$ 11.28$ 10.90$ Net income attributable to minority interests 0.01 0.02 - - Net income attributable to shareholders of the parent 7.13$ 6.72$ 11.28$ 10.90$

Diluted Earnings Per Share (in New Taiwan Dollars) Before tax After tax Before tax After tax Consolidated net income 6.98$ 6.57$ 10.89$ 10.53$ Net income attributable to minority interests 0.01 0.01 - - Net income attributable to shareholders of the parent 6.99$ 6.58$ 10.89$ 10.53$

Notes

NT$’000

Description2009

(98,530) (272,503)


NT$’000

3,751,512(2,008,936)

1,742,576

16,633 -

(483,786) (854,819)

CONSOLIDATED STATEMENTS OF INCOME

2008

887,757


(221) (9,414)


3,755,882

(1,676) -2,694 -474

4,809,076

(3,731)

PixArt Imaging Inc. And Subsidiaries

1,671 20,562

(9,193)

848,204

898,905 (52,623)

(1,029,762) 1,304,102

78,147 29,262

141 2,258

4,804,871

(117,951) (375,073) (536,738)

(2,471,007)

2,333,864

(47,244)

- (8,514) (8,514)

4,124

111,674

1,407,262

1,360,018 846,282

(1,922) 846,282

1,359,697 321

1,360,018

- 100 -

NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000

Balance as of January 1, 2008 1,170,655 185 105 1,091,677 3,816 - 16,081 296,784 2,391,714 - (7,245) 4,963,772 - 4,963,772 Appropriation and distribution of 2007 earnings: Legal reserve - - - - - - - 161,798 (161,798) - - - - - Directors' and supervisors' remuneration - - - - - - - - (14,562) - - (14,562) - (14,562) Cash paid for employees' bonuses and Shareholders' dividends - - - - - - - - (1,018,602) - - (1,018,602) - (1,018,602) Capitalization of employees' bonuses 27,000 - - - - - - - (27,000) - - - - - Capitalization of stock dividends 46,492 - - - - - - - (46,492) - - - - - Exercise of employee stock options 1,656 1,367 (5) 3,095 - - (2,927) - - - - 3,186 - 3,186 Employee stock options distributed to employees - - - - - - 5,218 - - - - 5,218 - 5,218 Adjustment from changes in the percentage of ownership in investees - - - - - 106 - - - - - 106 - 106 Treasury stock repurchased - - - - - - - - - - (273,589) (273,589) - (273,589) Net income attributable to parent company for 2008 - - - - - - - - 1,359,697 - - 1,359,697 - 1,359,697 Cumulative translation adjustments - - - - - - - - - 72 - 72 - 72 Increase in minority interest - - - - - - - - - - - - 105,215 105,215

Balance as of December 31, 2008 1,245,803 1,552 100 1,094,772 3,816 106 18,372 458,582 2,482,957 72 (280,834) 5,025,298 105,215 5,130,513 Appropriation and distribution of 2008 earnings (Note) : Legal reserve - - - - - - - 135,970 (135,970) - - - - - Cash paid for Shareholders' dividends - - - - - - - - (737,098) - - (737,098) - (737,098) Capitalization of stock dividends 12,285 - - - - - - - (12,285) - - - - - Capitalization of employees' bonuses 22,833 - - 388,612 - - - - - - - 411,445 - 411,445 Issuance of common stock for cash 15,000 - - 204,030 - - - - - - - 219,030 - 219,030 Exercise of employee stock options 2,668 (1,502) 79,017 12,288 - - (12,288) - - - - 80,183 - 80,183 Employee stock options distributed to employees - - - - - - 1,932 - - - - 1,932 - 1,932 Net income attributable to parent company for 2009 - - - - - - - - 848,204 - - 848,204 - 848,204 Cumulative translation adjustments - - - - - - - - - (310) - (310) - (310) Increase in minority interest - - - - - - - - - - - - (2,057) (2,057)

Balance as of December 31, 2009 1,298,589 50 79,117 1,699,702 3,816 106 8,016 594,552 2,445,808 (238) (280,834) 5,848,684 103,158 5,951,842

Totalshareholders'

equity

Long-terminvestmenttransaction

Additional paid-in capital

Donated byshareholders


Commonstock

Capital collectedin advanceDescription Legal

reserve

Capital stock tobe registered Undistributed

earnings

Total stockholders'equity of parent

company

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

Minorityinterests

PixArt Imaging Inc. And Subsidiaries

Employee stockoptions

Capital reserveCumulativetranslation

adjustments

Retained earnings

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Note) : Profit sharing to employees and bonus to directors in the amount of NT$456,445 thousand and NT$12,240 thousand, had been charged against earnings of 2008

Treasurystock

- 101 -

2009 2008Cash flows from operating activities: NT$’000 NT$’000

Consolidated net income 846,282 1,360,018 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation (including leased assets) 20,778 19,460 Amortization 31,624 30,855 Amortization of financial assets discount or premium 3,138 - Employee stock options distributed to employees 1,932 5,218 Provision (reversal) of allowance for loss on decline in market value and obsolescence of inventories (57,928) 83,871 Deferred income tax 8,556 (7,823) Changes in operating assets and liabilities: Notes receivable (702) 160 Accounts receivable (54,429) 72,615 Other receivables 357 (9,650) Inventories 80,279 136,041 Prepayments and other current assets (13,732) (25,469) Notes payable (135,383) (25,193) Accounts payable 67,934 (80,537) Payables to related parties 11,719 (68,082) Income tax payable 30,235 29,636 Accrued expenses 317,136 504,097 Other current liabilities 5,372 4,403 Accrued pension liabilities - 543

　 Net cash provided by operating activities 1,163,168 2,030,163 Cash flows from investing activities :

Increase in held to maturity financial assets (565,764) - Purchase of property, plant and equipment (27,959) (19,365) Proceeds from disposal of property, plant and equipment 23 - Increase in intangible assets (32,345) (31,482) Increase in refundable deposits (2,188) (809) Increase in deferred assets (5,925) (7,399)

　 Net cash used in investing activities (634,158) (59,055) Cash flows from financing activities :

Decrease in deposits received (237) (89) Directors' and supervisors' remuneration - (14,562) Shareholders' dividends (737,098) (906,602) Employees' bonuses - (112,000) Issuance of common stock for cash 219,030 - Exercise of employee stock options 80,183 3,186 Treasury stock repurchased - (273,589) (Decrease) increase in minority interest (135) 105,000 　 Net cash used in financing activities (438,257) (1,198,656)

Effect of exchange rate changes (310) 72 Net increase in cash and cash equivalents 90,443 772,524 Cash and cash equivalents at the beginning of the year 5,045,377 4,272,853 Cash and cash equivalents at the end of the year 5,135,820 5,045,377 Supplemental disclosures of cash flow information:

Income tax paid during the year 14,048 25,414 Non-cash activities :

Stock dividends and employees' bonuses capitalized (including additional paid-in capital) 423,730 73,492


English Translation of Financial Statements Originally Issued in ChinesePixArt Imaging Inc. And Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

DescriptionFor the year ended December 31,

- 102 -

English Translation of Financial Statements Originally Issued in Chinese PixArt Imaging Inc. And Subsidiaries


- 103 -

1. HISTORY AND ORGANIZATION

PixArt Imaging Inc. (the "Company") was incorporated under the Company Law of the Republic of China in July 13, 1998. The numbers of employees as of December 31, 2009 and 2008 were 185 and 172, respectively. The main activities of the Company are in CMOS image sensor and related IC design, research, production, and sales. The Company’s shares were previously registered and traded as the “Emerging Stock” on Taiwan’s GreTai Securities Market (formerly known as OTC Market) starting July 2003 and have been listed and publicly traded on the OTC Market since May 2006.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements were prepared in conformity with requirements of the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (R.O.C.). Summary of significant accounting policies is as follows:

General Descriptions of Reporting Entities (1) Overview of Consolidation

Investees in which the Company, directly or indirectly, holds more than 50% of voting rights or less than 50% of voting rights but has de facto control, are accounted for under the equity method and consolidated into the Company’s financial statements. The consolidated entities are as follows: A. The parent company: PixArt Imaging Inc. (the “Company”)

B. The consolidated subsidiaries are listed as follows:



- 104 -


Investor Subsidiary Nature of business Percentage of ownership (%) Note

The Company Pixart International (BVI) Ltd.

Investment activities 100 -

The Company Pixart International (SAMOA) Ltd.


Pixart International (SAMOA) Ltd. Yuan Xiang

Investment Corp. Investment activities 100 -

The Company Yuan-Xiang Investment Corp.


The Company Yuan-Feng Investment Corp.




IC design 20 1



IC design 10 1








PrimeSensor Technology (SAMOA) Ltd.



PrimeSensor Japan Inc.


70 -




30 -


Investor Subsidiary Nature of business Percentage of ownership (%) Note

The Company Pixart International (BVI) Ltd.


The Company Pixart International (SAMOA) Ltd.


The Company Yuan-Xiang Investment Corp.


The Company Yuan-Feng Investment Corp.







IC design 20 -



IC design 10 -



- 105 -

Note1: The Company has held less than 50% of voting rights in PrimeSensor Technology Inc. However the Company has de facto control as the Company has power to control the financial, operational and human resources activities of PrimeSensor Technology Inc. PrimeSensor Technology Inc. was included as a subsidiary in the Company’s consolidated financial statements for the year ended December 31, 2009.

C. All subsidiaries of the Company have been included as consolidated entities in the

consolidated financial statements.

(2) Principles of Consolidation A. The consolidated financial statements were prepared in accordance with SFAS No. 7.

The transactions between the consolidated entities were appropriately eliminated in the consolidated financial statements.

B. Investees in which the Company and subsidiaries hold more than 50% of voting rights,

including those that are exercisable or convertible, are accounted for under the equity method and shall be consolidated, since the Company and subsidiaries are considered to possess control. An entity shall also be consolidated if any of the following circumstances exists: a. The total amount of voting rights held by the investee exceeds 50% due to agreement

with other investors; b. As permitted by law, or by contract agreements, the Company controls an entity’s

finances, operations and human resources; c. The Company has authority to appoint or discharge more than half members of board

of directors (or equivalents), by whom the investee is controlled; d. The Company leads and controls more than half of the members of the board of

directors(or equivalents), by whom the investee is controlled; e. Other indications of control possession.

(3) Cash Equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity date that they are subject to an insignificant risk of changes in value from fluctuations in interest rates. Commercial papers, negotiable certificates of deposit, and bank acceptances with original maturities of three months or less are considered to be cash equivalents.



- 106 -

(4) Foreign Currency Transactions and Translation of Financial Statements denominated in Foreign Currency A. The Company maintains its accounting records in New Taiwan dollars ("NT Dollars" or

"NT$"), the national currency of the R.O.C. Transactions denominated in foreign currencies are recorded in NT Dollars using the exchange rates in effect at the dates of the transactions. Non-derivative transactions denominated in foreign currencies are recorded in NT Dollars using the exchange rates in effect at the dates of the transactions. When a transaction is settled in a subsequent accounting period, the monetary assets and liabilities denominated in foreign currencies are remeasured on the balance sheet date using the exchange rates prevailing as at that date, with the resulting exchange gains or losses included in earnings.

