(English Translation of Fina ncial Report Originally Issued ... - … · INVENTEC CORPORATION ....

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(English Translation of Financial Report Originally Issued in Chinese)

INVENTEC CORPORATION

FINANCIAL STATEMENTS

September 30, 2010 AND 2009

AND

INDEPENDENT AUDITORS’ REVIEW REPORT

Address: No. 66, Ho-Kang Street, Taipei, Taiwan, ROC

Telephone: 886-2-2881-0721

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FINANCIAL STATEMENTS

TABLE OF CONTENTS

Contents Page

Cover Page 1

Table of Contents 2

Independent Auditors’ Review Report 3

Balance Sheets 4

Statements of Income 5

Statements of Cash Flows 6

Notes to Financial Statements

1. Organization and Business 7

2. Summary of Significant Accounting Policies 7-13 3. Reasons for and Effects of Accounting Changes 14

4. Summary of Major Accounts 14-28

5. Related-Party Transactions 28-32

6. Pledged Assets 32

7. Significant Commitments and Contingencies 32

8. Significant Catastrophic Losses 32

9. Significant Subsequent Events 32

10. Others 33

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(English Translation of Financial Report Originally Issued in Chinese) Independent Auditors’ Review Report

The Board of Directors of

Inventec Corporation:

We have reviewed the accompanying balance sheets of Inventec Corporation as of September 30, 2010 and 2009, and the related statements of income, and cash flows for the nine months then ended. These financial statements are the responsibility of the management of Inventec Corporation. Our responsibility is to express an opinion on these financial statements based on our reviews.

Except as described in the following paragraph, we conducted our reviews in accordance with the Statements of Auditing Standards No. 36 “Review of Financial Statements” issued by the Auditing Committee of the Accounting Research and Development Foundation of the Republic of China. A review consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards. We did not perform an audit and, accordingly, we do not express an audit opinion.

As described in Note 4.e, as of September 30, 2010 and 2009, long-term equity investments and credit balance of long-term equity investments of Inventec Corporation were $18,313,990 thousand, $16,225,735 thousand, and $0 thousand, $34,235 thousand, respectively. Equity earnings related thereto for the nine months ended September 30, 2010 and 2009, were $1,082,706 thousand and $862,330 thousand, respectively, under the equity method based upon the financial statements prepared by the investee companies which were not reviewed in compliance with the review procedures mentioned in the preceding paragraph.

Based on our review, except as described in the preceding paragraph that the carrying value of equity-accounted investments and the investments net income (loss) were based on unreviewed financial statements of the investees, and that the effects of such adjustments, if any, as might have been made had we applied review procedures on the financial statements of the investees referred to in preceding paragraph, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the related financial accounting standards of the “Business Entity Accounting Act” and of the “Regulation on Handling Business Entity Accounting”, and accounting principles generally accepted in the Republic of China.

As stated in note 3, effective January 1, 2009, the Company adopts the amendment of Statement of Financial Accounting Standards (SFAS) No. 10 “Accounting for Inventories”, resulting in a decrease of $393,893 thousand in net income and $0.14 in earnings per share for the nine months ended September 30, 2009.

KPMG

CPA: Charlotte Lin

Melody Chen

Taipei, Taiwan, ROC October 21, 2010

Notes to Readers

The accompanying financial statements are intended only to present the financial position, results of operation, and cash flows in accordance with the 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 financial statements are those generally accepted and applied in the Republic of China. The auditor’report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chineses language auditors’ report and financial statements, the Chinese version shall prevail.

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2010 2009Cash flows from operating activities:

Net income 3,096,042$ 3,427,298 Adjustment to reconcile net income to net cash provided by (used in) operating activities:

Depreciation 304,536 288,516 Amortization 821,161 401,983 Provision for doubtful accounts 1,494 13,526 Reversal for warranty reserve (152,235) (358,917) Provision for inventory decline - 67,468 Gain on disposal and scrapping of properties (4,773) (3,484) Difference between investment income recognized under the equity method and cash dividends received (787,718) (138,954) Impairment losses on financial assets carried at cost 94,917 102,238 Foreign exchange gain for long-term borrowings (228,000) (54,000)

Changes the assets and liabilities：Changes in assets： Financial assets at fair value through profit or loss - current 7,371 (5,649) Accounts receivable 13,085,255 (6,406,925) Other receivable - related parties 1,211,977 (12,724,258) Inventories (674,691) (496,924) Other current assets (40,432) (157,641) Other financial assets - current (16,474) 130,774 Deferred income tax assets 371,067 167,999 Changes in liabilities： Financial liabilities at fair value through profit or loss-current 65,470 42,785 Accounts payable (9,878,419) 14,773,601 Income tax payable (236,215) (109,314) Accrued expenses (345,067) (254,830) Other payables (381,809) 419,252 Other current liabilities 271,591 138,652 Deferred income tax liabilities 166,585 (99,917) Accrued pension liabilities 29,822 30,028 Deferred credits 1,063 12,501

Net cash provided by (used in) operating activities 6,782,518 (794,192) Cash flows from investing activities:

Increase in financial assets carried at cost (410,000) - Increase in Long-term investments (1,717,874) (477,673) Proceeds from disposal and recovery of long-term investment under the equity method - 39,518 Purchase of property and equipment (271,342) (1,764,846) Proceeds from disposal of properties 5,685 8,533 Decrease in refundable deposits 12,002 2,424 Purchase of intangible assets (176,265) (271,796) Increase in other assets (370,248) (482,175)

Net cash used in investing activities (2,928,042) (2,946,015) Cash flows from financing activities:

Decrease (increase) in short-term borrowings (1,199,711) 10,037,186 Redemption of long-term loans - (3,927,600) Decrease in other liabilities (45,962) (17,142) Cash dividends paid (2,821,426) (2,561,000)

Net cash (used in) provided by financing activities (4,067,099) 3,531,444 Net Decrease in cash and cash equivalents (212,623) (208,763) Cash and cash equivalents, beginning of the period 1,451,761 1,024,235 Cash and cash equivalents, end of the period 1,239,138$ 815,472$ Supplemental disclosures of cash flow information:

Cash paid during the period for interest 103,327$ 88,421 Cash paid during the period for income taxes 556,773$ 492,906

Non-cash investing and financing activitiesCurrent portion of long-term loans payable 7,484,400$ -

Investing activities both concerned with cash and non-cash itemsIncrease in property and equipment 260,876$ 1,911,090 Increase (Decrease) in other payables 10,466 (146,244) Cash paid for property and equipment 271,342$ 1,764,846


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

INVENTEC CORPORATIONSTATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009(All Amounts Expressed in Thousands of New Taiwan Dollars)

For the Nine Months Ended September 30,

Reviewed only, not audited in accordance with generally accepted auditing standards.

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Amount % Amount %

Operating Revenue:

Net sales (Note 5) 257,209,345$ 100 296,326,152 100

Technical service revenue 60,364 - 43,849 -

Net operating revenue 257,269,709 100 296,370,001 100

Operating Cost (Notes 2、4.d and 5) (246,276,918) (96) (286,821,582) (97)

10,992,791 4 9,548,419 3

Unrealized intercompany profits (Note 5) (29,105) - (24,416) -

Realized intercompany profits (Note 5) 28,042 - 11,915 -

Gross margin 10,991,728 4 9,535,918 3

Operating Expenses:

Selling expenses (2,889,495) (1) (1,891,228) (1)

Administrative and general expenses (1,604,830) (1) (1,363,423) -

Research and development expenses (3,194,543) (1) (2,829,153) (1)

(7,688,868) (3) (6,083,804) (2)

Income from Operations 3,302,860 1 3,452,114 1

Non-Operating Income:

Interest income 7,182 - 7,544 -

Investment income accounted for under the equity method (Note 4.e) 1,082,706 - 862,330 -

Other revenues 174,300 - 101,833 -

1,264,188 - 971,707 -

Non-Operating Expenses:

Interest expense (105,542) - (83,015) -

Impairment loss (Note 4.b) (94,917) - (102,238) - Foreign exchange loss (405,834) - (355,687) -

Other expenses (6,503) - (3,909) -

(612,796) - (544,849) -

Income from continuing operations before income tax 3,954,252 1 3,878,972 1

Income tax expense (Note 4.k) (858,210) - (451,674) - Net Income 3,096,042$ 1 3,427,298 1

BeforeIncome Tax

AfterIncome Tax

BeforeIncome Tax

AfterIncome Tax

Earnings per share (Notes 2 and 4.n)Primary earnings per share 1.33$ 1.05 1.38 1.22

Primary earnings per share - retroactively adjusted 1.31$ 1.16

Diluted earnings per share 1.32$ 1.04 1.36 1.21

Diluted earnings per share - retroactively adjusted 1.30$ 1.15

Reviewed only, not audited in accordance with generally accepted auditing standards.


