Dialog Semiconductor Annual Report 2008

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FY2008 Annual Report · Dialog Semiconductor

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Dialog Semiconductor Plc
Tower Bridge House
St Katherine‘s Way
London E1W 1AA
UK

www.dialog-semiconductor.com

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Making the difference
in power management

Annual report and accounts 2008

Contents

Section 1: Overview
Dialog at a glance
2
Our markets
4
Chairman’s statement
6
Dialog Semiconductor shares in 2008
7

Section 2: Business review
10 Business review
12 Chief Executive’s review
15 Solutions, products and key customers
18 Financial review
23 Risks and their management
24 Corporate social responsibility

Section 3: Management and governance
25 Executive management
26 Board of Directors
27 Directors’ report
29 Corporate Governance
31 Directors’ remuneration report
35 Statement of Directors’ responsibilities
35 Responsibility statement

Section 4: Consolidated financial statements and notes
36 Independent Auditors’ report
37 Consolidated income statement
38 Consolidated balance sheet
39 Consolidated statement of cash flows
40 Consolidated statement of changes in Shareholders’ equity
41 Notes to the consolidated financial statements

Section 5: Company financial statements and notes
78 Company balance sheet
79 Company statement of changes in equity
80 Notes to the Company financial statements

Section 6: Additional information
81 Glossary
83 Advisers and corporate information
84 Group directory

Dialog Semiconductor creates some of
the world’s most energy-efﬁcient, highly
integrated, mixed-signal integrated
circuits. These are optimised for personal
mobile and automotive applications.
The Company provides ﬂexible and
dynamic support, world-class innovation,
and the assurance of dealing with an
established business partner. Customers
with a signiﬁcant contribution to revenue
include Sony Ericsson, Apple, Bosch and
Tridonic ATCO.

With its unique focus and expertise in system power
management, Dialog brings decades of experience to
the rapid development of integrated circuits for power
and motor control, and audio and display processing.
Dialog’s processor companion chips are essential for
enhancing both the performance of hand-held products
and the consumers’ multimedia experience. Automotive
applications include intelligent motor control for comfort
and safety systems. Over one billion parts have been
shipped to date.With world-class manufacturing partners,
Dialog operates a fabless business model. Dialog
Semiconductor Plc is headquartered near Stuttgart,
Germany with operations in Austria, China, Germany,
Japan, Korea, Taiwan, UK, and the USA.

Dialog Semiconductor Plc Annual Report and Accounts 2008 1

Section 1 | Overview

Dialog at a glance

Financial highlights

Revenue: 2006-2008 (US$m)

• 86% growth in revenue, fully funded

from own resources

• Full-year 2008 net profit of US$6.8 million

– ending seven consecutive years of
net losses

• Improved gross margin in every quarter
of 2008 – reaching 42.1% for Q4 2008

• Cash holding increased to US$36.9 million

• Dialog remains debt free

Operational highlights

• Successful introduction and ramp of

new products during 2008, with revenue
contribution of more than 30% from
products developed in the previous
12 months.

• Continued transition from customised

ASIC products to standard ASSP products

• Successful entrance to the Smartphone
market with industry leading providers –
with first volume shipments in 2H 2008

• Expansion of customer base for advanced

3G/HSDPA integrated solutions to six cellular
customers including adoption of the
technology in the emerging netbook market

• Increased penetration and market share

gain in portable media devices

• Pipeline of new products and customer

design-ins that will stimulate future growth

2 Dialog Semiconductor Plc Annual Report and Accounts 2008

161.8

35.2

126.5

93.9

36.0

57.9

86.8

35.3

51.7

2006

2007

2008

Gross margin: 2006-2008 (%)

+86%

2008 versus 2007

Automotive
and Industrial

Wireless

38.7

33.4

+108%

2008 versus 2006

18.6

2006

2007

2008

Profitability: 2006-2008 (US$m)

6.76

-44.02

-18.99

+115%

2008 versus 2006

2006

2007

2008

Configurable power management IC – optimises
efficiency of portable devices

February 2009 – Dialog Semiconductor introduces the DA9052, an advanced
system power management integrated circuit (PMIC) that offers designers greater
flexibility in reducing power consumption, size and cost in mobile phones and other
portable multimedia devices. Conceived as a platform-PMIC, capable
of supporting all major families of application and mobile graphics processors,
DA9052 offers an unprecedented level of user configurability.

Our products are used in
high-end display systems
such as:
> Smart phones
> Mulitimedia handsets
> Personal media players
> Personal navigation

systems

Our products offer:
> Better efﬁciency
> Extended battery life
> Lower cost and circuit

complexity

> Higher resolution
> Low power image

display

Dialog Semiconductor is working with
the leading developers of next generation
displays and deliver driver solutions able
to support the ultra low power capabilities
of emerging display technologies.

We have developed a range of advanced
driver technologies for low power display
applications – from OLEDs, to electronic
paper and MEMs displays.

Dialog Semiconductor Plc Annual Report and Accounts 2008 3

Section 1 | Overview

Our markets

Dialog has a successful record
of delivering qualiﬁed and
tested chips to the world’s
leading Original Equipment
Manufacturers (“OEMs”).

We supply these customers with standard or Application-Specific
IC (“ASIC”) products through a combination of direct sales and
specialist independent sales representatives.

Our power management, audio and display semiconductor
solutions are designed to meet the needs of the wireless,
automotive and industrial systems markets.

Power management and audio TAM
for PMP, 3G/HSDPA and Netbook

US$ billion

1.5

1.28

1.11

0.98

2008

2009

2010

2011

Source: Dialog 2009

Mobile terminal OLED and sub display driver TAM

US$ million

474

300

200

135

2008

2009

2010

2011

Source: Dialog 2009

Wireless communications

Our knowledge of designing for the wireless
communications market is one of our major strengths, and
the basis of a significant proportion of our business: more
than 700 million mobile phone handsets incorporate our
power management and audio processing chip designs.
Our expertise in low-power, mixed signal circuit design
helps manufacturers to deliver a range of highly integrated
chip and system-level solutions for mobile and cellular
handsets, and to satisfy the requirements of 2.5G, 3G,
GPRS and CDMA wireless systems. Our products employ
leading-edge silicon and packaging technologies.
We design, manufacture and test our products to enable
complex devices and features to be developed rapidly
and at low risk.

Our power management,
audio and display
semiconductor solutions
are designed to meet the
needs of the wireless,
automotive and industrial
systems markets.

4 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 1 | Overview

We focus our semiconductor solutions for the automotive
industry on safety and comfort electronics. Working closely
with our customers, we develop Application-Specific
Integrated Circuit (“ASIC”) or custom chips for systems
which support safety and comfort for the car driver and
passengers such as windscreen wiper motor controller,
seatbelt adjusters and intelligent battery management.
We also work in partnership with automotive manufacturers
on the development of high-voltage (40V) System-on-
Chips (“SoC”) which, on the same silicon, include a
microcontroller, embedded flash memory, high-voltage
devices, and high-performance analog components.

Automotive safety/comfort integrated
motor controller TAM

US$ million

605

590

715

635

2008

2009

2010

2011

Source: Dialog 2009

Industrial systems

We offer a range of established mixed signal components
for industrial systems, including dimming, control,
sensor and power management ASICs for use in lighting
systems, and single-chip solutions for intelligent control
of fluorescent lamps.

We supply these customers with
standard or Application-Specific
IC (“ASIC”) products through a
combination of direct sales and
specialist independent sales
representatives.

Dialog Semiconductor Plc Annual Report and Accounts 2008 5

Section 1 | Overview

Chairman’s statement

Dear Shareholders,
I am delighted to announce a very impressive set of results
for 2008; more so given the current economic climate. This is
testament to the passion of the Management Team to ensure
the successful turnaround in the fortunes of the Company.
As I write, the year ahead is uncertain for most businesses
but we are cautiously optimistic of making further progress.

I am acutely aware however that this continued improved
performance has not been reflected in our share price. In the
recent past the Board has tried to support the Management in
delivering the financial turnaround of the Company. Over the
coming year there will also be increased focus on improving the
liquidity of our shares in an effort to ensure Shareholders benefit
from the improvement in financial performance.

I am concerned also to ensure that appropriate remuneration
plans are in place to provide incentives for employees and which
will act as retention tools. This should lead to the objectives
of the employees and the Shareholders being better harmonised.
Last year, the Board put in place the Long Term Incentive Plan
for senior executives and issued further options under the
Employee Share Option Scheme. However, with the current
share price, the Board believes it is necessary to re-evaluate
their effectiveness. These are matters the Board will seek
to address over the coming months.

Greg Reyes
Chairman

6 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 1 | Overview

Dialog Semiconductor shares in 2008

Investment case
Dialog Semiconductor has a proven and established history in the
development and supply of state-of-the-art power management,
audio and display driver integrated circuits. It has built a stellar
reputation as a quality supplier of superior products to the high
volume cellular, portable media and automotive industries.
The Company’s core competency is its ability to develop and
bring quickly to production in a fabless model, complex mixed
signal integrated circuits containing an extremely high level
of integration for power management, audio and control
functionality on a single monolithic chip.

Dialog supports customers with both Application Specific
Standard products and customised ASIC solutions. Dialog is
engaged with industry leading global customers in its respective
segments, deriving revenue from a number of established and
emerging high-growth markets.

Dialog Semiconductor’s share price development
The following graphs chart the cumulative Shareholder return of
the Company for the past 12 months and for the past five years,
compared with selected technical benchmark indices – Germany’s
TECdax index, Prime Semiconductor index (“SemiC”) and the
Philadelphia SE Semiconductor index (“SOX”).

In 2008, Dialog Semiconductor’s share price decreased by 59%,
from €1.70 at the beginning of the year to €0.70 at the end of
the year. It underperformed the benchmark indices throughout
2008. This was primarily driven by the global financial crisis which
added tremendous pressure to the mid and small cap companies,
especially Semiconductor companies who typically have high
cyclical exposure to a global recession. Concerns around the
automotive end market in Germany caused additional pressure
on the stock.

2008 12-month Dialog Semiconductor stock analysis

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DIALOG SEMICON. (XET)

TECDAX (XETRA) – PRICE INDEX

PRIME BIOTECHNOLOGY IG – PRICE INDEX

PHILADELPHIA SE SEMICONDUCTOR – PRICE INDEX

Dialog Semiconductor Plc Annual Report and Accounts 2008 7

Section 1 | Overview

Dialog Semiconductor shares in 2008

2004-2008 Dialog Semiconductor stock analysis

250

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100

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DIALOG SEMICON. (XET)

TECDAX (XETRA) – PRICE INDEX

PRIME BIOTECHNOLOGY IG – PRICE INDEX

PHILADELPHIA SE SEMICONDUCTOR – PRICE INDEX

Share fundamentals for the financial year 2008

Total number of shares outstanding and registered as of 31 December 2008

Weighted average number of shares during 2008 (diluted)

Type

Par value (in £)

Bloomberg Symbol

Reuters Symbol

ISIN

46,068,930

45,408,000

Ordinary

0.1

DLG

DLGS.DE

GB0059822006

Key figures for the financial year 2008 based on weighted average number of shares (basic)

Sales per share (in US$)

Operating profit per share (in US$)

Net profit per share (in US$)

Book value per share as of 31 December 2008 (in US$)

Accounting standards

Market data 2008

Exchange segment Germany

Designated sponsor

Market capitalisation as of 31 December 2008 (in millions of €)

Daily Turnover of shares during 2008

3.56

0.13

0.15

1.33

IAS/IFRS

Midcap, Prime All

Share, Prime Technology,

Technology All Share

West LB

32.2

75,668 shares/day

8 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 1 | Overview

Trading in Dialog shares
Dialog shares are traded in Germany on the XETRA and Frankfurt
regulated official markets and on all other German regional
exchanges on the open market.

Dividend policy
Dialog Semiconductor participates in industries that are
considered to be global growth engines and provides its services
and products to the major players in these industries.

Dialog’s Board of Directors is committed to re-investing all profits
into laying the framework for future growth and continues to
believe that, in line with the strategic changes under way, this
policy is in the best interests of all its Shareholders.

Investor relations
Dialog Semiconductor understands the importance of clear
communication with investors and analysts, particularly during
a period of great uncertainty and global economic crisis. During
2008, the management team continued its efforts to ensure
that the market was kept up to date with the effect the changing
macro environment was having on its business, together with
the important and exciting changes under way at the Company.

Dialog Semiconductor’s shares are followed by a number of
analysts representing major banks and research institutions in
Europe. During 2008, we issued quarterly earning reports, we
held our annual analyst conference, attended or presented at
several conferences and, in addition, kept in regular contact
with our investors and analysts.

Information provided, including presentations, press releases
and reports of the Company, as well as the recommendations
of analysts covering the Company, can be downloaded from
the corporate Website: www.dialog-semiconductor.com.

Shareholder structure
Information about the main Shareholders of the Company
is shown in the following graph.

Dialog main Shareholders

18.37

5.47

76.20

Apax Partners

Adtran Inc

Freeﬂoat

Freefloat
Freefloat includes 4,621,593 shares (10.0%) held by the Capital
Group International, Inc. as notified on 14 December 2007 on
behalf of discretionary clients, 1,881,425 shares (4.09%) held by
Allianz Global Investors Kapitalanlagegesellschaft mbH as notified
on 28 January 2009 on behalf of discretionary clients, 1,444,700
shares (3.1%) held by Union Investment Privatfonds GmbH as
notified on 26 January 2009 on behalf of discretionary clients,
1,383,306 shares (3.0%) held by X-FAB Semiconductor Foundries
AG as notified on 17 February 2009, 1,118,468 shares (2.4%)
held by Pictet Asset Management Ltd as notified on 15 January
2009 on behalf of discretionary clients, 1,085,616 shares (2.4%)
held by Cominvest Asset Management GmbH as notified on 30
June 2008 on behalf of discretionary clients and 641,259 shares
(1.4%) held by the Dialog Semiconductor Plc Benefit Trust.

Disclosure of interests
The provisions of the UK Companies Act 2006 require that
any person acquiring a direct interest of 3% or more of a class
of shares issued by the Company – with voting rights at the
Company’s general meeting – must inform the Company of its
interest within two working days. If the 3% interest is exceeded,
the Shareholder must inform the Company of any increase
or decrease of one percentage point in its interest.

Dialog Semiconductor Plc Annual Report and Accounts 2008 9

Section 2 | Business review

Business review

The strategy developed and
executed in 2006 and 2007
enabled us to achieve “hyper”
growth in 2008 with increased
proﬁtability, low inventory, no
debt and more cash than we had
at the beginning of the year.

In 2007’s annual report, we set out a number of objectives
designed to enable us to build, and improve, on that position
during 2008. Since the creation of sustainable Shareholder
value lies at the heart of our strategy, profitable growth
continues to be our principal objective.

We stated that we would continue our efforts to fine-tune
our strategy and to develop the Company to ensure that we
achieve our objectives. Our financial KPIs are set out on
page 2, and our operational KPIs are set out on this page.

10 Dialog Semiconductor Plc Annual Report and Accounts 2008

Strategy: to improve our cost platform

Progress: Full fabless model operations using
subcontractors in Asia; streamlining of
logistics and offshore warehousing achieved
low SG&A ratio as a percentage of sales by
improving productivity

Strategy: to diversify our revenue

Progress: New market area expanded through

development of highly integrated power
management devices for consumer
multimedia markets
Expanded highly-integrated audio and
power management devices for 3G/HPSDA
mobile and smartphones to six customers
More than 35% of revenue is now
generated from customers in North America

Strategy: to focus our products and sales

on higher-growth markets

Progress: Progress: R&D focused on a broad base

of products invested such as Smartxtend
technology for PMOLED displays and
system power management products for
application processors

Strategy: to strengthen our management and skill base

Progress: Created worldwide manufacturing

operations as well as business development
and corporate strategy management functions
Continued to recruit highly skilled design,
application and marketing talent

Europe’s top five car makers use our
custom, mixed-signal, system-on-chip
devices for smart motor control, where
they reduce size and cost, and boost
performance and reliability.

Produced on a purpose designed automotive
CMOS process, our unique ICs combine high
performance analogue circuits, ﬂash memory,
microcontrollers, high density digital logic
and high voltage circuits on a single chip.

Dialog’s motor control ICs are
custom designed for a wide
range of automotive applications,
including window and mirror
control, automatic seat belt
tensioning, accurate windscreen
wiper control, and control of
engine cooling fans.

We are engaged with major
customers to develop energy
saving integrated circuits,
supporting advanced
ﬂuorescent, high intensity
and LED lighting applications.

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Chief Executive’s review

climate during the year and the ever increasing pricing pressure
we see from customers.

I am not satisfied with the development of our share price in a
year where we had high growth and performed ahead of our
competitors. My gratitude goes to our Shareholders who have
remained faithful to us despite this less than pleasant share price
development. I am sure that our consistent orientation towards
profitable growth is going to increase the Shareholder value in
the longer run.

We made significant progress in addressing the challenges
highlighted in the past year’s report:
(cid:1) Improving our cost platform;
(cid:1) Diversifying our revenue;
(cid:1) Focusing our products and sales on higher-growth markets; and
(cid:1) Strengthening our management and skill base.

With the completed transition to a fabless semiconductor
model for fabrication, packaging and test operations using
manufacturing partners in Asia, our cost platform was significantly
improved. We now have a truly scalable business platform to build
further growth without major capital expenditure and at the
same time protecting ourselves in this economic downturn
against “under utilisation” costs of such equipment.

Additionally, we have set up a manufacturing support centre
in Taiwan with Dialog engineers embedded within our
manufacturing partners facilities. We believe that maintaining
a tight working relationship with our subcontractors will help
achieve high yields and maintain high levels of production quality
during the steep volume ramps experienced with new products
developed for our largest customers.

We took steps in simplifying and improving our supply chain
logistics. With further upgrading of our IT systems to improve our
planning and inventory management, we can continue to scale
the revenue, while maintaining our operational cost ratios at best
in class industry benchmarks

The year 2008 was one of rapid growth and improving financial
performance. During the first half, we experienced the seasonally
lower revenue – as we had forecasted. In the second half, we saw
increasing revenue from our wireless products. This was driven by
the success of our 3G/HSPA integrated power management and
audio products. We have been successful in diversifying our
revenue and expanded our cellular customer base to six customers,
as the trend for higher data rates in cell phones accelerated.

Additionally, the second half of the year saw the adoption of
our solutions by leading Smartphone manufacturers, with volume
production already in a popular model sold today. Despite the
forecasted contraction of the cellular industry, we are encouraged
as 3G/HSPA and Smartphones are the highest forecasted growth
sectors of the cellular industry for 2009.

Despite strong economic
headwinds, 2008 was an excellent
year for growth in sales and
proﬁtability for Dialog. Our Board
and the executive team focused on
delivering on the long-term strategy
of leveraging Power Management
as our core expertise in the growing
personal mobile products market.
The Company has a stronger
balance sheet and we are now
moving forward with conﬁdence
for continued proﬁtable growth
in the years ahead.

Nothing succeeds like success and we are convinced about
Dialog’s potential to pursue a number of higher-growth
opportunities in the mobile phone, consumer electronics and
automotive systems markets. Our excellence in engineering
mixed-signal chips and established relationships with a number
of world-class customers led to an 86% growth in our top line.
Equally encouraging, Dialog achieved full year profitability for
the first time since the year 2000 and has now recorded five
consecutive quarters of profitability. This growth was fully
funded by our own resources while growing our cash balance.