B. The assets and liabilities of the foreign subsidiaries are translated into NT Dollars, with

the local currency of each foreign subsidiary as its functional currency, at current exchange rates in effect at the balance sheet date. Shareholders’ equity accounts should be translated at the historical rate except for the beginning balance of the retained earnings, which is the translated amount from the last period carried forward. Dividends are translated at the spot rate of the declaration date. The financial statements of foreign operations are translated into New Taiwan Dollars using the weighted average exchange rates for profit and loss accounts. The accumulated exchange gains or losses resulting from the translation, after adjusting for percentage of ownership, are recorded in the cumulative translation adjustment in stockholders’ equity.

(5) Financial Assets and Financial Liabilities

A. Financial asset or liability is recognized on the balance sheet when the Company becomes a party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets are recognized using either trade date accounting on equity instrument or settlement date accounting on debt security, beneficiary certificate and derivative instrument. As to accounting for de-recognition of financial assets and liabilities, the Company adopted the R.O.C. SFAS No. 33, “Accounting for Transfers of Financial Assets and Extinguishment of Liability”.

B. Upon initial recognition of financial assets or financial liabilities, they shall be measured

at fair value. In the case of a financial asset or financial liability at fair value not through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial assets or financial liabilities shall be included as well.



- 107 -

C. Financial assets or financial liabilities are classified as follows: a. Financial assets measured at cost

Unlisted stock, funds, and other securities without reliable market prices are measured at cost. They are either holdings in unquoted equity instrument or emerging stocks that the Company has no material influence on or derivative assets that are linked to and must be settled by delivery of the abovementioned unquoted equity instruments. When objective evidence of impairment exists, the Company recognizes an impairment loss, which cannot be reversed in subsequent periods.

b. Held-to-maturity financial assets

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity financial assets if the Company has both the positive intention and ability to hold the financial assets to maturity. Investments intended to be held to maturity are measured at amortized cost. The Company recognizes an impairment loss if objective evidence of impairment loss exists. However, the impairment loss may be reversed if the value of asset recovers subsequently and the Company concludes the recovery is related to improvements in events or factors that originally caused the impairment loss. The new cost basis as a result of the reversal cannot exceed the amortized cost prior to the impairment.

c. Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as in any of the preceding categories. After initial measurement, available-for-sale financial assets are measured at fair value with unrealized gains or losses being recognized directly in equity. When the investment is derecognized, the cumulative gain or loss previously recorded in equity is recognized in profit or loss.

If there is objective evidence which indicates that the investment is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases for equity securities, the previously recognized impairment loss is reversed to the extent of the decrease and recorded as an adjustment to shareholders’ equity; for debt securities, the amount of the decrease is recognized in profit or loss, provided that the decrease is clearly attributable to an event which occurred after the impairment loss was recognized.



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An available-for-sale financial asset that would have met the definition of loans and receivables may be reclassified as the bond portfolios with no active market if the Company has the intention and ability to hold the financial asset for the foreseeable future or until maturity. The financial instrument shall be reclassified at its fair value on the date of reclassification. Any gain or loss already recognized as adjustment to stockholder’s equity shall be amortized and charge to current income. The fair value of the financial instrument on the date of reclassification becomes its new cost or amortized cost, as applicable. The fair value for publicly traded securities or close-ended funds is based on closing prices at the balance sheet date, while those of open-ended funds are determined based on net assets value of the balance sheet date. If a published price quotation in an active market does not exist for a financial instrument in its entirety, but active market exists for its component parts, fair value is determined on the basis of the relevant market price for the component part.

(6) Allowance for Doubtful Accounts An allowance for doubtful accounts is provided based on management’s judgment of the collectibility and aging analysis of accounts and other receivables as at balance sheet date.

(7) Inventories

Inventories are accounted for on a perpetual basis. Raw materials are recorded at actual purchase costs, while the work in process and finished goods are adjusted to costs using the weighted-average method at the end of each month. Prior to December 31, 2008, inventories were stated at the lower of aggregate cost or market value as of the balance sheet date. The market values of raw materials and supplies are determined on the basis of replacement cost while the market values of work in process and finished goods are determined by net realizable values. Effective January 1, 2009, inventories are valued at the lower of cost and net realizable value item by item. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.



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(8) Property, Plant and Equipment A. Property, plant and equipment are stated at cost. Significant improvements and

replacements are capitalized and depreciated over their estimated useful lives while ordinary repairs and maintenance are expensed as incurred. Interest expenses incurred in the period of such property, plant and equipment in construction or installation will be capitalized. When property, plant and equipment are disposed of, their original cost and accumulated depreciation are written off. Gains or losses on disposal of property, plant and equipment are reported under non-operating income or expenses. Equipments for lease are reclassified as leased assets to others based on its book value. Depreciation derived from leased assets to others at book value is recorded under non-operating expenses.

B. Property, plant and equipment are stated at cost. Depreciation is provided on the

straight-line basis over the following useful lives (The salvage value of property, plant and equipment that continues to be in use after reaching its originally estimated useful life shall be depreciated over its estimated remaining useful life).

Buildings and facilities 50 years Research and development equipment 3 years Miscellaneous equipment 2 to10 years Lease Assets 50 years


A. Software, patents and other separately identifiable intangibles with finite lives are stated at cost and amortized on a straight-line basis over the following useful lives:

Software 3 to 5 Years Patents and Others 3 to 5 Years

The Company will reassess the useful lives and the amortization method of its recognized intangible assets at the end of each reporting period. If there is any change to be made, it will be treated as change of accounting estimation.

B. Expenditures related to research activities as well as those expenditures not meeting the

criteria for capitalization are expensed when incurred. Expenditures related to development activities meeting the criteria for capitalization are capitalized.



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(10) Deferred Assets Deferred charges are stated at cost and amortized on a straight-line basis over their estimated economic lives, normally 2 years.

(11) Asset Impairment

Pursuant to R.O.C. SFAS No. 35, “Accounting for Assets Impairment”, the Company is required to perform (1) impairment testing on goodwill annually; (2) impairment testing for intangible assets which have indefinite lives or are not available for use annually; and (3) evaluating whether indicators of impairment exist for assets subject to guidelines set forth under the Statement. The Statement requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.

Impairment losses shall be recognized when the carrying amount exceeds the recoverable amount. Impairment losses on goodwill shall not be reversed subsequently. For assets other than goodwill impaired in prior periods, if the amount of the impairment loss decreases and the decreases is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss can be reversed to the extent of the impaired amount. The reversal may not result in a carrying amount that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed.

(12) Revenue Recognition

Revenue is recognized in accordance with R.O.C. Statement of Financial Accounting Standards No. 32, “Accounting for Revenue Recognition.”

(13) Capital expenditures vs. revenue expenditures

An expenditure is capitalized if it increases the future service potential of the assets and the purchase price exceeds a certain monetary threshold. Otherwise, expenditures are expensed as incurred.

(14) Pension plan

A. All regular employees are entitled to a pension plan that is managed by an independently administered pension fund committee. Fund assets are deposited in the committee’s name in the Taiwan Bank and, hence, are not associated with or controlled by the Company. Therefore, fund assets are not included in the Company’s financial statements. Pension benefits for employees of the subsidiaries are provided in accordance with the relevant local regulations.



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B. The Labor Pension Act of the R.O.C. (‘the Act’), which is accounted for as a defined contribution plan, became effective July 1, 2005. Employees covered by the Labor Standards Law (“the Law”), which is accounted for as a defined benefit plan, were allowed to either elect the pension calculation under the Act or continue to be subject to the pension scheme under the Law. Those employees who elect to be under the Act will retain their seniority achieved under the Labor Standards Law. Under the Act, the Company will make monthly contributions at no less than 6% of these employees’ monthly wages to the employees’ individual pension accounts.

C. The accounting for the Company’s pension liability is computed in accordance with

R.O.C. SFAS No.18. Net pension costs of the defined benefit plan are recorded based on actuarial valuations. Pension cost components such as service cost, interest cost, expected return on plan assets, the amortization of net obligation at transition, pension gain or loss, and prior service cost, are all taken into consideration. Net transition obligations from the plan assets are amortized using the straight-line method over the employees’ expected average remaining service period of 15 years. The Company recognizes expenses from the defined contribution pension plan in the period when the contribution becomes due.

(15) Income taxes

A. The Company adopted R.O.C. SFAS No. 22, “Accounting for Income Taxes” for inter-period and intra-period income tax allocation. Under the Statement, the tax effects of taxable temporary differences are recognized as deferred income tax liabilities while those of deductible temporary differences, loss carry-forward, and investment tax credits are recognized as deferred income tax assets. A valuation allowance on deferred income tax assets is provided to the extent that it is more likely than not that the tax benefits will not be realized. A deferred tax asset or liability is classified as current or noncurrent in accordance with the classification of its related asset or liability. However, if a deferred tax asset or liability does not relate to an asset or liability in the financial statements, its classification is based on the expected reversal date of the temporary difference.

B. Income tax (10%) on un-appropriated earnings is recorded as an expense in the year following current fiscal year on the portion that the shareholders resolve the earnings not to be distributed.



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C. According to R.O.C. SFAS No. 12, “Accounting for Income Tax Credits”, the Company recognizes the tax benefit from the purchase of equipment and technology, research and development expenditure, employee training, and certain equity investment using the flow-through method.

D. The Income Basic Tax Act of the R.O.C. (the IBTA) became effective on January 1,

2006. Set up by the Executive Yuan, the IBTA is a supplemental 10% tax that is payable if the income tax payable determined under the R.O.C. Income Tax Act is below the minimum amount as prescribed by the IBTA. The IBTA is calculated based on taxable income as defined by the IBTA, which includes most income that is exempted from income tax under various legislations. The impact of the IBTA has been considered in the calculation of the Company’s income tax for the current reporting period.

(16) Earnings Per Share

Earnings per share are computed according to R.O.C. SFAS No. 24, “Earnings per Share.”

(17) Treasury Stock In accordance with R.O.C. SFAS No. 30, “Accounting for Treasury Stock”, treasury stock held by the Company is accounted for under the cost method. When treasury stock is retired, the treasury stock account is credited and all capital account balances related to the treasury shares, including capital reserve - treasury stock transactions, are reduced on a proportionate basis. Any difference, if on credit side, is recorded in capital reserve - treasury stock transactions; if on debit side, retained earnings is reduced.

(18) Employee Stock Option

The Company used intrinsic value method to recognize compensation cost for its employee stock options issued between January 1, 2004 and December 31, 2007, in accordance with Accounting Research and Development Foundation interpretation Nos. 2003-070~072. Under the method, the excess of the market price over exercise price at the plan date is adjusted under shareholders’ equity and expensed over vesting periods. Disclosure of pro forma information for net income and earnings per share using fair value method is required.

For stock options granted on or after January 1, 2008, the Company recognizes compensation cost using the fair value method in accordance with R.O.C. SFAS No. 39 “Accounting for Share-Based Payment.” In accordance with R.O.C. SFAS No. 39, share-based payment transaction shall be measured by reference to the fair value of the equity instruments at the date when they are granted. The fair value is determined by an external appraisal using an appropriate pricing model.



