It has been 19 years since SerComm was …...Above all, Femtocell will grow by multiple times more...

002　Letter to Shareholders

009　Company Overview

012　Corporate Organization

022　Capital & Shares

026　Dividend Policy

029　Business Overview

030　Industry Outlook

037　Sales & Marketing

042　Condensed Balance Sheets & Income Statements

044　Financial Analysis

046　Operating Results

047　Analysis of Cash Flow

048　Affi liated Companies Chart

049　Affi liates Information

050　Consolidated Financial Statements

Contents

SerComm Corporation Annual Report 2010 002

Letter to Shareholders

Dear Shareholders:

It has been 19 years since SerComm was incorporated. Moving

toward its 20th anniversary, SerComm has been adhering to the

principles of innovation and quality after it was incorporated,

and is getting more and more mature in its R&D abilities,

marketing and production. 2010 was a year full of honors for

SerComm. By applying the proper business strategies and

being dedicated to upgrading the enterprise efficiency, the

Company’s entire business has grown drastically and brought

about outstanding performance. The yearly operating revenue

of 2010 grew by 20% more than that of 2009, and the profit

thereof grew by more than 50%. The 4Q operating revenue even

made an unprecedented quarterly record. Meanwhile, SerComm’s

efforts in innovation and R&D have been recognized as well, and it was

the only communication network vendor who won the “IDC Enterprise Innovation Award 2010”.

For annual operation, SerComm’s total operating revenue amounted to NT$8.154 billion in 2010,

an increase by at least 20% more than that of 2009, NT$6.794 billion. The yearly operating profi t was

NT$250 million. The net earnings before taxes were NT$371 million and net earnings after taxes were

NT$314 billion, growing by 48% and 53% more than those of the previous year respectively. When

calculated against the 167.5 million shares of common stock outstanding (weighted average), Earnings

Per Share (EPS) before tax amounted to NT$2.21, and Earnings Per Share after tax NT$1.88.

Recalling 2010, broadband mobile was considered the mainstream standard creating the new

age of digital convergence. SerComm has successfully taken the chance of diversified broadband

applications, and achieved remarkable performance after arranging its layout in the telecommunication

market for years. Multiple products, such as Femtocell base station, IP Surveillance and Business

Routers, have yielded positive results. Above all, the mass production of Femtocell and shipment

thereof to Japan and Europe has been offi cially launched. Meanwhile, at the beginning of this year,

it worked with the international leading manufacture to take part in the 2011 Mobile World Congress.

Nowadays, SerComm is a leading supplier in the global industry chain of Femtocell. Further, the new

production capacity of Suzhou 2nd Factory strengthens the entire production capacity.

Looking into the entire economy in 2011, due to the opportunities brought by fixed mobile

SerComm Corporation Annual Report 2010003

convergence, SerComm acted optimistically toward future operation. The Company will continue

innovation and R&D and further develop the core business to provide customers with high value-added

products and increase the market share by means of outstanding software and fi rmware integration

technology. Given the contribution of new products, new markets and new production capacity, as well

as the continued efforts by the SerComm Board of Directors and employees, the Company’s entire

operation is believed to live up to shareholders’ expectations and once again deliver strong results.

James Wang

President of SerComm Corporation


Review of 2010 Business ResultsUnit: Thousand NTD

Item 2009 2010 Year on YearChange (%)

Wired Product 1,351,855 1,844,810 36.47

Wireless Product 5,189,783 6,019,683 15.99

Others 252,473 289,340 14.60

Total Revenue 6,794,111 8,153,833 20.01

Financial PositionUnit: Thousand NTD

Year 2009 2010 Difference Change %

Current Assets 2,651,058 3,752,691 1,101,633 41.55

Fixed Assets 504,639 511,298 6,659 1.32

Other Assets 138,673 139,885 1,212 0.87

Total Assets 4,624,543 6,020,683 1,396,140 30.19

Current Liabilities 1,821,367 2,535,261 713,894 39.20

LT Liabilities 361,801 873,691 511,890 141.48

Total Liabilities 2,188,714 3,423,503 1,234,789 56.42

Capital 1,709,450 1,760,873 51,423 3.01

Capital Reserves 149,171 196,598 47,427 31.79

Retained Earnings 510,193 658,256 148,063 29.02

Total Shareholders' Equity 2,435,829 2,597,180 161,351 6.62


Research and Development StatusAt SerComm, new product R&D projects are formulated in response to market demand based on

our core network communications technology, market trends and the evolving IT & communications

industry. All research proposals for new products must also undergo a review by R&D, marketing and

sales units before R&D resources are invested.

To accelerate the acquisition of new technologies, SerComm also actively seeks out partnership

opportunities in addition to in-house R&D. This has led to the development of various application

servers that offer high-performance, ease of administration and integration with the Internet. A total of

8 projects were completed from our 2010 R&D plan. These were the VDSL Gateway, GPON Gateway,

802.11n Wireless H.264 HD IP Camera, H.264 high-defi nition wireless (802.11n) video server, Video

Server, 802.11n Wireless Monitoring Gateway, Video Bridge and Femtocell access point.

Summary of 2011 Business Plan(1) Business Direction

1. Deliver high performance in management to maintain the company’s high rate of growth and

solid profi tability.

2. Actively develop all kinds of specialized servers, maintain technical leadership and emphasize

long-term cultivation of personnel.

3. Strengthen quality of service, continue the optimization of work processes and improve overall

operational effi ciency.

4. Consolidate existing gains in the European, American and Japanese markets while actively

developing our distribution channels in other regions to establish a global distribution network.

5. Focus on cost and quality control while expanding our production capability to meet market

demand.

(2) Projected Sales and Basis:

The Company’s growth in 2011 will be generated primarily from the two product lines

including Fixed Mobile Convergence (FMC) and Smart Home Control Systems. For the time

being, the visibility of purchase orders already accepted by the Company may extend to the end

of Q2.

In terms of the industrial development trends in 2011, FMC will be an important growth force.

In addition to the product line for Femtocell, the shipment of telecommunication wireless hot point

equipment was increasing as of the second half of 2010, and the Company also started shipping

the equipment to certain Chinese telcos. According to the forecast, the product line for FMC will

grow drastically. Above all, Femtocell will grow by multiple times more than that of 2010, and the


shipment of telecommunication wireless hot point equipment is expected to grow as well.

The Company is also confi dent about the product line for Smart Home Control Systems in

2011. The relevant products, such as IP Cameras, Door Sensors and Network Attached Storage,

will enable the product line for Smart Home Control Systems to seek a new growth force, to meet

the need for end-user applications aroused by such devices as iPhones and iPads, and to deal

with the prevailing APP. Smart Home Control Systems are expected to grow drastically in 2011

more than it did in 2010.

(3) Major Production and Marketing Policies

1. Carry out sound production and target management while improving production processes.

2. Closely monitor the quality and delivery times of key components as well as supply-and-

demand and changes in pricing.

3. Dedicate resources to the development of new products and expand existing product ranges

to quickly meet market demand.

4. Actively expand our marketing network and form strategic alliances with major OEM partners

in European, North America and Asia.

5. Strengthen sales management, consolidate market niches and expand developing markets.

6. Stay fully up-to-date on market distribution channels and demand. Strengthen collection of

market intelligence.

7. Boost SerComm's industry profile, establish a sound market reputation and provide high-

quality service.

8. Continue to carry out production cost reduction plans to make products more price

competitive.

Future Development Strategy

1. Expand the company’s market value to benefi t shareholders and employees.

2. Pay attention to intellectual property and cultivate outstanding personnel.

3. Strengthen technology research and development.

4. Improve market position and become the market leader.

5. Increase operational income and maximize profi tability.

Effect of External Competition, Regulations and the General Business Environment

Given that ECFA became effective as of January 1, 2011, Taiwan’s economy is expected to

grow drastically. In terms of the export trade statistics in 2010, the value of export from Taiwan to

China (including Hong Kong) accounted for more than 40% of the whole export value. Due to the

advantages originating from custom’s duty exemption and credit and increases in Mainland tourists


visiting Taiwan in 2011, the earnings gained by Taiwanese exporters increased, and the real estate

investment, retail consumption and number of the employed increased relatively because of admission

to Mainland investment and tourists. As a result, Taiwan’s entire economy improved signifi cantly.

Following the globalization of capital markets, investors’ demand for fi nancial information is getting

more and more intensive day by day. However, since the accounting principles vary by country and

enterprises are used to disclosing their fi nancial information on line in diversifi ed forms or manners

and thereby it is diffi cult to re-use, analyze and compare the information, international investors look

forward to unification of the globalfinancial report format badly. To unify the global financial report

format, it is necessary to meet two requirements. The first is the accounting principles generally

accepted in the world. So far, various countries in the world are tending to apply IFRS, and Taiwan is

also dealing with it actively. The second is establishment of generally accepted fi nancial information

criteria. That is, enterprises’ information shall be communicated in a uniform electronic language. That

is the reason why XBRI was created. Accounting Research and Development Foundations in Taiwan

have been dedicated to researching and amending the relevant statements of financial accounting

standard according to IFRS in the recent years and to establishing a disclosure system compatible with

the international system and promoting the compatibility of accounting principles with the international

system. Listed/OTC companies, emerging stock companies and the financial industry regulated by

Financial Supervisory Commission (FSC) are expected to prepare their fi nancial reports in accordance

with IFRS as of 2013. The Taiwan Stock Exchange Corporation (TWSE) is also working hard to

urge listed companies to adopt XBRL, in hopes of building a global enterprise information supply

chain by enactment of international standards to help participants at the various stages acquire,

exchange, analyze and compare various enterprises’ information in a more effective manner, resolve

the increasingly complicated information disclosure issue, enhance the transparency of information

disclosure in Taiwan's stock exchange, and also become compatible with the international system.

The amendments to Article 36 of the Securities and Exchange Act made per the Decree under

Hua-Tsung-1-Yi-Tze No. 09900133481 dated June 2, 2010, providing that companies shall publicly

announce and declare annual financial reports duly audited and attested to by a certified public

accountant, approved by the Board of Directors and recognized by the supervisors within three months

after close of each fi scal year, will be enforced as of January 1, 2012.

According to Article 14-6 of Securities and Exchange Act added per the Decree under Hua-Tsung-

1-Yi-Tze No. 09900317071 dated November 24, 2010, a company whose stock is listed on the stock

exchange or traded over-the-counter shall establish a remuneration committee; remuneration referred

to in the preceding paragraph shall include salary, stock options, and any other substantive incentive

measures for directors, supervisors and executives.


In 2011, the global economy reflected adjustment-style growth. The IMF forecast that global

economic growth will become sluggish in 2011. In terms of the forecast GDP for various countries in

2011, the average GDP growth rate of developed countries was about 2.2% in 2011. Accordingly, the

global economic growth still needs to depend on the support and development of economy in emerging

markets. Since outbreak of the fi nancial crisis, the global economy has been recovering. The leading

economic indicators in the main territories globally attained the peak in 2010, and are still expanding.

Therefore, the economy is expected to recover continuously after 2011.

In the past business cycle of the U.S.A., the interest rate was low, so that the economy bottomed

out. At the same time when the U.S.A. continued to adopt the easy money policy to boost the economy,

the economy has been getting away from the bottom and consumer confi dence has been recovering

gradually. The Manufacturing Index showed that the economic expansion remained unchanged, and

the inventory level restored to the same before the fi nancial crisis, refl ecting that the market confi dence

was recovering. Though the European Debit Turmoil is still a concern, the IMF would not allow the

fi nancial markets to suffer liquidity risks again, due to the lessons learned from the last fi nancial crisis.

The historically low credit card default rate refl ects that the credit risk is decreasing.

The Company will access the relevant information from time to time and research the response

actions immediately in order to meet the Company’s business needs.


Company overview

Company Profi le

1992 SerComm Corporation Founded. First Asian Networking Company Dedicated in Embedded

Products Development

First in Asia to Launch Embedded Print Server

1995 SerComm is the Second Print Server Provider in the World Received "Novell NDS"

Certifi cation

1997 Launched Broadband Router

SerComm Received ISO 9001 Certifi cation

1999 First in Asia to Launch NAS Server

SerComm is Listed in Taiwan OTC Market (OTC: 5388)

Established R&D Center in Suzhou, China

2000 First in Asia to Launch 802.11b Broadband Router

2001 First in the World to Launch Wireless Print Server (USB and Parallel)

2002 First in the World to Launch Single-boarded Wireless Router Based on Marvell Solution

2003 First in the World to Launch Single-chip 802.11g ADSL Gateway Based on TI Solution

Launched Wireless IP Camera and Media Adapter

2004 SerComm Was Awarded by CommonWealth Magazine as " Taiwan Best Performing 100

Listed Company" for the 2nd Consecutive Year

2005 Es tab l i shed Ch ina Manu fac tu r i ng Base , Se rNe t Techno logy, Suzhou . An

Environmentalfriendly "Green Factory" with Capacity Ramping up to 1 Million Units per Month

in 18 Months

2006 First in the World to Launch 802.11n ADSL2+ Gateway Based on Broadcom Solution

Launched VoIP Business Gateway and IP PBX

SerComm's Sales Exceeds US$250 MN with Annual Shipment of Fully-integrated ADSL Wi-


Fi Gateway to European Market Exceeding 3 Million Units

2007 SerComm Was Awarded by Business Weekly Magazine as:

　"100 Fast Growing Companies in Greater China Area"

　"1000 Largest Listed Companies in Greater China Area"

　"30 Largest Companies in Telecom / Networking Sector in Greater China Area"

Transfer to List on Taiwan Stock Exchange (TSE: 5388)

Launched IAD Products and SATA NAS (Network Attached Storage)

2008 SerComm Was Awarded by CommonWealth Magazine as:

　"Taiwan 1000 Largest Listed Manufacturers”

　"Top 14 Largest Companies in Telecom / Networking Sector in Taiwan"

SerComm Was Ranked #214 as "2007 Taiwan Top 5000 Corporations" by China Credit

Information Service Ltd.

Taicang SerComm Technologies Corp. Founded

Successfully Launched Many Wireless Network New Products, Including: 1) Giga bit MFP

Print Server, 2) Integrated Access Device, 3) 11g Wireless IP Surveillance Camera, 4) 11n

Business Access Point, 5) VoIP Phone and 6) 11n WiFi VPN Router

2009 Announced Integrated 3G Femtocell Home Gateway Together with the Leading Provider of

3G Femtocells. Live Demonstration at Mobile World Congress 2009 Includes Home Monitor

Application Connected to SerComm IP Video Camera.

SerComm Was Awarded by China Credit Information Service as 2008 the “Largest

Corporations Top 5000 in Taiwan”, Ranked #211.

Introduced Wireless HD IPTV Networking Solution Together with the Leading Provider of

Semiconductors for Multimedia Wi-Fi Home Networking Applications.

SerComm Was Awarded by CommonWealth Magazine as:

　"Taiwan 1000 Largest Listed Manufacturers"

　"Top 22 Largest Companies in Telecom / Networking Sector in Taiwan

Purchased Plant and Facility from Billionton Technology (Suzhou), Enabling In-house

Production Tripled to Meet Future Capacity Requirement

2010 Demonstrated LTE-enabled Security IP Camera Together with USA’s Largest Wireless Voice

and Data Network Company

SerComm Was Awarded by China Credit Information Service as 2009 the “Largest

Corporations Top 5000 in Taiwan”, Ranked #238.

Awarded the "IDC Enterprise Innovation Awards 2010" by IDC (International Data

Corporation)


SerComm Japan Corp. Founded

2011 First to Launch TD-SCDMA Femtocell

First Integrated 3G Femtocell in Taiwan Certified by NCC (National Communications

Commission) in 2011

Nominated the "Residential Femtocell Access Point Design and Technology Innovation" by

Femto Forum

SerNet (Suzhou) Technologies II Grand Opening

SerComm France SARL Founded


Organization Chart


Directors and SupervisorsAs of April 19, 2011

Name/ Position Elected Date Term(Yrs)

Date fi rst elected

Shareholdingwhen Elected

CurrentShareholding

Spouse & MinorShareholding Education &

Experience Current Position

Shares % Shares % Shares %

Paul Wang Chairman 2010.6.23 3 1992.7.29 3,444,577 2.01 3,684,577 2.06 1,142,745 0.64

Carnegie-Melon University, PhD inPhysics

Note 1

D.C. Cheng Director Representative of TLC Capital Co., Ltd.

2010.6.23 2 2001.12.13 6,679,405 3.90 6,619,405 3.71 0 0

Columbia University, MBAExecutive Director & General Manager, Taiwan of Morgan Stanley Asia

Note 2

I.D. LiuDirector 2010.6.23 2 2004.6.11 207,999 0.12 207,999 0.12 0 0

National Chiao-Tung University, MSVice Chairman of UMC

Note 3

Paul HsuDirectorRepresentative of Pacifi c Venture Partners Co. Ltd.

2010.6.23 2 2004.6.11 3,680,926 2.14 3,680,926 2.06 0 0

M.A. from Fletcher School of Law and Diplomacy of Tufts University, USANew York University, LL. MExecutive Partner of Lee and Li

Note 4

James WangDirector &President

2010.6.23 3 2001.5.28 1,950,006 1.14 1,796,006 1.01 0 0

Harvard Business School, MBACarnegie-Melon University, MEPresident of Emerson SZ

Note 5

Ben LinDirector &E. VicePresident

2010.6.23 3 2004.6.11 1,718,590 1.00 1,224,201 0.69 301,338 0.16

National Ching-Hwa University, MSDirector of IBM Subsidiary

Note 6

Danny T. ChiuIndependentDirector

2010.6.23 2 2008.6.13 0 0.00 0 0.00 0 0

Harvard Business School, MBAConsultant of The Boston Consulting Group, Inc.

Note 7

Hilo ChenIndependentDirector

2010.6.23 2 2008.6.13 0 0.00 0 0.00 0 0

Bachelor of Transportation & Management, National Chiao-Tung UniversityPresident and CEO of Systex Corporation

Note 8

J.S.KuoSupervisor 2010.6.23 3 2004.6.11 1,428,281 0.83 2,678,281 1.50 10,290 0.01

University of New Hampshire, PhD inPhysicsChairman of Tajen Venture Capital

Note 9


Name/ Position Elected Date Term(Yrs)

Date fi rst elected

Shareholdingwhen Elected

CurrentShareholding


Experience Current Position

Shares % Shares % Shares %

Edward Y. WaySupervisor 2010.6.23 3 2007.6.15 0 0.00 0 0.00 0 0

University of Georgia, MBACertifi ed Public Accountant (CPA)

Note 10

Cynthia HsiueSupervisor 2010.6.23 3 2010.6.23 0 0.00 0 0.00 0 0

Tamkang University, MBACEO of China Leader Management Inc.

Note 11

Note ： Directors and supervisors are not spouse or within second-degree relative of consanguinity to each

other.

Note1： Chairman of Pacifi c Capital Partners Co., Ltd.; Director and CEO of Servecomm Inc.; Independent

Director of Prosperity Dielectrics Co., Ltd. and MiTAC Inc.; Supervisor of TECO Electric & Machinery

Co., Ltd., Les Enphants Co., Ltd. and MediaTek Inc.

Note2： Director of Topint Technology Co., Ltd.; Independent director of Edom Technology Co., Ltd.; President

of TLC Capital Co., Ltd. and UMC Capital

Note3： Chairman of Jing Hong Investments Ltd.; Director of Silconwave Precision Industries Co., Ltd.,

Independent Director of Chimei Innolux Corporation.

Note4： CEO of Phycos International Co., Ltd. and Epoch Foundation; Independent director of Industrial Bank

of Taiwan and ProMos Technology Inc. and Gloria Material Technology Corporation; Director of Long

Chen Paper Co., Ltd.

Note5： Chairman of SerComm Investments Ltd., SerComm Trading Co., Ltd., ShuKuan Investments Ltd.,

Zealous Investments Ltd., SerNet Technology Ltd. and DWNet Technology Ltd.; Independent director

of Creative Sensor Inc.; Director of SerComm Japan Corp.