Clearly we have a lot more work to do to achieve our medium
range growth and profitability targets, but our 2008 results
demonstrate the Company’s progress in executing to its chosen
strategy. With improved gross margins in every quarter of 2008,
we finished up over five percentage points for the full year at
38.7% and attained 42.1% in the fourth quarter. This is a
particularly impressive achievement given the tougher economic

Dialog Semiconductor Plc Annual Report and Accounts 2008

SmartXtend™ technology
allows the main displays of
mobile devices – particularly
those offering W-QVGA
and QVGA resolution – to
utilise passive matrix OLED
displays rather than LCD
or active matrix OLEDs.

Dialog’s low power, highly integrated, mixed-
signal CMOS ICs for personal mobile devices,
including wireless handsets, extend battery
life, create high quality audio and produce
brighter, crisper image displays. Today, over
700 million 2.5G, 3G, GPRS and CDMA
handsets contain Dialog devices.

By matching our own
innovation to the needs
of another, we produced
an award winner and
could have a signiﬁcant
impact in one of the
world’s largest
global markets

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Chief Executive’s review

Our rapid development of highly integrated power management
devices for hand-held consumer multimedia applications, helped
expand revenue in what is a growth market for Dialog. We expect
to see more designs in this market to enter into production in
2009 and thereby further diversify the number of platforms we
derive revenue from.

We firmly believe that this will improve our ability to deliver further
profitable growth. In the second half of the year, we opened
Dialog’s new sales and engineering support office in Korea as we
anticipate an increased revenue stream from this region.
Additionally, we expanded our executive team with the creation
of a new position for global strategy and business development.

We have made good progress transitioning to a more balanced
portfolio of Application Specific Standard Products versus
customised ASIC products – with 33% standard products by year
end. This allows us to sell the same product to multiple customers
which should further increase our profitability. It also provides us
access to emerging high growth markets, for example netbooks
and other personal portable devices, further expanding the
addressable market for Dialog technology. Through a focused
R&D approach, in 2008 we have seen the first results of our
investments in advanced low power audio and highly
configurable system power management technology and we
plan to launch additional market beating products in 2009.

We recently introduced our highly innovative SmartXtend™
technology for passive matrix OLED displays, with our first
production products scheduled for the second half of 2009.
This technology is continuing to gain good attention with major
cell phone manufacturers. In combination with solutions for
other ultra low power display technologies such as MEMS and
electronic paper displays, this new range of products will provide
Dialog with additional areas for revenue generation in the
important cell phone market.

In 2008 we relaunched our corporate website in line with our
new corporate identity, introduced with last year’s report. This
has helped align our appearance and business values with the
confident position we hold in the markets we serve.

My sincere thanks to all Dialog employees who have shown
innovation, great resilience as well as dedication and loyalty
throughout a very challenging yet satisfying year.

In 2009 we aim to:
(cid:1) Continue to develop and market an expanded portfolio of

Application Specific Standard Products to address a broader
customer base in high growth markets;

(cid:1) Leverage our competitive advantage in power management,
advanced audio and high voltage mixed-signal capabilities
through focused R&D, to develop best in class products;

(cid:1) Increase our sales, marketing and technical support to

customers worldwide, particularly in North America and
Asia; and

(cid:1) Optimise our operating platform and increase efficiencies by
taking advantage of advanced Information Management
Systems for planning, logistics and sales operations.

Whilst the economic and market conditions in the second half of
2008 meant that we saw a reduction in our automotive revenues,
we are confident in our potential for growth in this segment over
the longer term as the automotive market recovers. Our portfolio
of automotive and industrial products, which covers highly
integrated smart motor controllers and intelligent lighting control
products, has continued to expand as we develop new products
through customer funded engagements.

Amidst a time of great uncertainty for our industry and
customers, we will continue to strive to create sustainable
Shareholder value for Dialog – your Company. We expect that
Dialog will buck industry trends in 2009 and achieve growth and
perform in excess of our competitors.

In conclusion, let me once again affirm that I remain confident
in our future.

We attracted leading industry talent and expertise to the Company
in 2008, particularly in our design, application engineering,
product marketing, sales and global manufacturing teams.

Dr Jalal Bagherli
Chief Executive Officer

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Solutions, products and key customers

Our products and solutions meet
the needs of Original Equipment
Manufacturers (“OEMs”). We
design, develop and deliver mixed
signal components and system-
level solutions in areas such as
power management, audio
CODECs, and System-on-Chip
(“SoC”) integration.

Our solutions
Our solutions address two major markets: mobile handset
and portable electronic devices, and automotive and
industrial electronics.

The continuing decrease in size – and increase in capabilities –
of electronic devices, is a major driver in the development of
our solutions. High-speed data, video and high-quality audio
on mobile telephones and other hand-held products, make huge
demands on battery energy management, as well as on the
technology which controls the quality of images and displays.

Our skill in developing highly integrated silicon solutions enables
our customers to design products which deliver excellent
performance as well as market-leading talk and standby times.

In the automotive market customers use our products in the
comfort and safety systems, as well as in the management and
control of the electronic systems they design for cars; and in the
industrial market customers use our products in highly integrated
smart-power management systems, such as intelligent electronic
ballasts for fluorescent lighting.

Design, development and production
We are justifiably recognised for the quality and feature-rich
functionality of our mixed signal standard Integrated Circuit
(“IC”) and Application Specific Integrated Circuit (“ASIC”)
solutions. We nevertheless continually work to increase our digital
and analog design expertise, and to develop our software. During
2008, we invested US$36.7 million in research and development.

Our ability to develop mixed signal ASIC and Application Specific
Standard Product (“ASSP”) designs rapidly, enables us to respond
to customers’ needs for new solutions that increase performance,
while at the same time reducing cost. Our strategy of modifying
and re-using a wide set of specialised analog building blocks
speeds up the design process; in addition, our use of industry
standard design tools increases the level of automation and the
quality of verification in our products. Our commitment to
continuously deepening our expertise has resulted in increased
levels of integration and product innovation in all business
sectors. We continue to focus our research and development
on state-of-the-art technology to meet the demands of next-
generation products.

Our products
Broadly speaking, we produce two ranges of products which
are both built around similar technology “building blocks”.
For high-volume customers, we engineer and fine-tune system
solutions to their precise specifications; for those market
segments which consist of lower-volume customers, we provide
a range of flexible application specific standard products designed
to cover a broader set of requirements. Our overriding philosophy
is to provide flexibility without degrading performance. This
approach gives a diverse set of customers access to the highly
integrated power management, audio and display technologies
developed by Dialog.

Now that the majority of semiconductor manufacturers are
“fabless” (they outsource the fabrication, or manufacture,
of their chips to silicon foundries) the electronics industry is
becoming more specialised. For example, our system platform
partners often enter into agreements with us to design exclusive
custom chips to form part of their systems and, in turn, license
their system platform to a number of manufacturers of end-user
equipment. Those OEM manufacturers complete the circle by
buying the chips from us.

Power management and audio ICs. Effective power
management – in which the design of chips used in hundreds
of millions of mobile phones and other portable devices has
given us a great deal of experience – is increasingly one of the
fundamentals of system design. However, power management
constantly presents new challenges with the introduction of
multi-core processors, increased peak currents due to lower
geometry technologies and multiple sleep modes. Lithium
batteries need to charge faster, safer and from a wider variety
of sources such as USB ports demanding powerpath control for
example. These trends impact the power management IC directly
and we constantly evolve our core technology and intellectual
property to extend our market-leading status.

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Solutions, products and key customers

Automotive and industrial system ICs. The ICs we supply
to leading Tier 1 customers who in turn deliver Dialog-based
products to nearly all leading car manufacturers, capitalise on
our expertise and knowledge of technology, ranging from power
management systems and mixed signal design, to high voltage
circuits and embedded microprocessors on a single chip in a
standard CMOS process. We provide technology for windscreen
wipers, electric windows and motorised seat belts, and our
partnership with leading car sub suppliers has resulted in chips
which can be connected direct to a car battery without external
protection circuits. In addition, we are pursuing the Systems-on-
Chip integration of advanced 32-bit microprocessors for products
that require sophisticated signal processing for automotive
sensing applications.

Our single-chip solutions for industrial systems integrate
microprocessors with high-voltage, low-power circuits which
allow dimming and power factor correction used for fluorescent
and high intensity lamps.

Application Specific Integrated Circuits (“ASICs”). Our ASICs
form the basis for highly integrated control chips for smart power
electronic systems, in applications such as computer and mobile
communications systems. They are ideal for situations in which
chips have to be highly integrated and also have the ability to
control high voltages intelligently using digital circuits on the
same chip.

We work in partnership with the silicon foundries which
manufacture our ASIC solutions, to ensure that our customers
have access to the latest CMOS processes, as well as to the
foundries’ capacity. This, combined with our own in-house
engineering capability, ensures that our customers are able
to meet their cost and time-to-market objectives

With a legacy of over 50 different power management designs
for the world’s leading mobile phone manufacturers and portable
consumer OEM’s we optimise all aspects of the design including
electrical, thermal and mechanical (packaging) considerations.
These designs offer unprecedented integration with multiple power
management and analogue functions on the chip, including
programmable high-performance LDOs (low drop-out voltage
regulators), high-efficiency DC-DC voltage converters, intelligent
battery charging circuits, software programmable LED drivers,
sensor ADCs, USB interfaces, and multichannel audio capabilities.

By capitalising on our experience in integrating high and low
voltage circuits on CMOS – the most widely-used semiconductor
technology – and combining it with our experience in developing
and integrating high-performance CODECs and other analog
functions, we are able to offer a selection of unique power
management and audio solutions. The integration of more than
30 different functions on a single chip delivers significant space,
power and cost savings to our customers.

Display drivers and related-system ICs. The demands from
the market for the next generation of portable displays to
be “always on”, with longer battery life and better front of
screen performance even in bright sunlight means the current
technology based on Liquid Crystals (LCD) will struggle.
To address these important market needs a number of new
display technologies, such as e-paper, MEMs and OLEDs have
been launched. Dialog has not only worked closely with the
key innovators of these display technologies but also key users
to develop and introduce a range of truly innovative low power
silicon driver solutions.

During 2008 TDK demonstrated the first three-inch WQVGA
passive matrix OLED panel which was driven by Dialog’s drivers
based on our new SmartXtend technology. The technology uses
a number of innovative techniques, including a unique addressing
scheme, accurate dynamic current matching and state-of-the-art
power management to outperform LCD displays.

SmartXtendTM will form the basis of a new family of PMOLED
drivers which will be launched during the second half of 2009.

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Manufacture, assembly and testing
Wafer manufacture. We outsource our wafer production to
selected foundries, principally in Singapore and Taiwan, which
provide high-quality products and have the ability to meet both
our stringent qualification requirements and tight deadlines.
Our choice of CMOS, rather than bipolar, technology enables
more transistors to be integrated on a single chip – a necessary
requirement for our target markets – and the end products are
less power hungry.

Assembly and testing. The final assembly of our chips is
outsourced to a number of qualified subcontractors in Asia.
Our test programmes, based on our own and individual
customers’ specifications, are developed by our test engineers
in parallel with the design process.

All test development is undertaken at our Nabern facility using
the same type of test equipment and handling interfaces that are
used in our offshore test sub-contractors in order to speed up the
volume ramp and production transfer process. All production
testing and warehousing of final product is outsourced to our
Asian test sub-contract partners enabling direct drop shipments
to our end customers.

We have also created a specialist offshore operations and support
centre in Taiwan. We have our own manufacturing and technical
engineers close to foundries, and assembly and test
subcontractors in Asia. By being “on the spot” to resolve any
potential engineering issues quickly, they can forestall potential
delays in production.

Quality and environment control
We have an uncompromising approach to quality assurance
in every area of our operations and an uncompromising goal
to deliver “zero fail” products. Active employee participation in
error prevention approaches has enabled us to win the approval
of all our major customers and to exceed their ppm failure rate
expectations. The overall objective of our quality management
system is to provide all our customers with the assurance that
our products and services not only fulfill their current contractual
requirements, but will also meet their future needs.

We are committed to minimising our impact on the environment
by developing and promoting environmentally-compatible
products, and operate in accordance with the ISO 14001
international environmental quality standard.

We continuously promote awareness and knowledge of
environmental issues throughout the organisation to ensure
that they become a natural part of the decision-making process.
As we demand the same standards from our suppliers we only
form supply-partnerships with those who are accredited to the
same international quality standards.

For more detailed information on specific products, please see
our Website: www.dialog-semiconductor.com.

Our principal customers
Our principal customers are recognised wireless communications,
consumer electronics, industrial and automotive equipment
manufacturers. These include customers for both our standard
products introduced over recent years and for application specific
(ASIC) products.

The rapidly-evolving technology in all our target market sectors
means that a partnership approach with our customers is essential
– whether for standard products or for custom solutions. As a
result, our customers look to Dialog as an outside source of
expertise, while the close working relationship provides us with
an opportunity continually to develop and fine-tune market
leading technological expertise with recognised industry leaders.

We strive to form long-term relationships with all our major
customers. In 2008, major revenue contributions came from
customers such as Sony Ericsson Mobile Communication, Apple,
RIM, Asus, Sharp, Motorola, Bosch, Tridonic, Siemens, Continental,
Adtran and Qualcomm.

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Financial review

“Our continuous focus
on working capital
management is paying off.”

Jean-Michel Richard, CFO, Vice-President, Finance

Revenues

Wireless

Automotive/industrial

Corporate sector

Revenues

Cost of sales

Gross profit

Selling and marketing expenses

General and administrative expenses

Research and development expenses

Other operating income

Restructuring and related impairment charges

Operating profit (loss)

Impairment of investments

Interest income and other financial income

Interest expense and other financial expense

Foreign currency exchange gains and losses, net

Result before income taxes

Income tax expense

Net profit (loss)

The following discussion of our financial condition and results
of operations should be read in conjunction with the audited
financial statements included within this annual report, which
have been prepared in accordance with International Financial
Reporting Standards (IFRS).

The following tables detail the historical statements of the
operations of Dialog for the financial years ended 31 December
2008 and 2007 in US dollars and as a percentage of revenues.

2007

US$

% of revenues

US$000

% of revenues

51,701

35,327

(255)

59.6

40.7

(0.3)

86,773

100.0

(99,)

(.)

(57,812)

(,)

(9,8)

(,)

–

(99)

(.8)

(.)

28,961

(7,253)

(7,945)

(31,105)

1,190

(1,120)

(17,272)

(2,662)

1,097

(531)

519

(18,849)

(136)

(18,985)

(66.6)

33.4

(8.3)

(9.2)

(35.8)

–

(1.3)

(19.9)

(3.1)

1.3

(0.6)

0.6

(21.7)

(0.2)

(21.9)

Change

144.7

(0.4)

(152.2)

86.5

71.6

116.2

51.8

24.0

18.1

(34.9)

(112.9)

(134.5)

(100.0)

(20.3)

73.1

(75.7)

(132.0)

(635.3)

(135.6)

8 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Results of operations
Segment reporting
Revenues in the wireless communications sector were
US$126.5 million for the year ended 31 December 2008
(2007: US$51.7 million) comprising 78.2% of our total revenues
(2007: 59.6%). The significant increase in this sector resulted
from higher sales volumes in 2008 as a result of successfully
introducing new products for consumer portable multimedia
players and 3G/HSDPA mobile phones in the second half of 2007.

2008 operating profit in the wireless communications sector
was US$10.9 million compared to an operating loss of US$12.4
million in 2007. This was achieved through a significant increase
in revenue coupled with a richer product mix and higher margins
derived from new products introduced in 2008.

Revenues from our automotive/industrial applications sector
were US$35.2 million for the year ended 31 December 2008,
almost flat to 2007 (2007: US$35.3 million) representing 21.7%
of our total revenues (2007: 40.7%). However, operating losses
in the sector were reduced from US$1.3 million in 2007 to
US$875,000 for the year ended 31 December 2008.

The corporate sector includes sales discounts for early
payments, the costs of the holding company, stock option
expenses, bonus payments for employees and management and
restructuring expenses. The operating loss in the corporate sector
was US$4.1 million for the year ended 31 December 2008 (2007:
US$3.5 million). In 2008 the corporate sector also included
expenses related to the introduction of a Management Long-Term
Incentive Plan (LTIP US$0.4 million – for further information
please refer to note 22b). Further charges were booked for one-
time costs for legal obligations in connection with two rented
offices that the Company will vacate in 2009 (US$0.8 million).

Revenues
Total revenues for the year
ended 31 December 2008
were US$161.8 million (2007:
US$86.8 million). The increase
of 86.5% in revenues results
from higher sales volumes in our
wireless communication sector,
as described above.

Cost of sales
Cost of sales consists of material
costs, the costs of outsourced
production and assembly, related
personnel costs and applicable
overheads and depreciation of
test and other equipment. For
the year ended 31 December
2008, cost of sales increased by

Revenues

161.8

86.8

2007

2008

Cost of sales as % of revenue

66.6

61.3

2007

2008

71.6% to US$99.2 million (2007: US$57.8 million) reflecting
the increased revenues during the year. However, as a percentage
of total revenues, cost of sales in the same periods decreased
from 66.6% to 61.3%, demonstrating the gains made possible
by our ongoing efforts to improve the Company’s product mix
and the efficiency of the previously announced restructuring
measures taken since 2006.

Gross profit
Gross profit for the year ended 31 December 2008 was US$62.6
million (2007: US$29.0 million). Our gross margin increased from
33.4% of revenues in 2007 to 38.7% of revenues for the year
ended 31 December 2008, driven by lower cost of sales as a
percentage of revenue and the accelerated introduction of new
products as prescribed above.

Selling and marketing expenses
Selling and marketing expenses consist primarily of salaries,
travel expenses, sales commissions and advertising and other
marketing costs. In 2008, selling and marketing expenses increased
to US$11.0 million in line with increased revenues and as a result
of the Company’s investment in creating value by increasing staff
in strategic marketing functions (2007: US$7.3 million). However,
given the increased revenues, selling expenses decreased from
8.3% of total revenues in 2007 to 6.8% of total revenues in the
year ended 31 December 2008.

General and administrative expenses
General and administrative expenses consist primarily of personnel
and support costs for our finance, human resources and other
management departments. In 2008, general and administrative
expenses increased to US$9.9 million (2007: US$7.9 million).
Our fourth quarter 2008 expenses include one-time costs for
legal obligations in connection with two rented offices that the
Company will vacate in 2009 for an amount of US$0.8 million.
Despite that increase, as a result of a higher revenue base and
effective cost control measures, general and administrative
expenses decreased from 9.2% of total revenues in 2007 to
6.1% of total revenues in the year ended 31 December 2008.

Research and development expenses
Research and development expenses consist principally of design
and engineering-related costs associated with the development
of new Application Specific Integrated Circuits (ASICs) and
Application Specific Standard Products (ASSPs). Research and
development expenses increased to US$36.7 million in 2008
(2007: US$31.1 million). This increase was primarily driven
by our continuous and strategic investments in research and
development. However, as a percentage of total revenues,
research and development expenses decreased from 35.8% in
2007 to 22.7% in the year ended 31 December 2008, resulting
from a higher revenue base in the latter period.

Dialog Semiconductor Plc Annual Report and Accounts 2008 9

Section 2 | Business review

Financial review

Other operating income
Other operating income in 2008 includes the unexpected
settlement of US$0.3 million against a receivable which had been
written down in 2006 as a result of the insolvency of BenQ
Mobile GmbH. Other operating income also includes the release
of a liability of US$0.2 million which the Company had booked
in 2007 to account for a potential warranty claim of one of its
customers. In Q1 2008, the Company was able to successfully
close this issue to the satisfaction of both parties. Other operating
income in 2008 also includes the release of a reserve in the
amount of US$0.2 million that the Company had booked in
Q1 2006 in conjunction with the spin-off of our digital imaging
business (DIS). In Q2 2008, the Company was able to release
this reserve after having been informed by DIS that the potential
liability was no longer justified.