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The Company enters into equity-settled share-based payment transaction only with its employees. Pursuant to R.O.C. SFAS No. 39, the goods or services received under such transaction, and the corresponding increase in equity, shall be measured by reference to the fair value of the equity instruments granted. If there is no limitation or condition to the vesting of equity instrument, the equity instrument is deemed to vest at the grant date. The employee compensation costs and a correspondent equity are recognized then. If the equity instrument is vested over a certain period of time, the employee compensation costs shall be recognized over that period with a corresponding increase in equity.

In valuing the fair value of the equity instrument granted, no account is taken of any vesting conditions other than market conditions. Instead, non-market vesting conditions shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount, so that, ultimately, the amount recognized for goods or services received as consideration for the equity instruments granted shall be based on actual number of equity instruments that eventually vest. For grants of equity instruments with market conditions, the Company shall recognize the goods or services received from a counterparty that satisfies all other vesting conditions, irrespective of whether the market condition is satisfied.

(19) Employee Bonuses and Remunerations Paid to Directors and Supervisors

In accordance with Accounting Research and Development Foundation interpretation No. 2007-052 effective January 1, 2008, employee bonuses and remunerations paid to directors and supervisors are charged to income statements at fair value.

3. REASONS AND EFFECTS FOR ACCOUNTING CHANGES

(1) Effective from January 1, 2008, the Company adopted R.O.C. SFAS No. 39, “Accounting for Share-Based Payment” to account for share-based payments transactions. This change in accounting principles has no significant impact on consolidated net income and EPS for the year then ended December 31, 2008.

(2) Effective January 1, 2008, the Company adopted Accounting Research and Development

Foundation interpretation No. 2007-052 to account for employee bonuses and remunerations paid to directors and supervisors.

(3) Effective January 1, 2009, the Company adopted the newly revised ROC SFAS No. 10,

“Accounting for Inventories”. The main revision is as follows:



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a. Inventories are valued at the lower of cost and net realizable value item by item; b. Unallocated overheads resulted from low production or idle capacity are recognized as costs

of goods sold in the period in which they are incurred; and c. Abnormal amounts of production cost and loss on decline in the market value of inventories

(or gains on recovery in market value of inventories) are recognized as cost of goods sold. Such changes in accounting principle did not have significant impacts on the consolidated financial statements for the year ended December 31, 2009. The non-operating income of NT$3,085 thousand and the non-operating expense of NT$83,871 thousand for the year ended December 31, 2008 were reclassified to cost of goods sold accordingly.

4. CONTENTS OF SIGNIFICANT ACCOUNTS (1) Cash and Cash Equivalents

As of December 31, 2009 2008 NT$’000 NT$’000 Cash 79 50 Savings and checking 360,863 182,495 Time deposit 4,450,000 4,535,000 Cash equivalents-CP-Repo 324,878 327,832 Total 5,135,820 5,045,377

(2) Notes Receivable

As of December 31, 2009 2008 NT$’000 NT$’000 Notes receivable 702 - Less: Allowance for doubtful accounts - - Net 702 -

(3) Accounts Receivable

As of December 31, 2009 2008 NT$’000 NT$’000 Accounts receivable 407,907 353,478 Less: Allowance for doubtful accounts (19,570) (19,570)

Allowance for sales discounts (5,824) (5,824) Net 382,513 328,084



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(4) Other Receivables As of December 31, 2009 2008 NT$’000 NT$’000 VAT refundable 15,363 17,900 Interest receivable 5,560 7,909 Other receivables 4,532 3 Total 25,455 25,812

(5) Inventories

As of December 31, 2009 2008 NT$’000 NT$’000 Raw materials 21,939 6,149 Supplies 5,976 10,963 Work in process 166,054 208,192 Finished goods 117,888 189,911 Total 311,857 415,215 Less: Allowance for loss on decline in market

value and obsolescence

(34,776)

(115,783) Net 277,081 299,432

Because of disposal of inventories, the Company recorded a gain of NT$57,928 thousand on recovery of market value of inventories during the year ended December 31, 2009. The inventory loss provision of NT$83,871 thousand for the year ended December 31, 2008 were reclassified for cost of goods sold.

(6) Held to maturity financial assets-current

December 31, 2009


Amounts (NT$’000)

94 Taiwan Power 3A04 corporate bond 100 101,367



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(7) Held to maturity financial assets-noncurrent December 31, 2009

Investment items Shares/units Amounts (NT$’000)

95 Formosa Plastics Corp. No.2 corporate bond 50 50,640 95 Formosa Plastics Corp. No.1 corporate bond 100 102,160 90 Formosa Petrochemical co. 2B06 corporate bond 100 103,843 95 Taiwan Power 1A corporate bond 100 101,860 95 CPC 1A corporate bond 100 102,756 461,259

(8) Financial assets measured at cost-noncurrent

As of December 31, Investee Company 2009 Ownership 2008 Ownership

NT$’000 % NT$’000 % Shieh Yong Investment Co., Ltd. 300,000 4.55 300,000 4.55

(9) Property, Plant and Equipment

a. No interest was capitalized for the years ended December 31, 2009 and 2008.

b. The Company had leased part of its buildings and facilities since 2005, which were recorded under leased assets as below. The Company cancelled the lease and utilized the underlying buildings and facilities by its own starting July 1, 2009.


Items 2009 2008

NT$’000 NT$’000 Buildings and facilities - 22,457 Less : Accumulated depreciation - (1,468) Leased assets to others, net - 20,989



Original cost NT$’000 NT$’000 NT$’000 Balance at beginning of period 1,900 61,314 63,214 Increase – separately acquired 4,207 28,138 32,345 Decrease – disposed - (9,741) (9,741)

Reclassification 6,834 (6,834) - Balance at end of period 12,941 72,877 85,818

(To be continued)



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(Continued) As of December 31, 2009 Patents Software Total Accumulated amortization Balance at beginning of period 264 21,653 21,917 Increase – amortization 3,460 20,791 24,251 Decrease – disposed - (9,741) (9,741) Reclassification 1,139 (1,139) -

Balance at end of period 4,863 31,564 36,427 Net 8,078 41,313 49,391


Original cost NT$’000 NT$’000 NT$’000 Balance at beginning of period 47,522 40,959 88,481 Increase – separately acquired 1,900 29,582 31,482 Decrease – disposed (47,522) (9,227) (56,749) Balance at end of period 1,900 61,314 63,214 Accumulated amortization Balance at beginning of period 39,602 15,076 54,678 Increase – amortization 8,184 15,804 23,988 Decrease – disposed (47,522) (9,227) (56,749) Balance at end of period 264 21,653 21,917 Net 1,636 39,661 41,297

(11) Pension Fund

a. The Company periodically made contribution to a fiduciary account in Bank of Taiwan for its defined benefit pension plan. The fund balances were NT$10,292 thousand and NT$9,156 thousand as of December 31, 2009 and 2008, respectively. The total pension expenses, including net pension cost under the old Standard Labor Law and the pension expenses under the new Labor Pension Act, totaled to NT$10,488 thousand and NT$9,509 thousand for the years ended December 31, 2009 and 2008, respectively. The pension expenses under the Labor Pension Act amounted to NT$9,659 thousand and NT$7,886 thousand, respectively.



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b. Pension cost: For the year ended December 31, 2009 2008

The old Standard Labor Law NT$’000 NT$’000 Service cost 309 761 Interest cost 215 637 Expected return on plan assets (229) (235) Amortization (385) 460 Net periodic pension cost (90) 1,623 Over-accrual 919 - Net periodic pension cost 829 1,623 The new Labor Pension Act Pension expenses 9,659 7,886 Total 10,488 9,509

c. The funding status of pension plan under old regulation was summarized as follows:

As of December 31, 2009 2008

Benefit obligation NT$’000 NT$’000 Vested benefit obligation - - Non-vested benefit obligation (5,878) (4,434) Accumulated benefit obligation (5,878) (4,434) Effect on projected salary increase (11,580) (4,179) Projected benefit obligation (17,458) (8,613) Fair value of plan assets 10,292 9,156 Funded status (7,166) 543 Unrecognized net transitional benefit obligation 843 963 Unrecognized loss (gain) 1,379 (7,481) Accrued pension liabilities (4,944) (5,975) Over-accrual (1,031) - Accrued pension liabilities (5,975) (5,975)

d. The vested benefit was nil as of December 31, 2009 and 2008.



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e. The actuarial assumptions are as follows: For the year ended December 31, 2009 2008 Discount rate 2.25% 2.50% Rate of salary increase 5.00% 3.00% Expected return on plan assets 2.25% 2.50%

(12) Common Stock

As of January 1, 2008, the Company’s authorized common stock amounted to NT$1,500,000 thousand, divided into 150,000,000 shares (including 7,500,000 shares reserved for exercises of employee stock options) and each share at par value of NT$10. The Company issued common stock amounted to NT$1,170,655 thousand (including NT$185 thousand which were recorded under Common stock to be registered).

In the shareholders’ general meeting on June 13, 2008, the Company amended its Articles of Incorporation to increase the reserve for the grant of employees’ options to 10,000,000 shares. The shareholders also approved the capitalization of shareholders’ dividend of NT$46,492 thousand and employees’ bonus of NT$27,000 thousand by issuing 7,349,241 new shares, each share at par value of NT$10. The capitalization date was at August 26, 2008 and the governmental approval has been successfully obtained. Based on the resolution of shareholders’ general meeting on April 30, 2009, the Company resolved to issue 3,511,788 new shares, each share at par value of NT$10, for the capitalization of shareholders’ dividend of NT$12,285 thousand and employees’ bonus of NT$411,445 thousand. The capitalization date was set on September 1, 2009 and the government approval has been successfully obtained. On April 30, 2009, the board of the directors of the Company was authorized by the shareholders' meeting to issue new shares from private placement in total shares at no more than 2,000 thousand shares. The issuance can be at one time or multiple times starting from the approval day. The actual issue date and the issue price can be determined based on the investors and market conditions. Accordingly, on July 22, 2009, the Company issued 1,500 thousand new shares from private placement amounting to NT$219,030 thousand, each at a par value on NT$10 while the private placement price per share was on NT$146.02. The government approval has been successfully obtained.



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Due to the exercise of employees’ stock options granted, additional 301,722 common shares (including 10,000 shares of capital collected in advance) were issued for the year ended December 31, 2008. The governmental approval has been successfully obtained. For the year ended December 31, 2009, additional 533,598 common shares were issued at par value of NT$10 for the exercise of employees’ stock options granted. As of December 31, 2009, 5,000 shares have been issued but not yet registered. They were recorded under the caption of common shares to be registered at par value of NT$50 thousand. Meanwhile, the Company has received subscription of NT$79,117 thousand from exercise of employee options for 427,000 shares, which was recorded under capital collected in advance as of December 31, 2009 due the underlying shares have not yet been issued.