Note6： Owner of Smart Trade Inc. and SerComm Holding Limited; Director of ShuKuan Investments Ltd.,

SerNet Technology Ltd., Servecomm Inc., SerComm Japan Corp.and Cerpass Technology Group

Note7： CEO and President of Morrison Express Co., Ltd.; Independent director of TransAsia Airways

Note8： Chairman of Guoshi Partners Ltd. and Yong-kai Management Consultant; Director of ALi Corporation;

Independent director of Spirox Corporation

Note9： Chairman of TECO Technology Foundation; Independent director of TECO IMAGE SYSTEM; Senior

adviser of Taishin Financial Holding Co., Ltd.; Director of Pacifi c Capital Partners Co., Ltd.

Note10：Independent director of APEX Biotechnology Corp., DelSolar Co., Ltd.; Director of Citibank Taiwan

Ltd., Capital Securities Corporation, MiTAC International Corp. and Primax Electronics Ltd., DaChan

Food (Asia) Limited

Note11：Director of AboCom Systems, Inc., Billionton Systems Inc.; Independent director of FX Hotel Group, Simplo

Tech. Co., Ltd., ASEC International Corp.,; Supervisor of eChem Solutions Corp.


Major Institutional Shareholders April 30, 2011

Name of Institutional Shareholder Primary Shareholder of Institutional Shareholder (see Note) Shareholding %

TLC Capital Co., Ltd. United Microelectronics Corporation 100.00%

Pacifi c Venture Partners Co. Ltd.

Paul Wang 60.50%

DaYuan Management Consultant 35.00%

Hui Su 2.00%

Management TeamAs of April 19, 2011

Name / Position Elected DateShareholdingwhen Elected


ExperienceCurrent Position

Shares % Shares %

James WangPresident 2000.01.24 1,796,006 1.01 0 0.00

Harvard Business School, MBACarnegie-Melon University, MEPresident of Emerson SZ

Note 1

Ben LinE. Vice President 1992.07.29 1,224,201 0.69 301,338 0.16

National Ching-Hwa University, MSDirector of IBM Subsidiary

Note 2

Charles ChuVPSalesDivision

2000.06.15 578,787 0.32 0 0.00

Master of Michigan State UniversityVice President of Northern United M&E Company

Note 3

Leo Chen CFO

2001.10.15 433,753 0.24 0 0.00

University of Illinois, MSADirector of Lite-On Group

Director ofShuKuanInvestmentsLtd.

Jemmy Lee VP Manufacturing Division

2002.04.24 187,171 0.10 0 0.00 Vice President of Proview Company China

Presidentof SerNetTechnologyLtd.

Hawk WuVPProduct DevelopmentDivision

2007.03.01 265,562 0.15 0 0.00

Director of Quanta Computer Corp.Director of Xavi Technologies Corp.Manager of Taicom data systems

－

Michael LeeVP Business DevelopmentDivision

2008.9.15 426,890 0.24 0 0.00

National Taiwan University, MSDirector of Hitron Technologies Inc.

－


Name / Position Elected DateShareholdingwhen Elected


ExperienceCurrent Position

Shares % Shares %

Benjamin YehVP IP Surveillance BU

2007.11.12 290,943 0.16 0 0.00

UC, Berkeley, MEHarvard Business School, MBASenior Manager of TSMCDirector of Advantech Co., Ltd.

－

SP Chen Director HR Division

2007.03.01 60,000 0.03 0 0.00

Master of Law, Graduate School of LaborRelations, Chinese Culture UniversityDirector of HR & G/A Dept., Destiny Technology Corp.

－

Rick Tsai Director MIS Division

2007.03.06 48,000 0.03 0 0.00

M.S. in Computer Sciences, MontanaStateDeputy General Director, Institute for Information Industry (III)

－

Note 1： Chairman of SerComm Investments Ltd., SerComm Trading Co., Ltd., ShuKuan Investments

Ltd., Zealous Investments Ltd., SerNet Technology Ltd. and DWNet Technology Ltd.;

Independent Director of Creative Sensor Inc.; Director of SerComm Japan Corp.

Note 2： Owner of Smart Trade Inc. and SerComm Holding Limited; Director of ShuKuan Investments

Ltd., SerNet Technology Ltd., Cerpass Technology Corporation, Servecomm Inc. and

SerComm Japan Corp.

Note 3： Director of DWNet Technology Ltd.; Supervisor of SerComm Japan Corp.


Remuneration to DirectorsUnit: Thousand NTD

Name / Position

Compensation(A)

Profi t Sharing(C)

Expenses & Special Allowance

(D)

Total Items to Net Income(%)

A+C+D

Bonus & SpecialAllowance

(E)

Retirement Pension(F)

Employee Bonuses from Allocated Earnings

(G)

Number of SharesObtained as Employee

Stock Options (H) (Thousands of shares)

Total Items to Net Income (%)A+C+D+E+F+G

SerCommConsolidatedSubsidiaries








SerCommConsolidatedSubsidiariesCash

BonusesStock

BonusesCash

BonusesStock

Bonuses

Paul WangChairman

0 0 4,186 4,186 204 204 1.40 1.40 8,900 13,587 258 258 0 0 0 0 540 540 4.31 5.80

D.C. ChengDirector Representativ of TLC Capital Co., Ltd.

I.D. LiuDirector

Paul HsuDirector Representative of Pacifi c Venture Partners Co. Ltd.

James WangDirector & President

Ben LinDirector & E. Vice President

Danny T. ChiuIndependent Director

Hilo ChenIndependent Director


Compensation Range

Name of Director

Total AmountA+C+D

Total AmountA+C+D+E+F+G

SerComm Consolidated Subsidiaries SerComm Consolidated

Subsidiaries

Below NTD 2,000,000

Paul Wang, TLC Capital Co., Ltd., I.D. Liu, Pacifi c Venture Partners Co. Ltd., James Wang, Ben Lin, Danny T. Chiu, Hilo Chen

Paul Wang, TLC Capital Co., Ltd., I.D. Liu, Pacifi c Venture Partners Co. Ltd., James Wang, Ben Lin, Danny T. Chiu, Hilo Chen

Paul Wang, TLC Capital Co., Ltd., I.D. Liu, Pacifi c Venture Partners Co. Ltd., Danny T. Chiu, Hilo Chen

Paul Wang, TLC Capital Co., Ltd., I.D. Liu, Pacifi c Venture Partners Co. Ltd., Danny T. Chiu, Hilo Chen

NTD 2,000,000～NTD 5,000,000 James Wang,Ben Lin

NTD 5,000,000～NTD 10,000,000 James Wang,Ben Lin

NTD 10,000,000～NTD 15,000,000

NTD 15,000,000～NTD 30,000,000

NTD 30,000,000～NTD 50,000,000

NTD 50,000,000～NTD 100,000,000

Over NTD 100,000,000

Total 8 8 8 8

Remuneration to SupervisorUnit: Thousand NTD

Name / Position

Compensation (A) Retirement Pension(B)

Profi t Sharing(C)

Total Items to Net Income (%)A+B+C

SerComm ConsolidatedSubsidiaries SerComm Consolidated

Subsidiaries SerComm ConsolidatedSubsidiaries SerComm Consolidated

Subsidiaries

J.S. KuoSupervisor

0 0 1,474 1,474 66 66 0.49 0.49Edward Y. WaySupervisor

Cynthia HsiueSupervisor


Compensation Range

Name of Supervisor

Total Amount A+B+C

SerComm Consolidated Subsidiaries

Below NTD 2,000,000 J.S. Kuo, Edward Y. Way, Cynthia Hsiue

J.S. Kuo, Edward Y. Way, Cynthia Hsiue

NTD 2,000,000～NTD 5,000,000

NTD 5,000,000～NTD 10,000,000

NTD 10,000,000～NTD 15,000,000

NTD 15,000,000～NTD 30,000,000

NTD 30,000,000～NTD 50,000,000

NTD 50,000,000～NTD 100,000,000

Over NTD 100,000,000

Total 3 3


Changes in Share Positions Among Directors, Supervisors, ManagersUnit: Shares

Title Name

2010 Current Year to April 19

ShareholdingIncrease / Decrease

Stock Mortgage

ShareholdingIncrease / Decrease

Stock Mortgage

Chairman Paul Wang 240,000 0 40,000 0

Director D.C. ChengRepresentative of TLC Capital Co., Ltd.

0 0 (60,000) 0

Director I.D. Liu 0 0 0 0

Director

Paul HsuRepresentative of Pacifi c Venture Partners Co., Ltd.

0 0 0 0

Director & President James Wang 1,626,000 0 (900,000) 0

Director & E. Vice President Ben Lin (199,439) 0 (74,950) 0

Independent Director Danny T. Chiu 0 0 0 0

Independent Director Hilo Chen 0 0 0 0

Supervisor J.S. Kuo 900,000 0 350,000 0

Supervisor Edward Y. Way 0 0 0 0

Supervisor Cynthia Hsiue 0 0 0 0

Vice President Charles Chu 171,000 0 0 0

Vice President Leo Chen 10,500 0 0 0

Vice President Jemmy Lee 110,000 0 0 0

Vice President Hawk Wu (55,000) 0 (27,000) 0

Vice President Michael Lee 98,000 0 0 0

Vice President Benjamin Yeh 78,000 212,000 0 0

Director SP Chen 40,000 0 0 0

Director Rick Tsai 20,000 0 0 0


Long-Term Investments OwnershipUnit: Shares / %

InvesteeSerComm Investment Total Investment

Shares % Shares %

Servecomm Inc. 250,000 100.00% 250,000 100.00%

Sercomm Investments Ltd. 1,200,000 100.00% 1,200,000 100.00%

ShuKuan Investments Ltd. 2,800,000 100.00% 2,800,000 100.00%

SerComm Trading Co., Ltd. 42,300,000 100.00% 42,300,000 100.00%

Zealous Investments Ltd. 30,956,000 100.00% 30,956,000 100.00%

SerNet Technology Ltd. 29,900,000 100.00% 29,900,000 100.00%

Smart Trade Inc. 11,500,000 100.00% 11,500,000 100.00%

DWNet Technology Ltd. 11,500,000 100.00% 11,500,000 100.00%

Industrial Bank of Taiwan 4,153,907 0.17% 4,153,907 0.17%

TECO Nanotech Co., Ltd. 287 0.00% 287 0.00%

Taicang SerComm Technologies Corp. Liquidating 100.00% Liquidating 100.00%

Sercomm Japan Corp. 540 100.00% 540 100.00%

Sercomm France SARL 1,000 100.00% 1,000 100.00%

CapitalUnit: Shares, as of April 30, 2011

Type of ShareAuthorized Shares

Issued Shares Un-Issued Shares Total Shares

Common Stock 177,621,426 72,378,574 250,000,000


History of CapitalizationUnit: Shares/ NTD, as of April 30, 2011

Year/Month

IssuePrice

Authorized Paid-In CapitalSource of Capital

Shares Amount Shares Amount

1992/07 10 5,880,000 58,800,000 5,880,000 58,800,000 Initial founding

1993/12 10 10,000,000 100,000,000 7,000,000 70,000,000 Cash offering

1995/07 10 18,000,000 180,000,000 12,000,000 120,000,000 Cash offering

1996/11 10 28,000,000 280,000,000 24,000,000 240,000,000 Cash offering

1997/08 10 28,065,000 280,650,000 28,065,000 280,650,000Capitalization of retained earnings, capital surplus and employee profi t sharing



2000/8 10 80,000,000 800,000,000 55,828,000 558,280,000Capitalization of retained earnings and employee profi t sharing



2002/12 10 91,450,000 914,500,000 75,040,929 750,409,290 Conversion of bonds



2003/9 10 137,600,000 1,376,000,000 85,511,191 855,111,910Capitalization of retained earnings and employee profi t sharing

2004/3 10 137,600,000 1,376,000,000 86,675,365 866,753,650 Conversion of bonds


Year/Month

IssuePrice





2004/9 10 137,600,000 1,376,000,000 103,855,775 1,038,557,750 Capitalization of retained earnings

2004/10 10 137,600,000 1,376,000,000 96,855,775 968,557,750 Cancellation of treasury shares

2004/11 10 137,600,000 1,376,000,000 98,912,189 989,121,890 Conversion of bonds and stock options

2005/1 10 137,600,000 1,376,000,000 99,888,725 998,887,250 Conversion of bonds and stock options

2005/5 10 137,600,000 1,376,000,000 101,186,847 1,011,868,470 Conversion of bonds and stock options

2005/9 10 177,600,000 1,776,000,000 121,092,261 1,210,922,610

Capitalization of retained earnings, capital surplus and employee profi t sharing; Conversion of bonds and stock options

2006/1 10 177,600,000 1,776,000,000 121,308,861 1,213,088,610 Conversion of stock options


2006/10 10 177,600,000 1,776,000,000 138,315,621 1,383,156,210

Capitalization of retained earnings and employee profi t sharing; Conversion of stock options


2007/10 10 210,000,000 2,100,000,000 155,438,721 1,554,387,210

Capitalization of retained earnings and employee profi t sharing; Conversion of stock options



2008/9 10 210,000,000 2,100,000,000 170,613,769 1,706,137,690Capitalization of retained earnings and employee profi t sharing


Year/Month

IssuePrice










Status of ShareholdersAs of April 19, 2011

Type ofShareholders

GovernmentAgencies

FinancialInstitutions

Other LegalEntities

ForeignInstitutions /

IndividualIndividual Treasury

Stock Total

Number ofShareholders 2 73 45 25 12,456 1 12,602

Shareholding 953,000 52,090,495 31,664,178 5,956,792 83,745,524 4,029,000 178,438,989

Ownership％ 0.53% 29.19% 17.75% 3.34% 46.93% 2.26% 100.00%


Distribution Profi le of OwnershipAs of April 19, 2011

Class of Shareholding Number of Shareholders Shareholding (share) %

1-999 4,562 984,916 0.55

1,000-5,000 5,593 12,166,866 6.82

5,001-10,000 1,140 8,866,443 4.97

10,001-15,000 394 4,833,676 2.71

15,001-20,000 243 4,460,055 2.50

20,001-30,000 202 5,151,227 2.89

30,001-40,000 77 2,742,423 1.54

40,001-50,000 65 3,010,280 1.69

50,001-100,000 125 9,096,079 5.10

100,001-200,000 88 12,477,352 6.99

200,001-400,000 34 10,170,221 5.70

400,001-600,000 28 14,189,659 7.95

600,001-800,000 13 9,479,314 5.31

800,001-1000,000 8 7,802,000 4.37

Over 1,000,001 30 73,008,478 40.91

Total 12,602 178,438,989 100.00


Market Price, Net Worth, Earnings and Dividends per ShareUnit: NTD/ Thousand Shares

Year 2009 2010 March 31, 2011

MarketPrice

Original

Highest 27.00 31.95 32.95

Lowest 10.60 18.15 27.60

Average 19.38 26.71 30.86

AdjustedHighest 27.00 31.95 －

Lowest 10.60 18.15 －

Net Valueper Share

Before Distribution 14.68 15.09 16.05

After Distribution 13.68 －－

Earningsper Share

Weighted AverageShares

Original 165,933 167,513 173,047

Adjusted 166,960 －－

Earning per Shares

Original 1.24 1.88 0.83

Adjusted 1.23 －－

Dividends per Share(Note1)

Cash Dividend 1.00 1.55 －

Stock Dividend

From RetainedEarnings 0 0 －

From CapitalSurplus 0 0 －

Return onInvestment(Note2)

Price / Earning Ratio 15.63 14.21 9.30

Price / Dividend Ratio 19.38 17.23 －

Cash Dividend Yield Rate 5.16% 5.80% －

Note1： Pending for Shareholder's approval

Note2： Price / Earning Ratio = Average market price / Earnings per share;

Price / Dividend Ratio= Average market price / Cash dividend per share;

Cash Dividend Ratio = Cash dividend per share / Average market price

Dividend PolicyThe appropriations of the Company’s earnings are base on the annual net income. The dividend

amount is determined by the profi t earning condition, fi nancial condition and future operating needs for

cash. In principle, dividends could be distributed in cash and/or in the form of stock; nevertheless, cash

dividends shall be no less than 10% of the aggregate amount distributed.


Dividends Paid:

Year EPSNT$

Cash DividendNT$ per share

Share DividendNT$ per share

2010 1.88 1.55 －

2009 1.24 1.00 －

2008 1.88 1.50 －

2007 3.65 2.00 0.40

2006 2.69 0.99 0.99

2005 2.76 1.07 1.07

Distribution of Profi tSerComm's Board of Directors adopted a proposal for 2010 profi t distribution. This proposal is

subject to approval by shareholders at the annual general meeting, scheduled for June 17, 2011.

Proposal of profi t distribution for 2010Unit: NTD

Cash dividend $1.55 per share

Cash bouns to employees $42,450,420

Remuneraton to Directors and Supervisors $5,660,056

Treasury Stock (Share Buy-back)As of April 30, 2011

Instance 8th

Purpose Transfer to Employees

Buy-back Period 2008/9/22 ~ 2008/11/21

Price Range (NTD) 10.5 ~ 25.0

Buy-back Volume (Share) 5,000,000

Buy-back Amount (NTD Thousand) 66,254

Cumulative Cancellation and Transfer Volume (Share) 971,000

Cumulative Holding (Share) 4,029,000

Cumulated Holding as a Percentage of Total Issued Shares (%) 2.27%


Employee Stock OptionsAs of April 30, 2011

Category 2nd 3rd 4th

Date of Approval by Regulatory Authority 2003/10/16 2005/11/11 2007/12/3

Issue Date 2003/10/23 2005/11/14 2007/12/14

Number of Shares Issued (Share) 2,400,000 5,000,000 2,000,000

Number of Shares Issued / Total Issued Shares (%) 1.34% 2.80% 1.12%

Exercise Period 10 years 10 years 5 years

Method of Provision Issue of new shares Issue of new shares Issue of new shares

Number of Shares in Exercised Options (Share) 2,262,200 2,083,500 169,000

Total Amount in Exercised Options (NTD) 30,162,200 25,926,500 3,380,000

Number of Shares In Unexercised Options (Share) 0 2,629,000 1,831,000

Price per Share In Unexercised Options (NTD) 10.0 11.0 20.0

Number of Shares In Unexercised Options as Share of Total Issued Shares (%)

0.00% 1.47% 1.03%

Impact on Shareholders’ Equity (%) 0.00% 1.11% 1.41%


Business OverviewBusiness Scope

Item 2009 2010

Wired Product 19.90% 22.63%

Wireless Product 76.39% 73.83%

Others 3.71% 3.55%

Total 100.00% 100.00%

Main Products(1) Router

(2) ADSL Gateway

(3) Integrated Access Device

(4) Business Access Point

(5) Wireless LAN Card

(6) Print Server

(7) IP Video Applications

(8) Home Plug AV

(9) VoIP Products

(10) NAS, Network Attached Storage

(11) Cable Products

(12) Smart Home Control/ Surveillance

(13) Femtocell Products

New Products Under Developing(1) FTTH Products

- EPON Gateway

- GPON/EPON RF Module

(2) Smart Home Control/ Surveillance

- IP Camera Cloud Server

(3) Femtocell Products

- Iuh Femtocell

- LTE Femtocell

- Enterprise Femtocell

(4) Ethernet-over-Cable (EoC) Solutions


Industry Overview1. Industry Status and Development

According to the forecast, the global network communication output value will amount to US$300.5

billion in 2010. The corporate users, investments in telecommunications and consumer markets

appear to be recovering. The demand for mobile internet growing rapidly as of 2009 is expected to

grow at a bursting speed in the future. According to the forecast, the global network communication

output value will amount to US$324.6 billion in 2011, a growth rate 8.02%. Notwithstanding, the

network communication trend consists of the convergence of three networks, digital convergence, the

Internet and cloud computing, all of which will refresh the network communication industry, and cause

a revolution in the network communication industry by focusing on the shipment of high-rank products.