Operating profit (loss)
We reported an operating profit
of US$6.0 million (2007: loss
of US$17.3 million) for the year
ended 31 December 2008.
The improvement primarily
resulted from higher gross profits.

Operating profit (loss)

6.0

-17.3

2007

2008

Interest income and
other financial income
Interest income and other financial income includes income
from the Company‘s investment (primarily short-term deposits
and securities). Interest income and other financial income
in 2008 was US$874,000 (2007: US$1.1 million). The net
decrease is primarily driven by a planned reduction in short-
term investments (securities) and reduced interest rates.

Interest expense and other financial expense
Interest expense and other financial expense consist primarily
of expenses from the Company’s factoring agreement and losses
from the sale of securities. Interest expense and other financial
expense in 2008 was US$919,000 (2007: US$531,000).
The net increase is primarily driven by an increase in trade
receivables financing and a loss from the sale of securities.

Net income (loss)
For the reasons described
above, in 2008, we reported a
net income of US$6.8 million.
This compares to a net loss of
US$19.0 million in the previous
year. Income per share was
US$0.15 for the year ended
31 December 2008 (2007:
loss per share: US$0.42).

Net income (loss)

6.8

-19.0

2007

2008

Liquidity and capital resources
Cash flows
Cash provided by operating activities was US$9.3 million
for the year ended 31 December 2008 (2007: cash outflow
of US$10.2 million). The cash inflow in 2008 relates primarily
to the operating income (adjusted by non-cash effective expenses).
This cash inflow was partially offset by cash used to finance the
increase in working capital. The cash outflow in the year ended
31 December 2007 mainly resulted from operating expenses
as well as an overall increase in working capital.

Cash provided by investing activities in 2008 was US$12.1 million
(2007: cash outflow US$6.1 million). The cash inflow resulted
primarily from the net sale of securities of US$19.7 million. This
cash inflow was partially offset by cash outflows in connection
with the purchase of tooling (masks), laboratory equipment,
probe cards, load boards and other advanced test equipment
for a grand total of US$3.5 million (2007: US$4.1 million),
the purchase of software and licences of US$2.8 million
(2007: US$1.1 million) and payments related to capitalised
development costs of US$1.4 million (2007: US$0.7 million).

Liquidity
At year ended 31 December 2008 we had cash and cash
equivalents of US$36.9 million (31 December 2007: US$15.9
million) and zero marketable securities (31 December 2007:
US$19.9 million). The working capital (defined as current assets
minus current liabilities) was increased to US$47.2million
(31 December 2007: US$36.1 million).

As at 31 December 2008 we had no long-term debt
(31 December 2007: nil).

A reduction in customer demand for our products, caused by
unfavourable industry conditions or an inability to develop new
products in response to technological changes, could materially
reduce the amount of cash generated from operations.

If necessary, we have available for use a short-term credit facility
of US$8.9 million (€6.4 million) that bears interest at a rate of
EURIBOR + 0.75% per annum. At 31 December 2008 we had
no amounts outstanding under this facility. In addition, we have
a factoring agreement, which provides the Company with up
to US$30 million of readily available cash (up US$17 million
compared 31 December 2007). Accordingly, we believe the
funding available from these and other sources will be sufficient
to satisfy our working capital requirements in the near to medium
term if required.

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Balance sheet

Assets

Cash and cash equivalents and available for sale securities

All other current assets

Total current assets

Property, plant and equipment, net

Intangible assets

Held to maturity securities

All other non-current assets

Total non-current assets

Total assets

Liabilities and Shareholders’ equity

Current liabilities

Net Shareholders’ equity

Total liabilities and Shareholders’ equity

8
US$

2007

US$000

Change

US$000

,88

–

31,844

21,822

53,666

10,452

2,443

4,000

662

17,557

71,223

17,531

53,692

71,223

5,071

8,566

13,637

(2,718)

2,197

(4,000)

(4,507)

9,130

2,617

6,513

9,130

15.9

39.3

25.4

(26.0)

89.9

–

2.1

(25.7)

12.8

14.9

12.1

12.8

The balance sheet total was US$80.4 million at
31 December 2008 (31 December 2007: US$71.2 million).
Compared to 31 December 2007, total cash and cash equivalents
and securities (held as available for sale and held to maturity)
increased by 3% to US$36.9 (31 December 2007: US$ 35.8).

2008 net capital expenditure and investments in property, plant
and equipment and intangible assets of US$7.6 million were
more than offset by depreciation and amortisation expenses in
the amount of US$7.7 million and impairment charges and losses
on disposal of fixed assets amounting to US$1.0 million. All other
non-current assets remained stable

Current liabilities in 2008 were US$2.6 million above the previous
year’s level, and relate primarily to higher trade accounts payable
in the course of our increased business volume.

We had no non-current liabilities at 31 December 2008.

Shareholders’ equity increased to US$60.2 million (US$53.7
million at 31 December 2007), mainly as a result of increased net
profit (adjusted by expenses for share-based payments). At the
year ended 31 December 2008, the equity ratio was 74.9%
(75.4% at 31 December 2007).

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Financial review

Off-balance-sheet arrangements and other commitments
We have no off-balance-sheet arrangements involving
variable interest entities. We lease all our office facilities,
office equipment and vehicles under operating leases. In addition,
we have contracted consulting services related to computer aided

design (CAD) until 29 December 2009. Future minimum
payments under these agreements, which have initial or
remaining terms in excess of one year at 31 December 2008,
are as follows:

Within one year

Between one and two years

Between two and three years

Between three and four years

Between four and five years

Thereafter

Total

Operating leases
and software
commitments
8
€

Other

commitments

Operating leases

and software

commitments

Other

commitments

2008

€000

1,411

205

–

2007

€000

2,180

338

235

176

–

2007

€000

2,293

2,557

993

–

6,714

1,685

2,929

5,942

Finance lease, hire purchase and software commitments
The Group has finance leases and hire purchase contracts for test
and IT equipment and has software contracts. The leases have
terms of renewal but no purchase options and escalation clauses.

Renewals are at the option of the specific entity that holds the
lease. Future minimum payments under finance leases and hire
purchase and software contracts together with the present value
of the net minimum payments are as follows:

Within one year

Between one and two years

Total minimum payments

Less amounts representing finance charges

Present value of minimum payments

Minimum payments

8
US$

2007

US$000

()

–

We have no long-term debt, capital lease obligations,
unconditional purchase obligations or any other long-term or
financial obligations that would have a material impact on our
liquidity or financial condition. We have supply agreements with
various suppliers.

foreseeable future. Dialog’s Board of Directors is committed to
reinvesting all profits into creating a framework for future growth
and continues to believe that – in line with strategic changes
underway – this policy is in the best interest of Dialog’s Shareholders.

Dividend
We did not pay dividends in the years ended 31 December 2008,
2007 and 2006 and do not plan to pay dividends in the

Jean-Michel Richard
CFO, Vice President Finance

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Risks and their management

The market
The market in which we compete is intensely competitive and
highly cyclical, and is characterised by continuous development
and technological improvement. Our future success depends on
our ability to anticipate and respond to new market trends, to
implement new designs rapidly to meet customers’ needs, and to
keep abreast of the technological changes. As a result, we invest
in research and development to enable us to create innovative
designs and products on a cost-effective, timely basis.

Revenue and profitability
We were profitable in 2008 but had not been profitable for the
previous seven financial years. We therefore cannot guarantee
that we will be profitable in the future. But we constantly seek to
improve profitability by launching new products and acquiring new
customers. Since we continue to rely on a relatively small number of
customers for a substantial proportion of our revenue, the loss of
one or more of these customers would be likely to have a material
affect. Our goal is to spread this risk by acquiring more customers. In
the past year, we have made considerable progress in this objective.
We are attempting to reduce the risk of our revenues, profitability
and growth being affected by a slow-down in the wireless
communications market by winning customers in other sectors.

Third-party costs
During 2007, we outsourced our manufacturing and testing
to lower-cost environments, where there is excellent capacity,
to overcome the potential problem of an inability to access
manufacturing capacity which would result in increased costs
and, therefore, decreased revenue.

Supplier risk
The financial crisis and its potential impact on the economy
will result in a global economic slowdown which could have
a negative impact on the Company’s suppliers. If any of the
Company’s suppliers were to become insolvent, there could be
a risk of the Company’s production being interrupted. For this
reason, the Company tries to source its components from at least
two different suppliers and from different sites. In addition, the
Company takes the necessary precautions for supplier insolvency
with its risk management system in which information on the
creditworthiness of suppliers is kept. This allows the Company
to identify suppliers at risk at an early stage.

Intellectual property
We make strenuous efforts to protect our intellectual property
from being copied or used by others.

Interest rate risk
The Group earns interest from bank deposits and uses money
market deposits with highly rated financial institutions. During the
year, the Group has held cash on deposit with a range of maturities
from one week to one month. This can vary in view of changes
in the underlying currency’s interest rates and the Group’s cash
requirements. Furthermore, during the year the Group also held
liquid “investment grade” rated debt-based funds classified as
available for sale or held to maturity. These funds incorporated
floating interest rates that were reset as market rates changed.
By the end of 2008, all securities were sold for cash. The Group has
no long-term debt and no amounts outstanding under short-term
credit facilities as at 31 December 2008 (2007: US$nil).

The Group’s policy is to manage its interest income using a mix
of fixed and variable interest rate debts. In order to achieve this
policy, the Group invests in highly liquid funds having a matching
investment strategy. Once the operating business has been
financed, short-term excess funds are invested in floating interest
rate securities. Only short-term deposits bear fixed interest rates.

Currency risk
The Company’s functional – and presentational – currency
is the US dollar, and the majority of its revenue and expenses
are in that currency.

There are, however, foreign exchange risks associated with
transactions, and recognised assets and liabilities in other
currencies, primarily the euro and the pound sterling.

Transaction currency exposures arise from sales or purchases
in currencies other than the US dollar. We use forward currency
contracts to eliminate our exposure associated with the payment
of salaries and wages in other currencies. We maximise the
effectiveness of our hedge derivatives by matching the terms
and conditions of the hedge to those of the underlying obligation
(see note 26 on page 72 for further information).

Other price risks
IFRS 7 requires us to disclose how hypothetical changes in risk
variables, such as stock exchange prices, would affect the price
of financial instruments. As part of our cash management, in 2007
we invested in available-for-sale securities with defined maturities
and repayments of 100% of their nominal amounts. Fluctuations
could occur during their maturity, however, and have an impact on
the Company’s profit or loss. In 2008, the Group sold all securities
for cash, eliminating all price risk associated with such instruments.

Credit risk
The Company is exposed to credit risk from its operating
activities and certain of its financing activities. We ensure that
our exposure to bad debt is minimised by constantly monitoring
all customers who trade on credit terms, and receivable balances.

In August 2007, we entered into a factoring agreement with a
reputable German financial institution for a total of €10 million
to finance our growth. In 2008, the amount was increased to
US$30.0 million. Since the financial institution assumes all risks
associated with the collection of receivables from selected
customers, the agreement significantly reduces our risks
associated with their collection.

Our exposure to credit risks arising from other financial assets,
such as cash and cash equivalents, available-for-sale and held-to-
maturity financial investments, would arise from the default
of a counterparty and is limited to the carrying amount of the
particular instruments.

Liquidity risk
We monitor our liquidity on a quarterly basis with the objective
of avoiding interest on short-term bank liabilities or overdrafts. Our
policy is to structure the maturity of our current financial assets in
the Group to meet 100% of the respective maturities and liabilities.

Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 2 | Business review

Corporate social responsibility

Corporate social responsibility
Dialog considers that the social challenges of corporate
responsibility should be based on fair wages, healthy and
safe working conditions, respect for human rights, honest
relationships and commitment to community development.

With regard to these challenges Dialog is committed to the
adoption of the Electronics Industry Code of Conduct (EICC)
standard as the model for ensuring that working conditions
for internal and external suppliers are safe and that all workers
are treated with respect and dignity. In addition, the Company
complies with the ISO 14001 environmental standard – and
expects its suppliers to do the same – in order to ensure that
all manufacturing processes are environmentally responsible.

Management systems
Dialog’s management system complies with the EICC code.
It is certified to the TS16949 international standard as a formal
implementation of the code and is committed to implementing
and facilitating continuous improvements, and to mitigating
operations-related risks. To enable us to comply with all applicable
laws, regulations and customer requirements, as required by
the code, we also ensure that all our major supply-chain partners
are accredited at least to the same standard. To ensure that we
constantly improve our management systems, we regularly review
and audit internal and supply-chain management systems.

The environment and environmental protection
The environmental agenda at Dialog considers climate change
environmental protection aspects (air, land and water quality),
effective resource management (eco-efficiency) and sustainability.

Our commitment to the environment is evidenced by our ISO14001
certification. Since we firmly believe that sustainable development
can be secured only if we safeguard our valuable resources, we
deal only with suppliers which have similar environmental goals
and are also accredited to the ISO14001 standard.

Within our supply chain, we continually emphasise that
environmental issues should be an instinctive part of any
decision-making process, and that suppliers should use
environmentally-friendly technology to:
(cid:1) reduce and eliminate emissions of ozone-depleting, and other,

chemicals;

(cid:1) manage, reduce and dispose of hazardous substances safely;
(cid:1) monitor and control waste water and solid waste emissions;
(cid:1) reduce and eliminate all types of waste, including water

and energy;

(cid:1) reduce waste by maximising product yields; and
(cid:1) ensure all environmental permits are obtained, maintained

and kept current.

Health and safety
Dialog considers a safe and healthy working environment to
be essential in the maintenance of employees’ morale and in the
production of high-quality and innovative products. As a result,
we require our major suppliers also to be committed to ensuring
the creation of healthy and safe working conditions. We expect
them to provide evidence of suitable controls, safe working
procedures, preventative maintenance and general protective
measures in their working environments.

Dialog Semiconductor Plc Annual Report and Accounts 2008

When hazards cannot be adequately controlled by these means
alone, suitable protective clothing or equipment is supplied, and
evacuation procedures and facilities are in place at Dialog’s and
suppliers’ premises.

Connecting with employees
Dialog aims to attract and retain the best people by ensuring that
all employees receive comprehensive on-the-job formal training,
coaching and mentoring. Clear and regular communication is
achieved through regular company-wide information sessions,
led by the CEO, and every effort is made to keep employees fully
aware of Company matters that affect them.

We encourage employee feedback at all levels for new ideas
to improve business efficiency and performance. We support
initiatives and fund raising in the local communities in which
we work. In 2007, for example, we made a contribution to
a cancer hospice charity.

Ethics
Dialog believes that continued success in the semiconductor
market can be achieved only by adopting continuously high
standards of ethical behaviour when dealing with customers,
suppliers and workers. It is particularly important to protect
Intellectual Property (“IP”), which is the key to ensuring the
development of innovative solutions to complex problems.
Any transfer of technology or know-how is always done in a
manner that protects IP rights; effective protection also means
that products can be discussed openly with our business partners.

The disclosure of information which is related to business activities,
structure, our financial situation and performance is always carried
out in accordance with applicable regulations and prevailing
industry practices. We expect the highest standards of integrity
from all Dialog stakeholders; any malpractice is strictly prohibited
and may result in immediate termination and legal action.

Neither we nor our suppliers offer or accept inducements or
any other means of obtaining undue or improper advantage.
We have a “whistleblower” policy in place to protect employees’
confidentiality and encourage our suppliers to do the same.

Human rights
Dialog’s suppliers must demonstrate a commitment to upholding
workers’ human rights and to treating them with dignity and
respect. Standards such as the Universal Declaration of Human
Rights, Social Accountability International and the Ethical Trading
Initiative have been used as a basis for these requirements.

All labour must be given voluntarily and workers must be free to
leave their employment on reasonable notice. Child labour must
not be used at any stage of manufacturing. Working hours must
not exceed the maximum set by local laws, and wages must
comply with all applicable laws.

Suppliers must ensure that workers are not threatened or subjected
to inhumane or harsh treatment, harassment or any form of
unlawful discrimination. Communication and direct engagement
between workers and management is encouraged, even in those
countries where there is no meaningful legal protection.

Section 3 | Management and governance

Executive management

Dr Jalal Bagherli ()
Chief Executive Ofﬁcer
Jalal joined Dialog, as CEO, in
September 2005. He was previously
Vice President and General Manager
of the Mobile Multimedia business
unit for Broadcom Corporation
and the CEO of Alphamosaic.
He has extensive experience of the
semiconductor industry through his
previous professional and executive
positions at Texas Instruments and
Sony, and a wealth of knowledge
about the Far Eastern, European
and North American markets.
He is a non-executive Director
of Lime Microsystems Ltd.

Gary Duncan ()
Vice President, Engineering
Gary, who joined the Company
in 1987, is responsible for the
design and development of our
semiconductor products. Before
joining Dialog, he held senior
engineering and management
roles at Plessey and ES2.

Peter Hall ()
Vice President, Supply Operations
and Quality
Peter joined Dialog in 1987 and is
responsible for supply operations,
purchasing, procurement and quality
control. He also reports directly to
the Audit Committee in his role as
Internal Audit Manager. His previous
experience includes management
and engineering positions at STC
Semiconductors and MEM in
Switzerland. Peter holds a BSc in

electrical and electronic engineering
from Newcastle University and an
MSc in digital design techniques from
Herriot Watt University, Edinburgh
and an MBA from the Open
University, United Kingdom.

Udo Kratz ()
Vice President, General Manager
Audio and Power Management
Business Unit
Udo joined Dialog in May 2006.
He is responsible for the Audio and
Power Management Business Unit
which makes products for the mobile
phone and portable consumer
markets. His 18 years’ experience
in the semiconductor industry was
gained in general management,
senior marketing and engineering
at Robert Bosch GmbH, Sony
Semiconductor and Inﬁneon
Technologies. Udo holds an
electronic engineering degree
from the University for Applied
Sciences, Mannheim.

Jean-Michel Richard ()
CFO, Vice President Finance
Jean-Michel joined the Company
in 2006 to head up its ﬁnance
department. He was previously
Finance Director for the Global
Manufacturing and Technology
Division of ON Semiconductor, in
Phoenix, Arizona, and before that
held senior ﬁnance and treasury
positions at ON and Motorola, in
Europe and the US. Jean-Michel holds
a Masters in Economics from the
University of Geneva, Switzerland.

Jürgen Friedel ()
Vice President, General Manager
Automotive and Industrial
Business Unit
Jürgen joined Dialog in 1999 and is
responsible for the Automotive and
Industrial Business Unit. He previously
held senior management positions at
SEL/ITT and National Semiconductor,
in Germany. Jürgen holds a diploma
in communications engineering
from the University for Applied
Sciences, Esslingen.

Manoj Thanigasalam ()
Vice President, General Manager
Display Systems Business Unit
Manoj joined the Company in March
2006. Responsible for the Display
Systems Business Unit, he was
previously Vice President of Business
Development at ZBD Displays and,
before that, was General Manager
of marketing for the Digital TV and
wireless communications market
at Sony Semiconductor. He has also
worked for Texas Instruments, Philips,
ARM and LSI Logic. Manoj holds a
degree in physics and electronics
from Bradford University.