As of December 31, 2009, the Company’s authorized common stock amounted to NT$1,500,000 thousand, divided into 150,000,000 shares (including 10,000,000 shares reserved for exercises of employee stock options) each share at par value of NT$10. The Company issued common stock amounted to NT$1,377,756 thousand (including NT$1,298,589 thousand of common stocks, NT$50 thousand recorded under common stock to be registered and NT$ 79,117 thousand recorded under capital collected in advance).

(13) Capital Reserve

As of December 31, 2009 2008 NT$’000 NT$’000

Additional paid-in capital 1,699,702 1,094,772 Donated by shareholders 3,816 3,816 Long-term equity investment 106 106 Employee stock options 8,016 18,372 Total 1,711,640 1,117,066

According to the R.O.C. Company Law, capital reserve can only be used for making up losses or reclassifying to paid-in capital using only balances in additional paid-in capital or donated assets. The Company shall not use capital reserve to make up its loss unless legal reserve is insufficient for making good such losses. The Company issued 2,283,292 new shares at par value of NT$10 for the capitalization of employees’ bonus of NT$411,445 thousand and generated paid in capital in excess of par value in amount of NT$388,612 thousand. Please refer to Note 4(12) to the financial statements.



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(14) Employee Stock Options The options are valid for six years and exercisable at certain percentage subsequent to the second anniversary from the granted date. Detailed information relevant to the employee stock options is disclosed as follows:

Date of grant

Total number of options granted (in thousands)

Total number of options outstanding

(in thousands)

Shares Available for option holders

(in thousands)

Exercise price (NTD)

(Remark)

2005.11.24 440 72.5 72,500 10.0 2006.01.16 110 7.5 7,500 10.0 2006.02.24 30 7.5 7,500 10.0 2006.04.11 225 60.5 60,500 10.0 2007.12.27 5,000 3,888 3,888,000 193.9

Remark: The shares available for option holders are subject to adjustments in accordance with the plan in the event that changes to the capital structure might occur.

The Company used the intrinsic value method to recognize compensation cost for its employee stock options, which are classified as equity-settled share-based payment transaction and issued between 2004 and 2007, in accordance with Accounting Research and Development Foundation interpretation Nos. 2003-070~072. Employees’ stock options granted between 2005 and 2006 were accounted for under intrinsic value method. Accordingly, the Company provides NT$1,932 thousand and NT$5,218 thousand of compensation expense for the years ended December 31, 2009 and 2008, respectively. Because the exercise price at the plan date for stock option plan of 2007 was close to the market price, the Company provided no compensation expense under the intrinsic value method.

The respective information of the units and weighted average exercise prices for stock option plans of the Company is disclosed as follows:

For the year ended December 31, 2009 Options

(in thousand units) Weighted-average Exercise

Price per share (NTD) Outstanding at beginning of period 4,826.5 192.9 Granted - -

Exercised (542) 148.1 Expired (248.5) 180.9 Outstanding at end of period 4,036 187.2 Exercisable at end of period 1,836 Weighted-average fair value of options granted during the period (in NTD)

-



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For the year ended December 31, 2008

Options (in thousand units)

Weighted-average Exercise Price per share (NTD)

Outstanding at beginning of period 5,622 202.7 Granted - -

Exercised (251.5) 10.7 Expired (544) 192.0

Outstanding at end of period 4,826.5 192.9

Exercisable at end of period 78


-

Information for options granted after January 1, 2004 are as follows:

The fair value of the options outstanding as of December 31, 2009 and 2008 were estimated at the date of grant using the Black-Scholes options pricing model. The Company’s pro-forma information is set forth as follows:

Outstanding Stock Options Exercisable Stock Options

Year

Range of Exercise

Price (NTD)

Options (Unit)

Weighted- average

Expected Remaining

Years


share (NTD)

Options (Unit)


share (NTD)


10 72.5 0.17 10 72.5 $10


10 75.5 0.49 10 23.0 10


193.9 3,888.0 2.25 193.9 1,740.5 193.9

Total 4,036.0 2.18 187.2 1,836.0 184.3



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For the year ended December 31, 2009 2008 Net income-as reported (NT$’000) 848,204 1,359,697 Basic earnings per share-as reported (NT$) 6.72 10.90 Diluted earnings per share -as reported (NT$) 6.58 10.53 Net income-pro forma (NT$’000) 723,105 1,221,596 Basic earnings per share-pro forma (NT$) 5.73 9.79 Diluted earnings per share -pro forma (NT$) 5.61 9.46

Pro forma information under fair value method using Black-Scholes Option Pricing Model is as follows:

(15) Legal Reserve

According to the R.O.C. Company Law, 10% of the Company’s net income, after deducting previous years' losses, if any, shall be appropriated for legal reserve prior to any distribution, until such reserve is equal to the Company’s paid-in capital. When legal reserve has reached 50% of paid-in capital, 50% of such reserve may be distributed to the Company’s shareholders through the issuance of additional common shares.

(16) Earnings Distribution and Dividends Distribution Policy According to the Company's Articles of Incorporation, Current year's earnings, if any, shall be distributed in the following order: (a) Income tax obligation; (b) Offsetting accumulated deficits, if any; (c) Legal reserve at 10% of net income after tax; (d) Special reserve in compliance with the Company Law or the Securities and Exchange

Law;

Employee stock option plan in 2005

First employee


Second employee


Third employee


Employee stock option plan in 2007

Expected dividend yield 1.58% 1.52% 1.90% 1.58% 3.09%Expected volatility 103.54% 119.69% 131.54% 147.96% 48.40%Risk free interest rate 1.63% 1.63% 1.63% 1.63% 2.625%Expected life 4.25 years 4.25 years 4.25 years 4.25 years 4.25 years



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(e) Remuneration for directors and supervisors to a maximum of 1% of the remaining Current year’s earnings after deducting for item (a) through to (d).

(f) After deducting for item (a) through to (d) above from the current year’s earnings, no less than 1% of the remaining amount together with the prior years’ unappropriated earnings is to be allocated as employees’ bonus.

(g) The remaining, after all the above appropriations and distributions, may be retained or distributed proportionally as shareholder’s bonus. The distribution will be proposed by the board of directors and resolved in the shareholders’ meeting.

The policy for dividend distribution should reflect factors such as the current and future fund requirements and long-term financial planning. The board of directors shall make the distribution proposal in the subsequent year and submit it to the annual shareholders’ meeting for approval. Since 2008, the distribution of employee bonus and remuneration for directors and supervisors shall be accrued as an expense at the year the employees, directors and supervisors grant their services. If the accrued amount is modified and proposed to shareholders’ meeting by the board of directors in the subsequent year and the difference is not significant, the Company shall recognize the difference in earnings then. If the accrued or proposed amount is further modified at shareholders’ general meeting held in the subsequent year, the Company shall recognize the difference in earnings then as well. In the case that stock, instead of cash, is to distribute for employee bonus purpose, the number of shares distributed will be computed by dividing the amount of bonuses by the closing price (after considering the effect of cash and stock dividends) of the shares on the day immediately preceding the shareholders' meeting. Shareholders’ dividends may be distributed in the form of shares, cash, or a combination of both. Cash dividends may not be less than 10% of total dividends to be distributed. Remuneration for directors and supervisors’ services is limited to cash only. During the years ended December 31, 2009 and 2008, the amounts of the employee bonuses were NT$285,278 thousand and NT$456,445 thousand, respectively. During the year ended December 31, 2009 and 2008, remunerations to directors and supervisors were NT$7,631 thousand and NT$12,240 thousand, respectively. The employee bonuses and remunerations to directors were accrued in accordance with the Company’s Articles of Incorporation and counted without considering the cost of employee bonus and its related income tax. The accrual was charged to earnings.



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Based on the resolution of the board of directors’ meeting on March 10, 2009 and April 24, 2008, the Company resolved the distribution of earnings of 2008 and 2007. The distributions of earnings were approved by the shareholders’ general meetings. Details of the settlement of employees’ bonus and remuneration of directors and supervisors were as follows:

As approved in the shareholders’ meeting held on April 30, 2009

As approved by the shareholders’ meeting

on June 13, 2008 NT$’000 except

otherwise stated NT$’000 except

otherwise stated Remuneration of directors and supervisors 12,237 14,562 Profit sharing to employees - in cash 45,000 112,000 Profit sharing to employees - in stock

Amount 411,445 27,000 Number of shares (par value of NT$10) 2,283,292 shares 2,700,000 sharesMarket price (NT dollar) 180.198(Remark) -

Shareholders’ cash dividends 737,098 906,602 Shareholders’ stock dividends

Amount 12,285 46,492 Number of shares (par value of NT$10) 1,228,496 shares 4,649,241 shares

Remark: The profit sharing to employee in stock of 2,283,292 shares was determined by

the closing price of the Company’s common shares (after considering the effect of dividends) of the day immediately preceding the shareholders’ meeting, each share priced at NT$180.198.

The resolved amounts of the profit sharing to employees and bonus to directors were consistent with the resolutions of the stockholders’ general meeting held on April 30, 2009 and the minor different amount had been charged against earnings of 2009. The detail is as follows:

Distribution items

Amount resolvedby the board of

directors

Amount recognized in accrued year Difference

Reason of differences and further procedures

NT$’000 NT$’000 NT$’000 Profit sharing to employees - in cash 411,445 411,445 - - Profit sharing to employees - in stock 45,000 45,000 - - Remuneration of directors and supervisors 12,237 12,240 3 (Remark)



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Remark: This was an estimated difference and recognized the change as an adjustment to income of 2009.

The information about the appropriations of profit sharing to employees and bonus to directors is available at the Market Observation Post System website.

(17) Treasury Stock

The movement of treasury stock for the years ended December 31, 2009 and 2008 is as follows:



(NT$’000)Shares

Amount (NT$’000)

Shares Amount


shares to employees 1,965,000 280,834 - - 1,965,000 280,834



(NT$’000)Shares

Amount (NT$’000)

Shares Amount


shares to employees 30,000 7,245 1,935,000 273,589 1,965,000 280,834

a. According to the Securities and Exchange Law of the R.O.C., total shares of treasury

stock shall not exceed 10% of the Company’s issued stock and the total purchase amount shall not exceed the sum of the retained earnings, additional paid-in capital – premiums, and realized additional paid-in capital. The ceiling of number of shares and the dollar amount of treasury stock that the Company could hold as of December 31, 2009 was 12,986,391 shares and NT$4,741,702 thousand and, respectively.

b. Pursuant to the Securities and Exchange Law, treasury stock shall not be pledged, nor

does it possess voting rights or the rights to receive dividends. Treasury stock shall be transferred to employees within three years from the repurchased date or cancelled.

c. None of the Company’s treasury stock was transferred to employees as of December 31,

2009.