2010 2009


FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

STATEMENTS OF INCOME


(All Amounts Expressed in Thousands of New Taiwan Dollars, Except for share Date)


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ASSETS Amount % Amount %Current Assets:

Cash and cash equivalents (Notes 2 and 4.a) 1,239,138$ 1 815,472 1 Financial assets measured at fair value through profit or loss - current (Notes 2 and 4.b) - - 6,723 - Accounts receivable, net of allowance for doubtful accounts (Notes 2、4.c and 5)

- Non-related parties 34,890,937 31 58,233,872 46 - Related parties 15,197,424 14 10,576,326 8

Other receivable - related parties (Note 5) 30,236,685 27 30,572,528 24 Other financial assets - current 27,408 - 14,283 - Inventories, net of allowance for market value decline and obsolescence (Notes 2 and 4.d) 1,574,722 1 1,187,535 1 Other current assets 444,527 - 567,011 - Deferred tax assets - current (Notes 2 and 4.k) 580,873 1 1,029,271 1

84,191,714 75 103,003,021 81 Funds and Long-term Investment:

Financial assets carried at cost - non-current (Notes 2 and 4.b) 1,404,259 1 1,089,176 1 Long-term investments accounted for under the equity method (Notes 2 and 4.e) 18,313,990 17 16,225,735 13

19,718,249 18 17,314,911 14 Property, Plant, and Equipment, at Cost (Notes 2 and 4.f):

Land 3,182,796 3 3,351,445 3 Building 2,054,675 2 2,340,918 2 Machinery 762,239 1 849,434 1 Transportation equipment 37,790 - 33,304 - Furniture and office facilities 1,897,024 2 1,681,929 1 Other equipment 421,251 - 387,593 -

8,355,775 8 8,644,623 7 Less: Accumulated depreciation (2,612,368) (2) (2,313,811) (2) Construction in progress 89,325 - - - Prepayment for equipment 15,234 - 24,075 -

5,847,966 6 6,354,887 5 Intangible Assets:

Computer software cost (Notes 2 and 4.g) 97,930 - 133,174 - Deferred pension cost (Notes 2 and 4.j) 15,252 - 22,877 -

113,182 - 156,051 - Other Assets:

Refundable deposits (Note 6) 11,077 - 20,379 - Other assets (Note 2) 1,001,062 1 663,743 -

1,012,139 1 684,122 - TOTAL ASSETS 110,883,250$ 100 127,512,992 100

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:

Short-term borrowings (Note 4.h) 8,310,803$ 7 12,194,093 10 Financial liabilities reported at fair value through profit or loss - current (Notes 2 and 4.b) 92,313 - 48,879 - Accounts payable

- Other customers 40,871,100 37 48,279,684 38 - Related parties (Note 5) 7,447,017 7 17,511,459 14

Income tax payable (Notes 2 and 4.k) 336,782 - 382,791 - Accrued expenses (Note 5) 2,034,555 2 1,621,978 1 Other payables (Note 5) 208,344 - 865,616 1

Current portion of long-term loans payable 7,484,400 7 - - Other current liabilities 891,832 1 651,655 - Estimated warranty reserve (Note 2) 1,579,856 1 1,837,198 1

69,257,002 62 83,393,353 65 Long-Term Borrowings (Note 4.i): - - 3,873,600 3 Other Liabilities:

Accrued pension liabilities (Notes 2 and 4.j) 826,398 1 761,410 1 Deferred income tax liabilities - non-current (Notes 2 and 4.k) 80,285 - 42,938 - Deferred credits - intercompany profits (Notes 2 and 5) 74,522 - 70,909 - Other liabilities (Note 2) 89,312 - 34,235 -

1,070,517 1 909,492 1 Total Liabilities 70,327,519 63 88,176,445 69 Stockholders' Equity:

Capital stock, par value $10 per share; authorized 3,000,000,000 shares, 29,624,973 27 28,214,260 22 2,962,497,327 shares issued and outstanding as of September 30, 2010;

2,821,426,026 shares issued and outstanding as of September 30, 2009. (Note 4.1)Capital surplus:

Additional paid-in capital 471,689 - 471,689 - Capital surplus of long-term investments 915,371 1 923,420 1 Others 175 - 175 -

Retained earnings:Legal reserve 6,024,621 5 5,563,347 4 Undistributed earnings (Note 4.m) 3,250,575 3 3,662,505 3

Other stockholders' equityCumulative translation adjustments (Note 2) 688,725 1 896,798 1 Net loss unrecognized as pension cost (420,398) - (395,647) -

Total Stockholders' Equity 40,555,731 37 39,336,547 31 Commitments and Contingencies (Note 7)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 110,883,250$ 100 127,512,992 100


September 30, 2010 September 30, 2009

BALANCE SHEETS

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


September 30, 2010 AND 2009

INVENTEC CORPORATIONReviewed only, not audited in accordance with generally accepted auditing standards.

(English Translation of Financial Report Originally Issued in Chinese) Reviewed only, not audited in accordance with generally accepted auditing standards.

INVENTEC CORPORATION NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 AND 2009 (Amounts Expressed in Thousands, Except for Share Data)

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1. Organization and Business

Inventec Co., Ltd. (the “Company”) was organized in 1975. The Company engages primarily in the developing, manufacturing, processing and trading of computers and related products. The shares of the Company became officially listed and traded on the Taiwan Stock Exchange in November 1996.

Pursuant to the resolution of the board of directors’ meeting on October 14, 2009, the Company merged with the wholly owned subsidiary Inventec Enterprise System Corporation (“IESC”). The record date for this merger was November 30, 2009. The Company was the surviving entity, and IESC was the liquidated company.

IESC was registered at the Ministry of Economic Affairs on December 25, 2003, and engaged primarily in the developing and selling of server appliances, storage equipment, and storage area network development.

As of September 30, 2010 and 2009, the Company had approximately 4,300 and 4,107 employees, respectively.

2. Summary of Significant Accounting Policies The financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language financial statements, the Chinese version shall prevail.

The financial statements were prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, the Business Entity Accounting Act, the Regulation on Handling Business Entity Accounting, and accounting principles generally accepted in the R.O.C. (“R.O.C. GAAP”). The significant accounting policies and their measurement basis were as follows:

a. Use of Estimates

The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.


INVENTEC CORPORATION NOTES TO FINANCIAL STATEMENTS (CONT’D)

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b. Foreign Currency Translation

The Company records its transactions in New Taiwan dollars. Non-derivative foreign currency transactions are recorded at the exchange rates prevailing at the transaction date. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are translated into New Taiwan dollars using the exchange rates on that date, and the resulting unrealized exchange gains or losses from such translations are reflected in the accompanying statements of income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the reporting currency using the foreign exchange rates at the balance sheet date.