Mark Tyndall ()
VP Business Development
and Corporate Strategy
Mark Tyndall joined Dialog
Semiconductor as Vice President
of Business Development and
Corporate Strategy in September
2008. Prior to Dialog, Mark was Vice
President of Business Development
and Corporate Relations at MIPS

Technologies. From 1999 to 2006,
he held the position of Vice President
of Business Development at Inﬁneon
and has also served as a Board
Director of a number of start-up
companies, several of which were
successfully acquired. Earlier in
his career, Mark held management
positions in marketing at Fujitsu
Microelectronics and in design at
Philips Semiconductors.

Mohamed Djadoudi ()
Vice President, Global
Manufacturing Operations.
Mohamed joined Dialog in March
2007 and is responsible for product
engineering, test development,
assembly development, data
automation and software support and
offshore manufacturing operations.
Mohamed has 24 years’ experience
in the ﬁeld of semiconductor
manufacturing operations, starting
initially with IBM in France and the
US. He was previously Senior Vice
President and Chief Technology
Ofﬁcer of the Unisem group, an
assembly and test subcontractor
based in Malaysia and China. He also
held the position of Vice President
of Test Operations at ASAT based
in Hong Kong before becoming one
of the original members of the
management buy-out team of ASAT
UK (Atlantis Technology UK), where
he served as the Technical Director.
Mohamed holds an Electronic and
Electrotechnic degree from the Paris
University of Technology.

From left to right: Peter Hall, Udo Kratz,

Jürgen Friedel, Jalal Bagherli, Jean-Michel

Richard, Gary Duncan, Manoj Thanigasalam,

Mark Tyndall and Mohamed Djadoudi.

Section 3 | Management and governance

Board of Directors

Gregorio Reyes ()
Chairman
Gregorio joined the Board in
December 2003. His experience
is primarily in data storage and
magnetic recording, semiconductors,
and telecommunications. He was
President and CEO of National
Micronetics from 1981 to 1984,
and Chairman and CEO of American
Semiconductor Equipment
Technologies from 1986 to 1990.
He co-founded Sunward Technologies
in 1985 and was Chairman and CEO
until 1994. He is currently on the
Board of Seagate Technology and
is also a Director of a number of
privately-held companies, including
LSI Logic, Nuera Communications,
Future Trade Technology, Appshop
and Astute Networks.

Dr Jalal Bagherli ()
Chief Executive Ofﬁcer
Jalal joined Dialog, as CEO, in
September 2005. He was previously
Vice President and General Manager
of the Mobile Multimedia business
unit for Broadcom Corporation and
the CEO of Alphamosaic. He has
extensive experience of the
semiconductor industry, through his
previous professional and executive
positions at Texas Instruments and
Sony, and a wealth of knowledge
about the Far Eastern, European
and North American markets.
He is a non-executive Director
of Lime Microsystems Ltd.

Michael John Glover ()
Non-executive Director
Michael joined the Board of Dialog’s
then holding company in 1990 and
has been a Director of Dialog since
March 1998. He was previously an
executive and Director of technology
based companies in the UK, Europe,
South-east Asia and North America
and he is a Senior Fellow specialising
in Entrepreneurial Business
Development at the University of
Surrey’s School of Management.
He holds a degree in economics
from the University of Birmingham.

Aidan Hughes ()
Non-executive Director
Aidan joined the Board in October
2004. He qualiﬁed as a Chartered
Accountant with Price Waterhouse
in the 1980s before taking senior
accountant roles at Lex Service Plc
and Carlton Communications Plc.
He was Finance Director of the Sage
Group plc from 1993 until 2000 and,
from December 2001 to August
2004 was a Director of Communisis
Plc. He is a Director of, and investor
in, a number of UK private
technology companies.

John McMonigall ()
Non-executive Director
John joined the Board in March
1998. He has been a Director at
Apax Partners since 1990 and,
between 1986 and 1990, held a
variety of senior positions at British

Telecommunications plc and was
also a member of the management
board. He is currently on the Board
of several other public and private
companies including Autonomy Plc.

Russ Shaw ()
Non-executive Director
Russ joined the Board in July 2006.
He is currently Director of Innovation
at Telefonica. He was previously
Innovation Director at O2, which he
joined as Marketing Director in 2005.
The strong brand and product range
he established resulted in signiﬁcant
customer growth. His more than 20
years’ senior marketing and brand
management experience in the
telecoms and ﬁnancial services area
has enabled him to bring an excellent
level of knowledge to Dialog.

Chris Burke (8)
Non-executive Director
Chris joined the Board in July 2006.
Until the end of 2004, he was CTO
at Vodafone UK Limited and was
previously CTO at Energis, after
spending 15 years in Research and
Development at Northern Telecom.
He holds appointments at Connectivity
Ltd (an Esprit, and 3i Portfolio
Company), Tatara Systems, One
Access, INUK Networks, and March
Networks. He currently invests from
his own fund and provides strategic
advice to a wide range of investors
and technology companies, including
HP Communications & Media, and
VantagePoint Venture Partners.

Peter Weber ()
Non-executive Director
Peter joined Dialog on 1 February
2006. He brought with him 35 years’
experience, gained at a broad range
of companies in the semiconductor
sector, including Texas Instruments,
Intel, Siliconix, the Temic Group and
Netro Corporation. Since 1998 he has
been an investor and management
consultant, and is a Director of a
number of companies in Europe and
the US. Peter holds an MSEE degree
in communications engineering.

Peter Tan (9)
Non-executive Director
Peter joined the Board in July 2006.
He has held senior management roles
across a wide range of technology
companies, including Apple
Computer, Molex and Flextronics.
During more than 30 years’
experience of operating in the Far
East he has built up expertise in
world-class manufacturing and
technology companies.

From left to right: Gregorio Reyes, Peter

Weber, John McMonigall, Aidan Hughes,

Jalal Bagherli, Russ Shaw, Michael Glover,

Peter Tan and Chris Burke.

Section 3 | Management and governance

Directors’ report

The Directors of Dialog Semiconductor Plc (“Dialog” or “the Company”) present their annual report and audited financial statements
for the year ended 31 December 2008. These accounts have been prepared under IFRS for UK reporting purposes and available on the
Company’s Website, www.dialog-semiconductor.com.

Principal activities and review of the business
Dialog Semiconductor creates some of the world’s most energy-efficient, highly integrated, mixed-signal integrated circuits. These are
optimised for personal mobile and automotive applications. The Company provides flexible and dynamic support, world-class innovation,
and the assurance of dealing with an established business partner. Customers with a significant contribution to revenue include
Sony Ericsson, Apple, Bosch and Tridonic. With its unique focus and expertise in system power management, Dialog brings decades of
experience to the rapid development of integrated circuits for power and motor control, audio and display processing. Dialog’s processor
companion chips are essential for enhancing both the performance of hand-held products and the consumers’ multimedia experience.
Automotive applications include intelligent motor control for comfort and safety systems. Over one billion parts have been shipped
to date. With world-class manufacturing partners, Dialog operates a fabless business model. Dialog Semiconductor Plc is headquartered
near Stuttgart, Germany with operations in Austria, China, Germany, Japan, Korea, Taiwan, the UK and the USA. The Company employs
approximately 280 worldwide, and is listed on the Frankfurt (FWB: DLG) stock exchange.

More information about the business is set out in the Chairman’s statement, on page 6, and in the Business review, on pages 10 to 24.

Future developments
The Group’s stated objective is to be the leading global supplier of lowest-power, highest-quality mixed signal components and system
level solutions to the wireless and automotive markets.

Research and development (R&D)
The Group believes that its future competitive position will depend on its ability to respond to the rapidly-changing needs of its
customers by developing new designs in a timely and cost-effective manner. To this end, the Company’s management is committed
to investing in researching and developing new products and customising existing products.

To date, R&D projects have been in response to key customers’ requests to assist in the development of new products, and for the
development of application-specific standard products (ASSPs). The Company does not expect any material change to this approach
in the foreseeable future.

Going concern
After reviewing the 2009 budget and longer-term plans, the Directors are satisfied that, at the time of approving the financial
statements, it is appropriate to adopt the going-concern basis in preparing the financial statements of the Company.

Dividends
The Directors do not recommend the payment of a dividend (2007: nil). They are committed to re-investing all profits into the business
and believe that this policy is in the best interests of its Shareholders.

Purchase of own shares
The Company operates an Employee Share Option Trust which purchases shares in the Company for the benefit of employees under
the Company’s share option scheme. Since the Company has de facto control of the assets and liabilities of the Trust, they are included
in the Company and Group balance sheets. At 31 December 2008, the Trust held 641,259 shares, which represented 1.4% of the total
called-up share capital, at a nominal value of £64,126.

Share capital
Details of the share capital are set out in note 20 to the consolidated financial statements.

Substantial shareholdings
Details of substantial shareholdings are on page 9 of this annual report.

Directors
The Directors, together with their biographies, are listed on page 26 of this report.

Directors’ remuneration and interests
Directors’ remuneration and interests are detailed in the Directors’ remuneration report on pages 31 to 34 of this annual report.
No Director had a material interest during the year ended 31 December 2008 in any contract of significance with any Group company.

Dialog Semiconductor Plc Annual Report and Accounts 2008 27

Section 3 | Management and governance

Directors’ report

Directors’ third-party indemnity provisions
The Company has granted an indemnity to its Directors against proceedings brought against them by third parties, by reason of their
being Directors of the Company, to the extent permitted by the Companies Act 2006. Such indemnity remains in force as at the date
of approving the Directors‘ report.

Election and re-election of Directors
In accordance with the Company’s Articles of Association, one-third of the non-executive Directors have to stand for re-election at the
Annual General Meeting. The next Annual General Meeting will be held on 22 April 2009 at 9am.

Corporate Governance
The Company’s Corporate Governance statement is set out on pages 29 and 30 of this report.

Supplier payment policy
It is the Group’s policy to pay creditors in accordance with the terms and conditions agreed with them, and in accordance with
contractual and other legal obligations. Days payable outstanding for the Group at 31 December 2008 was 40 days (2007: 77 days).

Financial instruments
The Group’s financial risk management and policies, and exposure to risks, are set out on page 23.

Political and charitable contributions
The Group made no political contributions during the period. We made charitable contributions of US$8,993 to local community
projects (2007: US$1,200).

Employee policies
It is our policy to support our people through training, career development and opportunities for promotion. We operate an open-
management approach and consult with our staff on matters which are of concern to them. We share information with them on
the performance of the Company which, together with related bonuses, encourages staff involvement.

Disabled persons
Our policy provides for disabled persons, whether registered or not, to be considered for employment, training and career development
in accordance with their aptitudes and abilities.

Statement on disclosure of information to auditors
The Directors who were members of the Board at the time of approving the Directors’ report are listed on page 26. Having made
enquiries of fellow Directors and of the Company’s auditors, each of the Directors affirms that:
(cid:1) to the best of their knowledge and belief, there is no information relevant to the preparation of their report of which the Company’s

auditors are unaware; and

(cid:1) they have taken all reasonable steps to be aware of relevant audit information and to establish that the Company’s auditors are

aware of that information.

Annual General Meeting
The notice convening the Annual General Meeting will be published separately and posted on the Company’s Website.
The meeting will be held at Tower Bridge House, St Katherine’s Way, London E1W 1AA on 22 April 2009 at 9am.

Auditors
In accordance with Section 384 of the Companies Act 2006, a resolution for the re-appointment of Ernst & Young LLP as auditors
of the Company is to be proposed at the forthcoming Annual General Meeting.

By order of the Board

Dr Jalal Bagherli
Director

25 February 2009

28 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 3 | Management and governance

Corporate Governance

Governance standards
Dialog Semiconductor Plc is committed to implementing high levels of governance. Accordingly, Dialog Semiconductor (as a foreign
company listed on the German stock exchange) has established and published its own Corporate Governance principles corresponding
in substance to the provision of the “German Declaration on Corporate Governance”.

Dialog’s Corporate Governance principles are published on its Website (www.dialog-semiconductor.com). The Website also contains
a full version of the Company’s Code of Business Conduct and Ethics. This details Dialog’s expectations regarding the ethical standards
that each Director, officer and employee should follow while acting on the Company’s behalf.

Corporate Governance information relating to the past financial year is set out below.

Shareholders and the Annual General Meeting (“AGM”)
The AGM, at which the annual financial statements and audit reports are presented, is the main forum for Shareholders to exercise
their voting rights. Directors appointed by the Board during any given year are subject to Shareholder approval at the AGM.

In addition, one-third of the Directors must resign each year and may put themselves forward for re-election. Changes to the
constitution of the Company are decided by Shareholders’ resolution. Similarly, the AGM is the forum at which Shareholders can
authorise the Directors to issue new shares.

Dialog does not have any shares in issue which have multiple voting rights, preferential voting rights or maximum voting rights.

Board of Directors
The Board is responsible for determining Dialog’s business strategy and ensuring that an executive is appointed to implement it.

It is also responsible for overseeing the financial aspects of the business.

The Board, which met five times during the year, currently consists of eight non-executive Directors and one executive Director.
The compensation provided to each Director is detailed in the Directors’ remuneration report on pages 32 and 33. The executive
Director’s remuneration is performance related and is connected to a set of goals and Dialog’s profitability.

Audit Committee, and Remuneration and Nomination Committee
During the year, Dialog’s Audit Committee comprised the following Directors: Aidan Hughes (Chairman), Michael Glover, Peter Weber
and Peter Tan. The Committee is responsible for monitoring financial statements and reviewing the performance of the external
auditors. It also assesses the efficiency of the audit process and (among other things) considers compliance with accounting standards.
The Chief Executive Officer, Chief Financial Officer, the Company Secretary and representatives of the external auditors usually attend
Audit Committee meetings.

During the year, the Audit, and Remuneration and Nomination Committees met frequently to analyse issues under their jurisdiction,
usually on the day before each Board meeting.

The Remuneration and Nomination Committee is chaired by Russ Shaw who is assisted by Michael Glover and Chris Burke.
The responsibility of the Committee, among other things, is to determine subject to Board approval, the salaries and incentives
of Dialog’s senior executives and decides on the size and composition of the Board. Corporate Governance is monitored at Board
level – a reflection of the importance it is given by the Board.

Dialog Semiconductor Plc Annual Report and Accounts 2008 29

Section 3 | Management and governance

Corporate Governance

Transparency
Under UK Disclosure and Transparency Rules, significant Shareholders are required to notify Dialog of a shareholding of 3% or more.
Dialog must then notify BaFin and the Stock Exchange. Under S. 15a of the German Securities Trading Act (Wertpapierhandelsgesetz)
transactions in the Company’s shares carried out by members of the Board of Directors and their family members are reported and
published without delay.

The Company operates a Code of Dealing in its shares which is designed to prevent insider trading and the abuse of price
sensitive information.

The Board appreciates the value of keeping Shareholders informed of Dialog’s performance throughout the year. As a result it publishes
quarterly financial reports, together with key information on the AGM, on its Website.

Business conduct and ethics
Dialog seeks to comply with all laws and regulations that have an impact on its business. In addition, the Company expects its
employees and Directors to act with honesty, integrity and fairness in the conduct of its business. Dialog’s Code of Business Conduct
and Ethics is published on the Company’s Website.

Dialog is committed to taking account of interests outside the Company, including those of employees, business partners, the
environment and the local communities on which it has an impact. The Board values, and has developed, a culture of corporate social
responsibility that takes the above factors into consideration.

Audit and auditors
The consolidated financial statements have been audited by Dialog’s auditors, Ernst and Young (“E&Y”). E&Y were appointed in
October 2006 following a tender process.

The remuneration given to the auditors over the past two financial years is detailed in notes 4 and 31 to the consolidated financial
statements on pages 55 and 80.

The Company’s audited financial statements for the year ended 31 December 2007, and the reports from the Directors and auditors
thereon, were presented to, and approved by, the Shareholders at the AGM of the Company held on 30 April 2008. E&Y, the
Company’s independent auditor, was reappointed until the following AGM.

Declaration of conformity with regard to the German Corporate Governance Code
Dialog Semiconductor Plc has established and published its own Corporate Governance principles corresponding in substance
to the provisions of the German “Corporate Governance Code” as amended on 14 June 2007 thereby adopting in substance
the recommendations of the Government Commission on the German Corporate Governance Code.

This declaration is available on the internet at: www.dialog-semiconductor.com.

Gregorio Reyes
Chairman

19 February 2009

30 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 3 | Management and governance

Directors’ remuneration report

Policy on Directors’ remuneration
The Board is responsible for setting the Company’s policy on Directors’ remuneration; the Remuneration and Nomination Committee
agrees the remuneration for each executive Director.

The primary objectives of the Company’s policy on executive Directors’ remuneration are first, that it should be structured so as to
attract and retain executives of a high calibre, with the skills and experience necessary to develop the Company successfully and,
second, to reward them in a way which encourages the creation of value for the Company’s Shareholders.

The performance measurement of each executive Director and the determination of his annual remuneration package are undertaken
by the Remuneration and Nomination Committee.

No Director is involved in deciding his or her own remuneration. The Remuneration and Nomination Committee comprises non-
executive Directors and its role is, inter alia, to apply the Board’s policy on remuneration. The current members of the Committee are
Russ Shaw (Chairman), Michael Glover and Chris Burke.

The Company has one executive Director, Dr Jalal Bagherli, who was appointed on 12 September 2005. The executive Director’s
remuneration consists of three components:
1. Salary – reflects the executive’s experience, responsibilities and market value;
2. Bonus – as part of his remuneration Dr Bagherli receives bonuses based on objectives set by the Remuneration and Nomination
Committee relative to the performance of the Group, as an incentive to Dr Bagherli to achieve relevant and demanding targets,
in relation to revenue growth, operating profit, design wins; and
3. Share options – details are set out in note 22 to the consolidated financial statements.

Compensation of non-executive Directors
Non-executive Directors, for example, are paid quarterly for their roles as Directors. Additional fees are paid to the Chairman of the
Company’s Board committees, the Audit Committee, and the Remuneration and Nomination Committee.

Our Directors are all reimbursed for any reasonable travel expenses incurred in connection with their attendance at Board meetings
or Board committees; they are also eligible to receive share options.

Directors’ contracts
The service agreement with Dr Jalal Bagherli, executive Director, dated 19 July 2005, is of unlimited duration. The agreement may
be terminated by either party on six months’ notice.

Performance graph
Details are set out on page 7 of this report.

Share options
Details are set out in note 22 to the consolidated financial statements, on pages 66 and 67.

Directors’ share interests
Directors’ beneficial interests (as defined by the Companies Act 1985) in 10 pence ordinary shares of the Company are set out in note
22a, on page 66, in the notes to the consolidated financial statements.

Dialog Semiconductor Plc Annual Report and Accounts 2008 31

Section 3 | Management and governance

Directors’ remuneration report

Directors’ pension arrangements
The Company contributes 9% of the executive Director’s basic salary to a pension scheme. There are no pension arrangements
for non-executive Directors.