- 127 -

(18) Net Operating Revenue For the year ended December 31,

2009 2008

NT$’000 NT$’000 Sale of goods 3,732,017 4,805,333 Other operating revenue 23,865 3,743 Total 3,755,882 4,809,076 Less: Sale returns (2,694) (474) Less: Sale discounts (1,676) (3,731) Net Operating Revenue 3,751,512 4,804,871

(19) Operating Cost and Expenses


Operating costs

Operating expenses

Total Operating

costs

Operating expenses

Total

NT$’000 NT$’000 NT$’000 NT$’000 NT$’000 NT$’000Personnel Expense Salary & wage 16,185 488,936 505,121 22,885 667,094 689,979 Insurance - 12,848 12,848 - 10,813 10,813 Pension 344 10,144 10,488 324 9,185 9,509

Other expenses - 2,378 2,378 - 2,127 2,127Total 16,529 514,306 530,835 23,209 689,219 712,428Depreciation (Remark) 720 19,837 20,557 1,459 17,561 19,020Amortization 6,663 24,961 31,624 15,051 15,804 30,855

Remark: Depreciation expenses amounted to NT$20,778 thousand and NT$19,460

thousand, including depreciation of leased assets recorded under non-operating expenses-other losses in amount of NT$221 thousand and NT$440 thousand, for the years ended December 31, 2009 and 2008, respectively.

(20) Earnings Per Share

The capital structure of the Company is considered complex since there are stock options outstanding. The Company presents basic and diluted earnings per share for the years ended December 31, 2009 and 2008 since its stock options would have a dilutive effect if they had been fully exercised.



- 128 -

For the year ended December 31, 2009 2008 In shares In shares

Common shares outstanding, beginning 124,735,528 117,084,010 Employees' stock options exercised(Remark) 79,075 169,670 Purchase treasury stock(Remark) (1,965,000) (1,071,008) Employee’s bonus in shares on Aug. 26, 2008 - 2,699,687 Stock dividends on Aug. 26, 2008 - 4,648,703 Employee’s stock bonus (Remark) 1,538,876 - Capital increase on July 22, 2009 669,863 - Stock dividends on Sep. 1, 2009 1,220,220 1,211,577 Weighted average of shares outstanding for basic EPS

computation 126,278,562 124,742,639

Potential common share equivalents: The dilutive effect of stock options (assuming fully

exercised) 792,952 429,626

Bonus to employees 1,802,106 4,003,902 Weighted-average of dilutive shares outstanding: 128,873,620 129,176,167

Remark: Computed on a weighted-average basis.


(NT$’000)After tax

(NT$’000)Shares


tax(NT$)After

tax(NT$)For the year ended December 31, 2009: Consolidated net income attributable to parent company's shareholders Basic EPS

Net income 900,790 848,204 126,278,562 7.13 6.72

Diluted EPS Net income 900,790 848,204 128,873,620 6.99 6.58



- 129 -

(21) Income Taxes

a. Tax authorities have assessed the income tax returns up to the year 2006. However, additional income taxes were levied on the Company in total of NT$73,271 thousand for the years 2004, 2005 and 2006. The Company has fully accrued the additional tax liability while filing administrative appeals to tax authority and courts in light that the discrepancy between the Company’s tax return filings and the authority’s assessment resulted from the different viewpoints on the calculation of tax exemption.

For the year ended December 31, 2009: Consolidated net income attributable to minority interests Basic EPS

Net loss (1,885) (1,922) 126,278,562 (0.01) (0.02)

Diluted EPS Net loss (1,885) (1,922) 128,873,620 (0.01) (0.01)


(NT$’000)After tax

(NT$’000)Shares


tax(NT$)After

tax(NT$)For the year ended December 31, 2008: Consolidated net income attributable to parent company's shareholders Basic EPS

Net income 1,406,880 1,359,697 124,742,639 11.28 10.90

Diluted EPS Net income 1,406,880 1,359,697 129,176,167 10.89 10.53

For the year ended December 31, 2008: Consolidated net income attributable to minority interests Basic EPS

Net loss 382 321 124,742,639 - -

Diluted EPS Net loss 382 321 129,176,167 - -



- 130 -

b. Pursuant to the “Statute for Upgrading Industries”, the Company is qualified as a technical service industry and is therefore entitled to an income tax exemption period for five consecutive years on the income generated from qualifying high technology activities. The Company has elected the tax exemption period to start from the year 2004.

c. The Company and subsidiaries have filed respective business income tax return

separately. There is no allowance for combining their filings into one.

d. As of December 31, 2009, unused tax credits available to reduce future taxable income are as follows:

Year incurred Total credit amount

(NT$’000) Unused amount

(NT$’000)

Expired after

2007 71,079 26,313 2011 2008 56,089 36,324 2012

2009(Estimated) 167,931 167,931 2013 Total 295,099 230,568

Investment tax credits have been included in calculation of deferred income tax assets.

e. As of December 31, 2009, the unutilized accumulated losses for the Company and subsidiaries were as follows:

Year incurred

Total credit amount(NT$’000)

Unused amount (NT$’000)

Expired after

2009 (Estimated) 1,056 1,056 2019

f. Deferred income tax assets and liabilities are as follows: As of December 31,

2009 2008 NT$’000 NT$’000

(a) Total deferred income tax liabilities 267 35

(b) Total deferred income tax assets 314,725 438,386

(c) Valuation allowance against deferred tax assets 290,729 406,066



- 131 -

(d)Temporary differences that generated deferred income tax assets or liabilities: As of December 31, 2009 2008 Amount Tax Effect Amount Tax Effect NT$’000 NT$’000 NT$’000 NT$’000

Unrealized estimated expense 334,506 66,901 281,471 70,368 Unrealized pension expense 5,975 1,195 5,975 1,494 Unrealized inventory provision 34,776 6,955 115,783 28,946 Unrealized bad debt expense 15,407 3,081 16,094 4,023 Allowance on sales returns and

discounts

5,824

1,165

5,824

1,456 Unrealized investment loss under

equity method

20,552

4,110

1,889

472 Unrealized gross margin 335 67 - - Unrealized exchange loss 2,357 472 5,454 1,364 Unrealized exchange gain (1,334) (267) (140) (35)Unutilized accumulated losses 1,056 211 - - Investment tax credits 230,568 330,263

g. As of December 31, 2009 2008

NT$’000 NT$’000Deferred income tax assets-current 78,641 110,465Valuation allowance-deferred income tax assets-current (73,856) (91,886)Net deferred income tax assets-current 4,785 18,579Deferred income tax liabilities-current (267) (35)Net deferred income tax assets and liabilities-current 4,518 18,544

h. As of December 31, 2009 2008 NT$’000 NT$’000 Deferred income tax assets-noncurrent 236,084 327,921 Valuation allowance-deferred income tax

assets-noncurrent (216,873) (314,180)Net deferred income tax assets-noncurrent 19,211 13,741 Deferred income tax liabilities-noncurrent - - Net deferred income tax assets and liabilities-noncurrent 19,211 13,741



- 132 -

i. According to the newly revised Income Tax Law of the R.O.C. on May 27, 2009, thestatutory tax rate of the Company will be changed from 25% to 20% effective January 1, 2010. Income tax payable and income tax expense are reconciled as follows:

For the year ended December 31, 2009 2008 NT$’000 NT$’000Tax on pre-tax income at statutory tax rate 224,522 352,031 10% income tax on undistributed earnings 47,545 34,953 Tax exemption (199,299) (372,814)Permanent difference 441 (172)Investment tax credits (21,292) (201,825)Change in Investment tax credits 65,322 - Change in valuation allowance (95,630) 192,268 Assessed additional income tax 41,886 26,450 Taxation separately 231 509 Change in deferred tax assets and liabilities resulting

from the change of statutory tax rate 1,266 -

Estimative change (12,369) 15,844 Income tax expense 52,623 47,244

j. Integrated income tax information: As of December 31, 2009 2008 NT$’000 NT$’000

Balance of the imputation credit account (ICA) 27,644 31,109 For the year ended December 31, 2009 2008 Expected (Actual) creditable ratio 1.68%(Remark) 1.72%

Remark：The ratio was computed based on the amount of actual available shareholders’ tax credits plus estimated income tax payable as of December 31, 2009.

k. Information related to undistributed retained earnings As of December 31, 2009 2008 NT$’000 NT$’000

After 1998 2,445,808 2,482,957



- 133 -

5. RELATED PARTY TRANSACTIONS (1) Related Parties and Relations with the Company

Related parties Relations United Microelectronics Corporation (“UMC”) Related party in substance UMC JAPAN (“UMC-J”) Related party in substance Five people, including Jhih-Hong Lu Directors of the Company Three people, including Sheng-Cheng Chou Supervisors of the Company Two people, including Sen-Huang Huang Vice president and above

(2) Major transactions with related parties

a. Purchases: For the year ended December 31, 2009 2008



(%) Amount


(%) UMC 768,845 82.83 809,657 75.17 UMC-J - - 44,703 4.15 Total 768,845 82.83 854,360 79.32

There is no comparable price available from other suppliers for the purchase price from related parties due to unique product specification and customization. Payment terms for above purchase are 45 days from the date of monthly closing. The total cost of wafer purchased from UMC and used for R&D purpose amounting to NT$13,477 thousand and NT$22,942 thousand were recorded under R&D expenses for the years ended December 31, 2009 and 2008. The Company has paid NT$169 thousand to UMC as prepayment as of December 31, 2009.

(3) Payables resulted from the above transactions:

Payables to related parties As of December 31, 2009 2008



(%) Amount


(%) UMC 114,992 38.00 103,273 28.77

(4) Remunerations paid to directors, supervisors and key managers:


Salaries, reward, compensation, special allowance and bonus

44,325 65,358



- 134 -

The information about the compensation of directors and management personnel is available in the annual report for the shareholders’ meeting. Total compensation expense for the year ended December 31, 2009 includes estimated profit sharing to employees and bonus to directors of the Company that relate to 2009 but will be paid in the following year. The actual amount will be finalized and approved upon the resolution of the shareholders’ meeting in 2010. The total compensation for the year ended December 31, 2008 included the bonuses appropriated from earnings of 2008 which was approved by the shareholders’ meeting held in 2009.

6. ASSETS PLEDGED AS COLLATERAL As of December 31,

Account 2009

(NT$’000)2008

(NT$’000)

Secured financial

institutions Contents Restricted deposits-Non-Current 3,000 3,000 Custom Custom duty guarantee

7. COMMITMENTS AND CONTINGENCIES

Significant commitments and contingencies of the Company as of December 31, 2009 were as follows:

a. The Company has paid royalty based on certain rate of selling dollar money or quantity for

certain product.

b. The Company has entered into certain lease agreement for land with the Administrative

Bureau of HSIP for its need of operations. Related minimum rental to be incurred in the future

is as follows:

Lease Period Amount (NT$’000)

2010.01.01~2010.12.31 2,449

2011.01.01~2011.12.31 2,449

2012.01.01~2012.12.31 2,449

2013.01.01~2013.12.31 2,449

2014.01.01~2014.12.31 2,449

2015.01.01~2024.12.31 10,931

Total 23,176



- 135 -

8. SIGNIFICANT DISASTER LOSS

None.

9. SIGNIFICANT SUBSEQUENT EVENT

None.