Output Values of Global Network Communication Industry

Unit: USD Billion

Source: MIC

The new network communication trends consist of the convergence of three networks, digital

convergence, the Internet and cloud computing. Accordingly, the demand for network broadband is

increasing and also accelerating the optical fi ber layout of telecommunication service providers. In

2010, the global users of broadband will be more than 5 hundred million, including the optical fi ber

users accounting for 10% thereof, primarily in Japan and China. The broadband users are expected to

attain 5.76 hundred million, growing by 11.4%, in 2011. Above all, the growth of optical fi ber users is

the fastest and, therefore, the market for broadband equipment will continue to grow in 2011.


Forecast of Global Broadband Growth

Unit: Million Users

Source: MIC

Given the over-saturation penetration of Wi-Fi in notebooks and the increasing penetration of Wi-

Fi modules in smart phones, such new applications as game players, BD players, pads and e-books

have the demand for W-iFi. Besides, following the decline in the price of wireless LANs and modules,

the most critical factor that is driving future growth will be the demand for e-homes. For example, the

electronic appliances in a living room may connect phones, computers and TV sets via the Internet, so

as to fulfi ll the so-called “Multiple Screens and a Cloud” cloud compting. The global wireless network

output values are expected to attain US$3.98 billion, a growth rate 10.7%, including the output value of

Taiwan accounting for 60% of the global market output values.

Forecast of WLAN Output Value and Growth Rate

　Unit: USD Million/ %

Source: MIC


Before moving toward its 12th Five-Year Plan, Mainland China has already had rough network

communication construction. Notwithstanding, the disproportionate penetration and coverage resulting

from the tremendous population and geographical territories remains a concern to be resolved

during the Plan. To deal with the “12th Five-Year” Plan, Mainland China expressly defi ned the “Three

Networks Convergence” included into the 7 strategic industries. As benefi ted from the Internet, cloud

computing and the convergence of three networks, the network communication equipment will be more

integrated, mobile and intelligent. The network communication industry is expected to move toward its

Two Golden Decades from this year and thereby stimulate the rapid growth of demand for fi ber optic

networks, 4G, wireless applications, e-homes and set-top boxes. Above all, the e-home application

is the first priority. Further, Femtocell is also a product valued by various network communication

providers during this year. Driven by the increasing demand, Taiwan’s network communication

providers are expected to have the chance to gain considerable profi ts. In addition to the convergence

of three networks, the Plan also valued smart and energy-saving development, and the smart grid is

one of the priorities for development. Taiwan’s network communication providers have already owned

the network transmission technology required by the smart grid. It is believed that the increasing

demand for smart grid is expectable in the future, as the energy-saving sense is prevailing increasingly.

2. The Relationship Between the Upstream, Midstream and Downstream Parts of the Industry

SerComm’s main business is the manufacture of wired and wireless networking products including

network application servers. In the computer networking industry we belong in the midstream segment.

Our upstream includes IC manufacturers and electronic components suppliers while our downstream

includes the average user, network equipment suppliers and enterprise network system developers.

Upstream Midstream Downstream

CPU Vendor LAN NIC Average User

IC Supplier Hub System Integrator

ASIC (in-house design) Bridge Enterprise network system developer

PCB Maker

ISDN Interface (Terminal Adapter, Router, Card Modem etc.)

Computer peripherals/ Printer/Fax/Modem /ISDM/Multimedia VendorChip

Passive Component

Resistor and Capacitor Supplier Network Application Server Network Hardware Vendor

Adapter Supplier Network Operating System

DRAM and SRAM Supplier

Flash Memory Supplier


3. Summary of 802.11 Wireless Networking Specifi cation Standards

802.11a 802.11b 802.11g 802.11n

Frequency Band 5 GHz 2.4 GHz 2.4 GHz 2.4 or 5 GHz

Max Speed 54Mps 11Mps 54Mps 540Mps

Transmission Distance 50 meter 100 meter 100 meter 100 meter

Spread SpectrumTechnology OFDM DSSS OFDM OFDM

Channel Bandwidth 20MHz 20MHz 20MHz 20 or 40MHz

802.11n is the latest WiFi technology. The transmission rate thereof, 540Mps, is 10 times that of

the previous generation, 802.11g, 54Mps. When such technology hit the market in 2006, it was diffi cult

to replace 802.11g, because of the new technology and high production cost resulting in the insuffi cient

market penetration rate. Notwithstanding, due to the increasingly mature 802.11n technology and

reduction of cost, the acceptability of 802.11n is increasing. According to the forecast of Topology

Research Institute, the market penetration rate of 802.11n in 2012 will be increased from 38.6% in

2009 to 71.1%. Apparently, 802.11n will become the mainstream product.

The development of 802.11n technology is maturing, and will be oriented towards simplifi ed design

and cost reduction to have it launched into consumption electronics and wireless digital electronic

appliances. If the 802.11n standard is enacted, it will help reduce the cost, and for enterprise WLAN

users who care about the interoperatability of standards, it will help increase their willingness to purchase

802.11n enterprise WLAN equipment. Due to the increasing expansion of the product applications, the

market demand for 802.11n will be increased, thereby stimulating the shipping of 802.11n.

Further, Femtocell is also a product valued by various network communication providers in 2011.

Driven by the increasing demand, Taiwan’s network communication providers are expected to have

the chance to gain considerable profi ts.

Femtocell refers to the equipment similar to AP. As long as it connects the backbone network, it

may integrate such communication technologies as 2G, 3G, Wi-Fi and even WiMAX and LTE. Its most

important characteristic resides in high-usage transmission. Despite the small coverage, only 10M around,

it fits home connections and also satisfies enterprises’ needs for business, due to low electromagnetic

waves. Moreover, the currently high price and gross margin of Femtocell are expected to boost the

operating revenues and earnings of the factories. Though the price of Femtocell will decline to less than

US$100, the price war and declination for Femtocell will not be so rigid as the distribution market, as

Femtocell is a telecommunication product instead of a retail product. Therefore, it still will help the relevant

providers’ profi tability for next two or three years positively. Femtocell Network Framework Illustration:


From consumers' point of view, under the current wireless network framework, connection of

the mobile communication equipment with outdoor base stations varies depending on landforms,

buildings, climate and excessive users and the communication quality is uneven. However, Femtocell

may improve the quality and stability of signals effectively. As far as high-rate users are concerned,

the program may help them reduce the communication cost effectively.

From the telcos’ point of view, Femtocell may improve such problems as insuffi cient coverage and

weak signals and may help boost users’ experience and reduce the loads of base stations and relevant

infrastructures. According to Qualcomm statistics, about 70%-80% of the broadband requests come

from high-usage users. Assuming that the traffic per person per month is 1GB, the telecos’ layout

cost may be cut by 40%, if 60% of such users adopt Femtocell service. Please see the following

illustration:

Source: Qualcomm


Following the promotion of Femtocell service boosted by the telecos in various countries, iSuppli

forecast that the globally installed bases will grow rapidly year by year. Please see the following

illustration:

Femtocell Global Shipment and Price

Source: iSuppli, Nov. 2010

SerComm has developed business in this area for more than two years, and was the fi rst vendor

making shipment to Japanese telecos in 2010. It controlled the key technology and developed the

market in Europe and the U.S.A. successfully.

The network equipment products primarily include modem, PC card and communication module.

There are multiple domestic competitors, including Gemtek, D-Link, CAMEO, ZyXEL, CyberTAN,

ACCTON, Askey, CNet and Foxconn, in addition to Usher Audito, Amigo Technology, Pro-Nets

Technology, RDC, Wontex, Hauman, Kinpo, Netronix Inc., PLANET Technology, Alpha Networks,

Opnet, UFO Communication, TAINET Communication, YFC-BonEagle ELECTRIC CO., LTD., Loop

Telecommunication and SHIN FENG COMMUNICATION CO., LTD., et al. The Company is the 3rd

largest supplier of WLAN broadband routers/gateways in the world, and the 6th largest supplier of

integrated access equipment in Taiwan. The Company will be oriented toward diversifi ed development

on R&D of products and will conduct stricter control over the production process to ensure the quality

to make the product more competitive. Meanwhile, the Company will work hard to solicit international

leading manufacturers for OEM/ODM orders. The Company’s market share is expected to grow year

by year in the future.


Research & Development ExpensesUnit: Thousand NTD

Item 2010 1Q 2011

R&D Expenses 291,149 64,647

Net Sales 6,794,111 1,685,084

R&D/Net Sales (%) 4.29% 3.83%

R&D Achievements:(1) VDSL Gateway

(2) GPON Gateway

(3) H.264 HD 11n IP Surveillance Camera

(4) H.264 HD wireless (802.11n) Video Server

(5) Network Video Recorder

(6) 11n Security Gateway

(7) Video Bridge

(8) Residential Femtocell Products

Long-term and Short-term Business Development Plans1. Long-term Development Plans

(A) Enrich knowledge of the industry, cultivate employees with expertise in industry IT networks and

develop core technology products.

(B) Strengthen collaboration with well-known international technology companies, improve

technology R&D capability and develop high value-added products.

(C) Actively develop new products with the goal of diversifying operations and entering the

international market.

2. Short-term Development Plans

(A) Marketing strategy

Consolidate existing customers and actively expand the market; build a complete marketing network;

fully implement quality assurance and inspection measures. Set up a comprehensive after-sales

service to provide customers with professional advice and repair services for products.

(B) Production strategy

Strengthen product planning and production process management. Provide employees with

re-training as well as implement budget and cost control measures to increase productivity and

reduce production costs. Fully implement quality assurance and inspection measures.


Market, Production and Sales OutlookRevenue Breakdown by Geography

Unit: Thousand NTD

Region2009 2010

Amount % Amount %

Taiwan 211,321 3.11 120,053 1.47

Europe 3,582,648 52.73 3,614,980 44.34

North America 2,424,329 35.68 3,186,802 39.08

Asia ex-Taiwan 533,273 7.85 1,229,839 15.08

Other 42,540 0.63 2,159 0.03

Total 6,794,111 100.00 8,153,833 100.00

Future Supply and Demand in the Market and Potential for Growth(A) The emergence of low-price PCs has led to strong growth in the market for personal computers

and peripheral devices around the world. With the rapid spread of the Internet, there has not

only been strong growth in demand for the associated hardware but also in home networking

and broadband Internet access.

(B) Users are greatly dependent on the Internet greatly in the Internet Age. The broadband of fi xed

networks and mobile Internet will be insuffi cient to meet the demand. Therefore, the telecos will

be forced to upgrade and construct base stations,stations; the relevant equipment procurement

project may bring about profi table gains.

(C) As the market is now dictated by consumer demand, major international vendors are adopting

an aggressive pricing strategy. To achieve this, they are reducing costs and outsourcing to

overseas manufacturers. This in turn has driven the revenue growth of Taiwanese networking

equipment manufacturers. With upstream chip suppliers now moving towards higher port

numbers and key chips gradually entering mass production, this will reduce the manufacturing

costs for downstream manufacturers. The increase in competitiveness and market suitability

will see order volumes increase in the future.

(D) Wireless products will become mainstream in the future. Widespread adoption of the Internet

and increasing maturity of the broadband market will allow wireless networking to free itself

from the constraints of wired networks, though further development is needed with the quality


and stability of wireless networking.

(E) MIC forecast that the output value of WLAN will grow by 10.7%, namely US$3.98 billion,

globally in 2011. Taiwan’s market value accounts for 60% of the global WLAN market value.

Therefore, Taiwan’s service providers may also benefi t from the continuous growth of WLAN

output value.

(F) As benefi ted from the Internet, cloud computing and the convergence of three networks, the

network communication equipment will be more integrated, mobile and intelligent. The network

communication industry is expected to move toward its Two Golden Decades from this year and

thereby stimulate the rapid growth of demand for optical fi ber network, 4G, wireless application,

e-home and set-top box.

Competitive NicheSerComm has foreseen the increasing maturity of the broadband networking market in the

future and our products can now all use wireless technology. Our customers have also recognized

the quality and stability of our products. We are continuing to enhance our product features to meet

market demand so all these will have a positive effect on revenue in the future with the Internet

becoming even more widespread and the growth of the broadband market.

Positive and Negative Factors in Long-Term Development(A)Positive Factors

a. High level of fl exibility in product combinations

SerComm’s business portfolio is divided into large-scale volume production of lower-margin

products and custom higher-margin niche products. It is SerComm’s intention to maintain a business

model that balances volume commodity/niche products after taking the company’s long-term strategy

and market positioning into account. Primary focus is given to consolidating existing markets and

customers with the goal of pursuing steady growth while maintaining profi t margins. This approach is

aimed at strengthening and reinforcing the company’s operations. The company’s business strategy

will also adjust profi ts and revenues as necessary in order to build up SerComm’s economies of scale

and boost our market standing.

b. Leadership in technology R&D

SerComm was the first Taiwanese manufacturer to develop wireless routers, wireless printer


servers and MFPs. We were also the fi rst company to announce an 11n ADSL Gateway and the fi rst

company in Taiwan to announce a mesh WiFi router. Our customers have all acknowledged these

products’ quality and attractiveness to the market, allowing us to join the ranks of suppliers to front-line

brands. The collaboration with international networking companies contributes towards our product’s

international competitiveness and continued business expansion.

c. Lead Production capacity of SerNet (Suzhou) II has been well-found

Due to the increasing demand in 2010, the production capacity of Suzhou Factory was expanded.

For the time being, the monthly production capacity attains 1.5 million units enough to meet the

Company’s growth. There is no further expansion plan now. However, new factory premises are still

expandable, and new production capacity will be decided subject to the future orders.

d. Layout of telecommunication service provider

This market demands multiple application equipments which are high value-added, instead of low

gross profi t market. In terms of QuadPlay (four in one) and Femtocell, it is expected that the shipments

will be increased due to the increasing demand in the market, thereby helping the average price and

gross profi t rate positively.

(B) Unfavorable Factors and Countermeasures

The Company’s trading counterparts are categorized into retail, SMB and Telecom. The price

competition in the retail market is intensive because of the low differentiation in products in the same

trade. Therefore, the growth of certain mass-production products, such as Home Router, Home

Gateway and Adapter, is limited. To deal with the declining retail customers, the Company intervenes

and increases the weight of sale to SMB and Telcom in a timely manner to prevent itself from engaging

in the intensive price war with the same trade. The Company successively generated new production

capacity since 2010/3Q, and received orders from Chinese network communication brands and,

therefore, launched into the layout of WLANs in such emerging market as Mainland China. Further,

due to the increasing demand for home safety controls, safety control products and IP Cameras are

also driving the Company’s growth.

Main Product ApplicationsWith its strength in integration of network communication products accumulated after many

years, SerComm has not only become the leading supplier of world-class WLAN equipment but also

controls the critical technology for Next-Generation Networks after the continuous R&D in network

communication technology. To deal with the emerging network applications integrated into homes,

SerComm created value-added network communication products with its high-level software and

hardware product integration technology. The whole series of high-performance, high-quality and


diversified professional broadband network communication products include broadband network

communication access points, home network communication products, network application equipment,

e-Cameras & safety control equipment, and network voice products. No matter whether at home or in

the offi ce, they may satisfy customers’ demands for diversifi ed and all-in-one digital integration network

communication.

Product Manufacturing ProcessThe manufacturing processes for our company’s products are divided into PCB assembly and fi nal

product assembly.

PCB assembly includes the SMT process and the DIP insertion process. The process is as

follows:

The fi nal product assembly process is as follows:


Production - AUnit: Thousand NTD; Unit

Item2008 2010

Capacity Quantity Amount Capacity Quantity Amount

Wired Product 3,000,000 1,050,980 1,304,356 4,000,000 1,194,726 1,726,557

Wireless Product 8,000,000 6,144,239 5,335,318 9,000,000 7,150,142 5,806,171

Total 11,000,000 7,195,219 6,639,674 13,000,000 8,344,868 7,532,728

Production - BUnit: Thousand NTD; Unit

Item

2009 2010

Export Domestic Export Domestic

Quantity Amount Quantity Amount Quantity Amount Quantity Amount

Wired Product 933,860 1,319,181 21,298 32,674 1,134,507 1,800,373 27,841 44,437

Wireless Product 5,558,268 5,263,608 345,727 178,648 6,741,815 6,233,408 181,522 75,615

Total 6,492,128 6,582,789 367,025 211,322 7,876,322 8,033,781 209,363 120,052

Employees

Year 2009 2010 2011/04/30

Headcount 394 439 431

Average Age 37.3 37.6 37.5

Employment Period (years) 5.4 4.7 4.7

As TotalEmployees %

Ph. D. 0% 1% 1%

Master 23% 26% 24%

College 64% 61% 63%

Senior High School 10% 9% 9%

Junior High School or Lower 3% 3% 3%


Financial Review and Operating ResultsCondensed Balance Sheet

Unit: Thousand NTD

Year 2006 2007 2008 2009 2010 2011/03/31

Current Assets 3,292,125 3,150,339 2,953,601 2,651,058 3,752,691 3,827,215

Long-Term Investmentsand Funds 787,439 1,058,495 1,190,451 1,230,522 1,494,735 1,768,948

Fixed Assets 489,545 542,789 521,469 504,639 511,298 509,842

Intangible Assets 110,426 112,229 108,421 99,651 122,074 120,301

Other Assets 58,002 115,230 176,689 138,673 139,885 137,101

Total Assets 4,737,537 4,979,082 4,950,631 4,624,543 6,020,683 6,363,407

Current Liabilities

BeforeDistribution 2,624,053 2,193,131 2,063,382 1,821,367 2,535,261 2,694,866

After Distribution 2,771,525 2,517,141 2,312,122 1,987,752 －－

Long-Term Liabilities 258,628 400,142 376,673 361,801 873,691 828,855

Other Liabilities 5,989 7,149 5,208 5,546 14,551 42,902

Total Liabilities



Capital 1,383,562 1,562,817 1,707,233 1,709,450 1,760,873 1,783,303

Capital Reserve 140,426 142,419 146,569 149,171 196,598 219,653

Retained Earnings

BeforeDistribution 493,240 694,940 553,450 510,193 658,256 801,810

After Distribution 181,898 238,579 304,710 343,808 －－

Unrealized Loss/Gain onFinancial Assets 0 0 0 0 0 0

Cumulative Translation Adjustment 38,525 83,700 164,370 133,269 34,841 45,406

Unrealized Loss on Retirement 0 0 0 0 0 0

Shareholders'Equity




Condensed Statement of IncomeUnit: Thousand NTD

Year 2006 2007 2008 2009 2010 2011/03/31

Net Sales 9,120,147 10,170,774 8,488,652 6,794,111 8,153,833 2,452,124

Gross Profi t 938,315 1,305,663 1,060,652 817,015 1,025,843 368,106

Operating Income 374,526 619,280 392,203 193,034 249,871 148,868

Non-Operating Income 77,245 106,833 39,644 88,105 152,719 34,355

Non-Operating Expenses 40,876 88,072 28,502 30,680 31,790 11,321

Pre-Tax Income fromContinuing Operations 410,895 638,041 403,345 250,459 370,800 171,902

Net Income / Loss formContinuing Operations 355,091 539,408 329,115 205,483 314,448 143,554

Cumulative Effect of Change in Accounting Principle

75 0 0 0 0 0

Net Income 355,166 539,408 329,115 205,483 314,448 143,554

EPS (NTD) 2.37 3.24 1.88 1.24 1.88 0.83


Financial Analysis

Year 2006 2007 2008 2009 2010 2011/03/31

FinancialRatio (%)

Total Liabilities to Total Assets 60.97 52.23 49.39 47.33 56.86 56.05

Long-term Funds to Fixed Assets 430.50 511.95 552.68 554.38 678.84 711.13

Liquidity (%)