The compensation of the members of the Board of Directors is as follows:

Name and position

Dr Jalal Bagherli

Base salary
US$

Other

US$

Total
2008

US$

Total

2007

US$

Directors’ holdings

at 31 December 2008

Options

Executive Director and CEO

311,955

127,917

439,872

630,847

563,892

360,555

Chris Burke

Non-executive Director

Michael Glover

Non-executive Director

Aidan Hughes

Non-executive Director and

Chairman of the Audit Committee

John McMonigall

Non-executive Director

Gregorio Reyes

Non-executive Chairman

Russ Shaw

Non-executive Director and

Chairman of the Remuneration and

Nomination Committee

Peter Tan

Non-executive Director

Peter Weber

Non-executive Director

36,701

45,876

36,701

45,876

41,288

36,701

–

36,701

40,024

8,000

90,000

36,701

40,024

220,000

90,000

45,876

50,030

25,000

90,000

36,701

45,027

100,000

90,000

45,876

55,033

160,000

90,000

41,288

40,024

19,891

90,000

36,701

40,024

30,000

90,000

36,701

40,024

25,000

90,000

628,500

127,917

756,417

981,057

1,151,783

1,080,555

32 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 3 | Management and governance

Non-executive Directors’ terms
All non-executive Directors are appointed for up to three years by the Board of Directors, subject to any earlier requirements to
stand for re-election as required by the Articles of Associations (one-third of the non-executive Directors must stand for re-election
at each AGM).

Share options granted to the executive Director
As of 31 December 2008, Jalal Bagherli, executive Director, held 360,555 options over ordinary shares which entitle him to acquire the
same amount of shares:

Exercise price
€

Date of grant

Expiry date

Vesting period

2007

Forfeited

Exercised

2008

At 31 December

2.00

3.50

5.00

6.50

8.00

0.10

12.09.2005

11.09.2015

12.09.2005

11.09.2015

12.09.2005

11.09.2015

12.09.2005

11.09.2015

12.09.2005

11.09.2015

4 years

01.02.2006

18.07.2015

1-44 months

01.02.2006

18.07.2015

1-44 months

60,000

83,438

51,293

–

(7,500)

(7,684)

(38,438)

(20,554)

60,000

37,500

23,055

434,731

(15,184)

(58,992)

360,555

Dialog Semiconductor Plc Annual Report and Accounts 2008 33

Section 3 | Management and governance

Directors’ remuneration report

Share options granted to the non-executive Directors
Each non-executive Director was entitled to an initial grant of 50,000 options vesting monthly in 48 equal tranches. At each AGM,
non-executive Directors receive a further 20,000 options vesting over 12 months. Options may be exercised at the market price
prevailing at the date of grant. The non-executive Directors are not subject to performance criteria related to their remuneration.
The stock options granted to non-executive Directors are not, therefore, subject to the achievement of performance targets.

The share option grants to non-executive Directors are as follows:

Director

Chris Burke

Michael Glover

Aidan Hughes

John McMonigall

Gregorio Reyes

Russ Shaw

Peter Tan

Peter Weber

Total

Exercise price
€

Date of grant

Expiry date

Vesting period

2007

options granted

2008

At 31 December

Number of

At 31 December

1.40

1.80

1.35

1.27

1.80

1.35

1.27

1.80

1.35

1.27

1.80

1.35

1.27

1.80

1.35

1.40

1.80

1.35

1.40

1.80

1.35

1.27

1.80

1.35

12.07.2006

11.07.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

19.06.2006

18.06.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

19.06.2006

18.06.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

19.06.2006

18.06.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

19.06.2006

18.06.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

12.07.2006

11.07.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

12.07.2006

11.07.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

19.06.2006

18.06.2013

10.05.2007

09.05.2014

30.04.2008

29.04.2015

48 months

12 months

48 months

12 months

48 months

12 months

48 months

12 months

48 months

12 months

48 months

12 months

48 months

12 months

48 months

12 months

50,000

20,000

–

50,000

20,000

–

50,000

20,000

–

50,000

20,000

–

50,000

20,000

–

50,000

20,000

–

50,000

20,000

–

50,000

20,000

–

20,000

–

20,000

–

20,000

–

20,000

–

20,000

–

20,000

–

20,000

–

20,000

50,000

20,000

50,000

20,000

50,000

20,000

50,000

20,000

50,000

20,000

50,000

20,000

50,000

20,000

50,000

20,000

560,000

160,000

720,000

Approved by the Board of Directors and signed on its behalf by:

Tim Anderson
Secretary

19 February 2009

34 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 3 | Management and governance

Statement of Directors’ responsibilities

Statement of Directors’ responsibilities
The Directors are responsible for preparing the IFRS report and accounts 2008 and the Group and parent company financial statements
in accordance with the applicable law and regulations.

Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under the law
the Directors are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and have elected
to prepare the parent company financial statements on the same basis.

The Group and parent company financial statements are required by law and IFRS as adopted by the EU to present fairly the financial
position of the Group and the parent company and the performance for that period; the Companies Act 1985 provides in relation
to such financial statements that references in the relevant part of the Act to financial statements giving a true and fair view are
references to their achieving a fair presentation.

In preparing each of the Group and parent company financial statements, the directors are required to:
(cid:1) select suitable accounting policies and then apply them consistently;
(cid:1) make judgements and estimates that are reasonable and prudent;
(cid:1) state whether they have been prepared in accordance with IFRS as adopted by the EU; and
(cid:1) prepare the financial statements on the going-concern basis unless it is inappropriate to presume that the Group and the parent

company will continue in business.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial
position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985.
They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and
to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report and Directors’ remuneration
report that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company’s Website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from
legislations in other jurisdictions.

Responsibility statement

To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give
a true and fair view of the assets, liabilities, financial position and profit and loss of the Group, and the Group management report
includes a fair review of the development and performance of the business and the position of the Group, together with a description
of the principal opportunities and risks associated with the expected development of the Group.

Dr Jalal Bagherli
Chief Executive Officer

Jean-Michel Richard
CFO Vice President Finance

19 February 2009

Dialog Semiconductor Plc Annual Report and Accounts 2008 35

Section 4 | Consolidated ﬁnancial statements and notes

Independent Auditors’ report

Independent auditors’ report to the members of Dialog Semiconductor Plc
We have audited the Group and Parent Company financial statements (the “financial statements”) of Dialog Semiconductor Plc for
the year ended 31 December 2008 which comprise the Group Income Statement, the Group and Parent Company Balance Sheets,
the Group Company Cash Flow Statement, the Group and Parent Company Statement of Changes in Equity and the related notes.
These financial statements have been prepared under the accounting policies set out therein. We have also audited the information
in the Directors’ Remuneration Report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’
report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors
The Directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in
accordance with applicable United Kingdom law and International Financial Reporting Standards (IFRSs) as adopted by the European Union
are set out in the Statement of Directors’ Responsibilities.

Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with
relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and
the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and,
as regards the group financial information, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information
given in the Directors’ report is consistent with the financial statements. The information given in the Director’s report includes that specific
information presented in the Operating and Financial review that is cross referred from the Business review section of the Director’s report.

In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and other
transactions are not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements.
The other information comprises only the unaudited part of the Directors’ Remuneration Report, the Chairman’s Statement, the Operating
and Financial Review and the Corporate Governance Statement. We consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part
of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by
the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s and
Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be
audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited.

Opinion
In our opinion:
(cid:1) the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state

of the group’s affairs as at 31 December 2008 and of its profit for the year then ended;

(cid:1) the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied
in accordance with the provisions of the Companies Act 1985, of the state of the parent company’s affairs as at 31 December 2008;
(cid:1) the financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance

with the Companies Act 1985 and Article 4 of the IAS Regulation; and

(cid:1) the information given in the directors’ report is consistent with the financial statements.

Ernst & Young LLP
Registered auditor
Reading
19 February 2009

36 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

Consolidated income statement
For the year ended 31 December 2008

Revenue

Cost of sales

Gross profit

Selling and marketing expenses

General and administrative expenses

Research and development expenses

Other operating income

Gains and losses from restructuring

Operating profit (loss)

Impairment of investments

Interest income and other financial income

Interest expense and other financial expense

Foreign currency exchange gains and losses, net

Result before income taxes

Income tax benefit (expense)

Net profit (loss)

Earnings (loss) per share (in US$)
Basic

Diluted

Weighted average number of shares (in thousands)
Basic

Diluted

Notes

2008

US$000

161,830

(99,217)

62,613

(11,007)

(9,853)

(36,721)

775

145

5,952

–

874

(919)

126

6,033

728

6,761

2008

0.15

45,125

45,408

2007

US$000

86,773

(57,812)

28,961

(7,253)

(7,945)

(31,105)

1,190

(1,120)

(17,272)

(2,662)

1,097

(531)

519

(18,849)

(136)

(18,985)

2007

(0.42)

44,938

Dialog Semiconductor Plc Annual Report and Accounts 2008 37

Notes

At 31 December

2008

US$000

36,915

–

7,455

19,938

1,532

1,383

67,303

7,734

4,640

–

286

390

13,050

80,353

2007

US$000

15,923

15,921

2,569

17,051

336

1,781

53,666

10,452

2,443

4,000

209

453

17,557

71,223

12,996

14,735

646

1,290

160

5,056

20,148

9,328

223,005

(169,758)

(2,231)

(139)

60,205

80,353

–

978

1,778

17,531

9,328

222,914

(177,844)

(501)

(205)

53,692

71,223

Section 4 | Consolidated financial statements and notes

Consolidated balance sheet
As at 31 December 2008

Assets
Cash and cash equivalents

Available-for-sale financial assets

Trade accounts receivable and other receivables

Inventories

Income tax receivables

Other financial assets

Other current assets

Total current assets

Property, plant and equipment

Intangible assets

Held to maturity securities

Deposits

Income tax receivables

Total non-current assets

Total assets

Liabilities and Shareholders´ equity
Trade and other payables

Other financial liabilities

Provisions

Income taxes payable

Other current liabilities

Total current liabilities

Ordinary shares

Additional paid-in capital

Accumulated deficit

Other reserves

Employee stock purchase plan shares

Net Shareholders´ equity

Total liabilities and Shareholders´ equity

38 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

Consolidated statements of cash flows
For the year ended 31 December 2008

Cash flows from operating activities:
Net profit (loss)

Adjustments to reconcile net loss to net cash provided by (used for) operating activities:

Interest income, net

Income tax expense

Impairment of inventories

Impairment of investment

Depreciation of property, plant and equipment

Amortisation of intangible assets

Losses (gains) on disposals of fixed assets and impairment of fixed and financial assets

Expense related to share-based payments

Changes in working capital:
Trade accounts receivable and other receivables

Factoring

Inventories

Prepaid expenses

Trade accounts payable

Provisions

Other assets and liabilities

Cash generated from (used for) operations

Interest paid

Interest received

Income taxes paid

Cash flow from (used for) operating activities

Cash flows from investing activities:
Sale of property, plant and equipment

Purchases of property, plant and equipment

Purchases of intangible assets

Payments for capitalised development costs

Investments and deposits made

Purchase of securities

Sale of Securities

Cash flow from (used for) investing activities

Cash flows from financing activities:
Sale of employee stock purchase plan shares

Cash flow from financing activities

Notes

2008

US$000

2007

US$000

6,761

(18,985)

7, 15

(103)

(728)

1,220

–

5,614

2,124

1,016

1,325

(5,584)

632

(4,105)

(73)

(1,451)

470

1,837

8,955

(654)

1,077

(45)

9,333

(3,474)

(2,758)

(1,431)

(13)

(3,050)

22,758

12,096

157

(969)

136

937

2,662

5,486

900

1,075

905

(6,816)

8,913

(10,529)

(321)

6,290

(461)

(496)

(11,273)

(76)

1,153

(53)

(10,249)

1,081

(4,146)

(1,100)

(724)

(1,021)

(26,621)

26,471

(6,060)

159

Cash flow from (used for) operating, investing and financing activities

Net foreign exchange difference

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

21,586

(16,150)

(594)

20,992

15,923

36,915

(16,109)

32,032

15,923

Dialog Semiconductor Plc Annual Report and Accounts 2008 39

Section 4 | Consolidated financial statements and notes

Consolidated statement of changes in Shareholders’ equity
For the year ended 31 December 2008

Balance at 1 January 2007
Net loss

Other comprehensive income
(loss)

Total comprehensive income
(loss)

Sale of employee stock
purchase plan shares

Equity settled transactions, net
of tax

Changes in Equity total

Balance at 31 December 2007
/ 1 January 2008

Net income

Other comprehensive income
(loss)

Total comprehensive income
(loss)

Sale of employee stock
purchase plan shares

Equity settled transactions, net
of tax

Changes in Equity total

Additional paid-in

Accumulated

Ordinary Shares
US$000

capital
US$000

deficit
US$000

Currency

translation

adjustment
US$000

9,328

222,781

(159,764)

(1,022)

–

133

–

(18,985)

–

(18,985)

–

905

–

120

–

133

(18,080)

120

9,328

222,914

(177,844)

–

6,761

(902)

–

Other reserves

Cash Flow

Available-for-sale

purchase plan

Employee stock

Hedges
000US$

–

securities
US$000

(422)

–

734

–

734

312

–

shares
US$000

(232)

–

Total
US$000

70,669

(18,985)

943

(18,042)

160

905

(16,977)

(205)

53,692

–

6,761

–

(1,136)

(282)

(312)

(1,730)

–

6,761

(1,136)

(282)

(312)

–

5,031

1,325

8,086

(1,136)

157

(282)

(193)

(312)

1,325

6,513

–

(139)

60,205

Balance at 31 December 2008

9,328

223,005

(169,758)

(2,038)

40 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

1. General
The consolidated financial statements of Dialog Semiconductor Plc (“Dialog or the Group”) for the year ended 31 December 2008 were authorised for

issue in accordance with a resolution of the Directors on 19 February 2009. Dialog Semiconductor Plc is a company incorporated in the UK, whose

shares are publicly traded. The principal activities of the Group are set out in the segment reporting (note 25).

Company Name and registered office

Dialog Semiconductor Plc

Tower Bridge House

St Katharine’s Way

London E1W 1AA

United Kingdom

Basis of presentation

The consolidated financial statements are prepared on the historical cost basis except that financial instruments classified as available-for-sale and de-

rivative financial instruments are stated at their fair value. Since 1 January 2007 when the main operating group entity, Dialog Semiconductor GmbH,

changed its functional currency from Euro to US dollars, the consolidated financial statements are presented in US dollars (“US$”) and all values are

rounded to the nearest thousand (US$000) except when otherwise stated.

Statement of compliance

The accompanying consolidated financial statements have been prepared on the basis of the recognition and measurement requirements of Interna-

tional Financial Reporting Standards (IFRS) and its interpretation as adopted by the EU. Based on these standards, management has applied the account-

ing policies as provided in note 2.

2. Summary of significant accounting policies
Principles of consolidation and investments in affiliated companies

As in 2007, the consolidated financial statements include Dialog Semiconductor Plc and its subsidiaries as at 31 December each year:

Name

Dialog Semiconductor GmbH

Dialog Semiconductor (UK) Limited

Dialog Semiconductor, Inc.

Dialog Semiconductor KK

Registered office

Kirchheim/Teck, Germany

Swindon, UK

Wilmington, Delaware, USA

Tokyo, Japan

Participation

100%

Subsidiaries are fully consolidated from the date of acquisition, being the date on which Dialog obtains control, and continue to be consolidated until

the date such control ceases.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

All intra-group balances, income and expenses, and unrealised gains and losses resulting from intra-group transactions are fully eliminated.

Foreign exchange

The functional currency for the Group entities is generally the currency in which they primarily generate and expend cash. Each entity in the Group

determines its own functional currency. Accordingly, the assets and liabilities of companies whose functional currency is other than the US dollar are

included in the consolidation by translating the assets and liabilities into the presentation currency (US$) at the exchange rates applicable at the end of

the reporting period. Equity accounts are measured at historical rates. The statements of income and cash flows are translated at the average exchange

rates during the year. The exchange differences arising on the translation are directly recognised in equity (other reserves).

Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities

denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken

to profit and loss with the exception of differences on monetary items that form part of a net investment in a foreign operation as well as differences on

foreign currency borrowings that provide a hedge against a net investment in a foreign entity.

Dialog Semiconductor Plc Annual Report and Accounts 2008 41

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
These are taken directly to equity until the disposal of the net investment at which time they are recognised in profit or loss. Tax charges and credits

attributable to exchange differences on those monetary items and borrowings are also dealt with in equity. Non-monetary items that are measured in

terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transaction. Non-monetary items meas-

ured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Foreign currency transac-

tion gains and losses are disclosed separately in the income statement, at each reporting period. Key exchange rates against US dollars used in prepar-

ing the consolidated financial statements were:

Currency

Great Britain

Japan

Euro

Financial instruments

Exchange rate at

Annual average exchange rate

31 December 2008

31 December 2007

US$1 =

0.69

90.43

0.72

US$1 =

0.50

112.12

0.68

2008

US$1 =

0.54

103.43

0.68

2007

US$1 =

0.50

117.78

0.73

A financial instrument is any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another. Financial

assets include, in particular, cash and cash equivalents, trade receivables and other loans and receivables, held-to-maturity investments and derivative

and non-derivative financial assets accounted for at fair value through profit or loss, as well as investments available-for-sale.

Financial liabilities generally substantiate claims for repayment in cash or another financial asset. In particular, this includes trade payables, liabilities to

banks and derivative financial liabilities.

Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the entity currently has a

legal right to set off the recognised amounts and intends to settle on a net basis.

Financial assets

Financial assets within the scope of IAS 39 are classified as being at fair value through profit or loss, loans and receivables, held-to-maturity investments

or available-for-sale financial assets, as appropriate. When financial assets are first recognised, they are measured at fair value, plus, in case of invest-

ments not at fair value through profit or loss, directly attributable transaction costs.

The Group determines the classification of its financial assets on first recognition and, where allowed and appropriate, re-evaluates this designation at

each financial year end.

All regular purchases and sales of financial assets are recognised on the settlement date, which is the date that the Group receives the asset. Regular

purchases or sales are classified as purchases or sales of financial assets that require delivery of assets within the period generally established by regula-

tion or convention of the market place.

At each balance sheet date, the Group assesses whether a financial asset or group of financial assets is impaired.

Financial assets held-to-maturity

Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the

positive intention and ability to do so. After initial measurement, held-to-maturity investments are measured at amortised cost using the effective inter-

est method. The effective interest method takes into account any premium or discount on acquisition and includes transaction costs and fees that are

an integral part of the effective interest rate.

Gains and losses are recognised in profit or loss when the investments are de-recognised or impaired, as well as through the amortisation process.

The carrying amount of financial assets held-to-maturity are tested at each reporting date to determine whether there is objective, material evidence of

impairment as outlined in IAS 39.59. Any impairment losses caused by the fair value being lower than the carrying amount are recognised in profit or

loss. The Group does not use allowance accounts in order to record the impairment in the balance sheet but credits the impairment loss directly against

the book value of the financial assets.

42 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

2. Summary of significant accounting policies continued
If in a subsequent period the fair value increases and this increase can be related objectively to events occurring after the impairment was recognised,

the impairment loss is reversed to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. The fair value

which is required for impairment testing corresponds to the present value of the estimated future cash flows discounted using the original effective

interest rate.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market, such as trade

account receivables. Loans and receivables are recorded initially at fair value and do not bear interest. As of 31 December 2008 as well as 31 December

2007, loans and receivables of the Group comprise mostly trade accounts receivables from customers. The Group also classified cash and cash equiva-

lents as loans and receivables. After initial recognition, loans and receivables are subsequently carried at amortised cost using the effective interest

method, less any allowance for impairment, if necessary.

Gains and losses are recognised in the income statement when the loans and receivables are de-recognised or impaired. Interest effects on the applica-

tion of the effective interest method are also recognised in profit or loss.

The Group continuously reviews its allowance for doubtful accounts. Management considers the collectability of a trade account receivable to be im-

paired when it is probable that the Group will be unable to collect all amounts due according to the sales terms, based on current information and

events regarding the customers’ ability to meet their obligations. The amount of the impairment loss on loans and receivables is measured as the differ-

ence between the carrying amount of the asset and the present value of estimated future cash flows, discounted at the original effective interest rate of

the financial asset. The amount of the impairment loss is recognised in profit or loss.