10. OTHER DISCLOSURES (1) Financial Instruments

a. Fair value of financial instruments: The Company and subsidiaries didn’t engage in certain derivative instruments for the years ended December 31, 2009 and 2008. Fair value of financial instruments in non-derivative instruments is shown as follows:

As of December 31,

2009 2008

Non-derivative instruments Book value Fair value Book value Fair value

Assets NT$’000 NT$’000 NT$’000 NT$’000

Cash and cash equivalents 5,135,820 5,135,820 5,045,377 5,045,377

Receivables 383,215 383,215 328,084 328,084

Other Receivables 25,455 25,455 25,812 25,812

Held to maturity financial assets 562,626 561,204 - -

Financial assets measured at cost-noncurrent 300,000 - 300,000 -

Refundable deposits 3,350 3,350 1,162 1,162

Restricted deposits 3,000 3,000 3,000 3,000

Liabilities

Payables(Including payables to related parties) 303,275 303,275 359,005 359,005

Income tax payable 84,541 84,541 54,306 54,306

Accrued expenses 736,132 736,132 830,441 830,441

Deposits received 694 694 931 931

(a) The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:



- 136 -

(i) The fair values of the Company’s short-term financial instruments approximate

their carrying values at the reporting date due to their short maturities. This method was applied to cash and cash equivalents, receivable, other receivables, payables (including payables to related parties), income taxes payables and accrued expenses.

(ii) The fair values of the Company’s refundable deposits, deposits received and

restricted deposits approximate their carrying value because the Company predicts the future cash inflows or outflows will be of similar amount to the carrying value.

(iii) The fair values of the Company’s investments accounted for under the equity

method were based on quoted market prices, if available, at the reporting date. If the quoted prices were not available and other valuation method was impractical, the Company did not provide the information of fair values.

(iv) The fair values of held-to-maturity financial assets were based on their quoted market prices, if available, at the reporting date. If market prices were impractical and not available, fair values are determined using valuation techniques. Such techniques use rates of returns from similar financial instruments as discount rates.

(v) Financial assets carried at cost are the shares of private companies held by the

Company without significant influence and no fair values were available and presentable either.

(b) How the fair value of financial instruments were determined are shown as follows:

Quoted market Valuation method As of December 31 As of December 31 2009 2008 2009 2008

Financial Assets NT$’000 NT$’000 NT$’000 NT$’000Cash and cash equivalents 4,810,942 4,717,545 324,878 327,832Receivables - - 383,215 328,084Other receivables - - 25,455 25,812Refundable deposits - - 3,350 1,162Restricted deposits 3,000 3,000 - -



- 137 -

Quoted market Valuation method As of December 31 As of December 31 2009 2008 2009 2008

Financial Liabilities Payables (Including payables to related parties) -

-

303,275 359,005

Income tax payable - - 84,541 54,306Accrued expenses - - 736,132 829,441Deposits received - - 694 931

(c) Gain (Loss) recognized for the changes in fair value of financial assets estimated

using valuation techniques were nil for the years ended December 31, 2009 and 2008, respectively.

b. As of December 31, 2009 and 2008, financial assets exposed to interest rate risk were

NT$2,237,504 thousand and NT$1,927,832 thousand, financial liabilities exposed to interest rate risk were nil.

c. Interest income recognized from financial assets and financial liabilities that are not at

fair value through profit or loss amounted to NT$16,633 thousand and NT$78,147 thousand for the years ended December 31, 2009 and 2008, respectively.

d. Information of financial risks

The Company held certain non-derivative financial instruments, including cash and cash equivalents. The Company held the financial instruments to meet the need in operating cash and also held other financial instruments such as receivables, payables and financial assets measured at cost-noncurrent. Major risks of financial instruments were summarized as follows:

(a) Market risk

Market risk includes currency rate risk. It comes from the purchases or sales activities which are not denominated in functional currency. Had the US dollar appreciated against the NT dollar for one cent, financial assets would increase in fair values by NT$842 thousand and NT$82 thousand as of December 31, 2009 and 2008, respectively.



- 138 -

(b) Credit risk

The Company and subsidiaries’ exposure to credit risk arises from potential default of the counter-party or other third-party. The level of exposure depends on several factors including concentrations of credit risk, components of credit risk, the price of contract and other receivables of financial instruments. Since the counter-party or third-party to the foregoing forward exchange contracts are all reputable financial institutions, management believes that the Company and subsidiaries’ exposure to default by those parties is minimal. The Company and subsidiaries’ credit risk mainly comes from the collectibility of accounts receivable while receivable balances are monitored on an ongoing basis and an allowance for doubtful receivables is provided. Thus, the net book value of accounts receivable are properly evaluated and reflect the credit risk the Company expose to. Financial instruments with positive fair values at the balance sheet date are evaluated for credit risk, which arises when counter-party or third-party to a financial instrument fails to discharge an obligation and the Company and subsidiaries suffer a financial loss as a result. Credit risk of credit-linked deposits and exchange rate-linked deposits arises if the issuing banks breached the contracts or the debt issuer could not pay off the debts; the maximum exposure is the carrying value of credit-linked deposits. Therefore, the Company and subsidiaries minimized the credit risk by only transacting with counter-party who is reputable, transparent and in good financial standing.

(c) Liquidity risk

The Company and subsidiaries have sufficient operating capital to meet the need in cash upon the settlement of financial instruments. Therefore, the liquidity risk is nil.

(d) Cash flow interest rate risk

Since the duration of the financial assets exposed to cash flow interest rate risk is short, the cash flow risk from fluctuation in interest rate is minimized.

(2) Other

A. Certain comparative amounts have been reclassified to conform to the current year’s presentation of financial statements.



- 139 -

B. INTERCOMPANY RELATIONSHIPS AND SIGNIFICANT INTERCOMPANY TRANSACTIONS

As of December 31, 2009 December 31, 2009

Transaction

Number

(Remark 1)

Company Name Counter Party

Relationship with

Counter Party

(Remark 2) Financial Statement Account

Carrying Value

(NT$’000)

Terms and

Conditions

Percentage of

Consolidation

(%) (Remark 3)

1 Receivables from related party 13,560 0.19

1 Operating Revenues 17,667 T/T 30days

0.47 0 The Company PrimeSensor Technology Inc.

1 Advance receipts 7,500 By contracts 0.11

3 Payables to related parties 5,092 0.07 1


(SAMOA) Ltd. PrimeSensor Japan Inc.

3 Operating expenses 5,177 By contracts

0.14

As of December 31, 2008: None.

Remark 1: Inter-company relationships’ and significant inter-company transactions’ codes were listed as follows: A. The Company: 0. B. Subsidiaries were assigned numbers which started from 1.

Remark 2: Relation codes were listed as follows: A. The Company to subsidiaries. B. Subsidiaries to the Company. C. Subsidiaries to subsidiaries.

Remark 3: Calculation of the percentage were listed as follows: A. Ratio of assets or liabilities to consolidated assets for the year ended December 31, 2009. B. Ratio of revenues or expenses to consolidated gross sales.



- 140 -

11. ADDITIONAL DISCLOSURES

(1) Following are the additional disclosures for the Company: A. Financing provided: None;

B. Endorsement/guarantee provided: None;



- 141 -

C. MARKETABLE SECURITIES HELD DECEMBER 31, 2009

December 31, 2009

Held

Company Name

Marketable

Securities Type


and Name

Relationship

with the

Company

Financial Statement

Account Shares/UnitsCarrying Value

(NT$’000)

Percentage of

Ownership (%)

Net Asset

Value

(NT$)

Note

Stocks Shieh Yong Investment Co., Ltd. - Financial assets measured

at cost-noncurrent 34,686,000 300,000 4.55 8.33 -

94 Taiwan Power 3A04 corportate

bond -


assets-current 100 101,367 - 102,400 -

95 Formosa Plastics co. No.2

corporate bond -



95 Formosa Plastics co. No.1

corporate bond -



90 Formosa Petrochemical co.

2B06 corporate bond -



95 Taiwan Power 1A corporate

bond -



The Company

Bonds

95 CPC 1A corporate bond - Held to maturity financial




- 142 -

D. MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF AT COSTS OR PRICES OF AT LEAST NT$100 MILLION OR 20% OF THE PAID-IN CAPITAL FOR THE YEAR ENDED DECEMBER 31, 2009

Beginning


Company

Name

Marketable Securities

Type and Name

Counter-

party

Nature of

Relationship

Financial

Statement

Account Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Carrying

Value

(NT$’000)

Gain (Loss) of

Disposal

(NT$’000)

(Remark)

Shares

/Units

Amonut

(NT$’000)

94 Taiwan Power

3A04 corportate

bond

- -

Held to maturity

financial

assets-current

- - 100 101,947 - - - (580) 100 101,367

95 Formosa Plastics

co. No.1 corporate

bond

- -

Held to maturity

financial

assets-noncurrent

- - 100 102,482 - - - (322) 100 102,160

90 Formosa

Petrochemical co.

2B06 corporate

bond

- -

Held to maturity

financial

assets-noncurrent

- - 100 105,156 - - - (1,313) 100 103,843

The

Company

95 Taiwan Power

1A corporate bond - -

Held to maturity

financial

assets-noncurrent

- - 100 102,324 - - - (464) 100 101,860

(To be continued)



- 143 -

(Continued)

Beginning


Company

Name

Marketable

Securities Type

and Name

Counter-

party

Nature of

Relationship

Financial

Statement

Account Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Shares

/Units

Amount

(NT$’000)

Carrying

Value

(NT$’000)

Gain (Loss)

of Disposal

(NT$’000)

(Remark)

Shares

/Units

Amonut

(NT$’000)

The

Company

95 CPC 1A

corporate bond - -

Held to maturity

financial

assets-noncurrent

- - 100 102,976 - - - (220) 100 102,756

Remark：Amortation of financial assets premium.

E. Acquisition of individual real estate properties at costs of at least NT$100 million or 20% of the paid-in capital: None;

F. Disposal of individual real estate properties at prices of at least NT$100 million or 20% of the paid-in capital: None;



- 144 -

G. TRANSACTIONS WITH RELATED PARTIES AT COST OR PRICE OF AT LEAST NT$100 MILLION OR 20% OF PAID-IN CAPTIAL:

Transactions Terms and conditions

different with third partiesAccounts (notes) receivable and payable

Company

Name Counter Party

Nature of

Relationship Purchases or

Sales

Amount

(NT$’000)

Percentage of

consolidated

purchases or sales

Credit

Period Unit price Credit Period

Carrying Value

(NT$’000)

Percentage of consolidated

accounts (notes) receivable

and payable

The

Company UMC

Related party

in substance Purchases

768,845

(Remark)82.83% 45 days - - (114,992) 38.00%

Remark: The total cost of wafer purchased from UMC amounted to NT$782,322 thousand, of which NT$768,845 thousand were recorded under raw materials and NT$13,477 thousand under R&D expenses.

H. Receivable from related parties amounting to at least NT$100 million or 20% of the paid-in capital: None;

I. Information about derivatives of investees over which the Company has a controlling interest: None.

(2) The following are additional disclosures for the Company’s affiliates:

The Company and its subsidiaries do not have any investee company which the Company or its subsidiaries exercise significant influence over. All investee companies controlled by the Company or its subsidiaries have been included as consolidated entities in the consolidated financial statements. Therefore no relevant disclosure is required.

(3) INFORMATION OF INVESTMENT IN MAINLAND CHINA FOR THE YEAR ENDED DECEMBER 31, 2009

None.