Current Ratio 125.46 143.65 143.14 145.55 148.02 142.02

Quick Ratio 84.99 111.74 114.40 113.36 117.88 100.68

Time Interest Earned 6,986 10,905 4,700 2,444 2,535 2,790

OperatingPerformance

AR Turnover (Times) 7.86 7.41 6.38 5.99 6.52 7.57

AR Turnover (Days) 46.42 49.23 57.29 60.95 55.95 48.20

Inventory Turnover (Times) 9.41 10.38 12.10 10.74 11.18 9.53

AP Turnover (Times) 4.67 4.24 4.43 4.29 4.92 4.83

Inventory Turnover (Days) 38.81 35.18 30.18 33.99 32.65 38.30

Fixed Assets Turnover (Times) 17.70 19.70 15.95 13.24 16.05 19.21

Total Assets Turnover (Times) 2.26 2.09 1.71 1.42 1.53 1.58

Profi tability

Return on Assets (%) 8.90 11.19 6.76 4.46 6.12 2.40

Return on Equity (%) 19.86 25.52 13.48 8.32 12.50 5.32

To Pay-in Capital %

Operating Income 27.07 39.63 22.97 11.29 14.19 8.35

Pre-Tax Income 29.70 40.83 23.63 14.65 21.06 9.64

Net Income / Sales (%) 3.89 5.30 3.88 3.02 3.86 5.85

EPS (NTD) 2.69 3.65 1.88 1.24 1.88 0.83

Cash Flow

Cash Flow Ratio (%) 33.76 23.95 14.82 21.59 3.03 22.50

Cash Flow Adequacy Ratio (%) 155.23 194.44 167.90 170.65 132.74 130.14

Cash Reinvestment Ratio (%) 35.65 14.22 (0.31) 5.11 (2.60) 16.65

LeverageOperating Leverage 2.28 2.55 3.18 4.53 4.16 2.54

Financial Leverage 1.02 1.01 1.02 1.06 1.06 1.04


1. Financial Ratio

(1) Total Liabilities to Total Assets＝Total Liabilities ／Total Assets

(2) Long-term Funds to Fixed Assets＝（Net Equity＋Long-term Funds）／Net Fixed Assets

2. Ability to Pay Off Debt

(1) Current Ratio＝Current Assets／Current Liability

(2) Quick Ratio＝（Current Assets－Inventory－Prepaid Expenses）／Current Liability

(3) Interest Protection＝Net Income Before Income Tax and Interest Expense／Interest Expense

3. Ability to Operate

(1) Account Receivable (including Account Receivable and Notes Receivable from Operation)

Turnover＝Net Sales／the Average of Account Receivable (including Account Receivable and

Notes Receivable from Operation) Balance

(2) A/R Turnover Day＝365／Account Receivable Turnover

(3) Inventory Turnover＝Cost of Goods Sold／the Average of Inventory

(4) Account Payable (including Account Payable and Notes Payable from Operation) Turnover＝

Cost of Goods Sold／the Average of Account Payable（including Account Payable and Notes

Payable from Operation）Balance

(5) Inventory Turnover Day＝365／Inventory Turnover

(6) Fixed Assets Turnover＝Net Sales／Net Fixed Assets

(7) Total Assets Turnover＝Net Sales／Total Assets

4. Earning Ability

(1) Return on Assets＝ PAT＋Interest Expense×(１－Interest Rate) ／the Average of Total Assets

(2) Return on Equity＝PAT／the Average of Net Equity

(3) Net Income Ratio＝PAT／Net Sates

(4) EPS ＝（PAT－ Dividend from Prefer Stock）／Weighted Average Outstanding Shares

5. Cash Flow

(1) Cash Flow Ratio＝Cash Flow from Operating Activities／Current Liability

(2) Cash Flow Adequacy Ratio＝Most Recent 5-year Cash Flow from Operating Activities／Most

Recent 5-year (Capital Expenditure＋the Increase of Inventory＋Cash Dividend)

(3) Cash Investment Ratio＝（Cash Flow from Operating Activities－Cash Dividend）／(Gross

Fixed Assets＋Long-term Investment＋Other Asset＋Working Capital)

6. Leverage

(1) Operating Leverage＝(Nest Revenue－Variable Cost of Goods Sold and Operating Expense)

／Operating Income

(2) Financial Leverage＝Operating Income／(Operating Income－nterest Expenses)


Financial PositionUnit: Thousand NTD

Item 2009 2010 Difference Change %

Current Assets $2,651,058 $3,752,691 $1,101,633 41.55

Fixed Assets 504,639 511,298 6,659 1.32

Other Assets 138,673 139,885 1,212 0.87

Total Assets 4,624,543 6,020,683 1,396,140 30.19

Current Liabilities 1,821,367 2,535,261 713,894 39.20

Long-term Liabilities 361,801 873,691 511,890 141.48

Total Liabilities 2,188,714 3,423,503 1,234,789 56.42

Capital 1,709,450 1,760,873 51,423 3.01

Capital Reserves 149,171 196,598 47,427 31.79

Retained Earnings 510,193 658,256 148,063 29.02

Total Shareholders' Equity 2,435,829 2,597,180 161,351 6.62

Operating ResultsUnit: Thousand NTD

Year 2009 2010 Difference Change%

Sales Revenue 6,955,728 $8,212,358 1,256,630 18.07

Sales Return /Allowances 161,617 58,525 -103,092 -63.79

Net Sales 6,794,111 8,153,833 1,359,722 20.01

Cost of Goods Sold 5,977,096 7,127,929 1,150,833 19.25

Gross Profi t 817,015 1,025,904 208,889 25.57

Unrealized Profi t from Intercompany Transactions -403 -61 342 84.86

Realized Gross Profi t 816,612 1,025,843 209,231 25.62

Operating Expenses 623,578 775,972 152,394 24.44

Operating Income 193,034 249,871 56,837 29.44

Non-operating Income 88,105 152,719 64,614 73.34

Non-operating Expenses 30,680 31,790 1,110 3.62

Pre-tax Income from Continuing Operation 250,459 370,800 120,341 48.05

Income Tax Benefi t (Expenses) 44,976 56,352 11,376 25.29

Net Income from Continuing Operation 205,483 314,448 108,965 53.03

Cumulative Effect of Change in Accounting Principle 0 0 0

Net Income 205,483 314,448 108,965 53.03


Analysis of Cash Flow

Year 2009 2010 Change %

Cash Flow Ratio (%) 21.59% 3.03% 85.97%

Cash Flow Adequacy Ratio (%) 170.65% 132.74% -22.21%

Cash Reinvestment Ratio (%) 5.11% -2.60% -151.88%

Projected Cash FlowUnit: Thousand NTD

BeginningCash Balance

Cash Flowsfrom Operating

Activities

Cash Flowsfrom Investing

& FinancingActivities

Projected EndingCash Balance

Source of Funding for Cash Shortfall

InvestingPlan

FinancingPlan

1,338,150 216,572 368,375 1,186,347 －－

Analysis for Investment Over 5% of Paid-in CapitalYear 2010

Company Investment Amount(NT$ /US$ thousand) Policy Improvement Plan

Servecomm Inc US$250 US Marketing NA

Sercomm Investment US$1,200 Foreign Investment NA

ShuKuan Investments Ltd. NT$28,000 Local Investment NA

SerComm Trading Co., Limited. US$34,300 Foreign Investment NA

Zealous Investments Ltd. US$30,956 Foreign Investment NA

SerNet Technology Ltd. US$24,900 Global Manufacture NA

Smart Trade Inc. US$3,500 Foreign Investment NA

DWNet Technology Ltd. US$3,500 China Sales NA

Taicang SerComm Technologies Corp. US$4,800 Global Manufacture NA


Special DisclosuresAffi liated Companies Chart


Affi liated Companies

Company Date of Incorporation Paid-in Capital Major Business

ServeComm Inc. 1996/9/25 USD$250,000 Sales of IT Products

SerComm Investments Ltd. 2001/10/09 USD$1,200,000Investment Overseas, Technology R&D, International Trading

ShuKuan Investments Ltd. 2002/12/31 NT$28,000,000 Investment Activity

SerComm Trading Co., Limited 2002/6/24 USD$42,300,000Investment Overseas, Technology R&D, International Trading

Zealous Investments Ltd. 1999/8/12 USD$30,956,000Investment Overseas, Technology R&D, International Trading

SerNet Technology Ltd. 2000/02/18 USD$29,900,000

Manufacture of Routers, Communication Products, WLAN Products; Sales and After-sales Service

Smart Trade Inc. 2003/03/21 USD$11,500,000Investment Overseas, Technology R&D, International Trading

DWNet Technology Ltd. 2004/01/14 USD$11,500,000 R&D Center of Software; Sales and After-sales Service

Taicang SerComm Technologies Corp. 2008/1/8 Liquidating

Manufacture of Routers, Communication Products, WLAN Products; Sales and After-sales Service

SerComm Japan Corp. 2010/3/15 JPY$27,000,000 Sales of IT Products and International Trading

SerComm France SARL 2011/1/27 EUD$100,000 Sales of IT Products and International Trading


REPORT OF INDEPENDENT AUDITORS

To Sercomm Corporation

We have audited the accompanying consolidated balance sheets of Sercomm Corporation and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2010 and 2009. 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 “Guidelines for Certified Public Accountants Examination and Reporting on Financial Statements” and generally accepted auditing standards in the Republic of China. 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sercomm Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with “Business Entity Accounting Act”, “Regulation on Business Entity Accounting Handling” with respect to financial accounting standards, “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, and generally accecpted accounting principles in the Republic of China.

Feb 25, 2011 Taipei, Taiwan Republic of China

Notice to ReadersThe accompanying consolidated financial statements are intended only to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China.


2010 2009Assets Notes Amount % Amount %

Current assetsCash 4 $2,044,583 25.62 $1,984,213 34.09Financial assets at fair value through profit or loss-current 2 and 5 10,337 0.13 2,531 0.04Notes and Accounts receivable-net 2 and 6 1,790,293 22.44 1,041,536 17.90Other receivables 133,606 1.67 76,634 1.32Inventories-net 2, 5 and 7 1,316,917 16.50 794,396 13.65Other current assets 178,032 2.23 89,475 1.54Deferred income tax assets-current 2, 3 and 23 20,426 0.26 25,557 0.44Restricted assets 26 8,654 0.11 15,744 0.27

Total current assets 5,502,848 68.96 4,030,086 69.25

Funds and investmentsFinancial Assets as fair value through profit or loss-noncurrent 2 and 13 1,487 0.02 - - Financial assets measured at cost-noncurrent 2 and 8 105,714 1.32 47,454 0.82

Total funds and investments 107,201 1.34 47,454 0.82

Property, plant and equipment 2, 9 and 26Buildings 655,421 8.21 318,412 5.47Machinery and equipment 919,503 11.52 624,652 10.73Research and development equipment 187,641 2.35 278,037 4.78Office and other equipment 184,398 2.31 114,458 1.97Leased assets 457,030 5.73 457,030 7.85

Total cost 2,403,993 30.12 1,792,589 30.80Less: Accumulated depreciation (500,129) (6.27) (464,590) (7.98)Construction in progress 39,725 0.50 272 - Prepayments for equipment 33,117 0.42 113,233 1.95 Property, plant and equipment-net 1,976,706 24.77 1,441,504 24.77

Intangible assets 2 and 10Computer software cost-net 57,818 0.72 38,861 0.66Other intangible assets 70,651 0.89 69,666 1.20Land use right 26 102,039 1.28 11,625 0.20

Total intangible assets 230,508 2.89 120,152 2.06

Other assetsProperty not used in operations 2 and 11 83,385 1.05 83,542 1.44Refundable deposits 26 25,600 0.32 39,150 0.67Deferred charges 2 53,305 0.67 57,502 0.99

Total other assets 162,290 2.04 180,194 3.10

Total assets $7,979,553 100.00 $5,819,390 100.00

As of December 31,

SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009(Expressed in Thousands of New Taiwan Dollars)

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


Liabilities and Stockholders' Equity Notes Amount % Amount %Current liabilities

Short-term loans 2 $1,482,803 18.58 $864,094 14.85Notes payable 42,486 0.53 34,013 0.58Accounts payable 2,101,803 26.34 1,586,220 27.26Income tax payable 2, 3 and 23 121,662 1.53 62,224 1.07Accrued expenses 25 520,644 6.52 329,531 5.66Lease payables-current 2 and 14 18,465 0.23 18,035 0.31Other current liabilities 206,268 2.59 122,097 2.10

Total current liabilities 4,494,131 56.32 3,016,214 51.83

Long-term liabilitiesBonds Payable 2 and 13 526,760 6.60 - - Lease payables-noncurrent 2 and 14 346,931 4.35 361,801 6.22

Total long-term liabilities 873,691 10.95 361,801 6.22

Other liabilitiesAccrued pension liabilities 2 and 15 5,673 0.07 5,546 0.09Deferred income tax liabilities-noncurrent 2, 3 and 23 8,878 0.11 - -

Total other liabilities 14,551 0.18 5,546 0.09Total liabilities 5,382,373 67.45 3,383,561 58.14

Stockholders' equityCapital 16

Common stock 1,747,405 21.90 1,709,450 29.38Advance receipts for common stock 13,468 0.17 - -

Capital reserve 18Bonds conversion premiums 2 and 13 164,399 2.06 128,530 2.21Employee stock option 26,253 0.32 20,641 0.35Stock option 2 and 13 5,946 0.08 - -

Retained earnings 19 and 20Legal reserve 273,125 3.42 252,576 4.34Unappropriated earnings 385,131 4.83 257,617 4.43

Adjusting items in stockholders' equityCumulative translation adjustments 2 34,841 0.44 133,269 2.29

Treasury stock 2 and 21 (53,388) (0.67) (66,254) (1.14)Total stockholders' equity 2,597,180 32.55 2,435,829 41.86

Total liabilities and stockholders' equity $7,979,553 100.00 $5,819,390 100.00

2010 2009As of December 31,

SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

December 31, 2010 and 2009(Expressed in Thousands of New Taiwan Dollars)



SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31, 2010 and 2009

(Expressed in Thousands of New Taiwan Dollars, Except for Per Share Data)

Notes Amount % Amount %Sales $8,698,312 100.68 $7,250,420 102.28Less : Sales returns and allowances 2 (58,525) (0.68) (161,617) (2.28)

Net sales 8,639,787 100.00 7,088,803 100.00Cost of goods sold 7 and 22 (7,192,936) (83.25) (5,897,332) (83.19)

Gross profit 1,446,851 16.75 1,191,471 16.81

Operating expenses 22 and 25Selling expenses 295,447 3.42 198,343 2.80General and administrative expenses 344,439 3.99 296,516 4.18Research and development expenses 454,472 5.26 434,015 6.12Subtotal 1,094,358 12.67 928,874 13.10

352,493 4.08 262,597 3.71

Non-operating incomeInterest income 30 12,111 0.14 9,600 0.14Dividend income 2 831 0.01 - - Foreign exchange gain-net 2 36,796 0.43 - - Gain on valuation of financial assets-net 2, 5, 13 and 30 13,199 0.15 11,466 0.16Other income 12,284 0.14 16,580 0.23 Total non-operating income 75,221 0.87 37,646 0.53

Non-operating expensesInterest expense 9, 13 and 30 32,328 0.37 19,437 0.28Loss on disposal of property, plant and equipment 2 1,464 0.02 2,386 0.03Foreign exchange loss-net 2 - - 6,689 0.09Other losses 11 7,284 0.08 13,932 0.20 Total non-operating expenses 41,076 0.47 42,444 0.60

Income from continuing operations before income tax 386,638 4.48 257,799 3.64Income tax expense 2, 3 and 23 (72,190) (0.84) (52,316) (0.74)Net income $314,448 3.64 $205,483 2.90

Attributable to:Stockholders of the parent $314,448 3.64 $205,483 2.90Minority interests - - - - Net income $314,448 3.64 $205,483 2.90

Before tax After tax Before tax After taxBasic earnings per share (New Taiwan Dollars) 2 and 24

Net income $2.31 $1.88 $1.54 $1.23Minority interests - - - - Stockholders of the parent $2.31 $1.88 $1.54 $1.23

Diluted earnings per share (New Taiwan Dollars) 2 and 24Net income $2.17 $1.77 $1.52 $1.21Minority interests - - - - Stockholders of the parent $2.17 $1.77 $1.52 $1.21


2010 2009

Operating income


SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the years ended December 31, 2010 and 2009(Expressed in Thousands of New Taiwan Dollars)

Capital Capital Cumulativecollected Capital Unappropriated Translation Treasury

Description Notes Common in advance Reserve Legal Rasorve Earnings Adjustments Stock TotalBalance as of January 1, 2009 $1,707,233 $- $146,569 $219,665 $333,785 $164,370 $(66,254) $2,505,368Appropriation of 2008 retained earning 20

Legal reserve - - - 32,911 (32,911) - - - Cash dividends - - - - (248,740) - - (248,740)

Change in cumulative translation adjustments of investees 2 - - - - - (31,101) - (31,101)Exercise of employee stock options 17 2,217 - 70 - - - - 2,287Compensation costs for Treasury stock transfer to employees 2 - - 2,532 - - - - 2,532Net income in 2009 - - - - 205,483 - - 205,483Balance as of December 31, 2009 1,709,450 - 149,171 252,576 257,617 133,269 (66,254) 2,435,829Appropriation of 2009 retained earning 20

Legal reserve - - - 20,549 (20,549) - - - Cash dividends - - - - (166,385) - - (166,385)

Change in cumulative translation adjustments of investees 2 - - - - - (98,428) - (98,428)Exercise of employee stock options 17 18,910 - 3,288 - - - - 22,198Compensation costs for Treasury stock transfer to employees 2 - - 2,324 - - - - 2,324Treasury stock transfer to employees 21 - - - - - - 12,866 12,866Convertible bonds converted into common stock 16 19,045 13,468 35,869 - - - - 68,382Equity instrument from Convertible bonds 13 - - 5,946 - - - - 5,946Net income in 2010 - - - - 314,448 - - 314,448Balance as of December 31, 2010 $1,747,405 $13,468 $196,598 $273,125 $385,131 $34,841 $(53,388) $2,597,180

Retained Earnings


CommonStock


SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2010 and 2009(Expressed in Thousands of New Taiwan Dollars)

2010 2009Cash flows from operating activities: Net income $314,448 $205,483 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 200,383 197,753 Amortization of discount on bonds payable 5,321 - Gain on valuation of financial assets (719) - Loss on disposal of property, plant and equipment 1,464 2,386 Compensation costs for treasury stock transfer to employees 2,324 2,532 Changes in assets and liabilities: Financial assets at fair value through profit or loss-current (7,806) (1,869) Notes and accounts receivable-net (748,757) 274,836 Inventories-net (522,521) 1,130 Other receivables (56,972) 13,031 Other current assets (88,556) 2,932 Deferred income tax assets 5,130 53,791 Notes payable 8,474 (314) Accounts payable 515,583 35,019 Income tax payable 59,438 (29,415) Accrued expenses 191,113 45,682 Financial liabilities at fair value through profit or loss-current - (763) Other current liabilities 84,169 26,256 Accrued pension liabilities 127 338 Deferred income tax liabilities 8,878 - Net cash (used in) provided by operating activities (28,479) 828,808Cash flows from investing activities: Decrease in restricted assets-current 7,090 7,447 Acquisition of financial assets at cost-noncurrent (58,260) - Acquisition of property, plant and equipment (719,240) (195,214) Proceeds from disposal of property, plant and equipment 1,117 33 Increase in computer software cost (39,397) (8,846) Increase in other intangible assets (24,786) (22,771) Decrease (increase) in land use right (91,335) 78,409 Decrease (increase) in refundable deposits 13,550 (15,353) Increase in deferred charges (19,682) (21,094) Net cash used in investing activities (930,943) (177,389)Cash flows from financing activities: Increase in short-term loans 618,709 285,054 Issurance of bonds payable 595,000 - Decrease in lease payables (14,440) (14,530) Cash dividends (166,385) (248,740) Exercise of employee stock options 22,198 2,287 Treasury stock transfer to employees 12,866 - Net cash provided by financing activities 1,067,948 24,071 Effects from exchange rate changes (48,156) (10,495)Net increase in cash 60,370 664,995Cash at beginning of the year 1,984,213 1,319,218Cash at end of the year $2,044,583 $1,984,213Supplemental disclosures of cash flows information: Cash paid for income tax $24,383 $52,460 Cash paid for interest $28,399 $19,486Financing activities not affecting cash flows: Lease payables-current $18,465 $18,035



SERCOMM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2010 and 2009 (Expressed in Thousands of New Taiwan Dollars unless Otherwise Stated)

1. Organization and Operations

Sercomm Corporation ("the Company ) was incorporated on July 29, 1992 under the laws of the Republic of China (R.O.C.). The Company primarily engages in the research, development, manufacturing and sale of access server (router), print server and network server. The Company’s common shares were traded on the GreTai (Over-the-counter) Securities Market of the R.O.C. in May 1999, and its shares were publicly listed and traded on the Taiwan Stock Exchange (TSE) in December 2007. The numbers of employees of the Company and its subsidiaries as of December 31, 2010 and 2009 were 3,721 and 2,628, respectively.