If, in a subsequent reporting period, the amount of the impairment loss decreases, and the decrease can objectively be related to an event occurring

after the impairment was recognised, the previously recognised impairment loss is reversed and recognised in profit or loss.

When a trade receivable is considered to be impaired, any credit losses are included in the allowance for doubtful accounts through a charge to bad

debt expenses. Account balances are set off against the allowance after all means of collection have been exhausted and the potential for recovery is

considered remote. Recoveries of trade receivables previously written-off are recorded as other income when received. Reversals of impairment losses

are recognised in profit and loss. The Group does not have any off-balance sheet credit exposure related to its customers.

Receivables from work in process for customer specific development projects according to IAS 11 are recorded in the balance sheet line “trade account

receivables and other receivables” and are disclosed in the notes respectively.

Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and

receivables, held-to-maturity investments or as financial assets at fair value through profit or loss. These financial assets are generally measured at fair

value.

After initial measurement available-for-sale financial assets are measured at fair value. Unrealised gains and losses, net of the related tax effect, on

available-for-sale financial assets are excluded from earnings and are reported as a component of other reserves until realised, or the investment is

determined as being impaired.

At each reporting date, the carrying amounts of available-for-sale assets are assessed to determine whether there is objective, significant evidence of

impairment as outlined in IAS 39.59. Any impairment losses on available-for-sale financial assets are charged to earnings. The Group does not use

allowance accounts in order to record the impairment in the balance sheet but credits the impairment loss directly against the book value of the finan-

cial assets. If this impairment relates to losses previously recognised in equity then the impairment loss is transferred from equity to the income state-

ment. Reversals of impairment losses in respect of equity instruments or investment funds that are classified as available-for-sale are not recognised in

profit or loss. 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 recognised in profit or loss.

The fair value of available-for-sale financial assets actively traded in organised financial markets is determined by reference to quoted market bid prices

at the close of business on the balance sheet date.

Dialog Semiconductor Plc Annual Report and Accounts 2008 43

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
For investments in which there is no active market, fair value is determined using valuation techniques, including recent arm’s length market transac-

tions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis; or other valuation

models. If the fair value of unquoted equity instruments cannot be measured with sufficient reliability, these instruments are measured at cost (less any

impairment losses, if applicable).

De-recognition of financial assets

A financial asset is de-recognised when:

(cid:122) the right to receive cash flows from the asset have expired;
(cid:122) the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third

party under a “pass through agreement”; or

(cid:122) the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the
asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and

rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in it.

Financial liabilities

Financial liabilities primarily include trade accounts payable, liabilities due to banks, derivative financial liabilities and other liabilities.

Financial liabilities measured at amortised costs
After initial recognition at fair value, less directly attributable transaction costs, financial liabilities are subsequently measured at amortised cost using the

effective interest method.

Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include liabilities held for trading and financial liabilities designated upon initial recognition as at

fair value through profit or loss. Gains and losses on liabilities held for trading are recognised in profit or loss.

During the financial years 2008 and 2007 the Group did not classify any financial liabilities as financial liabilities at fair value through profit or loss.

De-recognition of financial liabilities
A financial liability is de-recognised when the obligation under the liability is discharged, cancelled or expires.

Derivative financial instruments and hedge accounting

The Group uses derivative financial instruments, such as forward contracts, mainly for the purposes of hedging currency risks that arise from its operat-

ing activities. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are

subsequently remeasured at fair value on each subsequent reporting date. Derivatives are carried as assets when the fair value is positive and as liabili-

ties when the fair value is negative.

Any gains and losses arising from changes in the fair value on derivatives during the year that do not qualify for hedge accounting are taken directly to

profit or loss.

The fair value of quoted derivatives is equal to their positive or negative market value. The fair value of forward currency contracts is calculated by

reference to current forward exchange rates for contracts with similar maturity profiles.

The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes party to the con-

tract. Reassessment occurs only if there is a change in the terms of the contract that significantly modify the cash flows that would otherwise be re-

quired.

44 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

2. Summary of significant accounting policies continued
If the requirements for hedge accounting set out in IAS 39 are met, the Group designates and documents the hedge relationship from the date a de-

rivative contract is entered into, either as a fair value hedge or a cash flow hedge.

The Group did not enter into fair value hedges in 2008 and 2007.

In a cash flow hedge, the variability of cash flows to be received or paid related to a recognised asset or liability, or a highly probable forecast transac-

tion, or a firm commitment (in case of currency risks) is hedged. To hedge a currency risk of an unrecognised firm commitment, the Group makes use of

the option to recognise this as a cash flow hedge. The documentation of the hedge relationship includes identification of the hedging instrument, the

hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the

exposure to changes in the hedged cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting

changes in cash flows, and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial report-

ing periods for which they were designated.

For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognised in other reserves, net of applicable taxes,

while any ineffective portion of the fair value changes are recognised immediately in profit or loss. Amounts taken to equity are transferred to the

income statement when the hedged transaction affects the income statement, such as when the forecast or committed expenses occur. If the forecast

transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss.

If the derivative instrument does not, or no longer, qualifies for hedge accounting because the qualifying criteria for hedge accounting are not, or are no

longer, met the derivative financial instruments are classified as held for trading. Amounts previously recognised in equity are transferred to profit or loss.

If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts

previously recognised in equity remain in equity until the forecast transaction or the firm commitment occurs.

Cash and cash equivalents

Cash and cash equivalents include highly-liquid investments with original maturity dates of three months or less and are subject to an insignificant risk

of changes in value.

Inventories

Inventories include assets held for sale in the ordinary course of business (finished goods), in the process of production (work in process) or in the form

of materials to be consumed in the production process (raw materials). Inventories are valued at the lower of cost and net realisable value. Cost, which

includes direct materials, labour and overhead, plus indirect overhead, is determined using the first-in, first-out (FIFO) method. Net realisable value is the

estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs to make the sale.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. These include the cost of replacing

part of the plant and equipment when that cost is incurred, if the recognition criteria are met. Depreciation is charged on a straight-line basis over the

estimated useful lives of the assets as follows:

Equipment

Test equipment

Leasehold improvements

Office and other equipment

Useful life

Three to eight years

Shorter of useful life or lease term

18 months to 13 years

The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end.

Intangible assets

Purchased intangible assets with definite useful lives primarily consist of licences, software and patents, and are recorded at acquisition cost less accu-

mulated amortisation and accumulated impairment losses. Intangible assets are amortised on a straight-line basis over the estimated useful lives of

three to five years. For a particular software licence a useful life of ten years was estimated. Amortisation expenses are allocated to the cost of goods

sold, selling expenses, research and development expenses, or general administration expenses. The Group has no intangible assets with an indefinite

useful life.

Dialog Semiconductor Plc Annual Report and Accounts 2008 45

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
Self-developed intangible assets are recorded on a cost basis. They are amortised on a straight-line basis over the estimated usefulness of 18-24 months.

The costs of internally generated intangible assets comprise all directly attributable costs necessary to create, produce and prepare the asset to be capa-

ble of operating in a manner intended by management, e.g. costs of materials and services used or consumed in generating the intangible asset, costs

of employee benefits or fees to register a legal right. Reference is also made to the accounting policy regarding research and development costs in this

section.

Patents have been granted by the relevant government agency for a certain period, depending on the specific country, with the option of renewal at

the end of this period. In most cases the maximum lifetime of the patents is 20 years. They are amortised over the shorter period of expected future

benefit, which is principally ten years. Acquisition costs for patents are based on the cost of patent registration.

Impairment of non-monetary assets

In accordance with IAS 36, at each reporting date an assessment is made as to whether there is an indication that a non-monetary asset, such as prop-

erty, plant and equipment or purchased intangibles, may be impaired. If any such indication exists, an estimate is made of the asset’s recoverable

amount: the higher of an asset’s fair value, less cost to sell and its value in use. Where the carrying amount of an asset exceeds its recoverable amount,

the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted

to their present value, using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the

asset. In determining the fair value less costs to sell, an appropriate valuation model is used. For assets, an assessment is made at each reporting date as

to whether any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, an estima-

tion of the recoverable amount is made. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to

determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased

to its recoverable amount. That increased amount, however, cannot exceed the carrying amount that would have been determined, net of depreciation,

had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss

Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date of whether the

fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

For arrangements entered into before 1 January 2005, the date of inception is deemed to be 1 January 2005 in accordance with the transitional re-

quirements of IFRIC 4.

Where the Group is lessee, finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item,

are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Lease

payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining

balance of the liability. Finance charges are reflected in profit and loss.

Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.

Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.

Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty. The following specific

recognition criteria must also be met before revenue is recognised:

Sale of goods
Revenue from the sale of goods is derived from the sale of products, application specific integrated circuit (“ASIC”) and application specific standard

product (“ASSP”) to end customers. These products are manufactured and tested in accordance with customers’ technical specifications prior to delivery.

Revenue is recognised when title passes, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable,

and collection of the related receivable is probable. Revenues are recorded net of sales taxes and customer discounts, if any.

The Group has insurance for product claims and also records a provision for warranty costs as a charge in cost of sales, based on historical trends of

warranty costs incurred as a percentage of sales, which management has determined to be a reasonable estimate of the probable costs to be incurred

for warranty claims in a period.

46 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

2. Summary of significant accounting policies continued
Customer returns are permitted only for quality-related reasons within the applicable warranty period and any potential warranty claims are subject to

the Group’s determination that it is at fault for damages. Such claims must usually be submitted within a short period of the date of sale.

Research and development
Revenue from customer-specific research and development contracts involving the development of new customer-specific technology is recognised on

the percentage of completion basis when the outcome of the contract can be estimated reliably. A contract’s outcome can be estimated reliably when

total contract revenue can equally be estimated, it is probable that economic benefits associated with the contract will flow to the Group, and the stage

of contract completion can be measured reliably. When the Group is not able to meet those conditions, the policy is to recognise revenues only to the

extent the expenses incurred are eligible to be recovered. Completion is measured by reference to costs incurred to date as a percentage of estimated

total project costs. The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as the dependable

measurement of the progress made towards completing the particular project. Losses on projects in progress are recognised in the period they become

likely and can be estimated.

Government grants

Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied

with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the

costs that it is intended to compensate. Grants are deducted in reporting the related expense. The Group does not receive grants that relate to assets.

Cost of sales

Cost of sales consists of the costs of outsourced production, assembly and test, personnel costs and applicable overheads and depreciation of equip-

ment. Provisions for estimated product warranties are recorded in cost of sales at the time the related sale is recognised.

Sales and marketing expenses

Sales and marketing expenses consist primarily of salaries, travel expenses, sales commissions, bad debt expenses and costs associated with advertising

and other marketing activities.

General and administrative expenses

General and administrative expenses consist primarily of personnel and support costs for finance, human resources, information systems and other

management departments which are not attributable to development, production or sales functions.

Research and development costs
Costs identified as research costs are expensed as incurred, whereas development costs on an individual project are capitalised as an intangible asset
and amortised over the period of expected future benefit if the Group can demonstrate the following:

(cid:122) the technical feasibility of completing the intangible asset so that it will be available for use or sale;
(cid:122) its intention to complete the intangible asset and use or sell it;
(cid:122) its ability to use or sell the intangible asset;
(cid:122) how the intangible asset will generate probable future economic benefits. Among other things, the Group can demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

(cid:122) the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset; and
(cid:122) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Interest income/expense

Interest income is recognised as interest accrues. Interest income includes interest income from investments in securities, cash and cash equivalents.

Income and expense resulting from the allocation of premiums and discounts is also included. Interest expense is expensed as incurred.

Foreign currency exchange gains and losses

The foreign currency exchange gains and losses mainly result from foreign currency cash transactions and period end revaluation of foreign currency

denominated cash into US dollars. It is the Group’s view that these gains and losses are driven by the financing activities of the Group and are therefore

shown as non-operating results.

Dialog Semiconductor Plc Annual Report and Accounts 2008 47

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
Other financial income/expense

Other financial income/expense includes all remaining miscellaneous income and expense from financial transactions which are not included in interest

income/expense.

Employee benefits – defined contribution plans

Contributions to defined contribution and state-funded pension plans are recognised in the income statement as incurred.

Income taxes

Current income taxes for current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The

tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.

Deferred tax assets and liabilities are accounted for using the liability method and are recognised for the future tax consequences attributable to differ-

ences between the financial statement carrying amounts of assets and liabilities, and their respective tax bases, as well as on the carry-forward of un-

used tax losses that can be utilised.

Deferred tax assets and liabilities are measured using tax rates that have been enacted, or substantially enacted, by the balance sheet date and which

are expected to apply to taxable income in the years, in which those temporary differences are expected to be recovered or settled. The effect of a

change in tax rates on deferred tax assets and liabilities is recognised in income in the period that includes the enactment date.

A deferred tax asset is recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences

can be utilised. Unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent, that it has become prob-

able that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists, to set off current tax assets against current tax liabilities and

the deferred income taxes relate to the same taxable entity and the same taxation authority.

Share-based payments

The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date, reflects the extent to which the vesting

period has expired and the best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a

period represents the movement in cumulative expense in the period.

Stock options
The Group has established an equity-settled share option scheme under which employees and Directors may be granted stock options to acquire shares

of Dialog.

The fair value of options granted is recognised as a compensation expense with a corresponding increase in equity. The fair value is measured at grant

date and spread over the service period during which the employees become unconditionally entitled to the options.

The fair value of the options granted is measured using the Black-Scholes option pricing model, taking into account the terms and conditions on which

the options were granted. Expectations of early exercise are accounted for within the average life of the options. The Group applies IFRS 2 to all options

granted after 7 November 2002 that had not been vested as of 1 January 2005.

Executives’ Long Term Incentive Plan
The Group operates an equity settled Long-Term Incentive Plan (LTIP). Under this plan, key executives are eligible to share in a percentage of the value

created for shareholders in excess of an annual return hurdle measured over a three year performance period.

Each participant in the LTIP is awarded a number of units which convert into Company shares according to the level of outperformance of the Com-

pany’s share price over the annual return hurdle. If this hurdle is not reached no units convert into Company shares.

The fair value of the awards is recognised as a compensation expense with a corresponding increase in equity. The fair value is measured at grant date,

using a Monte Carlo Model, taking into account the terms and conditions on which awards are granted and is spread over the service period during

which the key executives become unconditionally entitled to the awards.

48 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

2. Summary of significant accounting policies continued
Employee share trust

The Group has established an employee share trust. The share trust is separately administrated and is funded by the Group, which consolidates the

assets, liabilities, income and expenses in its own accounts. The shares held by the trust are recorded at cost and are shown under “Employee stock

purchase plan shares” in the statement of changes in Shareholders’ equity.

Earnings per share/Loss per share

Basic earnings (loss) per share amounts are calculated by dividing net profit (loss) for the year attributable to ordinary equity holders of Dialog by the

weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of Dialog by the weighted average

number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued if all the securities or

other contracts to issue ordinary shares were exercised.

The weighted average number of shares outstanding is as follows:

Basic number of shares1
Effect of dilutive options outstanding

Dilutive number of shares

1) Because the Group reported a net loss in 2007, only basic per share amounts have been presented for this period

2008

000

45,125

283

45,408

2007

000

44,938

2,015

46,953

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of

these financial statements.

Significant accounting judgements, estimates and assumptions

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of

assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of reve-

nues and expenses during the reporting period.

Subject to such estimates and judgements is the following:

Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. In case of such an indicator, an

impairment test is made. This requires the determination of the value in use and the fair value less costs to sell respectively of the assets. Estimating the

value in use requires management to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in

order to calculate the present value of those cash flows. The carrying amount of such assets at 31 December 2008 was US$12,374,000 (2007:

US$12,895,000). Further information regarding impairment charges is provided in notes 4 and 12.

Impairment of available-for-sale financial assets and investments
The Group classifies certain assets as available-for-sale and recognises movements in the fair value in equity. When the fair value declines, management

makes assumptions about the decline in value to determine whether it is an impairment that should be recognised in profit or loss.

The Group did not record any impairment losses on its available-for-sale financial assets accounted for at fair value in 2008 and 2007.

In respect of available-for-sale investments accounted for at cost, the Group recognised an impairment amounting to US$2,662,000 in 2007. With the

impairment recognised in 2007 the carrying value of the investment was impaired to US$ nil. Further information regarding this investment is provided

in note 14.

Deferred tax assets
Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses
can be utilised.

Dialog Semiconductor Plc Annual Report and Accounts 2008 49

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing of

future taxable profits, together with future tax planning strategies. At year end 2008 and 2007, no deferred tax assets were recognised. The unrecog-

nised deferred tax assets at 31 December 2008 were US$51,552,000 (2007: US$58,675,000). Further information regarding the assessment of future

taxable income is disclosed in note 5.

Share-based employee compensation awards

Stock options
Share-based payment transactions for stock options are measured by reference to the fair value at the date on which they are granted. The fair value of

share-based payments is determined using the Black-Scholes model, which involves making assumptions about interest rates, volatilities, market condi-

tions and fluctuation. Due to the nature of these assumptions, such estimates are subject to significant uncertainty. In 2008, the expense related to

stock options was US$940,000 (2007: US$905,000).

Executives’ Long Term Incentive Plan
The fair value of the awards is recognised as a compensation expense with a corresponding increase in equity. The fair value is measured at grant date,

using a Monte Carlo Model, based on standard inputs such as the Company’s share price, interest rate, volatility of the Company’s share price, dividend

yield and expected life.

In 2008 an expense of US$385,000 was booked for the eight months the LTIP was in place (2007: nil). Further information regarding LTIP is provided in

note 22b.

Customer-specific research and development
For the determination of revenue and costs for customer specific research and development contracts, management judgement is required. It is, there-

fore, necessary to determine the stage of completion based on the progress made towards completing the particular project, as well as the contract

revenue and the contract costs. At 31 December 2008 no receivables or liabilities from constructions contracts were outstanding (2007: US$nil).

Self-developed intangible assets
Development costs are capitalised in accordance with the accounting policy mentioned above, i.e. they are recorded on a cost basis. However, initial

capitalisation of costs is based on management’s judgement that technological and economical feasibility is confirmed, usually when a product devel-

opment project has reached a defined milestone according to an established project management model. In determining the probable future economic

benefits of the self-developed intangible asset, management makes assumptions regarding the expected future cash generation of the assets, discount

rates to be applied and the expected period of benefits. At 31 December 2008, the carrying amount of capitalised development costs was

US$1,271,000 (2007: US$597,000).

Actual results may differ from those estimates.

Changes in accounting policies

The accounting policies are consistent with those of the previous financial year.

The Group has adopted the following amendments to Standards and new IFRIC interpretations during the year.

Interpretation/ Standard

Title

IFRIC 11

IFRIC 14

Group and Treasury Share Transactions

IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
Interaction

IAS 39 and IFRS 7

Amendment to IAS 39 and IFRS 7 “Reclassification of Financial Assets”

Effective date

1 March 2007

1 January 2008

1 July 2008

The above-listed amendments to standards and new interpretations did not result in a change of accounting policies.

50 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

2. Summary of significant accounting policies continued
Recently issued accounting standards not yet adopted (Standards and Interpretations are endorsed by the EU except as noted otherwise)

IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated Separate Financial Statements
The amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial State-

ments were issued in May 2008 and are effective for financial years beginning on or after 1 January 2009. The amendment allows first-time adopters to

use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiar-

ies, jointly controlled entities and associates in the separate financial statements and removes the definition of the cost method from IAS 27 and re-

places it with a requirement to present dividends as income in separate financial statements of the investor. As these amendments are only relevant for

separate financial statements they will not have an impact on the consolidated financial statements of the Group.