- 145 -

12. SEGMENT FINANCIAL INFORMATION 1. Revenues from customer representing over 10% of total net sales were as follows:


Customer Name Amount


(%) Amount


(%) A 1,327,790 35.39 2,600,189 54.12 C 1,048,989 27.96 947,493 19.72 D 380,275 10.14 402,837 8.38

Total 2,757,054 73.49 3,950,519 82.22

2. Export sales

The Company’s export sales amounted to NT$3,402,315 thousand and NT$4,349,223 thousand, representing 90.69% and 90.52% of net sales for the years ended December 31, 2009 and 2008, respectively.


Location 2009 2008 NT$’000 NT$’000 Asia 3,394,674 4,348,629 Other 7,641 594 Taiwan 349,197 455,648 Net Income 3,751,512 4,804,871

3. Operations in different geographic areas

The Company has no reportable division in overseas geographic areas.

4. Operations in different industries The main activities of the Company are in CMOS image sensor and related IC design, research, production, and sale. The Company operates predominantly in one industry segment.

- 146 -

6.The Effect of Insolvency of the Company and Affiliates on the Financial Status of the Company: None.

- 147 -

VII. Review on Financial Status &Operating Results and Risk Management

1. Financial Status

Currency: NTD 1,000 Year

Account

2009.12.31 2008.12.31 Change Change (%)

Current assets 5,612,533 5,386,431 226,102 4.20 %Funds and investments 1,029,006 558,968 470,038 84.09 %

Fixed assets 274,534 247,740 26,794 10.82 %

Intangible assets 47,273 41,297 5,976 14.47 %

Other assets 31,822 47,584 (15,762) (33.12) %

Total assets 6,995,168 6,282,020 713,148 11.35 %

Current liabilities 1,140,174 1,249,816 (109,642) (8.77) %

Other liabilities 6,310 6,906 (596) (8.63) %

Total liabilities 1,146,484 1,256,722 (110,238) (8.77) %

Capital 1,298,639 1,247,355 51,284 4.11 %Capital stock to be registered 79,117 100 79,017 79,017 %

Capital reserve 1,711,640 1,117,066 594,574 53.23 %

Retained earnings 3,040,360 2,941,539 98,821 3.36 %Accumulated translation adjustments

(238) 72 (310) (430.55) %

Treasury Stocks (280,834) (280,834) 0 0 %Total Shareholders’ Equity 5,848,684 5,025,298 823,386 16.38 %Reason for major changes and impact analysis:

Funds and investments: The increase is mainly due to purchasing corporate bond. Other assets: The decrease is mainly due to transferring leased assets to fixed asstes after the lease contract expired. . Capital stock to be registered: The increase is mainly due to the exercises of employee stock options. Capital reserve: The increase is resulted from the capitalization of employees’ bonus、issuing

common stocks through private placement and exercises of employee stock option.

- 148 -

2. Operation Results Currency: NTD 1,000

Year

Account 2009 2008 Change Change (%)

Revenue 3,758,802 4,809,076 (1,050,274) (21.84) %

Less: sales return & allowance 4,370 4,205 165 3.92 %

Net sales 3,754,432 4,804,871 (1,050,439) (21.86) %

Cost of goods sold 2,006,642 2,471,007 (464,365) (18.79) %

Gross profit 1,747,790 2,333,864 (586,074) (25.11) %

Less : Unrealized gross margin

from affiliates

335 － 335 －

Realized gross margin 1,747,455 2,333,864 (586,409) (25.13) %

Operating expenses 839,910 1,027,106 (187,196) (18.23) %

Income from operation 907,545 1,306,758 (399,213) (30.55) %

Non-operating gains/revenues 20,039 109,266 (89,227) (81.66) %

Non-operating expenses/losses 27,149 9,491 17,658 186.05 %

Income before tax 900,435 1,406,533 (506,098) (35.98) %

Less：Income tax 52,231 46,836 5,395 11.52 %

Net income 848,204 1,359,697 (511,493) (37.62) %a. Reason for major changes and impact analysis：

The global recession led to a decline in our revenue, gross profit, and net income compared

with 2008. Non-operating income dropped significantly as the direct result of the plummet in

interest rates. Furthermore, volatility in foreign exchange led to exchange losses.

Additionally, we recognized higher investment loss for the investments accounted under

equity method in 2009. These major changes led to a decline in net income in 2009

compared with 2008.

b.Sales forecast and rationale; impact on the Company’s financials and coping strategies：

In 2009, our sales quantity reached 187,465,000 pieces. In 2010, with the recovery in global

economy, introducing more application products and strengthening promotion, we expect this year’s

sales quantity will continue to grow. We will continue to introduce more competitive products,

expand the customer base, and develop various new products. We will face all the challenges in front

of us with firm and pragmatic attitude.

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3. Cash Flow Analysis

(I) 2009 cash flow analysis:

As the result of the economic recession in 2009, cash inflows from operating activities decreased by NT$850,180 from the previous year. Cash outflows from investment activities increased by NT$347,502, as a result of additional corporate bond investments. Cash outflows from financing activities decreased by NT$864,840 as the result of the cash offering by private placement in 2009 together with stock repurchase and higher dividend payments in 2008.

(II) Improvement plans for insufficient liquidity and liquidity analysis for the coming year:

The Company does not have any liquidity issues. According to the Company’s 2009 financial statements, there is approximately NT$4.77 billion in cash and cash equivalents. There should be no liquidity issues in the coming year.

4. The Effect of Material Capital Expenditures on Financial Position and Operation：No

material capital expenditure in 2009.

5. Direct Investment Policy, Reasons for Profit or Loss, Correction Plan and Investment Plan

for the Coming Year: None.

6. Risk Management (1) The impact of interest rate fluctuations, exchange rate fluctuations, and inflation on the

Company’s earnings and coping strategies：

Interest rate fluctuations, exchange rate fluctuations, and inflation can all impact the Company’s profits and losses. Interest-rate fluctuations can impact the Company’s interest income, while inflation can impact the Company’s costs and expenses. Since the Company’s revenue is mostly denominated in US Dollars, fluctuations in exchange rates may impact the Company’s exchange gains/losses, and consequently the Company’s profitability. The Company copes with exchange risk through natural hedging – by maintaining the lowest net foreign currency position. In addition, the Company’s finance department monitors the exchange rates, interest rates, and inflation carefully so that the Company can cope with fluctuations adquately.

(2) High leverage/high risk investment, loans to third parties, endorsements and guarantees, and policies in derivatives transactions, reasons for profits/losses and coping strategies：

The Company’s financial policies lean toward conservative. As of the publication date, the Company has not engaged in any high leverage/high risk investments, loans to others, endorsements/guarantees, or derivatives transactions. The Company has instituted the “Procedures Governing the Acquisition or Disposal of Assets,” which governs derivatives transactions; “Operating Procedures of Endorsements and Guarantees,” and “Operating Procedure of Loan Made to Others.” All of these policies have been approved at the Shareholders’ Meeting and shall serve as the basis for governing future transactions.

(3) R&D plans and expected R&D spending in this year：

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a. Please refer to the (3) Business operations, products and services in research and development for details of the Company’s R&D plans.

b. Anticipated research and development expenses: The Company is committed to invest in research and development. R&D expense is anticipated to account for about 10% to 12% of the Company’s revenues.

(4) The impact of changes in important government and regulatory policies domestically and abroad on the Compny’s finance and business and the Company’s responses to the impact:

The Company is an IC Design company for image sensors. Its customers, suppliers, and competitors are located across the globe. Any major changes in policy or regulations can have an impact on the industry and the Company as well. The Company will continue to monitor any relevant changes in policy or regulations and their impact on the Company’s business operations and take necessary actions to the changes rapidly.

(5) The impact of changes in technology and industry on the Company’s finance and business and the company’s response to the impact：

IC industry faces constant changes and technologies advance rapidly. Companies that are unable to cope with the rapid changes by adjusting their strategy or offering competitive products that meet the market demands will have adverse impacts on their finance and businsee. The Company carefully monitors changes in its industry and related technologies; and copes with these changes by first evaluating their impact and by developing competitive products that meet market demand. By doing so, the Company will be able to maintain its competitive advantage.

(6) The impact of changes in corporate image on the Company’s crisis management capabilities and the Company’s reponses to the impact：

Integrity is of the foremost importance to a company’s image. The Company has not encountered any crisis as a result of material changes in its corporate image. The Company will continue to implement various aspects of corporate governance and seek advice from experts when appropriate. The Company aims to manage the business impact these risks can potentially bring.

(7). Expected benefits and possible risks from mergers and acquisitions and coping strategies：

Currently the Company does not have any plans for mergers and acquisitions. The Company will evaluate the possible risks and benefits as well as the synergy before engaging in mergers and acquisitions.

(8). Expected benefits and possible risks from manufacturing expansion and coping strategies：

The Company is an IC Design company and outsources all of its manufacturing; therefore this issue is not applicable.

(9). Risks of purchasing and sales concentration and coping strategies：

a. Risks of purchasing concentration IC design companies need to take into consideration the wafer foundry’s capacity, yield rates, manufacturing processes, and ability to maintain confidentiality when evaluate and choose foundry source. Therefore, it is industry practice for domestic IC design companies to have purchasing concentrations. Looking forward, the Company aims to strengthen its current partnerships but also consider other wafer foundries both domestically and abroad. Doing so would give the Company more options in terms of supply source, quality, pricing, and ultimately diverse purchasing options.

b. Risks of sales concentration

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According to 2008 sales records, the Company’s top 2 customers accounted for 63.21% of the Company’s total sales. Any material change to the customers’ business operations may affect the Company materially. In order to lower the risk of sales concentration, the Company will continue to maintain relationships with its customers and develop products that meet the customers’ needs. In addition, the Company aims to develop new customers as it develops new products so that risks of sales concentration can be lowered.

(10). The impact and risk of the transfer of shares in huge volumes by Directors, Supervisors, or major shareholders on the Company, and the Coping Strategies：

Significant changes to the shareholding of the Company’s Directors, Supervisors, or major shareholders may lead to changes in the Company’s management and also create skepticism among investors. The Company’s stock price may be adversely affected. To manage such situations, the Company reports all insiders’ share transfer information in compliance with requirements by competent authorities. The company also closely monitor shareholding changes of the insiders in order to take necessary responses timely.

(11). The impact and risk of change in management on the Company, and the measures to cope with：

No change in management team in the Company occurred in the most recent year to the date of printing of this annual report.

(12). Litigation and Non-litigated Incidents：

The Company sought declaratory judgment against Avago Technologies General IP (Singapore) Pte. Ltd., Avago Technologies ECBU IP (Singapore) Pte. Ltd., and Avago Technologies USA, Inc. on February 9th, 2010 in the Northern California District Court in order to clarify whether the previous patent license agreement, signed on July 13th, 2006, included the Optical Pseudo Trackball. However, Avago Technologies General IP (Singapore) Pte. Ltd., Avago Technologies ECBU IP (Singapore) Pte. Ltd., and Avago Technologies USA, Inc. filed a countersuit against The Company for breech of patent license agreement. The litigations are still underway. The Company deems these litigations to have no material impact on The Company’s finances and business operations.