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: (1) Summary of consolidation

The Company’s consolidated financial statements include the following subsidiaries:

Percentage of ownership

Name of the Name of As of December 31,

investors subsidiaries Business nature 2010 2009

The Company Servecomm Inc. Sales of IT products 100.00% 100.00% The Company Sercomm

Investments Ltd. Investment overseas,

technology R&D, international trading

100.00% 100.00%

The Company Sercomm Trading Co. Ltd.

Investment overseas, technology R&D, international trading

100.00% 100.00%


SERCOMM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

Percentage of ownership

Name of the Name of As of December 31,

investors subsidiaries Business nature 2010 2009

The Company Shukuan Investment Ltd.

Investment activity 100.00% 100.00%

Sercomm Trading Co. Ltd.

Zealous Investments Ltd.

Investment overseas, technology R&D, international trading

100.00% 100.00%


Smart Trade Inc. Investment overseas, technology R&D, international trading

100.00% 100.00%


Sernet Technology (Suzhou) Limited

Manufacture of routers, communication products, Wlan products; sales and after-sales service

100.00% 100.00%


Taicang Sercomm Technology Limited


100.00% 100.00%

Smart Trade Inc. Dwnet Technology (Suzhou) Limited


100.00% 100.00%

Shukuan Investment Ltd.

Sercomm Japan Inc.

Sales of IT products 100.00% -

(2) Principles for consolidation

Consolidated financial statements were prepared in accordance with the R.O.C. SFAS No.7. Transactions between consolidated entities are eliminated in the consolidated financial statements. Investees in which the Company and subsidiaries hold more than 50% of voting rights, including those that are exercisable or convertible, are consolidated, since the Company and subsidiaries are considered to possess control. Consolidation shall also be implemented if any of the following circumstances exists:



i. the total amount of voting rights held in the investee exceeds 50% due to agreement with

other investors ii. as permitted by law, or by contract agreements, the Company controls an entity’s

finances, operations and personnel affairs iii. the Company has authority to appoint or discharge more than half members of board of

directors (or equivalents), by whom the investee is controlled iv. the Company leads and controls more than half of the members of the board of directors

(or equivalents), by whom the investee is controlled v. other indications of control possession

(3) Classification of current and noncurrent assets and liabilities

Current assets are assets held for trading purposes and assets expected to be converted to cash, sold or consumed within one year from the balance sheet date. Current liabilities are obligations incurred for trading purposes and obligations expected to be settled within one year from the balance sheet date. Assets and liabilities that are not classified as current are noncurrent assets and liabilities, respectively.

(4) Foreign currency transactions and translation of foreign currency financial statements

The Company’s and subsidiaries’ accounts are maintained in NTD, USD and RMB. Transactions denominated in foreign currencies are converted into NTD, USD and RMB at exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into NTD using the exchange rates prevailing at the balance sheet date, with the related exchange gains or losses included in the consolidated statement of income. The long-term foreign investments of the Company and the subsidiaries are converted into NTD and USD at exchange rates prevailing at the dates of the transactions. While recording under equity method, the long-term foreign investments of the Company and the subsidiaries are converted into NTD and USD at the weighted-average exchange rate during the reporting period. The long-term foreign investments will be adjusted at the exchange rate prevailing at the balance sheet date. Adjusting differences are recorded as cumulative translation adjustments under stockholders’ equity.



The Company prepares consolidated financial statement. Financial statements of foreign subsidiaries are translated into New Taiwan Dollars ("NTD ) at the exchange rates prevailing at the balance sheet date for assets and liabilities accounts, historical exchange rates for equity accounts, and weighted-average exchange rates during the reporting period for profit and loss accounts. Translation differences resulting from the translation of such financial statement into NTD are recorded as cumulative translation adjustments, a separate component of stockholders’ equity.

(5) Financial assets and financial liabilities

In accordance with the R.O.C. SFAS No. 34, “Accounting for Financial Instruments” and “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, financial assets are classified as either financial assets at fair value through profit or loss, derivative financial assets for hedging, financial assets measured at cost or available-for-sale financial assets. When financial assets are recognized initially, they are measured at fair value, plus transaction costs for all financial assets not measured at fair value through profit or loss. Financial liabilities are to be classified as either financial liabilities at fair value through profit or loss, derivative financial liabilities for hedging or financial liabilities measured at cost. The Company and its subsidiaries account for regular purchase or regular sale of financial assets as of the trade date, which is the date the Company and its subsidiaries commit to purchasing or selling the asset. Regular purchase or regular sale is that the delivery period of a transaction for a financial asset is in a regular period or required period by law. a. Financial assets and financial liabilities at fair value through profit or loss

Financial assets or financial liabilities at fair value through profit or loss are subsequently measured at fair value and changes in fair value are recognized in profit and loss. This category has two sub-categories: financial assets or liabilities held for trading and those designated at fair value through profit or loss at inception.



b. Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial instruments not classified as financial assets at fair value through profit or loss, held-to-maturity financial assets, bond investments for which no active market exists. Investments designated as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in other items in stockholders’ equity until the investment is derecognized or until the investment is determined to be impaired at with time the cumulative gain or loss previously reported in equity is included in the statement of operations.

c. Derivative financial assets and liabilities for hedging

Derivative financial assets and liabilities for hedging that have been designated in hedge accounting relationships and are effective hedging instruments and reported at fair value.

d. Financial assets measured at cost

Equity investments without reliable market prices, or derivatives linked to and settled in are measured at cost.

The fair value of stock of listed companies or beneficiary certification is measured by closing price at balance sheet date. The fair value of open-end funds is measured at the unit price of the net assets at the balance sheet date.

(6) Allowance for doubtful accounts

Allowance for doubtful accounts is provided based on collectability and aging analysis of notes receivable, accounts receivable, and receivable from affiliates.

(7) Inventories

Inventories are valued at the lower of cost and net realizable value.



Costs incurred in bringing each product to its present location and condition is accounted for as follows:

Raw materials - purchase cost on a weighted average cost formula basis. Work in progress and finished goods

- cost of direct materials and labor and a proportion of manufacturing overheads based on normal operating capacity on a weighted average cost formula basis.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

(8) Long-term investments accounted for under the equity method

Investees wherein the Company exercises significant influence are accounted for by the equity method. According to the R.O.C. SFAS No. 23, "Interim Financial Reporting and Disclosures , investment income or loss from investments in companies quarterly is accounted for under the equity method provided that the Company and subsidiaries owns at least 20% in its equity investee. The Company consolidates investee in which the Company owned, directly or indirectly, more than 50% of the voting shares of a company or less than 50% of voting shares but has a controlling financial interest in accordance with the R.O.C. SFAS No. 7, "Consolidation of Financial Statements . Stock dividends are recognized only as an increase in the number of shares, and the cost per share has to be recalculated. Cost on disposal of stocks is determined by the weighted-average method.

(9) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss. Significant renewals and improvements are capitalized and depreciated over their estimated useful lives while ordinary repairs and maintenance are expensed as incurred.



Property being leased to others is classified as other assets and stated at the book value. Property not in use is classified to other assets and stated at the lower of book value or net realizable value. Upon disposal or sale of an item of property, plant and equipment, the related cost, accumulated depreciation and accumulated impairment loss are written off. Gains or losses on disposal of property, plant and equipment are recorded as non-operating income or expense. Depreciation is recognized on a straight-line basis using the estimated economic life of the assets less salvage value, if any. If the main property, plant and equipment are fully depreciated and sub property, plant and equipment are still in use, the depreciation is based on the newly estimated remaining useful life. The estimated economic life of the property, plant and equipment is as follows: Buildings 40 Years Machinery and equipments 3-10 Years Molding equipments 3-5 Years Research and development equipments 3-5 Years Office and other equipments 2-5 Years Leased assets 35-50 Years Equipments leased under capital lease are carried at the lower of the market value or the present value of the minimum lease payments at the inception date of the lease. Depreciation of leased assets is calculated based on the economic useful lives of 35-50 years, and recognized as the lease payable. The Company recognizes the implicit interest of rental payments as interest expense in the period. Property leased to others under operating leases is classified as other assets and stated at book value. The value of the assets is depreciated using the straight-line method over the estimated useful lives.

(10) Land use right

Land use right is stated at cost and amortized over 50 years by using the straight-line method.



(11) Intangible assets

All purchased and in-house developed computer software for manufacturing the Company’s products (servers) shall be capitalized. Effective from January 1, 2007, the Company adopted R.O.C. SFAS No. 37 “Accounting for Intangible Assets”. In accordance with SFAS No. 37, an intangible asset should be measured initially at cost upon acquisition. After initial recognition, an intangible asset should be measured at its cost plus revaluation increment revalued in accordance with laws, less any accumulated amortization and any accumulated impairment losses. Intangible assets with finite useful lives should be amortized over its useful lives with impairment testing. The Company should assess, at each balance sheet date, whether there is any changes of the residual value, amortization period and amortization method of each intangible assets with finite useful lives. Such changes shall be accounted for as changes in accounting estimates. The Company’s research and development project needs to consider the research phase and the development phase. If is unable to distinguish, all regards as research phase. Expenditure on research shall be recognized as an expense when it is incurred. The cost of development activities should be capitalized as intangible assets if, and only if, the Company can demonstrate all of the following. Otherwise, the cost of development activities should be expensed as incurred. a) the technical feasibility of completing the intangible asset so that it will be available for

use or sale. b) its intention to complete the intangible asset and use or sell it. c) its ability to use or sell the intangible asset. d) how the intangible asset will generate probable future economic benefits. e) the availability of adequate technical, financial and other resources to complete the

development and to use or sell the intangible asset. f) its ability to measure reliably the expenditure attributable to the intangible asset during

its development.



The Company’s policies for intangible assets are summarized at the table below:

Description Estimated economic life Amortization method

Computer software cost 2~5 years Straight-line method

Development expenditures 5 years Straight-line method

(12) Deferred charges

Molding and product testing expenditures are amortized on a straight-line basis over their

estimated economic lives, 2-5 years.

(13) Convertible Bonds

The liability component of the convertible bonds is measured first, and the difference

between the proceeds of the bond issued and the fair value of the liability is accounted for

as the equity component. The embedded derivative is accounted for in accordance with

the requirements under the R.O.C. SFAS No.34. The liability component is subsequently

measured at amortized cost using effective interest rate method, and changes in fair value

of the equity component are not recognized while changes in fair value of the embedded

derivatives are reported to the income statement as valuation gains or losses on Financial

Instruments. When the conversion option expires unexercised and at that time the market

value of the common stock under conversion exceeds the put price, put premium should be

credited to capital reserve, if the market value is otherwise lower than the put price, then it

is recognized in profit or loss.

When the bond holder exercises the conversion option before bond maturity, the adjusted

carrying value of the liability components (including bonds and embedded derivatives) is

credited to a capital stock account along with the carrying amount of the stocks converted.

Bond issuance costs were allocated proportionately to the convertible bonds and embedded

derivates based on their respective balances upon initial recognition.



(14) Derecognition of financial assets and liabilities

a. Financial assets

The Company and its subsidiaries derecognize their financial assets or part of the financial assets when losing control of the contractual rights from the financial assets or part of the financial assets. When the Company and its subsidiaries transfer all or part of their financial assets and relinquish control of the financial assets, this transaction is considered as a sale within the range of exchange with reward.

When a transfer of a financial asset does not satisfy conditions required to be considered as lose of contro1, the Company and its subsidiaries treat the transfer as a guaranteed borrowing. The financial asset is not considered financial derivatives.

b. Financial liabilities

The Company and its subsidiaries derecognize their financial liabilities or part of the liabilities when extinguished by discharge, cancellation, or expiration of contractual obligation. When there has been an exchange of an existing financial liabilities between the Company and its subsidiaries and the creditor with substantially different terms, or there has been a substantial modification of the terms of the existing financial liabilities, and a simultaneous assumption of obligation from new financial liabilities, this transaction is accounted for as an extinguishment of the original financial liabilities and the recognition of new financial liabilities. A gain or loss from extinguishment of the original financial liability is recognized in the income statement.

(15) Impairment of financial assets

The Company assesses whether financial assets are impaired at each balance sheet date. Impairment of financial assets is measured by different methods as described below: a. Financial assets measured at cost

If there is objective evidence that an impairment loss exists on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. The impairment loss is not allowed to reverse.



b. Available-for-sale financial assets

If available-for-sale assets are impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognized in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.

(16) Assets impairment

Pursuant to the R.O.C. SFAS No. 35, "Accounting for Asset Impairment the Company assesses indicators of impairment for all its assets within the scope of the standard at each balance sheet date. If impairment is indicated, the Company compares the carrying amount with the recoverable amount of the assets or the cash-generating unit ("CGU ) associated with the asset and writes down the carrying amount to the recoverable amount where applicable. Recoverable amount is defined as the higher of fair values less costs to sell and the values in use. For previously recognized losses, the Company shall assess, at each balance sheet date, whether there is any indication that the impairment loss may no longer exist or may have decreased. If there is any such indication, the Company has to recalculate the recoverable amount of the asset. If the recoverable amount increases as a result of the increase in the estimated service potential of the assets, the Company shall reverse the impairment loss to the extent that the carrying amount after the reversal would not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the assets in prior years. Impairment loss (reversal) is classified as non-operating losses (income).

(17) Pension plan

All regular employees are entitled to a defined benefit pension plan that is managed by an independently administered pension fund committee within the Company according to the Labor Standards Law of the R.O.C. Fund assets are deposited in the committee’s name in the Bank of Taiwan and hence, not associated with the Company. Therefore the fund assets are not be included in the Company’s financial statements.



The Labor Pension Act of the R.O.C. (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. In accordance with the Act, employees may choose to elect either the Act, by retaining their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. For employees who elect the Act, the Company will make monthly contributions of no less than 6% of the employees’ monthly wages to the employees’ individual pension accounts. The accounting for pension is computed in accordance with the R.O.C. SFAS No.18, “Accounting for Pensions”. Net pension costs of the defined benefit plan are recorded based on an actuarial valuation. 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 by the actuary. The Company recognizes expenses from the defined contribution pension plan in the period in which the contribution become due. The pension plan of foreign subsidiaries is estimated at local related regulation.

(18) Employee stock option plan

The Company uses 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.92-070~072. 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 is measured by reference to the fair value of the equity instruments at the date on which they are granted; the fair value is determined by an external expert using an appropriate pricing model. The Company only enters into equity-settled share-based payment transaction with its and its subsidiaries’ 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 vesting condition attached, then the equity instrument is vested immediately, with the employee compensation costs recognized as at the grant date, with a corresponding increase in equity. If the equity instrument is vested over a certain period, then the employee compensation costs are recognized over the 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. 96-052 effective January 1, 2008, employee bonuses and remunerations paid to directors and supervisors are charged to expense at fair value and are no longer accounted for as an appropriation of earnings.

(20) Treasury stock

The Company adopts the R.O.C. SFAS No. 30, "Accounting for Treasury Stocks , which requires the treasury stock held by the Company to be accounted for under the cost method. The cost of treasury stock is shown as a deduction to stockholders’ equity, while any gain or loss from selling treasury stock is treated as an adjustment to capital reserve. If there is any deficiency, it is debited against retained earnings.

(21) Revenue recognition

The Company and its subsidiaries recognize revenue when the product or service has been delivered and significant risk has been transferred. The Company and its subsidiaries and their customers have agreed to use fair value in determining the sales prices, taking into account the related sales discounts. Since the receivables are collected within one year and such transactions are frequent, fair value of the receivables is equivalent to the nominal amount of the cash to be received.



(22) Capital expenditure versus operating expenditure

Expenditure exceeds a predetermined amount is capitalized when it is probable that the Company will receive future economic benefits associated with the expenditure. Otherwise, the expenditure is expensed as incurred.

(23) Unrealized gain (loss) on inter-affiliate accounts

Unrealized intercompany gains and losses arising from sales from the Company and its subsidiaries to equity method investees are eliminated in proportion to the Company’s year-end ownership percentage until realized through transactions with third parties. Intercompany gains and losses arising from transactions between the Company and majority-owned (above 50%) subsidiaries are eliminated entirely until realized through transactions with third parties. Unrealized intercompany gains and losses due to sales from equity method investees to the Company are eliminated in proportion to the Company’s weighted-average ownership percentage of the investee until realized through transactions with third parties.

(24) Income tax

The Company and its subsidiaries have adopted inter-period and intra-period income tax allocation according to the R.O.C. SFAS No. 22, “Accounting for Income Tax”. Tax effects on taxable temporary differences are recognized as deferred tax liabilities. Tax effects on deductible temporary differences, operating loss carryforward, and investment tax credits are recognized as deferred tax assets. Valuation allowance is provided on deferred tax assets when they are not certain to be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. However, if a deferred asset or liability is not directly related to an asset or liability, then the classification is based on the expected length of time before it is settled or recovered. According to the R.O.C. SFAS No. 12, “Accounting for Income Tax Credits”, the Company recognized the tax benefit from research and development expenditure, employee training by the flow through method.



Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision. Income tax (10%) on unappropriated earnings is recorded as expense in the year in which the shareholders have resolved earnings to be retained. 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 by 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 Company’s income tax for the current reporting period.

(25) Earnings per share

Earnings per share are computed according to the R.O.C. SFAS No. 24, “Earnings Per Share”. Basic earnings per share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the current reporting period. Diluted earnings per share is computed by taking basic earnings per share into consideration plus additional common shares that would have been outstanding if the dilutive share equivalents had been issued. Net income (loss) is also adjusted for interest and other income or expenses derived from any underlying dilutive share equivalents. The weighted-average of outstanding shares is adjusted retroactively for stock dividends and bonus share issues.

(26) Derivatives financial instrument and hedge activities

In order to hedge the resulting from the volatility in exchange rate, the Company and its subsidiaries entered into foreign exchange forward contracts. The derivative are initially recognized and re-measured at fair value. When the fair value is positive, the derivative is recognized as a financial asset; when the fair value is negative, the derivative is recognized as a financial liability. If the derivative financial products does not meet the criteria for hedge accounting, the changes in fair value is transferred to the income statement. In additional, the derivative financial products shall be reclassified as financial assets or liabilities for trade purpose.



Hedges are classified as the following three categories: a. Fair value hedges

Fair value hedges are hedges of the Company’s exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment.

b. Cash flow hedges

Cash flow hedges are hedges of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognized directly in equity, while the ineffective portion is recognized in profit or loss immediately.

c. A net investment in a foreign operation hedges

At inception of the hedge, there is formal documentation of the hedging relationship and the Company’s risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk will be assessed. There must be a reasonable basis for how the Company plans to assess the hedging instrument’s effectiveness.

Hedges which meet the strict criteria for hedge accounting are accounted for as follows: Fair value hedges Fair value hedges are hedges of the Company’s exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss.