If the non-monetary assets or liabilities are measured at fair value through profit or loss, the resulting unrealized exchange gains or losses from such translation are reflected in the accompanying statements of income. If the non-monetary assets or liabilities are measured at fair value through stockholders’ equity, the resulting unrealized exchange gains or losses from such translation are recorded as a separate component of stockholders’ equity.

For long-term equity investments in foreign investees which are accounted for by the equity method, their foreign currency-denominated assets and liabilities are translated at the spot rate on the balance sheet date; the components of their stockholders’ equity are translated at the historical rate except for the beginning balance of retained earnings, which is translated using the spot rate at the beginning of the year. Income statement accounts are translated at the weighted-average rate of the year. Translation differences are accounted for as cumulative translation adjustments to stockholders’ equity.

c. Basis for Classifying Assets and Liabilities as Current or Non-current

Unrestricted cash, cash equivalents, assets held for trading, or other assets that the company will convert to cash or use within in a relatively short period of time － one year or one operating cycle, whichever is longer － are classified as current assets; all other assets are classified as non-current assets. Debts due within one year or one operating cycle, whichever is longer, are classified as current liabilities; all other liabilities are classified as non-current liabilities.



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d. Asset Impairment

The Company adopts Statement of Financial Accounting Standards No. 35 (SFAS 35) “Impairment of Assets”. In accordance with SFAS 35, the Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit other than goodwill) may have been impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. The Company recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount. The Company reverses an impairment loss recognized in prior periods for assets other than goodwill if there is any indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods.

The Company performs an impairment test on the cash-generating unit to which goodwill is allocated on an annual basis and recognizes an impairment loss on the excess of carrying value over the recoverable amount.

e. Cash Equivalents

Cash equivalents are Treasury bills, commercial paper, or banker’s acceptances with maturities within three months. Commercial paper and banker’s acceptances are stated at cost and valued by the specific identification method. At year-end, interest receivable is accrued on unsold investments.

f. Financial Instruments

The Company classifies investments in financial assets as financial assets / liabilities reported at fair value through profit or loss or financial assets carried at cost.

Financial instrument transactions are recorded at the trading date. Financial instruments other than those held for trading are initially recognized at fair value plus transaction costs, while those held for trading are carried at fair value.

After initial recognition, financial instruments are classified, depending on the Company’s intention, as follows:

i. Financial assets or liabilities reported at fair value through profit or loss Financial assets held for trading are those that the Company principally holds for the purpose of short-term profit-taking. Financial derivatives, except for those that meet the criteria for hedge accounting, are classified as financial instruments reported at fair value though profit or loss. These financial instruments are recorded as financial assets or liabilities based on the favorable or unfavorable changes in the market value of these financial instruments.



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ii. Financial assets carried at cost

Financial assets carried at cost are investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured; therefore, the Company carries these assets at their original cost. If there is objective evidence indicating that a financial asset is impaired, a loss is recognized thereon. Any subsequent recovery in fair value is not recognized.

g. Notes and Accounts Receivable, and Allowance for Doubtful Accounts

Allowance for doubtful accounts is based on the age and results of the Company’s evaluation of the collectibility of outstanding receivable balances. Allowance for receivables outstanding beyond 1 year and of customers with financial difficulties is fully provided, net of the likely collectible amount.

h. Inventories

The cost of inventories shall comprise all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Inventories are measured at the lower of cost or net realizable value. The cost of inventories is based on the weighted-average-cost principle. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses at the end of the period. A provision for inventory devaluation and obsolescence is recorded as allowance for loss based on their estimated useful values or salvage values.

i. Long-Term Equity Investments

Long-term equity investments in which the Company, directly or indirectly, owns 20% or more of the investee’s voting shares, or less than 20% of the investee’s voting shares but is able to exercise significant influence over the investee’s operating and financial policies, are accounted for by the equity method.

Unrealized profits/losses on inter-company transactions are eliminated and deferred. Regardless of being from downstream or upstream transactions, unrealized inter-company gains and losses are eliminated in proportion to the shareholding ratio, except for those in downstream transactions, where gain or loss must be fully eliminated when controlling interests exist. Unrealized gains and losses resulting from transactions between investee companies are eliminated in proportion to the shareholding ratio if controlling interests exist. Otherwise the unrealized gains or losses are eliminated according to the shareholding ratio. Gains and losses resulting from transactions involving depreciable assets are recognized ratably over their economic lives, while those from other assets are recognized immediately.

Cost and gains or losses on disposition of long-term equity investments are determined by the weighted-average method. Capital surplus from disposal of such investments is reduced by the percentage sold, with gains and losses included in current earnings.



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The change in the book value of long-term equity investment as a result of the change in percentage of equity ownership due to disproportionate subscription to additional shares issued by the investee company is charged against capital surplus. When the balance of capital surplus arising from long-term equity investments is insufficient, the difference is charged against retained earnings.

The Company prepares quarterly consolidated financial statements, which include the accounts of those investees accounted for under the equity method and in which the Company has controlling interest over their operation.

j. Property, Plant, and Equipment, and Depreciation

Property, plant, and equipment are stated at cost. Interest expense incurred up to the time when the asset is ready for its intended use is capitalized as part of the acquisition cost. Major additions, improvements, and replacements are capitalized.

Depreciation is applied by the straight-line method based on estimated economic lives. Assets still in use after full depreciation may continue to be depreciated over their estimated economic lives. Economic lives of major property and equipment are as follows:

Buildings 10 to 50 years Machinery 2 to 11 years Transportation equipment 3 to 6 years Furniture and office facilities 2 to 18 years Power equipment 2 to 16 years Renovation and leasehold improvements 2 to 20 years Miscellaneous equipment 2 to 16 years Gain and loss on disposal of property are included in current earnings. Non-operating property is listed as other assets. Property with no operating value is reclassified as other assets and carried at the lower of book or net realizable value. If the net realizable value is equal to zero, cost and accumulated depreciation of the assets shall offset each other, and any difference would be recognized as current loss.

k. Intangible Assets

The Company adopts SFAS No. 37 “Intangible Assets”. In accordance with SFAS No. 37, an intangible asset should be measured at its fair value and shall be measured initially at cost. After initial recognition, an intangible asset shall be measured at its cost plus revaluation increment revalued in accordance with the laws, less any accumulated amortization and any accumulated impairment losses.

The residual value, the amortization period, and the amortization method for an intangible asset with a finite useful life shall be reviewed at least at each fiscal year-end. Any changes shall be accounted for as changes in accounting estimates.



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l. Pension Plan

For the defined benefit pension plan, the Company adopts SFAS No. 18 and secures an actuarial report on pension liabilities with December 31 as the measurement date. The Company recognizes a minimum pension liability equal to the amount by which the actuarial present value of the accumulated benefit obligation exceeds the fair value of the retirement plan’s assets. Effective January 1, 1996, the net periodic pension cost should include current year service cost, transitional assets, prior-year service cost, and pension income/loss amortized over the employees’ remaining service period (15 years). In accordance with the Labor Standards Law, the Company contributes 2% of employees’ monthly wages to Bank of Taiwan (originally the Central Trust of China, which combined with Bank of Taiwan).

Effective July 1, 2005, the Company adopts the “Labor Pension Act” (the “Act”), which prescribes a defined contribution pension scheme for those employees who were covered by the Labor Standards Law prior to the enforcement of this Act but chose to be subject to the pension mechanism under this Act and for those employees who are employed after the enforcement of this Act. In accordance with this Act, the Company contributes monthly to the Labor Pension Fund at the rate of 6% of the employees’ monthly wages. These contributions are recognized as pension expense for the current period.

m. Warranty Reserve

A warranty reserve is provided for products sold with a warranty based on estimated warranty service cost and in consideration of past experience.

n. Revenue Recognition

Revenue is recognized when title to the product and the risks and rewards of ownership are transferred to the customer; otherwise revenue recognition is deferred until these criteria are met. The related cost and expenses are recognized at the same period when revenue is recognized. The expenses are recognized on an accrual basis.

o. Classification of Capital and Operating Expenditures

Expenditures that benefit the Company in future years are capitalized, while immaterial expenditures or those with no future benefits are treated as current expense or loss.

p. Commitments and Contingencies

If loss from a commitment or contingency is deemed highly likely and the amount can be reasonably estimated, then such loss is immediately recognized. Otherwise only the nature of such loss is disclosed in the notes to the financial statements.