IFRS 1 First-time Adoption of International Financial Reporting Standards (Revised)
The IASB has released a restructured version of IFRS 1 First-time-Adoption of International Reporting Standards in November 2008 (updated in respect

of the effective date in December 2008) which is effective for periods beginning on or after 1 July 2009. The restructuring of IFRS 1 was aimed to make

IFRS 1 easier for the reader to understand and to design it to better accommodate future changes. The new version of IFRS 1 retains the substance of

the previous version, but within a changed structure. The revised standard has not yet been endorsed by the EU.

IFRS 2 Share-Based Payments
This amendment to IFRS 2 Share-based payments was published in January 2008 and becomes effective for financial years beginning on or after 1

January 2009. The Standard restricts the definition of “vesting condition” to a condition that includes an explicit or implicit requirement to provide

services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments

granted. In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity

or the counterparty, this must be accounted for as a cancellation. The Group does not expect material changes in its accounting due to this amended

IFRS.

IFRS 3 Business Combinations (revised) and IAS 27 Consolidated and Separate Financial Statements (amended)
The revised IFRS 3 and the amended IAS 27 were issued in January 2008 and are effective for annual periods beginning on or after 1 July 2009. The

changes made to the existing standards are comprehensive and mainly address the accounting for acquisition costs, contingent considerations, goodwill

and non-controlling interests, step acquisitions, partial disposal of an investment while a controlling interest is retained or control is lost, and acquisition

of additional shares after control is obtained. The revised and amended standards have not yet been endorsed by the EU.

IFRS 8 Operating Segments
IFRS 8 Operating Segments which replaces IAS 14 Segment Reporting was issued in November 2006 and is effective for annual periods beginning on or

after 1 January 2009. The IFRS requires an entity to adopt the “management approach” to reporting on the financial performance of its operating

segments. Generally, the information to be reported would be what management uses internally for evaluating segmental performance and deciding

how to allocate resources to operating segments. The Group does not expect that the operating segments would significantly differ from the business

segments identified under IAS 14 Segment Reporting. The management expects changes to the structure in respect of financial information shown in

the segment reporting.

IAS 1 Presentation of Financial Statements – Revised
The revised IAS 1 was issued in September 2007 and is effective for periods beginning on or after 1 January 2009. The changes made are to require

information in financial statements to be aggregated on the basis of shared characteristics and to introduce a statement of comprehensive income. The

revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive

income either in a single statement of comprehensive income with subtotals, or in two separate statements. The Group has not yet finally assessed the

impact of the adoption of the revised IAS 1 on its financial statements presentation.

IAS 23 Borrowing Costs
The revised IAS 23 Borrowing Costs was issued in March 2007 and is effective for periods beginning on or after 1 January 2009. The revised standard

removes the option of immediately recognising borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale,

as an expense. Following this revised standard, the Group will change its currently adopted policy of immediately expensing borrowing costs.

Dialog Semiconductor Plc Annual Report and Accounts 2008 51

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements
The amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements were issued in February 2008 and are

effective for periods beginning on or after 1 January 2009. IAS 32 requires a financial instrument to be classified as a liability if the holder of that in-

strument can require the issuer to redeem it for cash. Many financial instruments that would usually be considered equity, including some ordinary

shares and partnership interests, allow the holder to require the issuer to redeem it for cash with the consequence that these financial instruments are

considered liabilities rather than equity. The amendments to IAS 32 address this issue and require entities to classify the following types of financial

instruments as equity, provided they have particular features and meet specific conditions:

(cid:122) puttable financial instruments (for example, some shares issued by co-operative entities)
(cid:122) instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of

the entity only on liquidation (for example, some partnership interests and some shares issued by limited life entities).

Additional disclosures are required about the instruments affected by the amendments. The Group does not expect any changes of its financial state-

ments presentation, as Dialog did not issue financial instruments in the scope of the amendments.

IAS 39 Financial Instruments: Recognition and Measurement
The amended IAS 39 Financial Instruments: Recognition and Measurement was issued in July 2008 and is effective for periods beginning on or after 1

July 2009. The amended standard clarifies how the existing principles underlying hedge accounting should be applied in two particular situations. The

Group does not expect material changes of its hedge accounting. The revised standard has not yet been endorsed by the EU.

IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments Disclosures
The amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures were issued in October

2008, updated in November 2008 and are effective from 1 July 2008 onwards. The amended standard permits reclassification of some financial instru-

ments out of the fair-value-through-profit-or-loss category and out of the available-for-sale category. The amended standards have been endorsed by

the EU, except for amendments made in November 2008 in respect of the effective date and transition.

Improvements to IFRSs – a collection of amendments to International Financial Reporting Standards (annual improvements project)
The IASB has also issued a collection of amendments to various IFRSs (“Improvements to IFRSs”) in May 2008. This includes amendments to various

existing IFRSs. The amendments to IFRSs are presented in two parts: Part I contains amendments that result in accounting changes for presentation,

recognition or measurement purposes. Part II contains amendments that are terminology or editorial changes with no or minimal effect on accounting.

The Group does not expect material changes on its accounting due to the changes.

52 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

2. Summary of significant accounting policies continued
The following table sets out the IFRSs affected and the subject of amendment for Part I amendments:

IFRS

IFRS 5

IAS 1

IAS 16

IAS 19

IAS 20

IAS 23

IAS 27

IAS 28

IAS 31

IAS 29

IAS 36

IAS 38

IAS 39

IAS 40

IAS 41

Subject of amendment

Plan to sell the controlling interest in a subsidiary

Current/non-current classification of derivatives

Recoverable amount;
Sale of assets held for rental

Curtailments and negative past service cost;
Plan administration costs;
Replacement of term “fall due”;
Guidance on contingent liabilities

Government loans with a below-market rate interest

Components of borrowing costs

Measurement of subsidiary held for sale in separate financial statements

Required disclosures when investments in associates are accounted for at fair value through
profit or loss;
Impairment of investment in associate

Required disclosures when investments in jointly controlled entities are accounted for
at fair value through profit or loss

Description of measurement basis in financial statements

Disclosure of estimates used to determine recoverable amount

Advertising and promotional activities;
Unit of production method of amortisation

Reclassification of derivatives into or out of the classification of at fair value through profit or loss;
Designating and documenting hedges at the segment level;
Applicable effective interest rate on cessation of fair value hedge accounting

Property under construction or development for future use as investment property

Discount rate for fair value calculations;
Additional biological transformation

The following table sets out the IFRSs affected and the subject of amendment for Part II amendments:

IFRS

IFRS 7

IAS 8

IAS 10

IAS 18

IAS 20

IAS 29

IAS 34

IAS 40

IAS 41

Subject of amendment

Presentation of finance cost

Status of implementation guidance

Dividends declared after the end of the reporting period;

Costs of originating a loan

Consistency of terminology with other IFFRSs

Earnings per share disclosures in interim financial reports

Consistency of terminology with IAS 8;
Investment property held under lease

Examples of agricultural produce and products;
Point-of-sale costs

Effective date

1 July 2009

1 January 2009

Effective date

1 January 2009

Dialog Semiconductor Plc Annual Report and Accounts 2008 53

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

2. Summary of significant accounting policies continued
In addition, the following interpretations have been issued:

Interpretation

Title

IFRIC 12

IFRIC 13

IFRIC 15

IFRIC 16

IFRIC 17

IFRIC 18

Service Concession Agreements1
Customer Loyalty Programmes
Agreements for the Construction of Real Estate1
Hedges of a Net Investment in a Foreign Operation1
Distributions of Non-cash Assets to Owners1
Transfers of Assets from Customers

1) Interpretation has not yet been endorsed by the EU.

Effective date

1 January 2008

1 July 2008

1 January 2009

1 October 2008

1 July 2009

The above-listed interpretations will not have an effect on the financial statements as they currently do not apply to the Group.

The Group does not intend to make early application of the amended or revised Standards and Interpretation listed above.

3. Gains and losses from restructuring
In the third quarter of 2006 the Group decided to transfer its “Wafer Test”, “Final Test” and “Tape & Reel” operations from Kirchheim/Teck, Germany

to dedicated outsourced assembly and test organisations in Asia. This transfer was completed in the second quarter of 2007 and, as a result, in the

fourth quarter of 2007, the Group announced a further reduction of its workforce in Germany.

Unused amounts of US$159,000 of the restructuring accrual were released in 2008. The released amounts were recorded as income which was netted

with other restructuring expenses of US$14,000. In respect of the development of the restructuring provision please refer to note 18. The 2007 restruc-

turing expenses mainly comprise employee termination costs (net of US$421,000), impairment charges and other losses (US$687,000) in relation to

obsolete assets resulting from the transfer, other costs (US$367,000) and gains from the sale of excess assets (US$355,000).

54 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

4. Other disclosures to the income statements
a) Operating expenses and revenues

The operating result before income taxes is stated after charging:

Auditors' remuneration for the audit

Depreciation of property, plant and equipment

Amortisation of intangible assets

Personnel costs
Wages and salaries
Social and security costs1
Share-based payment
Pension costs from defined contribution plans1

Included in revenues
Revenue from the sale of goods

Revenue from customer specific research and development contracts

Included in cost of sales:
Costs in relation to customer specific research and development contracts

Amount of inventory recognised as expense

Impairment of inventories recognised as an expense

Included in gross profit
Recognised profits (losses) in relation to customer specific research and development contracts

Included in other operating income
Income from recoveries on trade accounts receivable impaired in prior periods

2008

US$000

(423)

(5,614)

(2,124)

(28,787)

(2,758)

(1,325)

(2,321)

(35,191)

157,569

4,261

(4,261)

(78,807)

(1,220)

–

302

2007

US$000

(468)

(5,486)

(900)

(22,320)

(3,369)

(905)

(2,016)

(28,610)

84,545

2,228

(2,228)

(47,807)

(937)

–

903

1) The pension costs from defined contribution plans include costs for the state funded pension plan in Germany of US$1,158,000 (2007:1,058,000). In the prior year this was shown under social and

security costs; the 2007 numbers were adjusted.

b) Interest and other financial income and expense

Interest income and other financial income and expense comprise the following items:

Interest income

Other financial income

Interest expense

Other financial expenses

2008

US$000

776

874

(673)

(246)

(919)

2007

US$000

1,053

1,097

(84)

(447)

(531)

Dialog Semiconductor Plc Annual Report and Accounts 2008 55

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

4. Other disclosures to the income statements continued
ba) Interest income and interest expense

Interest income and expenses comprise the following items:

Interest income

Interest expense

Of which: from financial instruments relating to categories in accordance with IAS 39

Loans and receivables

Held-to-maturity investments

Available-for-sale financial assets

Financial liabilities measured at amortised costs

bb) Other financial income and other financial expenses

Other financial income and expenses comprise the following items:

Other financial income

Other financial expenses

Composition and categories in accordance with IAS 39:

Gain from the sale of available-for-sale financial assets

Loss from the sale of available-for-sale financial assets

Loss from the sale of as held to maturity classified financial assets

Revaluation of financial assets held for trading

2008

US$000

776

(673)

103

(537)

–

640

–

103

2008

US$000

(246)

(148)

–

(247)

–

(148)

2007

US$000

1,053

(84)

969

541

414

–

969

2007

US$000

(447)

(403)

(377)

–

(70)

(403)

c) Government grants

The Group receives government grants for research and development activities of its Edinburgh design centre. Under the condition that Dialog remains

located in Scotland and employs an agreed amount of employees in Scotland until 29 January 2011, the total grant that can be received is US$2.0

million (£1.3 million). In 2008 the Group received grants in the amount of US$654,000 (2007: nil). In the profit and loss account the grants received

were deducted from research and development expenses.

d) Headcount

The average number of persons employed by the Group (including the Executive Director) during the year, analysed by category, was as follows:

Research and Development

Production

Sales and Marketing

Admin

56 Dialog Semiconductor Plc Annual Report and Accounts 2008

2008

154

255

2007

128

228

Section 4 | Consolidated financial statements and notes

5. Income taxes
Income (loss) before income taxes consists of the following:

Germany

Foreign

Income tax income (expense) is comprised of the following components:

Current taxes:

Germany

Foreign

Deferred taxes:

Germany

Foreign

Income tax benefit (expense)

2008

US$000

3,643

2,390

6,033

2007

US$000

(20,905)

2,056

(18,849)

2008

US$000

2007

US$000

(139)

(20)

–

887

728

–

(63)

–

(73)

(136)

The deferred tax benefit in 2008 mainly relates to the realisation of previously unrecognised deferred tax assets on net operating loss carryforwards.

Although Dialog is a UK company, its principal operations are located in Germany and its operating subsidiaries are all owned by its German subsidiary.

Accordingly, the following information is based on German corporate tax law.

The Company tax reform 2008 (Unternehmensteuerreform 2008) was enacted in Germany on 14 August 2007. Among other things, this new legisla-

tion reduces the statutory tax rate for its German subsidiary from 25% to 15%, effective 1 January 2008. When including the impact of the solidarity

surcharge of 5.5%, the federal corporate tax rate amounts to 15.825%. Combining the federal corporate tax rate with the trade tax rate of 12.551%,

the combined statutory tax rate of the German subsidiary is 28.376%.

For 2007 the statutory tax rate for Dialog’s German subsidiary was 25%. When including the impact of the solidarity surcharge of 5.5%, the federal

corporate tax rate amounted to 26.375%. Combining the federal corporate tax rate with the trade tax rate of 11.225%, the combined statutory tax

rate of the German subsidiary is 37.600%.

A reconciliation of income taxes determined using the combined German income tax rate of 28.376% (2007: 37.600%), is as follows:

Expected income (expense) for income taxes

Effect of change in German tax rate

Other tax rate differential

Non-deductible portion of share based payments

Tax free income (non-deductible expenses)

Unrecognised deferred tax assets

Adjustments recognised for tax of prior periods

Tax effect resulting from differences between functional currency and local currency used for taxation purposes

Other

Actual income (expense) for income taxes

2008

US$000

(1,712)

–

(9)

(332)

(186)

2,046

626

291

728

2007

US$000

7,087

(1,878)

302

(325)

(92)

(4,939)

–

(269)

(22)

(136)

Dialog Semiconductor Plc Annual Report and Accounts 2008 57

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

5. Income taxes continued
Deferred income tax assets and liabilities are summarised as follows:

Property, plant and equipment

Net operating loss and tax credit carryforwards

Liabilities

Deferred taxes in relation to tax credits

Other

Deferred tax assets

Property, plant and equipment

Intangible Assets

Other

Deferred tax liabilities

Net deferred tax assets

Recognised net deferred tax assets

Unrecognised deferred tax assets

At 31 December 2008

At 31 December 2007

US$000

296

47,130

3,403

1,049

51,910

(12)

(335)

(11)

(358)

US$000

620

52,955

4,036

1,443

59,107

(255)

(174)

(3)

(432)

51,552

58,675

–

51,552

58,675

Tax loss carry-forwards and unrecognised deferred tax assets are summarised as follows:

31 December 2008

31 December 2007

Tax loss

carryforwards

US$000

161,918

1,922

Temporary

Differences

US$000

10,590

1,055

4,486

3,871

–

176

Unrecognised

Tax loss

Tax credits

deferred tax asset

carryforwards

US$000

–

3,746

–

US$000

47,725

1,882

1,525

348

51,552

US$000

177,463

7,036

4,398

3,954

274

Temporary

Differences

US$000

12,608

2,311

–

130

Unrecognised

Tax credits

deferred tax asset

US$000

–

5,154

–

US$000

52,643

4,060

1,495

356

121

58,675

Germany

Federal

State

Other

Total

In assessing whether the deferred tax assets can be used, management considers the likelihood that some, or all, of the deferred tax assets will not be

realised. The ultimate realisation of deferred tax assets is dependent upon the generation of future taxable income during the periods, in which those

temporary differences become deductible. Management considers the reversal of deferred tax liabilities, projected future taxable income, benefits that

could be realised from available tax planning strategies and other positive and negative factors in making this assessment. Although the Group was

profitable in 2008 and plans to be profitable in 2009 and beyond, management has to consider the weight given to cumulative losses incurred in Ger-

many over the seven-year period ended 31 December 2007, the inherent uncertainties in projecting future taxable income and be mindful of the cur-

rent recessionary environment. Given these, the Group has concluded that tax losses may not ultimately be realised. Consequently, the Group did not

recognise deferred tax assets of US$51,552,000 as of 31 December 2008 (US$58,675,000 as of 31 December 2007).

The tax loss carry-forwards in the US will expire between 2009 and 2022; other tax loss carry-forwards have no expiration date.

Included in unrecognised deferred tax assets is an amount of US$1,049,000 (2007: US$1,443,000) (the decrease results from foreign currency adjust-

ments) in relation to tax credits in the UK. This asset may be recovered against future taxable profits derived from certain overseas dividends for the

company concerned.

The amount shown under “income tax receivables” in the balance sheet includes a corporation tax refund claim of the Group’s German subsidiary. The

total amount the German subsidiary is entitled to receive amounts to US$610,000 to be paid out in ten equal amounts during 2008 to 2017. The

amount shown within the non-current assets represents the discounted part of the claim that is due after 2009. The amount that will be paid in 2009 is

shown within the current assets

58 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

6. Cash and cash equivalents
Cash and cash equivalents comprise cash at bank (2008: US$14,222,000; 2007: US$15,187,000) and short-term deposits (2008: US$22,693,000; 2007:

US$736,000). Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements

of the Group. Cash and cash equivalents earn interest at the respective short-term deposit rates. The fair value of the cash and cash equivalents ap-

proximates its book value. As prescribed in note 26, in 2007 the Group entered into a selective factoring agreement. Included in cash at bank is an

amount of US$9,545,000 (2007: US$8,913,000) held at the factoring bank which represents the cash value of selected receivables sold to the factoring

bank. This amount is non-interest bearing until the related receivables have been entirely settled. The factoring bank charges interest on amounts drawn

from the account.

7. Available-for-sale financial assets
The Group has invested in highly liquid “investment grade” rated debt, equity and currency-based funds, classified as available-for-sale. The aggregate

costs, fair values and unrealised gains (losses) per security class are shown in the table below.

At 31 Dec 2008

At 31 Dec 2007

Cost

US$000

Fair value

Unrealised gain

Carrying value

US$000

Cost

US$000

Fair value

Unrealised gain

Carrying value

US$000

Available-for-sale
securities

–

15,609

15,921

312

15,921

In 2008, the Group sold all of its available-for-sale securities. The net realised gains of US$10,000 from those sales that had been previously (Q3 2008)

recognised directly in equity were recycled into profit and loss (2007: US$333,000).

8. Trade accounts receivable and other receivables

Trade accounts receivables

Receivables from factoring agreement

2008

US$000

3,837

3,618

7,455

2007

US$000

1,034

1,535

2,569

Trade receivables are non-interest bearing and are generally on 30-60-day terms.

As described in note 26, in 2007 the Group entered into a selective factoring agreement. The amount shown as receivables from the factoring agree-

ment represents a 15% retainer kept by the factoring bank against sold receivables. The retainer is released only once the receivable is fully paid by the

customer, at the latest, 120 days after the receivable becomes due or if the insurance event occurs. The amounts are non-interest bearing and are

generally on 30-60-day terms.