The Company and its subsidiaries shall discontinue prospectively the hedge accounting for an existing hedge if any one of the following occurs: a. The derivative is expired or sold, or terminated, or exercised. b. Any criterion for hedge accounting is no longer met. c. The Company removes the designation of the fair value hedge.

3. Accounting changes

In accordance with the amended tax laws effective on May 27, 2009, the Profit-Seeking Enterprise Income Tax rate has been reduced from 25% to 20%. And in accordance with the amended tax laws effective on June 15, 2010, the Profit-Seeking Enterprise Income Tax rate has been reduced from 20% to 17. The adoption resulted in increasing effect on net gain by NT$5,268 thousand and NT$1,592 thousand, thereby increasing gain per share by $0.03 and 0.01 for the year ended December 31, 2010 and 2009, respectively.

4. Cash

As of December 31, 2010 2009

Cash on hand $2,054 $1,536 Checking and savings accounts 719,872 459,424 Time deposits 1,322,657 1,523,253 Total $2,044,583 $1,984,213 As of December 31, 2010 and 2009, the savings accounts outside Taiwan were NT$1,102 thousand (USD$38 thousand) and NT$1,213 thousand (USD$38 thousand), respectively.

5. Financial assets (liabilities) at fair value through profit or loss-current

(a) Details of the financial assets or financial liabilities at fair value through profit or loss are as follows:

Financial assets held for trading - current As of December 31, 2010 2009 Foreign currency forward contracts $10,337 $2,531



The Company entered into the above-mentioned derivative financial instruments primarily for the purpose of hedging exchange risk associated with the assets, liabilities, or commitments denominated in foreign currencies. However these financial instruments do not satisfy the criteria of hedge accounting and thus are classified under "financial assets at fair value through profit or loss-current and "financial liabilities at fair value through profit or loss-current . Please refer to Note 30 for financial risk information.

(b) The details of the Company’s derivative financial instruments described above as follows:

December 31, 2010 Currency Nominal amount Maturity date

Sell foreign exchange forward USD/NTD USD$9,000 thousand 2011.1.12-2011.3.7

December 31, 2009 Currency Nominal amount Maturity date

Sell foreign exchange forward USD/NTD USD$9,000 thousand 2010.1.14-2010.3.12 Net gain on financial assets and financial liabilities held for trading during 2010 and 2009 were NT$12,480 thousand and NT$11,466 thousand, respectively.

6. Notes and accounts receivable-net


Notes receivable $- $552 Accounts receivable 1,795,969 1,046,732 Subtotal 1,795,969 1,047,284 Less: Allowance for doubtful accounts (5,676) (5,748) Net $1,790,293 $1,041,536

The Company entered into several factoring agreements without recourse with several banks in Taiwan. Accounts receivables were sold for 100% of their notional amount and were derecognized since the Company has surrendered control over the receivable to the factors. The factors had fully paid out the sales proceeds and assumed substantially all risks of collection as receivable were transferred. Commissions at the rate of 0.1%-0.6% on 10% of the accounts receivables factored or 0.72% on 100% of the accounts receivables factored were charged by the factor.



The details of accounts receivable derecognized are summarized as follows:

As of December 31,

The Factor (Transferee) 2010 2009 Credit line HSBC Bank (Taiwan) $6,855 $10,202 USD 800 thousand Taishin Bond 25,349 - USD 30,700 thousand Fubon Financial Bank - - USD 5,000 thousand

One of the Company's foreign customers has filed for restructuring in September 2010. As of December 31, 2010, the Company's Accounts Receivable from this customer amounted to NT$36,580 thousand of which NT$34,597 thousand is recoverable from an insurance claim made and has been reclassified to other receivables. Provisions for bad debts have been made for the remaining unrecoverable amount.

7. Inventories


Raw materials $808,898 $513,214 Work in process 362,924 258,049 Finished goods 224,372 112,945 Subtotal 1,396,194 884,208 Less: Allowance for loss on decline in market value and

obsolescence (79,277) (89,812)

Net $1,316,917 $794,396

For the ended December 31, 2010 and 2009, cost of goods sold were NT$7,192,936 thousand and NT$5,897,332 thousand, including NT$39,717 thousand, and NT$36,827 thousand of write-down of inventories to net realizable value, respectively.

8. Financial assets measured at cost-noncurrent


Unlisted stocks Industrial Bank of Taiwan $40,000 $40,000 TECO Nanotech Co., Ltd. 10 10 Cerpass Consultancy Corp. 7,444 7,444 Ubiquisys Ltd. 58,260 -

Total $105,714 $47,454



The stock investments were measured at cost because they were not traded in an open market and did not have fair value.

9. Property, plant and equipment

(1) The Company rented the Nankang Software Industrial Park office by capital lease, please refer to Note 14.

(2) The information of interest capitalized is as follows:

Year Total interest expense Interest capitalized Interest rates applied

2010 $32,328 5,442 1.63% 2009 19,437 - -

(3) Please refer to Note 26 for property, plant and equipment pledged as collateral.

10. Intangible assets

As of December 31, 2010 Computer

software cost Development expenditures Land use right Total

Cost: Beginning of the year $127,333 $238,910 $12,882 $379,125 Purchase 39,397 29,768 91,335 160,500 Translation adjustment (1,067) - (745) (1,812) End of the year 165,663 268,678 103,472 537,813

Accumulated amortization:

Beginning of the year 88,472 169,244 1,257 258,973 Amortization 20,122 28,783 263 49,168 Translation adjustment (749) - (87) (836) End of the year 107,845 198,027 1,433 307,305

Book value:

Beginning of the year $38,861 $69,666 $11,625 $120,152

End of the year $57,818 $70,651 $102,039 $230,508



As of December 31, 2009 Computer

software cost Development expenditures Land use right Total

Cost: Beginning of the year $116,653 $211,766 $91,632 $420,051 Purchase 11,064 27,144 - 38,208 Reduction - - (78,409) (78,409) Translation adjustment (384) - (341) (725) End of the year 127,333 238,910 12,882 379,125

Accumulated amortization:

Beginning of the year 70,192 140,590 1,020 211,802 Amortization 18,528 28,654 272 47,454 Translation adjustment (248) - (35) (283) End of the year 88,472 169,244 1,257 258,973

Book value:

Beginning of the year $46,461 $71,176 $90,612 $208,249

End of the year $38,861 $69,666 $11,625 $120,152

Please refer to Note 26 for Land use right pledged as collateral.

11. Property not used in operations

Details of the property not used in operations are as follows:


Leased assets-land $10,020 $10,020 Leased assets-buildings 5,752 5,752 Idle assets 68,858 68,858 Less: Accumulated depreciation (1,245) (1,088) Net $83,385 $83,542



Oriental Technopolis, the building where the Company’s office premises were located, suffered fire damage on May 12, 2001. Although the Company’s office was not deranged during the fire incident, some research and development equipments and office equipments were partially damaged. Since the building was required to be renovated before it can be re-used, the Company had relocated its office after the incident. The book value of the land and building of the original office in the Oriental Technopolis had been reclassified as Idle Assets in 2001. In December 2002, the Company reclassified the Idle Assets as Land and Construction-In-Progress due to that the Reconstruction Committee of Oriental Technopolis had approved to proceed with competitive price bidding process for the renovation project. The renovation project had been delayed because the financing difficulties of the original contractor. In 2007, the Reconstruction Committee of Oriental Technopolis had sought a new contractor to execute the contract. The Company reclassified the land and damaged building at their carrying amount of NT$43,230 thousand and NT$25,628 thousand, respectively, to “Idle Asset”. In 2008 and 2007, the Company estimated the probable repair cost to be NT$10,147 thousand in total, which was recognized as “non-operating expenses – other losses” and “other current liabilities” in the accompanying consolidated balance sheet and statement of income. The reconstruction was completed in June 2010. The Company actually paid in the amount of NT$5,823 thousand for the reconstruction. The Company rented the damaged building’s parking lot to others and thus had recorded them as “assets leased to others”.

12. Short-term loans

As of December 31, 2010

Items Amounts Interest rate Collateral Secured loans $282,219 1.79%-1.80% Land use right and Building Credit loans 1,200,584 0.92%-1.96% None Total $1,482,803

As of December 31, 2009

Items Amounts Interest rate Collateral Secured loans $320,366 0.76%-0.95% Land use right and Building Credit loans 543,728 0.79%-0.90% None Total $864,094



13. Bonds payable

A. The Company’s bonds payable are as follows:

As of December 31 Item 2010 2009

The third domestic unsecured convertible bonds payable $586,498 $- Less: discount on bonds payable (59,738) - Total $526,760 $-

Embedded derivatives (Note 1) $1,487 $-

Equity instrument (Note 2) $5,946 $-

Note 1: Including bonds holder’s put option value and the Company’s call option value. Note 2: Conversion option value.

B. The Company’s Board of Directors resolved on June 24, 2010 to issue the third domestic

unsecured convertible bonds, which were issued on August 6, 2010 with principal issuing terms as follows:

(a) Issue Amount: NT$600,000 thousand, each with a face value of NT$100 thousand,

issued based on 100% of par value. (b) Par Value’s annual interest rate:0%. (c) Issuing period: from August 6, 2010 to August 6, 2015. (d) Conversion method:

i. Conversion period: The bondholder may, on the following day when reaching one

full month from the bond issuing date and ten days prior to maturity, except for the closed period, at any time request the Company to convert the bonds into the Company’s common stocks in accordance with this measure.



ii. Conversion price and adjustments: With the convertible bonds’ conversion price set

at NT$22.24 per share at the time of issue, and following the issue of the convertible bonds, the conversion price is to be adjusted in accordance with stipulations set by the convertible bonds’ issuing provisions, when the Company increased the common stocks (except when the Company reissues or stages a private solicitation of common stocks with convertible rights or staging for an exchange of the common stocks through share pledging of a variety of marketable securities, or when the Company increases the common stocks already issued or solicited, including but not limited to capital reinvestment, earnings converting to capital reinvestment, capital reserve converting to capital reinvestment, employee bonuses converting to capital reinvestment, merger or new share issue by an invested entity, stock division and cash capital reinvestment for participating in offshore depository certificates and the like through solicitation issue or private solicitation), or when the common stock cash dividends of a given year against the ratio of the current price per share exceed 1.5%, or when the Company converts at a conversion price lower than the going price per share for a variety of marketable securities through share pledging reissue or private solicitation of common stocks with convertible rights or share pledging right, or when the Company reduces the common stocks in a capital reduction due to cancellation of the common stocks held in vault.

As of December 31, 2010, the conversion price was adjusted to $21.16 per share.

(e) The Company’s call option:

Under the following circumstances, effective from 30 days after the issuance until 40 days prior to maturity, the Company may recall the convertible bonds at par value plus 2% real yield per year:

i. The closing price of the Company’s common stocks exceeds 30% of the last

adjusted conversion price at the time for 30 consecutive business days. ii. The balance of the Company’s total outstanding bonds currently in circulation falls

lower than 10% of the par value.



(f) Bondholder’s put option:

During the period of two years after issuance to 40 days prior to reaching four years after issuance, bondholders may notify the Company’s stockholders’ service entity in writing to request the Company to buy back the convertible bonds at the par value plus 2% yearly yield of the bonds.

C. The conversion of the third domestic unsecured convertible bonds payable is as follows:

For the years ended December 31, 2010 Converted Par value Shares (thousand) Balance, beginning of period $- $- Converted during this period 68,800 3,251 Balance, ending of period $68,800 $3,251

D. The Company has, in complying with stipulations set by the R.O.C. SFAS No. 36,

separated the value of the bonds’ conversion option as an equity instrument from the net value of the bonds, which was accounted as capital reserve in the amount of NT$5,946 thousand. As the Company’s call option and Bondholder’s put option were not closely related to the economic characteristics and risks of the host contract, they are bifurcated as embedded derivates and accounted for as the financial liabilities at fair value through profit or loss.

E. For the year ended December 31, 2010, the related discount amortization was

NT$5,321 thousand, which was recorded as interest expenses under the non-operating expenses. As for the gain on valuation on financial liabilities, it was NT$719 thousand for the year ended December 31, 2010, which was recorded as valuation gain on financial liabilities at fair value through profit or loss under the non-operating income.

14. Lease payables


Lease payables $365,396 $379,836 Less: current portion (18,465) (18,035) Total $346,931 $361,801



The Company signed a contract with Industrial Development Bureau, Ministry of Economic Affairs to lease an office space in Nankang Software Industrial Park on August 15, 2003 and July 31, 2007, respectively. These capital leases expire on various dates from August 2003 to August 2013 and from July 2007 to July 2017, respectively. The annual lease payment is adjusted according to Industrial Development Bureau’s prescribed rental rate yearly. The prescribed rental rate is adjusted every January 1 and July 1 semi-annually based on the interest rate of long-term loan and annual base on Consumer Price Index. In addition, the Company has bargain purchase option within the lease term. According to the contract, the minimum lease payments (include interest expenses) for the future are as follows:

Year Amounts Discounted present value 2011 26,288 23,034 2012 26,287 22,543 2013 26,287 22,063 2014 26,287 21,594 2015 26,287 21,134 2016-2020 96,475 72,636 2021-2023 40,746 28,103 Total $268,657 $211,107

15. Pension plan

The defined benefit plan under the Labor Standard Law is disbursed based on the units of service years and the average salary in the last month of the service year. The Company contributes an amount equivalent to 4% of the employees’ total salaries and wages basis to the pension fund deposited at the Bank of Taiwan in the name of an administered pension fund committee. Since March 2005, the Company decreases the contributive ratio from 4% to 2%. As of December 31, 2010 and 2009, the Company has contributed the amount of NT$58,895 thousand and NT$55,106 thousand, respectively. The Labor Pension Act of R.O.C. (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. In accordance with the Act, employees may choose to elect either the Act, by retaining their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. For employees who elect the Act, the Company will make monthly contribution of no less than 6% of the employees’ monthly salaries to the employee’s individual pension accounts. In accordance with the Act, the Company has established a pension plan and contribution 6% of the employee’s salaries to employee’s individual pension account since July 1, 2005. According to the Act, the Company recognized pension cost and contributed NT$17,002 thousand and NT$16,554 thousand to employee’s individual accounts for the years ended December 31, 2010 and 2009, respectively.



(1) The components of net pension cost are as follows:

For the year ended December 31, 2010 2009

Service cost $812 $974 Interest cost 1,983 2,100 Expected return on plan assets (1,232) (760) Amortization and deferral 1,450 999 Net pension cost $3,013 $3,313

(2) The funding status of the pension plan is as follows:


Benefit obligation Vested benefit obligation $2,800 $2,800 Non-vested benefit obligation 60,283 55,639 Accumulated benefit obligation 63,083 58,439 Effect from projected salary increase 29,892 29,700 Projected benefit obligation 92,975 88,139

Fair value of plan assets (58,513) (54,754) Fund status 34,462 33,385 Unrecognized net transitional benefit obligation (562) (703) Unrecognized loss (28,227) (27,136) Accrued pension liabilities $5,673 $5,546

(3) Vested benefit of retirement based on Labor Standard

Law

$2,800 $2,800 (4) The actuarial assumptions are as follows:


Discount rate 1.75% 2.25% Growth rate in future compensation level 3.00% 3.00% Expected long-term rate of return on plan assets 1.75% 2.25%



16. Capital stock

(1) As of January 1, 2009, the authorized and issued capital of the Company was NT$2,100,000 thousand and NT$1,707,233 thousand, respectively. The par value of the Company’s common stock is NT$10 per share.

(2) For the year ended December 31, 2009, the Company issued NT$2,217 thousand for

conversion of employee stock option exercise, each with par value of NT$10. The issuance had been approved by the relevant authority.

(3) For the year ended December 31, 2010, the Company issued NT$18,910 thousand for

conversion of employee stock options exercise, each with par value of NT$10. The issuance had been approved by the relevant authority.

(4) The third issue of domestic unsecured convertible bonds of the Company had been

converted by bond holders into 3,251 thousand common stocks in 2010. As a result, the capital increased by NT$13,468 thousand which was accounted for as advanced receipts for common stock.

(5) As of December 31, 2010, the authorized and issued capital of the Company was

NT$2,500,000 thousand and NT$1,747,405 thousand, respectively. The par value of the Company’s common stock is NT$10 per share.

17. Employee stock options

On October 16, 2003, November 11, 2005 and December 3, 2007, the Company was authorized by the Securities and Futures Bureau of the Financial Supervisory Commission, Executive Yuan, to issue employee stock options with a total number of 24,000, 50,000 and 20,000 units, respectively. Each unit entitles an optionee to subscribe to 100 share of the Company’s common stock. Settlement upon the exercise of the options will be made through the issuance of new shares by the Company. An optionee may exercise the options in accordance with certain schedules as prescribed by the plan starting 2 years from the date of grant. The compensation costs for employee stock options for the years ended 31, December 2010, and 2009, were both NT$0. Detailed information relevant to the employee stock options is disclosed as follows:



Date of grant

Total number of options granted

(units)

Total number of options outstanding

(units)

Original exercise price

(NTD)

Adjusted exercise

price (NTD) October 23, 2003 24,000 448 $26.0 $10.0 November 14, 2005 50,000 27,690 $23.0 $11.0 December 14, 2007 20,000 18,310 $27.8 $20.0 (1) As of December 31, 2010, there had been no cancellations or amendments to the stock

options plan. The contractual life of options is 10 years and 5 years. There is no cash settling option and the Company does not have past practice of settling in cash.

Detailed information relevant to the employee stock options is disclosed as follows:

For the year ended December 31,

2010 2009

Option (units)

Weighted- average exercise

price (NTD) Option (units)

Weighted- average exercise

price (NTD)

Outstanding at beginning of year (Note) 65,358 $13.70 67,575 $14.53 Granted - - - - Exercised (18,910) 11.65 (2,217) 10.18 Forfeited - - - - Expired - - - -

Outstanding at end of year (Note) 46,448 14.54 65,358 14.68

Exercisable at end of year (Note) 46,448 45,358

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

$-

$-

Note: These stock options were granted for employees prior to adopting R.O.C SFAS

No.39; therefore the Company did not recognize these stock options in accordance with R.O.C SFAS No.39. These stock options have not supervised sustained, so they do not adopt R.O.C. SFAS No.39.



The weighted-average stock price was NT$26.93 and NT$14.17 when the exercise date of the options exercised for the years ended December 31, 2010 and 2009, respectively. The share-based payment transaction was employees in 2010.

(2) The information of the Company’s outstanding stock options as of December 31, 2010 is as

follows:

Outstanding Stock Options Exercisable Stock Options

Authorization

date

Range of

exercise

price (NTD) Option (units)

Weighted-average

remaining contractual

life (years)

Weighted-average

exercise price

(NTD) Option(units)

Weighted-average

exercise price

(NTD)

2003.10.23 10.00 448 - 10.00 448 10.00

2005.11.14 11.00 27,690 1.43 11.00 27,690 11.00

2007.12.14 20.00 18,310 0.71 20.00 18,310 20.00

46,448 46,448

(3) The fair value of these options was calculated at the grant date using the Black-Scholes

option pricing model with the following assumptions for the years ended December 31, 2010 and 2009:

2010 2009 Expected dividend yields 5.35%-14.19% 5.35%-14.19% Volatility factors of the expected market price 39.48%-56.41% 39.48%-56.41% Risk-free interest rate 1.85%-2.69% 1.85%-2.69% Weighted-average expected life of the options 3.5-6.55 year 3.5-6.55 year

Note: The assumptions adopting for the years ended December 31, 2010 and 2009 before

the effective date of were used for disclosure of the pro-forma information.

The expected duration of the stock option is according to historical information, might not be the condition that the employee carry out actually. The expected volatility index forecast that, the tendency in the future by means of historical volatility index, and it might be incompatible with the real condition.