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q. Income Tax

The Company adopts SFAS No. 22 “Income Taxes” in the accounting for inter-period and intra-period income tax allocation. The tax effects of deductible temporary differences, loss carry forwards, and unused investment tax credits are treated as deferred tax assets, whereas those of taxable temporary differences are accounted for as deferred tax liabilities.

Deferred income tax assets or liabilities are classified as current and non-current in accordance with the nature of the related assets and liabilities or the length of time to their reversal. A valuation allowance is then provided for deferred tax assets by assessing whether it is more likely than not that such assets will not be realized. Deferred tax assets and liabilities that result from the recognition of unrealized profit and changes in capital surplus, which are reflected in stockholders’ equity instead of current profit and loss, are disclosed in net amount. Adjustments to prior years’ income taxes are reflected as current income taxes.

The 10% surtax on undistributed earnings is reported as current expense on the date of the annual stockholders’ meeting declaring distribution of earnings.

r. Earnings per Share (“EPS”)

Earnings per share of common stock is determined based on net income available to common stockholders divided by the weighted-average number of outstanding shares of common stock. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming all potentially dilutive common shares are converted and outstanding. The employee bonus appropriated after 1 January, 2008 are potentially dilutive common shares. If a dilutive effect does not exist, only basic EPS is disclosed; otherwise, diluted EPS is disclosed in addition to the basic EPS. The effect on earnings per share from an increase in capital stock through the distribution of stock dividends from unappropriated earnings, capital surplus, or employee stock bonuses approved in the annual stockholders’ meetings held before and in 2008 is computed retroactively.

s. Employee Bonuses and Remuneration to Directors and Supervisors

Appropriations for employee bonuses and remuneration to directors and supervisors appropriated are accounted for Interpretation (96) 052 issued by the ROC Accounting Research and Development Foundation. According to this Interpretation, the Company estimates the amount of employee bonuses and remuneration to directors and supervisors and recognizes it as expenses in the year when services are rendered. The differences between the amounts approved in the shareholders’ meeting and those recognized in the financial statements, if any, are accounted for as changes in accounting estimates and recognized in profit or loss.



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3. Reasons for and Effect of Accounting Changes

Effective January 1, 2009, the Company adopts Republic of China Statement of Financial Accounting Standards (SFAS) No. 10 “Inventories”. In accordance with SFAS 10, the allocation of fixed production overheads to the finished goods and work in progress is based on the normal capacity of the production facilities. Inventories are measured individually at the lower of cost or net realizable value. The effect of the adoption of this new accounting principle on net income and earnings per share for the nine months ended September 30, 2009, was as follows:

Nature of change inaccounting principle

Affectedaccount

Decrease innet income

(after income tax)Decreasein EPS

Inventories are measured at the lower of cost or net realizable value item by item (the Company)

Cost of goodssold

59,571$ 0.02

Inventories are measured at the lower of cost or net realizable value item by item (the subsidiaries)

Investment incomeaccounted for underthe equity method

322,459 0.12

Allocation of fixed production overheads is based on the normal capacity (the subsidiaries)

" 11,863 -

Total 393,893$ 0.14

4. Summary of Major Accounts

a. Cash and Cash Equivalents

September 30, 2010 September 30, 2009Cash on hand 604$ 683Checking accounts 20,868 723 Demand deposits 4,569 1,243 Foreign currency deposits 414,836 23,993 Time deposits 736,790 720,690 Foreign currency time deposits 61,471 68,140 Total 1,239,138$ 815,472



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b. Financial Instruments Financial instruments reported at fair value through profit or loss:

ItemsDerivatives -Financial Assets - Current

BookValue

NominalPrincipal

BookValue

NominalPrincipal

Currency swap -GBP to USD -$ -GBP 6,448 5,000GBP Currency swap -EUR to USD - -EUR 275 10,000EUR

-$ 6,723

Derivatives -Financial Liabilities - CurrentCurrency swap - USD to NTD 87,527$ 174,000USD 47,735 93,000USD Currency swap - GBP to USD 4,786 5,000GBP - -GBP Currency swap - USD to JPY - -USD 1,144 2,000USD

92,313$ 48,879


The financial instruments shown above are presented at net value in the financial statements and recorded as “financial assets and liabilities reported at fair value through profit or loss”.

The income and loss on financial instruments reported at fair value were $92,313 and $42,156 for the nine months ended September 30, 2010 and 2009, respectively.

Financial Assets Carried atCost - Non-Current September 30, 2010 September 30, 2009Common StockInventec Tomorrow Studio Corp. 4,786$ 4,786WK Technology Fund IV 32,000 32,000 Asia Pacific Telecom Corp. - -Global Strategic Investments Fund 100,000 100,000 Taiyi Print Enterprise Co., Ltd. 48,000 48,000 WIN Semiconductor Corp. 290,000 290,000 Arima Communications Corp. 410,000 - Subtotal 884,786 474,786 Preferred StockE28 Limited 477,124 552,882 NetXen, Inc. - - CipherMax, Inc. - - Rasilient Systems, Inc. 32,397 32,397 Accel Semiconductor Corp. 9,952 29,111 Subtotal 519,473 614,390 Total 1,404,259$ 1,089,176

In August 2010, the Company invested in Arima Communications Corp. through private placement, portion of the Company’s equity investments are restricted for sale and reflected as financial assets carried at cost - noncurrent.



- 16 -

All of the abovementioned investments in common stock and preferred stock which do not have quoted market prices in an active market and whose fair value cannot be reliably measured were reflected as non-current financial assets carried at cost. Some investments have evidence of impairment, so the value of those financial assets – non-current was calculated by estimation of the recovery amount. The above investments have been evaluated and recognized for impairment loss. For the nine months ended September 30, 2010 and 2009, impairment losses were $94,917 and $102,238, respectively.

c. Accounts Receivable - Non-related Parties

September 30, 2010 September 30, 2009Accounts receivable - other customers 34,898,533$ 58,302,646 Less: Allowance for doubtful accounts (7,596) (68,774) Net 34,890,937$ 58,233,872

As of September 30, 2010, the Company had sold accounts receivable to financial institutions. These transactions conformed to the criteria for derecognizing. The details of accounts receivable sold were as follows:

Bank AmountSold

FactoringAmount

CreditAdvanced

InterestRate Collateral Important

ClausesAmount

DerecognizedMega 6,228,633$ USD 200,000 USD 199,732 0.606%~ None 6,228,633 InternationalCommercialBank

0.75%

September 30, 2010

Non-recourse.The buyer bearsthe credit risk, andthe seller bearsnon-credit risks.

d. Inventory

September 30, 2010 September 30, 2009Finished goods 569,567$ 291,946 Less: Allowance for market value decline (12,258) (36,660) and obsolescenceSubtatol 557,309 255,286 Work in process 432,265 416,435 Less: Allowance for market value decline (12,846) (20,095) and obsolescenceSubtatol 419,419 396,340 Raw materials 644,562 615,574 Less: Allowance for market value decline (46,568) (79,665) and obsolescenceSubtatol 597,994 535,909 Total 1,574,722$ 1,187,535



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As of September 30, 2010 and 2009, the details of cost of goods sold were as follows:

2010 2009Cost of goods sold 246,254,824$ 286,751,356 Production overhead allocated to the difference between normal capacity and actual production 22,094 2,758 Loss on inventory valuation and obsolescence - 67,468