The recorded trade accounts receivable for which an impairment has been recognised, was US$1,656,000 and US$1,624,000 at 31 December 2008

and 2007, respectively. The related allowance for doubtful accounts was US$1,656,000 and US$1,624,000 at 31 December 2008 and 2007, respec-

tively.

Dialog Semiconductor Plc Annual Report and Accounts 2008 59

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

8. Trade accounts receivable and other receivables continued
The allowance for doubtful accounts developed as follows:

Allowance for doubtful accounts at beginning of year

Additions charged to bad debt expense

Write-offs charged against the allowance

Reductions charged to income

Effect of movements in foreign currency

Allowance for doubtful accounts at end of year

As at 31 December, the aged analysis of trade account receivables is as follows:

Receivables neither past due nor impaired

Receivables past due, not impaired individually

Less than 30 days

30 to 59 days

60 to 89 days

90 to 123 days

Total

2008

US$000

1,624

–

(2)

1,656

2008

US$000

3,076

646

–

2007

US$000

2,556

–

(903)

(29)

1,624

2007
US$000

576

256

202

–

3,837

1,034

With respect to the receivables that are neither past due nor impaired, there are no indications as at the reporting date that the debtors will not meet

their payment obligations.

Receivables from construction contracts

As at 31 December 2008 and 2007, all incurred external costs for customer related research and development projects had been charged to and paid

by the customers in accordance with agreed milestones. Consequently, as at 31 December 2008 and 2007, the Group had no receivables from con-

struction contracts.

9. Inventories
Inventories are comprised of the following:

Raw materials

Work-in-process

Finished goods

At 31 December 2008

At 31 December 2007

US$000

3,074

4,814

12,050

19,938

US$000

1,490

5,321

10,240

17,051

The carrying amount of inventories carried at net realisable value at 31 December 2008 is US$nil (2007: US$nil).

60 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

10. Other financial assets
Other financial assets comprise:

Deposits for hedging contracts

Hedging instruments

Embedded derivatives

At 31 December 2008

At 31 December 2007

US$000

1,079

453

–

1,532

US$000

–

247

336

The deposits for hedging contracts are an advance settlement for hedging instruments with a negative fair value. The deposits are interest bearing with

1% below the current base rate and are offset with amounts due when the hedge is settled.

The hedging instruments include the fair value of derivative financial instruments used for cash flow hedges. The Group is exposed to currency risks in

the course of its operating activities. These risks are reduced by the use of forward currency exchange contracts.

Embedded derivatives in 2007 represent the book value of the Group’s investment in a currency index-linked derivative instrument which has been

separated from its host contract. For further details regarding the risk associated to this investment please see note 26.

The Group has clear guidelines as to the use of those derivatives, and compliance is constantly monitored. For further information on the Group’s hedg-

ing policy please see note 26.

11. Other current assets
Other current assets comprise:

Prepaid expenses

Other tax receivables

Other

At 31 December 2008

At 31 December 2007

US$000

807

508

1,383

818

565

398

1,781

Dialog Semiconductor Plc Annual Report and Accounts 2008 61

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

12. Property, plant and equipment, net
A summary of activity for property, plant and equipment for the years ended 31 December 2008 and 2007 is as follows:

Test equipment

Leasehold

Office and other

Advance payments

Cost

Balance at 1 January 2007

Effect of movements in foreign currency

Acquisitions

Reclassifications
Reclassifications to assets held for sale1
Disposals

Balance at 31 December 2007 / 1 January 2008

Effect of movements in foreign currency

Acquisitions

Reclassifications

Disposals

US$000

improvements

US$000

1,042

–

1,154

(251)

209

–

69,134

2,050

–

1,007

(1,395)

70,799

(49)

1,358

(119)

Balance at 31 December 2008

71,995

1,112

Depreciation and impairment losses

Balance at 1 January 2007

Effect of movements in foreign currency

Depreciation charge for the year

Impairment charges
Reclassifications to assets held for sale1
Disposals

Balance at 31 December 2007 / 1 January 2008

Effect of movements in foreign currency

Depreciation charge for the year

Impairment charges

Disposals

Balance at 31 December 2008

Net book value

At 1 January 2007

At 31 December 2007 / 1 January 2008

At 31 December 2008

(59,372)

(2)

(4,262)

(191)

(788)

1,281

(63,334)

(3,930)

(599)

116

(67,700)

9,762

7,465

4,295

(845)

(14)

(41)

–

(900)

204

(101)

(102)

–

(899)

197

254

213

equipment

US$000

18,377

1,991

–

(719)

19,715

(680)

2,334

–

(1,278)

20,091

(15,919)

(55)

(1,183)

(108)

–

277

(16,988)

618

(1,583)

–

1,048

(16,905)

2,458

2,727

3,186

–

(10)

(6)

–

Total

US$000

88,553

4,146

–

1,007

(2,114)

91,674

(990)

3,951

–

(1,397)

93,238

(76,136)

(71)

(5,486)

(299)

(788)

1,558

(81,222)

869

(5,614)

(701)

1,164

(85,504)

12,417

10,452

7,734

1) For further information see note 3 – Restructuring and related impairment charges.

Impairment of property, plant and equipment

Impairment charges in 2008 relate to the write-down of display test equipment to reduce the carrying amount to the value in use following an under-

utilisation of this equipment. To determine the value in use, an analysis of the discounted future cash flows was prepared. In determining value in use

for test equipment the cash flows were discounted at a rate of 10.5% on a pre-tax basis. In the income statement this impairment charge was recog-

nised in the line item “cost of sales” and it is allocated to the wireless business segment. Impairment charges on leasehold improvements in 2008 relate

to installed equipment in a rented office that the Group will vacate in 2009. The lease contract for this office was cancelled in December 2008. In the

income statement this impairment charge was recognised in the line item “general and administrative expenses” and it is allocated to the corporate

segment.

Impairment charges in 2007 relate to obsolete test equipment resulting from the transfer of the Group’s test operations to outsourced test operations in

Asia, see note 3 – Restructuring and related impairment charges. In the income statement this was recognised in the line item “Net restructuring and

related impairment charges”.

62 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

12. Property, plant and equipment, net continued
Finance leases

The carrying value of property plant and equipment held under finance leases at 31 December 2008 was US$364,000 (31 December 2007: nil). Addi-

tions during the year were US$481,000 (2007: nil). As of balance sheet date future minimum lease payments under those finance lease contracts were

US$353,000 (2007: US$nil). The present value of the net minimum lease payments was US$326,000 (2007: US$nil).

13. Intangible assets
A summary of activity for intangible assets for the years ended 31 December 2008 and 2007 is as follows:

Cost

Balance at 1 January 2007

Effect of movements in foreign currency

Acquisitions

Disposals

Balance at 31 December 2007 / 1 January 2008

Effect of movements in foreign currency

Acquisitions/additions

Disposals

Balance at 31 December 2008

Amortisation and impairment losses

Balance at 1 January 2007

Effect of movements in foreign currency

Amortisation charge for the year

Disposals

Balance at 31 December 2007 / 1 January 2008

Effect of movements in foreign currency

Amortisation charge for the year

Disposals

Balance at 31 December 2008

Net book value

At 1 January 2007

At December 31, 2007 / 1 January 2008

At 31 December 2008

Purchased software,

licenses and other

US$000

12,615

1,100

(66)

13,672

(382)

2,681

(421)

15,550

(11,036)

(23)

(773)

(11,826)

325

(1,354)

323

(12,532)

1,579

1,846

3,018

Patents

Intangible assets from

US$000

internal development

Total

US$000

–

724

–

724

1,431

2,155

–

(127)

–

(127)

–

(757)

–

(884)

–

597

–

364

–

364

–

(13)

–

(13)

–

351

1,271

12,615

1,824

(66)

14,396

(382)

4,476

(421)

18,069

–

(11,036)

(23)

(900)

(11,953)

325

(2,124)

323

(13,429)

1,579

2,443

4,640

Acquisitions to purchased software, licenses and other intangible assets in 2008 and 2007 mainly comprise software.

14. Investments
The Group holds a 7.66% interest in Digital Imaging Systems GmbH (DIS), a private entity that is not listed on a public stock exchange. As the fair value

cannot be reliably determined, the investment in DIS is accounted for at acquisition cost less accumulated impairment charges. The total investment in

DIS was US$2,662,000. In 2007, based on business and cash flow projections, the Group recognised a 100% impairment loss. Accordingly the book

value for DIS at 31 December 2008 and 2007 was nil.

15. Held-to-maturity securities
In the third quarter of 2007, securities totalling US$4.0 million were reclassified from “available-for-sale” to “held to maturity”. Whilst the Group inten-

tion was always to hold those securities to maturity (12 August 2010), the rapidly worsening economic environment forced management to review this

position.

Dialog Semiconductor Plc Annual Report and Accounts 2008 63

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

15. Held-to-maturity securities continued
After careful consideration, the management concluded in the fourth quarter 2008 that it was more prudent to convert these securities into cash. As a

result of this, the entire US$4 million worth of securities were sold for cash. Management sees this as an isolated event that was beyond its control, one

that could not have been reasonably anticipated back in 2007.

16. Trade and other payables
Trade and other payables comprise:

Trade accounts payable

Other payables

At 31 December 2008

At 31 December 2007

US$000

11,033

1,963

12,996

US$000

12,319

2,416

14,735

Terms and conditions of the above other current liabilities:

(cid:122) trade payables are non-interest bearing and are normally settled on 30-60-day terms; and
(cid:122) other payables are non-interest bearing and have an average term of five months.

17. Other financial liabilities
Other financial liabilities include the fair value of derivative financial instruments used for cash flow hedges. The Group is exposed to currency risks in

the course of its operating activities. These risks are reduced by the use of forward currency exchange contracts.

18. Provisions
The Group issues various types of contractual product warranties under which it guarantees the performance of products delivered for a certain period

or term. The estimated provision is based on historical warranty data. The provision for rental obligations and dilapidation relates to two offices that the

Group will vacate in 2009 as it relocates to larger premises. One office will be vacated before the end of the contractual lease term. As the likelihood of

the Group being able to sublet this office is low the Group has accounted for the rental obligations for the period the building is not used. In addition

the provision includes costs of dismantling and restoring the sites to their original condition. Regarding the provision for restructuring please see note 3.

The Group expects all provisions to mature within the next 12 months.

The changes in the provision are summarised as follows:

Balance at 1 January

Currency change

2008

US$000

340

–

638

978

US$000

–

Additions

US$000

196

753

–

949

Used

US$000

(21)

–

(474)

(495)

Released

At 31 December 2008

US$000

–

(159)

515

753

1,290

Obligations for product warranties

Rental obligations and dilapidation

Restructuring

Total

19. Other current liabilities
Other current liabilities comprise:

Obligations for personnel and social expenses

Advances received in relation to customer specific research and development contracts

Liabilities from capital lease contracts

Other

At 31 December 2008

At 31 December 2007

US$000

2,311

1,000

619

1,126

5,056

US$000

1,110

250

–

418

1,778

64 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

19. Other current liabilities continued
Terms and conditions of the above other current liabilities:

(cid:122) obligations for personnel and social expenses have an average term of three months (2007: three months); and
(cid:122) other payables are non-interest bearing and are normally settled on 30 day terms.

20. Shareholders’ equity and other reserves
Ordinary shares

At 31 December 2008 and 2007, Dialog had authorised 104,311,860 Ordinary shares with a par value of £0.10 per share, of which 46,068,930 shares

were issued and outstanding. The Dialog’s stock is all issued in the form of bearer shares, and all shares are fully paid.

On 24 September 2004, the Group completed an offering of 2,000,000 previously unissued Ordinary shares at £0.10 per share to its employee share

option trust (“Trust”), to make such shares available for the exercise of stock option rights that had previously been granted to employees. At 31 De-

cember 2008 and 31 December 2007 the Trust continued to hold 641,259 and 1,046,387 shares respectively. These shares are legally issued and out-

standing, but are not considered issued and outstanding for accounting purposes and accordingly have been reported under “employee stock purchase

plan shares” as a reduction of Shareholders’ equity.

Share premium

The account comprises additional paid-in capital in connection with the issue of shares.

Accumulated deficit

The accumulated deficit comprises losses and non-distributed earnings of consolidated Group companies. Because of the accumulated deficit, the

Group cannot pay a dividend and does not plan to pay dividends in the foreseeable future.

Other reserves

Currency translation reserve
The currency translation reserve is used to record exchange differences arising from the translation of the financial statements of subsidiaries whose

functional currency is not the US$.

Cash flow hedge reserve
The cash flow hedge reserve is used to record the portion of the gain or loss on a hedging instrument that is determined to be an effective cash flow

hedge.

Available-for-sale securities reserve
The available-for-sale securities reserve is used to record fair value changes on available-for-sale investments.

The related tax effects allocated to each component of other reserves for the years ended 31 December 2008 and 2007 are as follows:

Unrealised (losses) gains on available-
for-sale securities

Currency translation adjustment

Cash flow hedges

Other comprehensive income (loss)

Pre-tax

US$000

(312)

(249)

(282)

(843)

2008

Tax effect

US$000

–

(887)

–

(887)

Net

US$000

(312)

(1,136)

(282)

(1,730)

Pre-tax

US$000

2007

Tax effect

US$000

734

870

–

Net

US$000

734

120

943

21. Pension scheme
The Group operates defined contribution pension schemes. The pension cost charge for the year represents contributions payable by the Group to the

funds and amounted to US$1,163,000 (2007: US$958,000). At 31 December 2008, contributions amounting to US$69,000 (2007: US$80,000) were

payable to the funds and are included in other current liabilities. Pension costs also include payments to the state funded pension plan in Germany in

the amount of US$1,158,000 (2007: US$1,058,000).

Dialog Semiconductor Plc Annual Report and Accounts 2008 65

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

22. Share-based payments
a) Stock option plans

On 7 August 1998, the Group adopted a stock option plan (the “Plan”) under which employees, the executive management and the Executive Direc-

tors may be granted from time to time, at the discretion of the Board, stock options to acquire up to 3,840,990 shares of the Group’s authorised but

unissued Ordinary shares. On 16 May 2002 the Shareholders of the Group approved a resolution increasing the maximum amount of stock options

which may be granted by the Group at any time, to 15% of Dialog’s issued share capital on a diluted basis. At 31 December 2008, 8,129,811 shares

could be issued.

With the exception of those granted to the Chief Executive Officer, stock options granted to employees are granted with an exercise price not less than

the quoted price at the date of grant, and vest during the service period of the employee without any further vesting conditions. Stock options granted

before 31 October 2006 have terms of ten years and vest over periods of one to five years from the grant date. On 19 June 2006 the Group adopted a

revised stock option plan under which stock options now have a seven-year life and vest monthly over a period of one to 48 months. The new stock

options may not be exercised until they have been held for one calendar year from the grant date. The new rules were implemented on grants made on

or after 31 October 2006.

At the 2006 Annual General Meeting, Shareholders approved a stock option plan for Non-executive Directors. Each Non-executive Director is entitled to

an initial grant of 50,000 options vesting over four years and each year thereafter, soon after each Annual Shareholder Meeting, a further 20,000

options vesting over 12 months are granted. Options are exercisable at the market price prevailing at the date of grant.

The fair value of all grants in the two-year period ended 31 December 2008 was estimated using the Black-Scholes option pricing model. Expectations

of early exercise are considered in the determination of the expected life of the options. The Group does not have adequate historical development of

the share price, particularly as a result of material unusual effects in the stock market in recent years. Furthermore, implicit volatility cannot be deter-

mined since none of the Group’s options are actively traded. The Group has therefore based its calculation of expected volatility on an average of its

own volatility and the historical development of other companies in its business segment.

The following assumptions were used for stock option grants for the years ended 31 December 2008 and 2007:

Expected dividend yield

Expected volatility

Risk free interest rate

Expected life (in years)

Weighted average share price during the year (in US$)

Weighted average share price for Option grants (in US$)

Weighted average exercise price (in US$)

Weighted-average fair value (in US$)

Stock option plan activity for the years ended 31 December 2008 and 2007 was as follows:

2008

0%
40% – 48%

4.2%
2.0 – 6.0

2007

33% – 54%

4.0%

2.0 – 6.0

1.32

1.43

0.84

3.58

2.22

0.84

Outstanding at beginning of year

Granted

Exercised

Forfeited

Outstanding at end of year

Options exercisable at year end

2008

2007

Weighted average

exercise price

Weighted average

exercise price

Options

5,372,006

997,776

(405,128)

(168,144)

5,796,510

3,329,250

US$

2.77

1.43

0.42

2.79

2.56

3.09

Options

5,501,781

905,968

(132,570)

(903,173)

5,372,006

2,534,781

US$

2.56

2.22

1.17

3.02

2.77

3.14

The weighted average share price at the date of exercise of options was US$1.12 and US$2.56 in the years ended 31 December 2008 and 2007 respec-

tively.

66 Dialog Semiconductor Plc Annual Report and Accounts 2008

Section 4 | Consolidated financial statements and notes

22. Share-based payments continued
The following table summarises information on stock options outstanding at 31 December 2008:

Range of Exercise Prices

€0.00 - 2.98

€3.00 - 8.00

€0.00 - 8.00

Options outstanding

Weighted average

Options exercisable

Number

remaining

Weighted average

outstanding at 31

contractual life

exercise price

Number exercisable

exercise price

December 2008

(in years)

US$

at 31 December 2008

4,525,390

1,271,120

5,796,510

5.2

1.74

5.45

2.56

2,122,078

1,207,172

3,329,250

US$

1.81

5.32

3.09

b) Executives’ Long Term Incentive Plan (LTIP)

The Group also operates the Dialog Semiconductor Plc Long-Term Incentive Plan (LTIP) which was approved by shareholders at the Annual General

Meeting in April 2008. Under the LTIP, key executives are eligible to share in a percentage of the value created for shareholders in excess of an annual

return hurdle measured over a three year performance period. This value is delivered to a participant in the form of a series of nil-cost options which can

be exercised within five years of the date of grant. The first award under the LTIP was made on 8 May 2008.

The fair value of the LTIP, where the number of nil-cost options granted to an individual is contingent upon the returns to shareholders, was calculated

using a Monte Carlo simulation model. As a portion of each award is capable of vesting at three separate measurement dates each tranche has been

valued separately in accordance with IFRS2.

The fair values used in the calculations are as follows:-

Inputs

Share price at grant date

Exercise price

Expected life

Expected volatility

Risk-free-interest-rate

Tranche 1

Tranche 2

Tranche 3

1,40€

€ nil

0.64 yrs

40%

1,40€

€ nil

1.64 yrs

40%

4.8202%

1,40€

€ nil

2.64 yrs

40%

4.8202%

Expected volatility has been determined on the same basis as the input into the fair value calculation for share options granted during the year.

Measurement date 31 January 2009
The measurement share price at 31 January 2009 (average share price over the prior 30 days) was €0.63. As this price was below the return hurdle for

January 2009 of €1.62 (initial price of €1.44+12.5%), no share options were granted.

c) ESOP Trust

The Group established an employee share option trust (the “Trust”). The Trust purchases shares in the Group for the benefit of employees under the

Group’s share option scheme. At 31 December 2008 the Trust held 641,259 shares.

Dialog Semiconductor Plc Annual Report and Accounts 2008 67

Section 4 | Consolidated financial statements and notes

Notes to the consolidated financial statements
For the year ended 31 December 2008

23. Additional disclosures on financial instruments
Carrying amounts, amounts recognised and fair values by classes of financial assets and liabilities as well as by category:

Amounts recognised in balance sheet according to IAS 39