(4) The Company used the intrinsic value method to recognize compensation costs for its

employee stock options issued from 2004 to 2007. The compensation costs for the years ended December 31, 2010 and 2009 was both $0. Pro forma information using the fair value method on net income and earnings per share is as follows:

For the year ended December 31, 2010 Basic earnings per share Diluted earnings per share

Net income $314,448 $317,274 Earnings per share (NTD) 1.88 1.77 Pro forma net income 311,955 311,955 Pro forma earnings per share (NTD) 1.86 1.74

For the year ended December 31, 2009 Basic earnings per share Diluted earnings per share

Net income $205,483 $205,483 Earnings per share (NTD) 1.24 1.22 Pro forma net income 199,727 199,727 Pro forma earnings per share (NTD) 1.20 1.19

18. Capital reserve

Pursuant to the Company Law, capital reserve can only be used to offset an accumulated deficit or be increase common stock. However, only the capital reserve of the following nature can be transferred to capital (i) the income derived from the issuance of new share premium; (ii) the income from endowments received by the company. In addition, the Company can only use the capital reserve to make up its deficit when the legal reserve or other special reserve is insufficient to make up such losses and the total amount used each year cannot exceed 10% of the issued capital.

19. Legal reserve

The Company Law stipulates that companies must retain at least 10% of their annual earnings, as defined in the Law, until such retention equals to the amount of paid-in capital. This retention is accounted for as a legal reserve account upon approval at the shareholders’ meeting. Once the legal reserve equals one-half of the paid-in capital, 50% of the reserve may be transferred to common stock.



20. Distribution of earnings and dividend policies

According to the Company’s Articles of Incorporation, the Company’s annual earnings shall be used to offset an accumulated deficit, if any, and be retained at a rate of 10% as legal reserve, as defined in the Company Law, except when such retention equals the amount of issued common stock. After the aforementioned deduction, 15% of remaining earnings should be distributed as employees’ bonus. 2% of remaining earnings should be distributed as directors’ and supervisors’ remuneration. The distribution of any remaining earnings, after deducting employees’ bonuses and directors’ and supervisors’ remuneration, is subject to shareholders’ approval. A special reserve is equal to the reduction in stockholders’ equity (for example, cumulative translation adjustments and unrealized loss on long-term investment in stock, etc). If the aforementioned reduction in stockholders’ equity is reserved, the same amount could be removed from special reserve and transferred to unapporpriated earnings. Any appropriations of the profits are recorded in the year of stockholder approval and given effect to in the financial statements of that year. Distribution of profits may also be made by way of cash dividend, and the amount of that should in principle exceed or equal 10% of total dividends. This cash dividend percentage may be adjusted depending on actual profit of the year and operational conditions. The policy for dividend distribution should reflect factors such as current and future investment environment, fund requirements, domestic and international competition and capital budgets, as well as the benefit of stockholders, share bonus equilibrium, and long-term financial planning. The appropriations of earnings for 2009 had been approved in the stockholders’ meetings, and the date of payment was September 3, 2010. During the year ended December 31, 2010, the Company estimated the amounts of the employee bonuses and remuneration to directors and supervisors for 2010 to be $42,450 thousand and $5,660 thousand, respectively, and recognized as operating costs or operating expense for the period. The estimates were based on post-tax net income for 2010 and the Company’s Articles of Incorporation, and considered factors such as appropriation to legal reserve etc. The number of shares distributed as stock dividends was calculated based on the closing price one day earlier than the date of shareholders’ meeting of 2011 and considered the impacts of ex-right/ex-dividend. The difference between the estimation and the resolution of shareholders’ meeting will be recognized in profit or loss of 2011.



The Company has paid employees’ bonuses and directors and supervisors’ remunerations of

NT$27,740 thousand and NT$3,699 thousand in 2009, respectively, and there is no difference

between the amount estimated and paid.

Information on the board of directors’ recommendations and stockholders’ approvals is available

at “Market Observation Post System” on the Website of Taiwan Stock Exchange Corporation.

The Company’s distributions of 2009 and 2008 earnings were approved by the stockholders’

meetings on June, 2010 and June, 2009, respectively, and the detailed information is as follows:

2009 Distribution of Earnings 2008 Distribution of Earnings

Cash dividend NT$1 per share NT$1.5 per share

21. Treasury stock

Details of the treasury stock transactions are as follows:

For the year ended December 31,

(In thousand shares)

Purpose Beginning Increase Decrease Ending

2010

For transfer to employees 5,000 - 971 4,029

2009

For transfer to employees 5,000 - - 5,000

According to Securities and Exchange Law of the R.O.C., total shares of treasury stock shall not

exceed 10% of the Company’s stock issued. Total purchase amount shall not exceed sum of

retained earnings, capital reserve-premiums, and realized capital reserve.

Treasury stock shall not be pledged, nor should it be entitled voting rights or receive dividends,

in compliance with Securities and Exchange Law of the R.O.C.



22. Operating cost and expense

The Company’s personnel, depreciation, and amortization expense are summarized as follows: For the year ended December 31,

Item

2010 2009 Operating

cost Operating expenses

Total

Operating cost

Operating expenses

Total

Personnel expenses Salaries $410,900 $573,097 $983,977 $261,955 $476,797 $738,752 Labor and health insurance

3,009 30,604 33,613 2,941 28,419 31,360

Pension 1,848 18,167 20,015 1,792 18,075 19,867 Other personnel expenses

9,837 26,082 35,919 6,792 23,569 30,361

Depreciations 72,850 57,392 130,242 67,456 62,696 130,152 Amortization 42,463 27,678 70,141 40,434 26,212 66,646

23. Income tax

(1) The components of deferred tax assets (liabilities) as of December 31, 2010 and 2009 are summarized as follows:


(A) Total deferred income tax assets $109,102 $106,920

(B) Total deferred income tax liabilities $(59,941) $(33,830)

(C) Total valuation allowance $(37,613) $(47,533)

(D) Deferred income tax assets-current $22,183 $26,063

Deferred income tax liabilities-current (1,757) (506) Valuation allowance for deferred income tax

assets-current - -

Net deferred income tax assets-current $20,426 $25,557



Deferred income tax assets-noncurrent $86,919 $80,857 Deferred income tax liabilities-noncurrent (58,184) (33,324) Valuation allowance for deferred income tax

assets-noncurrent (37,613) (47,533)

Net deferred income tax assets (liabilities) $(8,878) $- -noncurrent

(E) The temporary differences of deferred tax assets (liabilities), loss carryforward, and

income tax credits were summarized as follows:


Amount Income tax

effect

Amount Income tax

effect Unrealized sales discounts $12,993 $2,209 $30,940 $6,188 Unrealized gross profit 31,122 5,291 21,480 4,296 Loss on inventory value decline

and obsolescence

52,263 8,884 50,161 10,032 Unrealized foreign exchange loss

(gain)

18,689 3,177 9,646 1,929 Development expenditures

capitalization

(70,651) (12,011) (69,666) (13,933) Investment income accounted for

under the equity method

(225,150) (38,275) (96,953) (19,391) Pension liabilities 2,286 388 2,199 440 Unrealized loss (gain) on valuation

of financial assets

(10,337) (1,757) (2,532) (506) Accrued service expenses 1,805 307 2,885 577 Accrued expenses 3,683 626 3,683 736 Accrued repair liabilities for idle

asset

2,568 437 9,325 1,865 Amortization of discount on bonds

payable

5,083 864 - - Foreign currencies of cumulative

translation adjustments on long-term equity

(46,459) (7,898) - - Unused investment tax credit - 83,818 - 74,924 Loss carryforward 27,072 3,101 41,225 5,933



(2) Reconciliation between the income tax expense and the income tax calculated on pre-tax

financial statement income based on the statutory rate is as follows:


Income tax on pre-tax income at statutory rate $78,874 $69,945 Tax effect of following:

Permanent differences (475) 176 Temporary differences (23,100) (21,746)

Income tax payable for continuing operation $55,299 $48,375 (3) The components of tax expenses are as follows:


Income tax payable $55,299 $48,375 Used investment tax credits (19,988) (22,890) Estimated tax at 10% on unappropriated earnings 1,855 4,746 Deferred income tax expense (benefit) resulting from:

Unrealized sales discounts 3,589 (3,299) Unrealized gross profit (1,928) (1,373) Loss on inventory value decline and obsolescence (421) 2,210 Unrealized foreign exchange loss (gain) (1,809) (1,390) Development expenditures capitalization 197 (377) Investment income accounted for under the equity

method 25,639 17,851

Pension liabilities (17) (173) Unrealized loss (gain) on valuation of financial

assets 1,561 658

Accrued service expenses 216 6,793 Accrued expenses - 329 Accrued repair liabilities for idle asset 1,351 428 Amortization of discount on bonds payable (1,017) - Investment tax credits (8,894) (7,525) Loss carryforward 3,102 8,330

Deferred tax assets-valuation allowance 7,447 33,270 Effect on deferred income tax assets/ liabilities resulting form changes in tax rates

(5,268) (1,942)

Adjustment of prior year’s tax expense 11,276 (31,705) Income tax expense $72,190 $52,316



(4) The integrated income tax information of the Company is as follows:


Imputation credit account (ICA) $23,129 $54,710


Actual (estimated) creditable ratio for the appropriation of retained earnings

11.55% 17.81%

The imputation credit allocated to shareholders is based on its balance as of the date of dividend distribution. The estimated creditable ratio may change when the actual distribution of imputation credit is made.

(5) As of December 31, 2010, the Company’s unused investment tax credit was as follows:

Total tax credit Unused tax credit Year of expiration $13,795 $- 2010

45,962 44,526 2012 62,503 39,292 2013

$122,260 $83,818

(7) The R.O.C. income tax authorities had assessed the income tax returns of the Company

through 2008. The 2003 to 2007 income tax return have been assessed by the authorities for additional tax payable NT$91,193 thousand due to research and development and the ratio of tax exemption. The Company disagreed with the assessment about the ratio of tax exemption and subsequently filed a tax appeal. The appeal is still under review.

(8) The income tax of foreign subsidiaries is estimated at local tax rate.



24. Earnings per share

The calculation of earnings per share is provided as follows:

For the year ended December 31, 2010

Amounts (Numerator) Earnings per share (NTD)

Income before

income tax Net income

Share expressed

(Denominator) (In thousands)

Income before


Basic

Net income $386,638 $314,448 167,513 $2.31 $1.88

Less: Minority interests gain - - - -

Shareholders of the parent income $386,638 $314,448 $2.31 $1.88

Effect of dilution

Convertible bonds payable $3,405 $2,826 8,772

Employee stock option in 2003 $- $- 27

Employee stock option in 2005 $- $- 1,417


Employees� bonuses $- $- 1,553

Diluted

Net income $390,043 $317,274 179,541 $2.17 $1.77

Less: Minority interest gain - - - -



Amounts (Numerator) Earnings per share (NTD)

Income before


Share expressed

(Denominator) (In thousands)

Income before


Basic

Net income $257,799 $205,483 166,960 $1.54 $1.23

Less: Minority interests gain - - - -


Effect of dilution


Employee stock option in 2005 $- $- 1,269

Employees� bonuses $- $- 989

Diluted

Net income $257,799 $205,483 169,361 $1.52 $1.21

Less: Minority interest gain - - - -




25. Related party transactions

(1) Name and relationship of related parties

Name of related parties Relationship with the Company Eight people including Por-Yuan, Wang Directors of the Company Three people including Ruei-song, Guo Supervisors of the Company Eight people including Por-Yuan, Wang Vice president and other key management

personnel of the Company (2) Significant related party transactions

Compensation of key management personnel

Categories 2010 2009 Salaries, bonuses, and other remuneration $35,767 $54,862

The Company’s key management personnel includes directors, supervisors and management that is vice president or above. For details of total compensation paid to the Company’s key management personnel including Directors, Supervisors, President and Vice-President, please refer to the annual report for the Company.

26. Assets pledged as collateral

The assets pledged of the Company and its subsidiaries were as follows:

As of December 31, Assets pledged Purpose of pledge 2010 2009

Property-building Bank loan $300,003 $288,666 Intangible assets-land use right Bank loan 10,704 11,625 Refundable deposits-time deposit and cash Custom duty guarantee 2,592 6,419 Restricted assets-cash L/C guarantee 8,654 15,744 Total $321,953 $322,454



27. Commitments and contingent liabilities

As of December 31, 2010, significant commitments and contingent liabilities not included in the financial statements are as follows: The future minimum payments under existing lease agreements are as follows:

Period Amount 2011 $12,426 2012 2,661 $15,087

28. Significant disaster loss

None. 29. Significant subsequent events

None. 30. Others

(1) Financial risk management objectives and policies

The Company’s and its subsidiaries’ principal financial instruments, other than derivatives, are comprised of cash and cash equivalents, common stock and loans. The main purpose of these financial instruments is to manage financing for the Company’s and its subsidiaries’ operations. The Company and its subsidiaries also hold various other financial assets and liabilities such as accounts receivable and accounts payables, which arise directly from its operations. The Company and its subsidiaries also enter into derivative transactions, including foreign forward exchange contracts. The purpose is to avoid the foreign currency exchange risk arising from the Company’s and its subsidiaries’ operation activities. The Company’s and its subsidiaries’ policies are not enter into trading purpose derivative transactions.



The main risks arising from the Company’s and its subsidiaries’ financial instruments include cash flow interest rate risk, foreign currency risk, credit risk, and liquidity risk. Cash flow interest rate risk The floating interest rate and fixed rates are used to hedge floating interest rate fluctuations of long-term bank loan and lease payable. Foreign currency risk The Company and its subsidiaries have foreign currency risk arising from purchases or sales. The Company and its subsidiaries utilize forward contracts to avoid foreign currency risk. The Company and its subsidiaries buy or sell the same amount of foreign currency with hedged items through forward contracts. Credit risk The Company and its subsidiaries trade only with established and creditworthy third parties. It is the Company’s and its subsidiaries’ policies that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis, which consequently minimizes the Company’s and its subsidiaries’ exposure to bad debts. With respect to credit risk arising from the other financial assets of the Company and its subsidiaries, which are comprised of cash and cash equivalents available-for-sale financial assets and certain derivative instrument, the Company’s and its subsidiaries’ exposure to credit risk arising from the default of counter-parties are limited to the carrying amount of these instruments. As the Company and its subsidiaries trade only with established third parties, it does not for any collateral from third parties. Liquidity risk The Company’s and its subsidiaries’ objective are to maintain a balance of funding continuity and flexibility through the use of financial instruments such as bank loans and cash and cash equivalents.



(2) Information of financial instruments

(A) Fair value of financial instruments


Financial assets Book value Fair value Book value Fair value Non-derivative financial instruments Assets

Cash $2,044,583 $2,044,583 $1,984,213 $1,984,213 Notes and accounts receivable-net 1,790,293 1,790,293 1,041,536 1,041,536 Other receivables 133,606 133,606 76,634 76,634 Restricted assets 8,654 8,654 15,744 15,744 Financial assets measured at cost-noncurrent 105,714 - 47,454 -

Refundable deposits 25,600 - 39,150 -

Liabilities Short-term loans 1,482,803 1,482,803 864,094 864,094 Notes payable 42,486 42,486 34,013 34,013 Accounts payable 2,101,803 2,101,803 1,586,220 1,586,220 Accrued expenses 520,644 520,644 329,531 329,531 Lease payables 365,396 365,396 379,836 379,836 Bonds payable 526,760 526,760 - -

Derivative financial instruments Assets

Foreign exchange forward contracts

10,337 10,337 2,531 2,531

Asset components of convertible bonds-embedded derivative contract

1,487 1,487 - -



(B) The methods and assumptions used to estimate the fair value of financial instruments are

as follows:

(a) The book value of short-term financial instruments approximates to the fair value due to their short maturities. Short-term financial instruments include cash, notes and accounts receivable, other receivables, restricted assets, refundable deposits, short-term loans, notes payable, accounts payable and accrued expenses.

(b) Refundable deposits are based on book value because the maturity date is uncertain. (c) The fair value of financial assets measured at cost is unable to be estimated since

there is no active market in trading those unlisted investments. (d) Lease payables are estimated based on the present values of future cash flow. For

bank loans associated with floating interest rate, the carrying value represents its fair value. The fair values of convertible bonds are determined based on their market price which was provided by financial institution.

(e) The fair value of derivative financial instruments is based on the amount the

Company expects to receive and to pay assuming that the contracts are settled at the balance sheet date. The fair value includes the unrealized gain on unsettled contracts in current period generally. The Company refers to quoted prices provided by financial institutions for its derivative financial instruments.

(C) The fair value of the Company’s and its subsidiaries’ financial assets and liabilities

determined by the quoted prices in active markets or valuation technique as follows:

As of December 31, Active market quotation Valuation technique

Financial assets 2010 2009 2010 2009 Non-derivative financial instruments Assets

Cash $2,044,583 $1,984,213 $- $- Notes and accounts receivable-net - - 1,790,293 1,041,536 Other receivables - - 133,606 76,634 Restricted assets - - 8,654 15,744 Refundable deposits - - 25,600 39,150



As of December 31, Active market quotation Valuation technique

Financial assets 2010 2009 2010 2009 Non-derivative financial instruments Liabilities

Short-term loans - - 1,482,803 864,094 Notes payable - - 42,486 34,013 Accounts payable - - 2,101,803 1,586,220 Accrued expenses - - 520,644 329,521 Lease payables - - 365,396 379,836 Bonds payable - 526,760 -

Derivative financial instruments Assets

Foreign exchange forward contracts

- - 10,337 2,531

Asset components of convertible bonds-embedded derivative contract

- - 1,487 - (D) As of December 31, 2010 and 2009, the Company and its subsidiaries’ financial

liabilities with fair value interest rate risk exposure amounted to NT$2,374,959 thousand and NT$1,243,930 thousand, respectively.

(E) For the year ended December 31, 2010, total interest revenue and interest expense for

financial assets or liabilities that are not at fair value through profit or loss were NT$12,111 thousand and NT$32,328 thousand, respectively, while interest revenue and interest expense for the year ended December 31, 2009 amounted to NT$9,600 thousand and NT$19,437 thousand, respectively.

(F) Guarantee for letter of credit of subsidiaries in pledge refer to Note 26.



(G) Financial risk information

(a) Market risk

Forward contracts held as of December 31, 2010 and 2009 were intended for hedging purposes. Gains or losses arising from the fluctuations in exchange rates are likely to be offset against the gains or losses from the hedged items. As a result, no significant exposure to market risk is anticipated.�

(b) Credit risk

Financial assets are influenced by potential effects of transaction counterparties’ non-fulfillment of contract. Effects include the concentration of credit risk of the Company’s and its subsidiaries’ financial instruments, components, amount of contracts, and other receivables. There is no significant credit risk exposure.

(c) Liquidity risk

No significant cash flow risk is anticipated since the working capital is sufficient to meet the cash flow requirements. The Company and its subsidiaries entered into foreign exchange forward contracts, since the forward rate has been fixed, no significant cash flow risk is anticipated. In addition, the Company and its subsidiaries invest unlisted stocks. The significant liquidity risk is expected.

(d) The cash flow risk of interest variation

The bank loan was floating rate liabilities. Therefore, the market interest rate would change cash flow in the future.

(3) Others

Significant intercompany transactions among consolidated entities for the years ended December 31, 2010 and 2009 are disclosed in Attachment 1.