246,276,918$ 286,821,582


e. Long-Term Equity Investments

Equity Book Original Equity Book Original

Name of Investee Company Holding Value Investment Holding Value Investment

Inventec Besta Co., Ltd. 37.53% 1,100,768$ 520,654 37.53% 1,116,502 520,654

Inventec Corporation (Hong Kong) Ltd. 100.00% 351,692 167,162 100.00% 351,478 167,162

Inventec Corporation (Scotland) Ltd. -% - - 100.00% 4,722 -

Inventec Holding (North America) Corp. 100.00% 860,623 159,003 100.00% 832,134 159,003

Inventec Multimedia and Telecom Corp. 48.67% 328,277 936,576 48.67% 685,949 936,576

Inventec Appliances Corp. 43.79% 5,186,444 2,171,923 43.79% 5,249,978 2,171,923

Inventec (Cayman) Corp. 100.00% 9,044,990 8,022,506 100.00% 7,048,720 6,642,203

Inventec Enterprise System Corp. -% - - 100.00% 653,223 200,000

Inventec (Czech) S.R.O 100.00% 91,551 85,921 100.00% 83,029 85,921

Inventec Development Japan Corporation(originally named Kohjinsha Co., Ltd.)

54.58% 122,028 466,572 -% - -

Inventec Investments Co., Ltd. 100.00% 1,094,606 1,000,000 100.00% 100,000 100,000

Inventec Tooling & Mold Co., Ltd. 100.00% 76,636 100,000 100.00% 100,000 100,000

Inventec Technology (Singapore) Pte. Ltd. 100.00% 56,375 32,275 -% - -

Total 18,313,990$ 16,225,735




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For the nine months ended September 30, 2010 and 2009, investment incomes and losses accounted for under the equity method from investee companies, in which the Company has controlling power or significant influence with, were as follows:

Name of Investee Company 2010 2009Based on the financial statements prepared by investee companies: Inventec Besta Co. Ltd. (3,849)$ 26,389 Inventec Appliances Corp. 177,950 100,256 Inventec Corporation (Hong Kong) Ltd. 6,818 8,456 Inventec Corporation (Scotland) Ltd. - (450) Inventec Holding (North America) Corp. 28,745 30,492 Inventec Multimedia and Telecom Corp. (110,697) 15,405 Inventec (Cayman) Corp. 914,941 645,720 Inventec Enterprise System Corp. - 221,431 Inventec (Czech) S.R.O 21,127 20,091 Inventec Development Japan Corporation (originally named Kohjinsha Co., Ltd.) (55,758) (205,460) Inventec Investments Co., Ltd. 94,888 - Inventec Tooling & Mold Co., Ltd. (22,899) - Inventec Technology (Singapore) Pte. Ltd. 31,440 - Total 1,082,706$ 862,330


According to the resolution of the board of directors’ meeting on October 14, 2009, the Company merged with the wholly owned subsidiary Inventec Enterprise System Corp. The Company was the surviving entity, and Inventec Enterprise System Corp. was the liquidated company.

As of September 30, 2009, the Company’s investment in Inventec Development Japan Corporation (Originally named Kohjinsha Co., Ltd.) was a credit balance of long-term equity investment of $34,235, recognized as other liabilities.

For the nine months ended September 30, 2010 and 2009, the Company increased the investments in Inventec Development Japan Corporation (originally named Kohjinsha Co., Ltd.) by JPY 950,100 and JPY 230,000, respectively, and its equity holdings were 54.58% and 61.69%, respectively.

In January and September 2010, the investee Inventec Development Japan Corporation (Originally named Kohjinsha Co., Ltd.) decreased its capital to make up a deficit with reduction amounts of JPY 195,000 and JPY 1,614,800, respectively.



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According to the resolution of the board of directors’ meeting on February 26, 2008, the wholly owned subsidiary Inventec Corporation (Scotland) Ltd. was liquidated. For the year ended December 31, 2009, the subsidiary remitted the earnings generated from all previous years, and the liquidation procedure was completed in 2010 .

The Company has controlling power in Inventec Corporation (Hong Kong) Ltd., Inventec Holding (North America) Corp., Inventec (Cayman) Corp., Inventec Multimedia and Telecom Corp., Inventec Development Japan Corporation (originally named Kohjinsha Co., Ltd.), Inventec (Czech) S.R.O, Inventec Investments Co., Ltd., Inventec Tooling & Mold Co., Ltd. and Inventec Technology (Singapore) Pte. Ltd. Therefore, the above investees were included in the consolidated financial statements.

f. Property, Plant, and Equipment

The board of directors in April 2009 resolved to purchase land and buildings located in Taoyuan County for business expansion. The land is 47,053 square meters, and the floor space is 74,689 square meters. The total cost of the land and buildings was $1,769,200 (including tax). The transaction was transferred to fixed assets in July 2009.

g. Intangible Assets

2010 2009Original software cost:Beginning balance, 1/1 143,379$ 108,078

Increase in this period 176,265 271,796 Amortization in this period (221,714) (246,700)

Ending balance, 09/30 97,930$ 133,174


For the nine months ended September 30, 2010 and 2009, the Company recognized the amortization of intangible assets as follows: operating expenses were $86,747 and $64,790, respectively, and operating costs were $134,967 and $181,910, respectively.

h. Short-Term Borrowings

Types of DebtSeptember 30, 2010Credit loan 8,310,803$ 0.59%~0.70% 26,849,556

September 30, 2009Credit loan 12,194,093$ 0.53%~1.42% 25,109,906

Balance Rate Loan Allowance



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i. Long-Term Borrowings

Types ofDebt

September30, 2010

Non-CurrentPortion

CurrentPortion Total Due Date

LoanAllowance

Credit loan $ - 7,484,400 $ 7,484,400 July 23,

2011 USD 240,000

September30, 2009

Credit loan $ 3,873,600 - $ 3,873,600 July 23,

2011 USD 240,000

The Company had a syndicated facility agreement with Hua Nan Bank, etc. The interest rates on the abovementioned long-term borrowings were 0.84% and 0.81% as of September 30, 2010 and 2009, respectively. According to the agreement, during the loan repayment periods, the Company must comply with certain financial covenants based on the audited consolidated financial statements on the balance sheet date (June 30 and December 31).

j. Pension Plan

For the nine months ended September 30, 2010 and 2009, actuarial assumptions used in pension cost calculation were as follows:

September 30, 2010 September 30, 2009Ending balance of pension fund $ 532,308 493,953Current pension costs： Defined benefit pension plan 65,685 63,787 Defined contribution pension plan 116,772 101,373Ending balance of pension fund payable(including accrued expenses were recognizedto $46,106 and $23,058, respectively)

872,504 784,468

k. Income Tax

(i) As of September 30, 2010 and 2009, deferred income tax assets and liabilities were as follows:

September 30, 2010 September 30, 20091) Total deferred income tax assets $ 1,351,241 1,913,407

(452,790) (384,074) (397,863) (543,000)

2) Total deferred income tax liabilities3) Allowance for deferred income tax



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Amount Amount- Recognition of unrealized foreign exchange loss: deductible

605,051$ 102,859 546,341 109,268

- Recognition of inventory market decline and obsolescence: deductible

71,672 12,184 136,420 27,284

- Recognition tax incentives of loss on overseas investments: taxable

(333,581) (56,709) (360,451) (72,090)

- Recognition of gain on investments: taxable

(1,363,698) (231,829) (349,054) (69,811)

- Recognition of unrealized intercompany loss : deductible

47,093 8,006 42,440 8,488

- Cumulative translation adjustment to long-term investments: taxable

(959,048) (163,038) (1,210,863) (242,173)

- Recognition of unrealized market decline in long-term investments stated at cost: deductible