(13). Other Major Risks：None.

7.Other Important Notices：None.

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VIII、Special Notes

1. Summary of Affiliated Enterprises

(1) Organization Chart

(2) Information on Affiliated Enterprises： Dec.31 2009

Company name Date of

incorporation Address

Paid-in (Authorized)capital

Major business

PixArt International (BVI) Ltd. 2004.08.11 B.V.I. US$500,000 Investment PixArt International (Samoa) Ltd. 2004.08.11 Samoa US$600,000 Investment Yuan Xiang Investment Corp. (Note) 2005.07.06 Mauritius US$1,000,000 Investment Yuan-Xiang Investment Corp. 2008.04.25 Taiwan NT$200,000,000 Investment Yuan-Feng Investment Corp. 2008.04.25 Taiwan NT$50,000,000 Investment PrimeSensor Technology Inc. 2008.05.28 Taiwan NT$150 ,000,000 IC design YuanXiang Technology (Samoa)Ltd. 2009.01.16 Samoa US$500,000 Investment YuanSheng Investment (Samoa) Ltd. 2009.01.16 Samoa US$175,000 Investment PrimeSensor Japan Inc. 2009.02.27 Japan JPY50,000,000 Technological services

PrimeSensor Technology (Samoa)Ltd. 2009.12.31 Samoa US$210,0000 Investment Note：As of December 31, 2009, the investment to Yuan Xiang Investment Corp. has not yet been paid.

(3) Data for Common Shareholders of Treated-as Controlled Companies and Affiliates: None. (4) Business of PixArt and its Affiliated Enterprises:

The major businesses of our company and related subsidiary are CMOS image sensor related IC design and other investment business, please refer to (2) Major business of Information on affiliated enterprises.

100% 20% 10%

Yuan Xiang Technology (Samoa) Ltd.

100%

Yuan Sheng Investment (Samoa) Ltd.

30%

70%

PrimeSensor Technology (Samoa) Ltd.

PixArt Imaging Inc.

PixArt Intertional (BVI) Ltd.

PixArt International (Samoa) Ltd.


Yuan-Xiang Investment Corp


100% 100% 100% 100%



100% 100%

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(5) Directors, Supervisors and President of Affiliated Enterprises:：

Dec.31 2009 Shareholding Company Name Title Name and Representative Shares (%)

PixArt International (BVI) Ltd. Director PixArt Imaging Inc (Representative :Sen-Huang Huang ) 500,000 100%

PixArt International (Samoa) Ltd. Director PixArt Imaging Inc (Representative :Sen-Huang Huang ) 600,000 100%

Yuan Xiang Investment Corp. (Note) Director PixArt International (Samoa)Ltd. (Representative :Sen-Huang Huang ) －－


Director

Director

Director

Supervisorr

President

PixArt Imaging Inc. (Representative:Sen-Huang Huang) PixArt Imaging Inc. (Representative: Jason Lu) PixArt Imaging Inc. (Representative: Mei-Wei Lo) PixArt Imaging Inc. (Representative: Stella Tsai) Sen-Huang Huang

20,000,000 100％


Director

Director

Director

Supervisorr

President

PixArt Imaging Inc. (Representative:Sen-Huang Huang) PixArt Imaging Inc. (Representative: Jason Lu) PixArt Imaging Inc. (Representative: Mei-Wei Lo) PixArt Imaging Inc. (Representative: Stella Tsai) Sen-Huang Huang

5,000,000 100%


Director

Director

Director

Supervisorr

President

Yuan-Xiang Investment Corp. (Representative:Sen-Huang Huang) Yuan-Xiang Investment Corp. (Representative: Jason Lu) Yuan-Xiang Investment Corp. (Representative: Mei-Wei Lo) Yuan-Xiang Investment Corp. (Representative: Stella Tsai) Sen-Huang Huang

3,000,000 20%

YuanXiang Technology (Samoa)Ltd. Director

PixArt International (BVI) Ltd. (Representative:Sen-Huang Huang) 500,000 100%

YuanSheng Investment (Samoa) Ltd. Director

PrimeSensor Technology Inc. (Representative:Sen-Huang Huang) 175,000 100%

PrimeSensor Japan Inc. DirectorDirectorDirector

Supervisorr

Lucas Oliver-Frost Kazuya Yonemoto

Jason Lu Mei-Wei Lo

－－

PrimeSensor Technology (Samoa)Ltd. Director PrimeSensor Technology Inc. (Representative:Sen-Huang Huang) 210,000 100%

Note：As of December 31, 2009, the investment to Yuan Xiang Investment Corp. has not yet been paid.

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(6) Operation Results of Affiliated Enterprises Dec.31 2009；Unit：NT$ 1,000

Company name Paid-in

(Authorized) capital

Total assets Total liabilities Net value Revenue Income/loss

From operationNet

Income/LossEPS ($) after tax

PixArt International (BVI) Ltd. (Note) US$500 US$235 US$－ US$235 US$－ US$－ US$ (284) US$(0.57)

PixArt International (Samoa) Ltd. US$600 US$333 US$21 US$312 US$－ US$(224) US$(230) US$(0.38)

Yuan Xiang Investment Corp. (Note) US$1,000 US$－ US$－ US$－ US$－ US$－ US$－ US$－

Yuan-Xiang Investment Corp. NT$200,000 NT$200,428 NT$5 NT$200,423 NT$281 NT$(332) NT$(425) NT$(0.02)

Yuan-Feng Investment Corp. NT$50,000 NT$49,810 NT$5 NT$49,805 NT$56 NT$(303) NT$(307) NT$(0.06)

PrimeSensor Technology Inc. NT$150,000 NT$161,128 NT$13,760 NT$147,368 NT$14,747 NT$(1,255) NT$(2,739) NT$(0.18)

YuanXiang Technology (Samoa)Ltd. US$500 US$392 US$158 US$234 US$－ US$(167) US$(285) US$(0.57)

YuanSheng Investment (Samoa) Ltd. US$175 US$133 US$－ US$133 US$－ US$(50) US$(50) US$(0.29)

PrimeSensor Japan Inc. JPY50,000 JPY42,281 JPY8,007 JPY34,274 JPY14,650 JPY(15,582) JPY(15,726) JPY(15,726)

PrimeSensor Technology (Samoa)Ltd. US$210 US$220 US$10 US$210 US$－ US$－ US$－ US$－

Note：As of December 31, 2008, the investment to Yuan Xiang Investment Corp. has not yet been paid.

(7) Consolidated Financial Statements of affiliated Enterprises: Please refer to 5.”Consolidated Financial Statements” in VI. Financial Information and the representation letter on next page.

(8) Affiliated Reports: Not Applicable.

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Representation Letter

The entities included in the consolidated financial statements as of December 31, 2009 and

for the year then ended prepared under the R.O.C.’s Statement of Financial Accounting

Standards No.7 (referred to as “Consolidated Financial Statements”) are the same as the

entities to be included in the combined financial statements of the Company, if any to be

prepared, pursuant to the Criteria Governing Preparation of Affiliation Reports, Consolidated

Business Reports and Consolidated Financial Statements of Affiliated Enterprises (referred

to as “Combined Financial Statements”). Also, the footnotes disclosed in the Consolidated

Financial Statements have fully covered the required information in such Combined

Financial Statements. Accordingly, the Company did not prepare any other set of Combined

Financial Statements than the Consolidated Financial Statements.

Very truly yours,

PixArt Imaging Inc.

Chairman: Sen-Huang Huang February 23, 2010

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2. Status of Private Placement of Securities：

Item 2009 First Private Placement Issuing Date：2009.08.10 (Total issued shares：1,500,000 shares)

Type common shares Date of Shareholder’s Meeting resolution and shares resolved 2009.04.30；No more than 2,000,000 shares

Basis and rationale for pricing

The price of this cash offering by private placement was calculated by taking the average of the closing prices (NT$208.6) from the five business days prior to the pricing date (not including the pricing date) and then multiplying by 70%. The pricing of the new shares is considered reasonable considering the reduced liquidity of the private placement shares compared to the Company’s common shares and the potential benefits of the new strategic partnerships.

The means of selecting the specified persons

In accordance with selection process stipulated in Securities and Exchange Act Article 43-6, item 1.

Explanation for private placement

In light of recent development trends in the industry, the Company plans to bring in strategic partners in order to ensure long-term growth and development. Cash offering by private placement offers the advantages of timely capital raising and limitations on share transfers, which are conducive to long-term working relationships with the strategic partners. Therefore cash offering by private placement was chosen over a public offering.

Payment completion date 2009.07.14

Private placement investors Qualifications Quantity (shares)

Amount (NT Dollars)

Relationship with PixArt Imaging and

level of involvement with

management Quanta Computer Inc. 500,000 73,010,000 Customer KYE Systems Corp. 110,000 16,062,200 Customer HungChi Investment Corp. 50,000 7,301,000 NA Robert Tsao 700,000 102,214,000 Honorary ChairmanPei-Ying Liou 50,000 7,301,000 Spouse of DirectorMei-Juan Lin 50,000 7,301,000 NA

Private placement investors

Yang-Kai Lu

Securities and Exchange Act Article 43-6, item 1, paragraph 2.

40,000 5,840,800 NA Issuing price $ 146.02 Difference between issuing price and reference price

Issuing price was NT$146.02, NT$61.72 higher than the reference price of NT$84.3.

Impact of cash offering by private placement on shareholders’ equity

Actual price for private placement was higher than the book value per share, which means the book value per share would be raised. Strategic partnerships would strengthen thehe Company, improve its competitiveness, and bring forth positive benefits to the shareholders.

Utilization of the fund raised and execution of the plan： Progress of funds’ utilization

2009 Items planned Expected completion date Total funds required

3Q 4Q Fund research and development, purchase R&D equipment and facilities, bolster working capital

3Q2010 NT$ 219,030,000 NT$ 38,229,895

NT$ 56,746,550

Balance of the unused funds NT$124,053,555 Details of the unused funds Funds are deposited in the Company’s bank account

Achievement of the expected benefits: comparison between fiscal 2008 (prior to cash offering by private placement) and 2009 (after cash offering by private placement), indicators for the Company’s overall financials and debt-paying ability have all been improved, demonstrating the effectiveness of the plan. Unit：%；NT$ Item 2008 2009 Financial information Current Asset 5,386,431 5,612,533

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Current Liabilities 1,249,816 1,140,174 Total Liabilities 1,256,722 1,146,484 Fixed Assets 247,740 274,534 shareholders’ equity ratio 79.98 % 83.61 % shareholders’ equity / Fixed Assets 2,028 % 2,130 % Capital Structure Long-term capital to fixed assets ratio 2,028 % 2,130 % Current ratio 430.98 % 492.25 %

Ability to repay debts Quick ratio 404.32 % 464.23 %

3. Acquisition or Disposal of PixArt’s shares by Subsidiaries：None。

4. Other Necessary Supplements: None。

5. Events regulated in Article 36-2-2 of the Securities and Exchange Laws that will materially

affect shareholders’ equity or the share price: None.

PixArt Imaging Inc.

Chairman：Sen-Huang Huang

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