(4) The information of foreign currency financial assets / liabilities are as follows:

(Unit : Foreign currency : thousand, NTD: thousand) As of December 31, 2010 Foreign currency Exchange rate NTD

Financial assets-monetary items Cash RMB 152,076 4.42 $672,257 Cash USD 2,645 29.13 77,052 Cash JPY 17,773 0.37 6,637 Accounts receivable RMB 75,825 4.42 335,187 Accounts receivable USD 42,976 29.13 1,251,904 Other receivables RMB 3,613 4.42 15,971 Other receivables USD 884 29.13 25,752 Restricted assets RMB 1,958 4.42 8,654 Refundable deposits RMB 2,520 4.42 11,141 Refundable deposits JPY 7,336 0.37 2,739

Financial assets-non monetary items Financial assets measured at cost-noncurrent

USD 2,000 29.13 58,260

Financial liabilities-monetary items

Short term loan RMB 282,392 4.42 1,248,323 Accounts payable RMB 367,948 4.42 1,626,526 Accrued expenses USD 170 29.13 4,970 Accrued expenses RMB 23,087 4.42 102,056

As of December 31, 2009 Foreign currency Exchange rate NTD

Financial assets-monetary items Cash RMB 189,419 4.69 $888,715 Cash USD 2,677 32.03 85,735 Accounts receivable RMB 22,623 4.69 106,145 Accounts receivable USD 26,584 32.03 851,501 Other receivables RMB 3,665 4.69 17,194 Other receivables USD 468 32.03 14,997 Restricted assets RMB 3,336 4.69 15,744 Refundable deposits RMB 5,830 4.69 27,354



As of December 31, 2009 Foreign currency Exchange rate NTD

Financial liabilities-monetary items Short term loan RMB 156,864 4.69 735,974 Accounts payable RMB 249,289 4.69 1,169,616 Accrued expenses RMB 16,104 4.69 75,559 Accrued expenses USD 166 32.03 5,317

31. Additional disclosures

Following are the additional disclosures required for the Company and its investees by the SFB: (1) Major transactions information:

(A) Loans of capital to others for the year ended December 31, 2010:None. (B) Provision of endorsements or guarantees for others for the year ended December 31,

2010: Please refer to Attachments 3. (C) Securities held as of December 31, 2010: Please refer to Attachment 4. (D) Accumulated buying/selling of the same securities for which the dollar amount reaches

$100 million NTD or 20% or more of paid-in capital for the year ended December 31, 2010: Please refer to Attachment 5.

(E) Acquisition of fixed assets for which the dollar amount reaches $100 million NTD or

20% or more of paid-in capital for the year ended December 31, 2010: None. (F) Disposition of real estate for which the dollar amount reaches $100 million NTD or 20%

or more of the net paid-in capital for the year ended December 31, 2010: None. (G) Buying/selling products with related parties for which the dollar amount reaches $100

million NTD or 20% or more of paid-in capital for the year ended December 31, 2010: None.

(H) Accounts receivable from related parties for which the dollar amount reaches $100

million NTD or 20% or more of paid-in capital as of December 31, 2010: None. (I) Derivative transactions: Please refer to Note 5.



(2) Information on re-invested enterprises:

(A) For those who directly or indirectly have major influence or control over the investee

company: Please refer to Attachment 7. (B) For those who directly or indirectly have control over the investee company, the investee

company’s transaction information listed under items A to I shall be disclosed: Please refer to Attachment 2, 4~6.

(3) Information on Mainland China investments: Please refer to Attachment 8.

32. Segment financial information

(1) Operations in different industries

The Company and its subsidiaries operate principally in one industry. The major business of the Company and its subsidiaries is manufacturing and selling the computerized networking equipments and related computerized information products.

(2) Operations in different geographic areas


Taiwan Asia America Elimination Consolidated

Sales to third-party customers $8,061,069 $653,886 $- $- $8,714,955 Intercompany sales 127,924 58,294 17,830 (204,048) -

Net sales $8,188,993 $712,180 $17,830 $(204,048) $8,714,955

Gross profit $248,799 $175,177 $1,388 $(7,229) $418,135

Investment profit (include dividend revenue)

831

Interest expenses (32,328)

Continuing operations income before income tax $386,638

Identifiable assets $4,664,229 $5,360,168 $6,258 $(2,158,303) $7,872,352

Funds and investments 107,201

Total assets $7,979,553



For the year ended December 31, 2009 Taiwan Asia America Elimination Consolidated

Sales to third-party customers $6,722,871 $406,380 $1 $- $7,129,252 Intercompany sales 101,291 5,227,860 17,370 (5,346,521) - Net sales $6,824,162 $5,634,240 $17,371 $(5,346,521) $7,129,252

Gross profit $189,797 $87,285 $3,025 $(2,871) $277,236

Investment profit (include dividend revenue)

-

Interest expenses (19,437) Continuing operations income

before income tax $257,799

Identifiable assets $3,481,411 $3,733,492 $6,304 $(1,449,271) $5,771,936

Funds and investments 47,454 Total assets $5,819,390

(3) Export information

A breakdown of export sales were summarized as follows: For the year ended December 31,

Area 2010 2009 Europe $3,614,980 $3,582,648 America 3,186,802 2,424,329 Asia 1,116,168 445,216 Other 2,159 42,540 Total $7,920,109 $6,494,733

(4) Major customers

Individual customer accounting for at least 10% of net sales were as follows:


Customers Amount Percentage Amount Percentage Customer A $552,798 6.40% $744,045 10.50% Customer B 1,964,165 22.73% 1,786,545 25.20% Customer C 199,538 2.31% 893,241 12.60% Customer D 1,041,813 12.06% 1,162,471 16.40%


SERCOMM CORPORATION AND SUBSIDIARIES (Expressed in Thousands of New Taiwan Dollars Unless Otherwise Stated)

Attachment 1 Significant intercompany transactions between consolidated entities Transactions

No. (Note1) Name of related parties Counterparty

Nature of relationship

(Note 2) Account Amount Terms

Percentage of consolidated

operatingrevenues or consolidated total assets (Note 3)


0 Sercomm Corporation Servecomm Inc. 1 Commission expenses $17,779 - 0.20%

0 Sercomm Corporation Servecomm Inc. 1 Other current assets 1,171 - 0.01%

0 Sercomm Corporation Servecomm Inc. 1 Accounts receivable 92 - -

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Sales revenue 113,671 Note 4 1.31%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Accounts receivable 77,778 Note 4 0.98%

0 Sercomm Corporation Sercomm Japan Inc. 1 Commission expenses 8,268 - 0.10%

0 Sercomm Corporation Sercomm Japan Inc. 1 Other current liabilities 6,641 - 0.08%

1 Zealous Investments Ltd. Sercomm Trading Co. Ltd. 2 Other current assets 3,361 - 0.04%

2 Sernet Technology (Suzhou) Limited

Dwnet Technology (Suzhou) Limited 3 Other receivables 119,722 - 1.50%


Dwnet Technology (Suzhou) Limited 3 Accounts receivable 14,889 - 0.19%


Dwnet Technology (Suzhou) Limited 3 Rent revenue 729 - 0.01%

2 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Commission expenses 14,135 - 0.16%

2 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Other current liabilities 4,391 - 0.06%

3 Sercomm Japan Inc. Dwnet Technology (Suzhou) Limited 3 Sales revenue 29,481 - 0.34%

Note 1 The Company and its subsidiaries are coded as follows: 1.The Company is coded 0. 2.The subsidiaries should be coded consecutively beginning from "1" in the order presented in the table above. Note 2 Transactions are categorized as follows: 1.The parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary. Note 3 The percentage with respect to the consolidated asset/revenues for transactions of balance sheet items are based on each items balance at

period-end. For profit or loss items, cumulative balances are used as basis. Note 4 The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection

period for overseas sales was net 30-240 days, while the terms for domestic sales was net 30-75 days. The collection period for third party sales was month-end 90 days.

Note 5 The list of significant intercompany transactions doesn't include transactions as the Company purchased materials on its subsidiary, Sernet Technology (Suzhou) Limited's behalf, sold the materials to Sernet Technology (Suzhou) Limited, and then bought the final products from Sernet Technology (Suzhou) Limited. In 2010, the Company purchased materials for such transactions amounted to $2,209,886 thousand. The Company bought the final products from Sernet Technology (Suzhou) Limited amounted to $6,168,886 thousand. In order to avoiddouble counting for such transactions above, the Company did not recognize related sales and cost of goods sold of materials andwork-in-process until selling the final products. In addition, the Company reversed the amount which have not been bought back fromSernet Technology (Suzhou) Limited to inventory account and reversed the related accounts receivable/payable balance.



Attachment 1-1 Significant intercompany transactions between consolidated entities Transactions

No. (Note1) Name of related parties Counterparty

Nature of relationship

(Note 2) Account Amount Terms

Percentage of consolidated

operatingrevenues or consolidated total assets (Note 3)


0 Sercomm Corporation Servecomm Inc. 1 Commission expenses $17,307 - 0.24%

0 Sercomm Corporation Servecomm Inc. 1 Other current assets 1,747 - 0.03%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Sales revenue 88,057 Note 4 1.21%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Accounts receivable 22,598 Note 4 0.39%

1 Zealous Investments Ltd. Sercomm Trading Co. Ltd. 2 Other current assets 3,203 - 0.06%


Dwnet Technology (Suzhou) Limited 3 Other receivables 66,227 - 1.14%


Dwnet Technology (Suzhou) Limited 3 Accounts receivable 6,576 - 0.11%


Dwnet Technology (Suzhou) Limited 3 Rent revenue 732 - 0.01%


Dwnet Technology (Suzhou) Limited 3 Accounts payable 1,925 - 0.03%


Dwnet Technology (Suzhou) Limited 3 Sales revenue 6,576 - 0.09%

2 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Commission expenses 12,811 - 0.18%

3 Dwnet Technology (Suzhou) Limited

Sernet Technology (Suzhou) Limited 3 Sales revenue 1,788 - 0.02%

Note 1 The Company and its subsidiaries are coded as follows: 1.The Company is coded 0. 2.The subsidiaries should be coded consecutively beginning from "1" in the order presented in the table above. Note 2 Transactions are categorized as follows: 1.The parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary. Note 3 The percentage with respect to the consolidated asset/revenues for transactions of balance sheet items are based on each items balance at

period-end. For profit or loss items, cumulative balances are used as basis. Note 4 The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection

period for overseas sales was net 45-90 days and month-end 60 days, while the terms for domestic sales was net 30-60 days. Thecollection period for third party sales was month-end 90 days.

Note 5 The list of significant intercompany transactions doesn't include transactions as the Company purchased materials on its subsidiary, Sernet Technology (Suzhou) Limited's behalf, sold the materials to Sernet Technology (Suzhou) Limited, and then bought the final products from Sernet Technology (Suzhou) Limited. In 2009, the Company purchased materials for such transactions amounted to $1,760,786 thousand.The Company bought the final products from Sernet Technology (Suzhou) Limited amounted to $5,225,723 thousand. In order to avoiddouble counting for such transactions above, the Company did not recognize related sales and cost of goods sold of materials andwork-in-process until selling the final products. In addition, the Company reversed the amount which have not been bought back fromSernet Technology (Suzhou) Limited to inventory account and reversed the related accounts receivable/payable balance.



Attachment 2 Loans of capital to others for the year ended December 31, 2010

Assets pledged Number

Name of financeprovider

Name of counterparty Account

Maximumbalanceduring 2010

Ending balance

Interestrate

Nature offinancing activity

Totaltransaction

amount

Reason forfinancing

Allowance for

doubtful accounts Item Value

Loan limit perentity (Note

l(2))

Maximumamount

availablefor law (Note 2)

1

SernetTechnology

(Suzhou)Limited Limited

DwnetTechnology

(Suzhou)Limited

Otherreceivables

-relatedparty

$123,807 $123,807 5% Note 3(2) $- Operating $- - $- $197,535 $395,071

Note 1 According the Company's Operational Procedures for Loaning Funds to Others, the maximum amount permitted to a single borrower as follows:(1) Trading partner: The amount shall not exceed the higher of the sales or purchases amount from the counterparty at the time of the

leading event or one year, whichever is lesser. (2) Short-term financing: The amount shall not exceed 20 percent of stockholders' equity as stated in its latest financial statement.

Note 2 The aggregate amount of loans shall not exceed 40% of stockholders' equity as stated in its latest financial statement. Note 3 The nature of financing activities as follows:

(1) Trading partner. (2) Short-term financing



Attachment 3: Provision of endorsements of guarantees for others for the year ended December 31, 2010

Endorsee

Number Name of endorsers

Name of endorsees Relationship

Endorsement limit for a

single entity

Maximum balance for the period

Ending balance

Amount of collateral

guarantee/endorsement

Percentage of accumulated

guarantee amount to net assets value

from the latest financial statement

Limit of total guarantee/endorsement

amount

0 The Company Sernet Technology (Suzhou) Limited

The Company’sequity investee

$628,417 (Note)

$291,300 (USD 10,000

thousand)

$291,300 (USD 10,000

thousand)$- 11.59% $1,256,835

(Note)

Note : The limit of endorsement for any single entity shall not exceed 25% of stockholders' equity as stated in its latest financial statement; the total amount of transaction of endorsement shall not exceed 50% of stockholders' equity as stated in its latest financial statement.



Attachment 4 Securities held as of December 31, 2010 Period ended

Held company name Securities type and name

Relationship with the Company Financial statement account Shares/units

(in thousands) Bookvalue

Percentageof

ownership (%)

Market value or Net asset

value

Note

Sercomm Corporation Stocks

Servecomm Inc. The Company’s equity investee

Long-term investments accounted for under the equity method 250 $4,703 100.00 $4,703 Note 1

Sercomm Investments Ltd.

The Company’s equity investee

Long-term investments accounted for under the equity method 1,200 7,105 100.00 7,105 Note 1



Long-term investments accounted for under the equity method 34,300 1,409,594 100.00 1,409,594 Note 3

ShukuanInvestment Ltd.



Industrial Bank of Taiwan - Financial assets measured at

cost-noncurrent 4,154 40,000 0.17 - Note 2

TECO Nanotech Co., Ltd. - Financial assets measured at

cost-noncurrent - 10 - - Note 2

Shukuan Investment Ltd. Stocks

CerpassTechnology Corp. - Financial assets measured at

cost-noncurrent 747 7,444 3.69 - Note 2

Sercomm Japan Inc.


Long-term investments accounted for under the equity method 1 13,021 100.00 13,021 Note 1

Sercomm Trading Co. Ltd. Stocks

ZealousInvestments Ltd.



Smart Trade Inc. The Company’s equity investee


Zealous Investments Ltd. Stocks




Taicang Sercomm Technology Corp.



Ubiquisys Limited - 875 58,260 3.78 - Note 2

(USD2,000 )

Smart Trade Inc. Stocks

Dwnet Technology (Suzhou) Limited



Note 1: Amount was recognized based on the unreviewed or unaudited financial statements in 2010. Note 2: Can't obtain the financial statements of the company in time. Note 3: Amount was recognized based on the audited financial statements.



Attachment 5 Accumulated buying/selling of the same securities for which the dollar amount reaches $100 million NTD or 20% or more than of paid-in capital for the year ended December 31, 2010

Beginning balance Addition Disposal Ending balance

Company name

Securities type and name

Financial statement account

Counter party Relationship

Shares/ Units(in thousands)

Amount (Note)

Shares/ Units(in thousands) Amount Shares/ Units

(in thousands) Amount Book value

Gain(loss) from

disposal

Shares/ Units(in thousands)

Amount (Note)

The Company


Long-term investments accounted for under the equity method

Purchase of newly issued shares

The Company's equity investee

27,300 $1,150,508 7,000 $218,464 - $- $- $- 34,300 $1,409,594






23,956 1,111,874 7,000 218,464 - - - - 30,956 1,351,802






19,900 935,540 5,000 154,260 - - - - 24,900 1,131,848

Note : The amount of ending balances of long-term investments accounted for under the equity method include adjustment under the equity method.



Attachment 6 Accounts receivable from related parties for which the dollar amount reaches $100 million NTD or 20% or more of paid-in capital as of December 31, 2010

Overdue receivables

The name of the company Name of counterparty Relationship Ending balance Turnov

er rate Amount

Actionadopted for

overdueaccounts

Subsequentcollections

Allowance for

doubtfulaccounts

Sernet Technology (Suzhou) Limited The Company The Company's

equity investee $1,105,160 - $- - $296,134 $-



Attachment 7 Names, locations and related information of investees on which the Company exercises significant influence

Original investment amount Balance as of December 31, 2010

Investorcompany Investee company Main businesses and

productsDecember 31,2010

December 31,2009

Shares (in thousands)

Percentage of

ownership

Bookvalue

Netincome (loss)of the

investee

Investmentincome (loss)

recognized

Note

Sercomm Corporation Servecomm Inc. Sales of IT products $7,939 $7,939 250 100.00 $4,703 $1,388 $1,388 Note 1

Sercomm Investments Ltd.

Investment overseas, technology R&D and international trading

40,037 40,037 1,200 100.00 7,105 (34) (34) Note 1



1,102,642 884,178 34,300 100.00 1,409,594 126,843 126,843 Note 2

ShukuanInvestment Ltd. Investment activity 28,000 28,000 2,800 100.00 31,836 3,042 3,042 Note 2


ZealousInvestments Ltd.


989,358 770,894 30,956 100.00 1,351,802 104,295 104,295 Note 2

Smart Trade Inc. Investment overseas, technology R&D and international trading

113,284 113,284 3,500 100.00 59,951 23,563 23,563 Note 2

ZealousInvestmentsLtd.



765,582 611,322 24,900 100.00 1,131,848 108,695 108,695 Note 2

Taicang Sercomm Technology Corp.


156,125 156,125 4,800 100.00 154,782 (85) (85) Note 2

Smart Trade Inc.

DwnetTechnology (Suzhou) Limited

R&D center of software; sales and after-sales service 113,284 113,284 3,500 100.00 59,948 23,563 23,563 Note 2

ShukuanInvestmentLtd.

Sercomm Japan Inc. Sales of IT products 9,617 - 1 100.00 13,021 2,839 2,839 Note 1

Note 1: Amount was recognized based on the unreviewed or unaudited financial statements. Note 2: Amount was recognized based on the audited financial statements.



Attachment 8 Information on Mainland China investments

Investment flowsInvesteecompany

Main businesses and products

Totalamount

of paid-in capital

Method of investment

Accumulated outflow of investment

from Taiwan as of January

1, 2010 Outflow Inflow

Accumulated outflow of investment

from Taiwan as of December

31, 2010

Percentageof

ownership

Investment income(loss)

recognized

Carryingvalue as of December31, 2010

Accumulated inward

remittance of earnings as

of December 31, 2010

SernetTechnology

(Suzhou)Limited

Manufacture of routers,

communication products, Wlan

products; sales and after-sales service

$769,782 Investment

in cash (Note 1)

$611,322 (USD 18,900

thousand)

$154,260(USD5,000

thousand)

$-$765,582

(USD 23,900 thousand)

100.00 % $108,695 (Note 3) $1,131,848 $-

DwnetTechnology

(Suzhou)Limited

R&D center of software; sales and after-sales service

$113,164 Investment

in cash (Note 2)

$113,284 (USD 3,500 thousand)

$- $- $113,284


100.00 % $23,563 (Note 3) $59,948 $-

TaicangSercomm

Technology Corporation

Manufacture of routers,

communication products, Wlan

products; sales and after-sales service

$156,125 Investment

in cash (Note 1)

$156,125 (USD 4,800 thousand)

$- $- $156,125


100.00 % $(85)(Note 3) $154,782 $-

Accumulated investment in Mainland China as of December 31, 2010

Investment amounts authorized by Investment Commission, MOEA Upper limit on investment

$1,034,991(USD 32,200 thousand) USD 32,454 thousand $1,565,275

(Note 4)

Note 1 The Company established Sercomm Trading Co. Ltd. in the third country. The Company reinvest Zealous Investments Ltd. (throughSercomm Trading Co. Ltd.) and then invest in Mainland China.

Note 2 The Company established Sercomm Trading Co. Ltd. in the third country. The Company reinvest Smart Trade Inc. (through SercommTrading Co. Ltd.) and then invest in Mainland China.

Note 3 Amount was recognized based on the audited financial statements. Note 4 The Mainland China investment limit is 60 percent of stockholders' equity on December 31, 2010 according to "Examine Standards of

Investments and Technical Cooperation in Mainland of China Area", published by Investment Commission, MOEA.

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