1,344,437 228,554 1,249,520 249,904

- Recognition of warranty expenses: deductible

1,579,856 268,576 1,837,198 367,440

- Recognition of pension expense: deductible

476,231 80,959 413,719 82,744

- Recognition of donation expense: deductible

20,000 3,400 - -

- Recognition of employee benefit: deductible

800 136 - -

- Unused balance of investment tax credits

- 645,354 - 1,068,279


4) Temporary differencesIncome Tax

EffectsIncome Tax

Effects

September 30, 2010 September 30, 2009(ii)　Deferred income tax assets - current 871,861$ 1,572,271 (ii)　Deferred income tax liabilities - current (1,214) - (ii)　Net deferred income tax assets - current 870,647 1,572,271 　Allowance for deferred income tax assets(ii)　 - current (289,774) (543,000) (ii)　Net 580,873$ 1,029,271

(iii) Deferred income tax assets - non-current 479,380$ 341,136 (451,576) (384,074)

(ii)　Net deferred income tax assets (liabilities)(ii)　 - non-current 27,804 (42,938) 　Allowance for deferred income tax assets(ii)　 - non-current (108,089) - (ii)　Net (80,285)$ (42,938)

(ii)　Deferred income tax liabilities - non-current



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(iv) According to the revised tax law issued on May 27, 2009, the statutory income tax rate has been reduced from 25% to 20% commencing from the year 2010. However, according to the revised tax law issued on June 15, 2010 , the statutory income tax rate has been modified to 17% commencing from the year 2010. As of September 30, 2010 and 2009, the Company is subject to the statutory income tax at the rate of 17% and 25%, respectively, and is covered by the Basic Income Tax Act. The income tax calculated on pretax financial income at a statutory income tax rate was reconciled with the income tax expense as reported in the accompanying financial statement for the nine months ended, September 30, 2010 and 2009 as follows:

2010 2009Income tax calculated per statutory tax rate 679,680$ 969,733Permanent differences (47,760) (109,419) Temporary differences (134,439) (90,138) Tax-exempt income - (3,004) Investment tax credits (205,045) (383,586) Current income tax payable 292,436 383,586 Income tax separately levied - 13 Adjustments - accrual of prior years' income tax (16,804) (7) Adjustments - accrual of prior years' deferred income tax 181,822 - Investment tax credits 205,045 (267,471) Allowance for deferred income tax - 141,500 Income tax effect of temporary differences:

Recognition of unrealized foreign currency exchange gain and loss (87,581) 42,229 Provision for and reversal of inventory market decline and obsolescence, net - (13,494) Provision for and reversal of loss on overseas investments, net (4,568) (54,442) Recognition of loss on investments 219,710 96,597 Recognition of unrealized intercompany gains or loss, net (176) (21,748) Recognition of unrealized market decline in long-term investment stated at cost

(16,136) (19,161)

Provision for and reversal of gains or loss on warranty reserve, net 25,880 71,783 Recognition of pension expense (5,070) (6,005)Recognition of others 2,380 3,500Effect resulting from the change in statutory tax rate 61,272 94,794

Income tax expense 858,210$ 451,674

For the Nine Months Ended September



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(v) The Company’s tax returns through 2005 and 2007 have been examined by the Tax Authority.

(vi) According to Article 6, Section 3 of the Statute for Upgrading Industries, unused investment tax credits which may be applied to offset income tax in the future are as follows:

Year of occurrence Unused investment

tax credits Year of expiration For the year ended December 31, 2009 $ 481,861 2013

Because the Company merged with Inventec Enterprise System Corp., according to the Business Mergers and Acquisitions Act, unused investment tax credits resulting from the merger which may be applied to offset income tax are as follows:

Investment tax credits

Inventec Enterprise System Corp. $ 163,493

(vii) Stockholders’ imputation tax credit account and tax rate:

September 30,2010

September 30,2009

Stockholders' imputation tax credit account 348$ 8,608

2010 2009Expected or actual deductible tax ratio 10.74% 13.35%

Undistributed earnings:September 30,

2010September 30,

2009Accumulated prior to 1997 154,534$ 162,140Accumulated after 1998 3,096,041 3,500,365Total $ 3,250,575 3,662,505

l. Capital Increase

On June 15, 2010, pursuant to resolutions of the annual stockholders’ meeting, the Company capitalized earnings of $1,410,713.Total capital after the increase was $29,624,973, with July 21, 2010, as the record date. The Company completed the relevant registration.

On June 16, 2009, pursuant to resolutions of the annual stockholders’ meeting, the Company capitalized earnings of $2,561,000 and employee bonuses of $67,226, for a total of $2,604,260 of common stocks (par value $10 per share) with 260,426,000 shares issued (including employee bonus of 4,326,000 shares). Total capital after the increase was $28,214,260, with July 21, 2009 as the record date. The Company completed the relevant registration.



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m. Earnings Distribution and Dividend Policy The Company’s articles of incorporation require that after-tax earnings shall first be offset against any deficit, and 10% of the rest be set aside as legal reserve. The appropriation for legal reserve is discontinued when the balance of the legal reserve equals the total authorized capital. Special reserve may be appropriated for operations or to meet regulations. Of the remainder, 3% and 3% will be distributed as employee bonus and remuneration of directors and supervisors, respectively. The remaining earnings, if any, may be appropriated according to the proposal presented to the annual stockholders’ meeting by the board of directors. If the employee bonus is distributed in the form of stock, the employees qualifying for such distribution may include the employees of subsidiaries of the Company who meet certain specific requirements. Such qualified employees and the distribution ratio shall be decided by the board of directors. In consideration of the Company’s long-term operating plan, funding needs, and satisfying shareholder demand for cash flow, the Company distributes cash dividends of at least 10% of the aggregate of cash dividends and stock dividends, if the distributions include cash dividend.

On June 15, 2010, and June 16, 2009, the Company’s shareholders approved a resolution authorizing the Company to distribute employee bonuses and remuneration of directors and supervisors from distributable earnings for 2009 and 2008 as follows:

2009 2008Common stock dividends per share (dollars) -Cash 1.0$ 1.0$ -Stock (at par) 0.5 1.0 Total 1.5$ 2.0$

Employee bonus - stock -$ 67,226 Employee bonus - cash 290,603 268,906 Remuneration of directors and supervisors 83,029 96,038 Total 373,632$ 432,170

The difference between the actual distribution for employee bonus and directors’ and supervisors’ remuneration of 2009 approved by the stockholders’ meetings and the amount estimated in the financial statements of 2009 was $41,515. The reason for the difference was that directors’ and supervisors’ remuneration was estimated at 3% originally but the distributed amount was 2%. The difference was recognized as an adjustment of net income in 2010.

The difference between the actual distribution for employee bonus and directors’ and supervisors’ remuneration of 2008 approved by the stockholders’ meetings and the amount estimated in the financial statements of 2008 was $48,019. The reason for the difference was that directors’ and supervisors’ remuneration was estimated at 3% originally but the distributed amount was 2%. The difference was recognized as an adjustment of net income in 2009.



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Pursuant to a ruling by the Financial Supervisory Commission, Executive Yuan, the Company estimates the amount of employee bonuses and directors’ and supervisors’ remuneration according to the Company’s articles of incorporation. As of September 30, 2010, the estimated employee bonus and directors’ and supervisors’ remuneration amounted to $197,814 and $84,777, respectively. The number of shares will be calculated as the quotient of the total amount of grant and closing share price one day prior to the shareholders’ meeting. Differences between the amount approved in the shareholders’ meeting and recognized in the financial statements, if any, are accounted for as changes in accounting estimates and recognized as profit or loss.

The information on the distribution of the Company’s earnings will be announced through the Market Observation Post System on the internet.

n. Earnings per Share

Basic EPS are calculated by dividing net income by the weighted-average shares outstanding during the period. The Company’s net income and weighted-average common shares outstanding (thousands) were computed as follows:

Before Tax After Tax Before Tax After TaxNet Income 3,954,252$ 3,096,042 3,878,972 3,427,298

Issuable shares 2,821,426 2,821,426 2,561,000 2,561,000 Issued shares (shareholders) 141,071 141,071 256,100 256,100Issued shares (employees) - - 1,682 1,682Weighted-average common shares outstanding 2,962,497 2,962,497 2,818,782 2,818,782 Dilutive potential common shares - employee stock (Note)

25,000 25,000 24,827 24,827

Diluted shares - weighted-average common shares outstanding 2,987,497 2,987,497 2,843,609 2,843,609

Primary earnings per share - weighted-average common shares outstanding - retroactively adjusted 2,962,497 2,962,497 Diluted earnings per share - weighted-average common shares outstanding - retroactively adjusted 2,987,324 2,987,324 Primary earnings per share 1.33 1.05 1.38 1.22Primary earnings per share - retroactively adjusted 1.31 1.16Diluted earnings per share 1.32 1.04 1.36 1.21Diluted earnings per share - retroactively adjusted 1.30 1.15

For the Nine Months Ended September 30,2010 2009

Note: Estimated employee bonuses are deemed to have been issued in stock when calculating diluted earnings per share.



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o. Financial Instruments

1) Fair value of financial instruments

Financial Assets Book Value Fair Value Book Value Fair ValueFinancial assets measured at fair value through profit or loss - current

-$ - 6,723 6,723

Financial assets carried at cost - non-current

1,404,259 - 1,089,176 -

Book value equal to fair value 81,602,669 81,602,669 100,232,860 100,232,860 Total 83,006,928$ 81,602,669 101,328,759 100,239,583

Financial LiabilitiesFinancial liabilities measured at fair value through profit or loss - current

92,313$ 92,313 48,879 48,879

Book value equal to fair value 66,356,219 66,356,219 80,472,830 80,472,830 Long-term borrowings - - 3,873,600 3,873,600 Total 66,448,532$ 66,448,532 84,395,309 84,395,309


2) Methods and assumptions used by the Company to evaluate the fair value of financial instruments are as follows:

a) The fair value of short-term financial instruments is determined by their face value on the balance sheet date. As these instruments have a short-term maturity period, the face value serves as a reasonable basis for establishing the fair value. This method is applied to cash and cash equivalents, accounts receivable, other receivables, other current financial assets, short-term borrowings, accounts payable, other payables, accrued expenses, etc. (Both tax refund receivable and income tax payable are legal responsibility and not contract obligation, so they do not belong to financial assets and financial liabilities.)

b) With respect to financial instruments such as refundable deposits that are an indispensable guarantee for the ongoing operation of the Company, it is impossible to estimate the time necessary to accomplish the exchange of assets. Consequently, the fair market value of such financial instruments cannot be established. Therefore, the book value is used as the fair market value.

c) The fair value of financial instruments which are carried at fair value through profit or loss and traded in active markets is based on quoted market prices. If the financial instruments are not traded in an active market, then the fair value is determined by using valuation techniques under which the estimates and assumptions used are consistent with prevailing market conditions.



- 27 -

d) Because financial assets carried at cost do not have a fair market value that can be measured, the fair market value of such financial assets carried at cost cannot be established.

e) The fair market value of long-term debt is determined by the present value of future cash flow. As the present value derived by using a floating interest rate in discounting future cash flow is close to the book value, the book value is adopted as the fair market value.

3) The fair values of financial assets and liabilities reported at fair value through profit or loss recognized by the Company under valuation techniques were $0 and $92,313, respectively, as of September 30, 2010, and $6,723 and $48,879, respectively, as of September 30, 2009.

4) Loss and gain recognized from changes in the fair values of financial assets and liabilities which were estimated using valuation techniques amounted to gains of $32,043 and $10,075 for the nine months ended September 30, 2010 and 2009, respectively.

5) The Company measured the fair market value of all financial instruments based on the method mentioned above.

6) Information on financial risk

a) Market risk

The derivative financial instruments are influenced by foreign exchange fluctuations. However, since the terms of the financial instrument contracts are relatively short, market risk is considered insignificant.

b) Credit risk

Implicit credit risk of the Company is inherent in its cash, cash equivalents, and accounts receivable. The cash is deposited in different financial institutions. The Company manages the credit risk exposure with each of these financial institutions and believes that cash and cash equivalents do not have a significant credit risk concentration.

The major customers of the Company are centralized in the high-tech computer industry. To minimize credit risk, the Company periodically evaluates the Company’s financial positions and the possibility of collecting trade receivables. As of September 30, 2010 and 2009, 64% and 79%, respectively, of accounts receivable were from two major customers. Thus, credit risk is significantly centralized.

c) Liquidity risk

The capital and working funds of the Company are sufficient to meet its entire contractual obligation; therefore, no liquidity risk exists.



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d) Cash flow and interest rate risk

The Company’s interest rate risk arises from short-term loans bearing floating interest rates. Future cash flow will be affected by a change in market interest rate. If the market rate were to increase 1%, the Company’s cash flow would increase by $118,464.

5. Related-Party Transactions

(a) Name of Related Party and Relationship with the Company

Name of Related Party Relationship with the Company Inventec Besta Co., Ltd. An investee company accounted for under the

equity method Inventec Appliances Corp. 〃 Inventec Multimedia and Telecom Corp. A subsidiary Inventec (Scotland) Corporation Ltd. A subsidiary (Liquidated on May 1, 2010) Inventec Corporation (Hong Kong) Ltd. A subsidiary Inventec Holding (North America) Corp. 〃 Inventec (Cayman) Corp. 〃 Inventec Enterprise System Corp. 〃 (Liquidated by the merger with the Company on

November 30, 2009) Inventec (Czech) S.R.O A subsidiary Inventec Development Japan Corporation (Originally named Kohjinsha Co., Ltd.)

〃

Inventec Investments Co., Ltd. 〃 Inventec Tooling & Mold Co., Ltd. 〃 Inventec Technology (Singapore) Ptd. Ltd. 〃 Inventec (Beijing) Electronics Technology

Co., Ltd. A subsidiary of Inventec Corporation (Hong

Kong) Ltd. Inventec (Tianjin) Electronics Co., Ltd. 〃 Inventec (Shanghai) Corp. A subsidiary of Inventec Corporation

(Cayman) Corp. Inventec (Pudong) Corp. 〃 Inventec (Pudong) Technology Corp. 〃 Inventec (Shanghai) Service Co., Ltd. 〃 Inventec Hi-Tech Corp. 〃 Inventec Group Social Welfare & Charity

Foundation Over one-third of total amount of fund

donated by the Company



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(b) Significant Transactions with Related Parties

(i) Sales

Name of Related Party Amount% of Net

Sales Amount% of Net

SalesInventec (Czech) S.R.O 19,248,098$ 8% 13,333,966 5% Inventec Holding (North America)Corp.

26,131,688 10% 15,496,862 5%

Others 285,378 - 347,879 - Total 45,665,164$ 18% 29,178,707 10%


The Company sold work-in-process to Inventec Holding (North America) Corp. and Inventec (Czech) S.R.O prices of work-in-process are negotiated. Since those companies are overseas after-sales service and assembly centers, there are no other customers to compare prices. The collection period is within two to three months.

For the nine months ended September 30, 2010 and 2009, unrealized gross profits on sales to related parties were $29,105 and $24,416, respectively.

(ii) Purchases

For the nine months ended September 30, 2010 and 2009, purchases of materials and goods were as follows:

Name of Related Party Amount% of NetPurchases Amount

% of NetPurchases

Inventec Corporation (Hong Kong) Ltd. 219,903,873$ 89% 272,292,431 95% Others 99,661 - 10,755 - Total 220,003,534$ 89% 272,303,186 95%


The Company purchased finished goods and work-in-process from Inventec Corporation (Hong Kong) Ltd. at an agreed-upon price. The payment term is approximately two to three months.

The Company purchased materials for product maintenance from Inventec Holding (North America) Corp. and Inventec (Czech) S.R.O at an agreed-upon price. The payment term is within two to three months.



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(iii) Warranty services and product maintenance

For the nine months ended September 30, 2010 and 2009, payments to related parties for service and maintenance expenses, after netting product warranty reserve, were as follows:

Name of Related Party2010 2009

Inventec Holding (North America) Corp. 163,515$ 237,407 Inventec Corporation (Hong Kong) Ltd. 122,345 217,366 Inventec (Czech) S.R.O 76,558 76,698 Total 362,418$ 531,471


(iv) Others

1) In 1999, the Company sold property, deferred assets, assets stated under expense, and trademarks to Inventec Besta Co., Ltd., resulting in a gain on property disposal of $51,712 and other revenue of $40,453. As of September 30, 2010 and 2009, unrealized gains on sale of property were $16,777 and $16,813, respectively, with unrealized other revenues of $1,211 and $1,211, respectively.

2) In 2000, the Company invested in Inventec Appliances Corp. with property, deferred assets, and assets stated under expense, resulting in a gain on asset disposal of $103,713 and other revenue of $31,693. The Company sold property, deferred assets, and assets stated under expense, resulting in a gain on property disposal of $5,829 and other revenue of $6,427. As of September 30, 2010 and 2009, unrealized gains on sale of property were $27,429 and $28,469, respectively.

3) For the nine months ended September 30, 2009, development fee paid to Inventec Enterprise System Corp. was $290,477.

4) For the nine months ended September 30, 2010 and 2009, general and administrative expenses and SAP expenses collected from Inventec Appliances Corp., Inventec Multimedia and Telecom Corp., Inventec Besta Co., Ltd., Inventec Enterprise System Corp., Inventec Corporation (Hong Kong) Ltd., Inventec Holding (North America) Corp., Inventec (Czech) S.R.O, and Inventec Technology (Singapore) Pte. Ltd. were $35,508 and $39,436, respectively, reflected as other revenues.

5) For the nine months ended September 30 , 2010 and 2009 , sales of property to and purchases of property from Inventec (Czech) S.R.O, Inventec Holding (North America) Corp., Inventec Technology (Singapore) Pte. Ltd., and Inventec Corporation (Hong Kong) Ltd. were $11,401、$8,172 and $19,161、$0, respectively.

6) For the nine months ended September 30, 2010 and 2009, the purchases of software for product development from Inventec Corporation (Hong Kong) Ltd., reflected as deferred expense, were $133,517 and $179,004, respectively. Prices were negotiated with payment terms of two to three months.



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(v) Accounts receivable (payable)

Amount % Amount %Accounts Receivable:Inventec (Czech) S.R.O 6,102,284$ 12% 4,282,202 6% Inventec Holding (North America) Corp. 8,857,779 18% 5,686,666 8% Others 237,361 - 607,458 1% Total 15,197,424$ 30% 10,576,326 15%

Other Receivables:Inventec Corporation (Hong Kong) Ltd. 30,000,195$ 99% 30,570,668 100% Others 236,490 1% 1,860 - Total 30,236,685$ 100% 30,572,528 100%


Note: Mainly due to purchasing raw materials on behalf of the Company’s subsidiaries.

Accounts Payable:Inventec Corporation (Hong Kong) Ltd. 7,347,371$ 15% 17,453,684 27% Others 99,646 - 57,775 - Total 7,447,017$ 15% 17,511,459 27%

Accrued Expenses:Others 16,794$ - 38,781 2%

Other Payables:Inventec Corporation (Hong Kong) Ltd. 104,914$ 50% 110,430 13%

Note: Mainly due to purchasing computer software.

(vi) Finance

For the nine months ended September 30, 2010, the amount financed to related parties was as follows (recognized as other receivables):

For the NineMonths Ended

September 30, 2010 Rate InterestInventec Investments JPY 600,000$ JPY 600,000$ 0.6% 955 Co., Ltd.

HighestBalance

EndingBalance



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(vii) Guarantees and endorsements

September 30, September 30, Name of Related Party Guaranteed 2010 2009 2010 2009 Name of Bank

Inventec (Shanghai) Corp. 20,000USD 20,000 20,000 20,000 E. Sun BankInventec (Shanghai) Service Co., Ltd 5,000 - 5,000 - Microsoft (China) Co., Ltd.Inventec (Shanghai) Corp., Inventec (Pudong) Corp., Inventec (Pudong) Technology Corp., Inventec (Shanghai) Service Co., Ltd., and Inventec Hi-Tech Corp.

50,000 50,000 50,000 50,000 Bank of America(Five corporations pool theguarantee)

Inventec (Shanghai) Corp., Inventec (Pudong) Corp., Inventec (Pudong) Technology Corp., Inventec (Shanghai) Service Co., Ltd., and Inventec Hi-Tech Corp.

60,000 60,000 60,000 60,000 Citibank, N.A.(Five corporations pool theguarantee)

Inventec (Czech)S.R.O 5,000 5,000 5,000 5,000 Citibank, N.A. " 1,450EUR 1,450EUR 1,450EUR 1,450EUR Citibank, N.A. " 1,300EUR 1,300EUR EUR - 1,300EUR CTP Property II, a.s.Total 140,000USD 135,000USD 140,000USD 115,000USD

2,750EUR 2,750EUR 1,450EUR 2,750EUR

Highest Balance Amount of GuaranteeFor the Nine Months Ended September 30,

6. Pledged Assets

As of September 30, 2010 and 2009, pledged assets were as follows:

Asset September 30, 2010 September 30, 2009 Purpose of pledgeRefundable deposits 11,077$ 20,379 Deposits for customs

duties, propertydeposits, etc.

7. Significant Commitments and Contingencies (Excluding Related-Party Transactions)

(a) As of September 30, 2010, unused standby letters of credit were zero.

(b) As of September 30, 2010 and 2009, promissory notes issued for bank credit limits amounted to $38,714,104 and $36,239,554, respectively.

8. Significant Catastrophic Losses: None.

9. Significant Subsequent Events:

On September 28, 2010, pursuant to the resolution of the board of directors’ meeting, the Company originated and established Inventec Solar Energy Corporation with WIN Semiconductor Corp., Inventec Investments Co., Ltd. and Inventec Appliances Corp.. Inventec Solar Energy Corporation engaged primarily in manufacturing, developing and trading Multicrystalline Silicon Solar Cell. The Company subscribed for $105,000,000 shares, for a total of $1,050,000 (par value $10 per share), and its equity holdings was 35%, the investment funds



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has remitted on October 13, 2010.

10. Other

(a) Personnel, depreciation, and amortization expenses incurred, categorized as operating cost or expense, were as follows:

Categorized asOperating Operating Operating Operating

Nature Cost Expense Total Cost Expense TotalPersonnel expense Salary expense 416,048 2,928,378 3,344,426 405,695 2,485,884 2,891,579 Health and labor insurance expense

28,255 176,580 204,835 26,851 148,212 175,063

Pension expense 22,870 159,587 182,457 22,882 142,278 165,160 Other expense 39,320 19,671 58,991 38,041 13,896 51,937Depreciation expense (Note)

83,777 214,292 298,069 92,048 195,368 287,416

Amortization expense 257,981 563,180 821,161 243,858 158,125 401,983

For the Nine Months Ended September 30, 2010 For the Nine Months Ended September 30, 2009

Note : For the nine months ended September 30, 2010 and 2009, the Company recognized

depreciation expense, excluding those of rental assets and idle assets, of $6,467 and $1,100, respectively.

(English Translation of Fina ncial Report Originally Issued ... - … · INVENTEC CORPORATION ....

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