Himax Technologies Annual Report 2005

FY2005 Annual Report · Himax Technologies

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LETTER TO SHAREHOLDERS

Dear Shareholders:

Since our inception in 2001, Himax has successfully established a solid position in the display driver business. We are now

well positioned to become a leading semiconductor solution provider for the flat panel display industry.

At this time last year, we at Himax collectively came to the conclusion that our market opportunity was growing and that we

needed to capitalize on this growth trend. Our Nasdaq IPO at the end of March 2006 was in-line with our growth plan, as

it not only strengthened our balance sheet but also served as a global branding event for Himax.

As a leading supplier in the TFT-LCD industry, Himax already has a solid track record of share gains in the global large panel

display drivers segment. While we have accomplished a great deal in the past, we believe that the greatest opportunities lie

ahead of us. We are strengthening our market position in small- and medium-sized display driver business. We also continue

to expand successfully into new segments such as LCD TV chipsets and LCOS microdisplays.

We achieved impressive growth led by favorable market dynamics and the execution of our business plan. Overall, Himax

ended 2005 in the number 3 spot, with 15.8% share in large panel display driver revenue globally. There is clearly more room

for expansion as we continue to grow with our anchor customers and expand our market share through new customers.

Display driver for TV panel shows strong growth. This segment is one of the largest opportunities in the semiconductor

industry. It continues to see strong demand growth due to superior performance and viewing experience offered by flat panel

displays. We continue to believe that the LCD industry is still in the early stages of expansion, with the TV segment offering

the greatest potential for growth.

We also expect further growth in the monitor and notebook computer segments as flat panels are now the dominant display

system worldwide. In these segments, low cost is one of the most important considerations for customers. We are addressing

this customer demand by introducing higher channel ICs, new designs, and more diversified supplier base. We expect that

both shipments and revenues will continue to grow as demand for flat panel applications remains strong.

Display driver shipments for both handset and consumer electronics have grown significantly since 2004, when the segment

was only a small contributor. We have made considerable progress in penetrating the small- and medium-sized TFT-LCD driver

segment, especially the displays for mobile handsets. We expect a continued transition to drivers for high-resolution displays,

which typically carry higher ASPs. Our technologies and product offerings ideally position us to benefit from this trend.

We also expect to benefit from the significant investments we have made in R&D to broaden our product offering into other

markets that offer the potential for attractive growth and higher gross margins. We have started shipping video processors

for LCD TVs and expect to introduce more integrated products in this area.

Capitalizing on our significant expertise in LCOS microdisplay technology, we are developing differentiated products that

address our customers’ specific display requirements such as high performance, low power consumption, and cost efficiency

for various applications. We believe the diversity in our offering revenue will further strengthen our position in the marketplace

and increase shareholder value.

In summary, the dedication of our employees and the strength of our technology and service have put Himax in a strong

position. We thank you for your support, and we will continue to drive for excellence and strive to achieve the growth you

have come to expect.

Sincerely,

Jordan Wu

President and CEO

Himax Technologies, Inc.

ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR 2005

Contents

Forward-Looking Statements .....................................................................................................................

Selected Financial Data ..............................................................................................................................

History and Development of the Company ...............................................................................................

Business Operations ...................................................................................................................................

Critical Accounting Policies and Estimates ...............................................................................................

Results of Operations .................................................................................................................................

Consolidated Financial Statements ............................................................................................................

Corporate Information .................................................................................................................................

FORWARD-LOOKING STATEMENTS

This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities

Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although

these forward-looking statements, which may include statements regarding our future results of operations,

financial condition, or business prospects, are based on our own information and information from other

sources we believe to be reliable, you should not place undue reliance on these forward-looking statements,

which apply only as of the date of this annual report. The words “anticipate,” “believe,” “expect,” “intend,” “plan,”

“estimate” and similar expressions, as they relate to us, are intended to identify a number of these forward-

looking statements. Our actual results of operations, financial condition or business prospects may differ

materially from those expressed or implied in these forward-looking statements for a variety of reasons, including,

among other things and not limited to, our anticipated growth strategies, our future business developments,

results of operations and financial condition, our ability to develop new products, the expected growth of the

display driver markets, the expected growth of end-use applications that use flat panel displays, particularly

TFT-LCD panels, development of alternative flat panel display technologies, other factors.

All references to “New Taiwan dollars,” “NT dollars” and “NT$” are to the legal currency of the ROC; and all

references to “dollars,” “U.S. dollars,” and “$” are to the legal currency of the United States.

SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2003, 2004 and

2005 and the selected consolidated balance sheet data as of December 31, 2004 and 2005 are derived from

our consolidated financial statements included herein, which have been audited by KPMG Certified Public

Accountants, or KPMG, and were prepared in accordance with U.S. GAAP. The selected consolidated balance

sheet data as of December 31, 2001, 2002 and 2003 and the selected consolidated statement of operations

data for the period from our inception on June 12, 2001 to December 31, 2001 and the year ended December

31, 2002 have been derived from our consolidated financial statements that have not been included herein but

have been audited by KPMG and were prepared in accordance with U.S. GAAP. Our consolidated financial

statements include the accounts of Himax Technologies, Inc. and its subsidiaries as if we had been in existence

for all years presented. As a result of our recent reorganization, 100% of our outstanding ordinary shares are

owned by former shareholders of Himax Taiwan. This reorganization is a change in legal organization for which

no change in accounting basis is appropriate. Therefore, in presenting our consolidated financial statements,

the assets and liabilities, revenues and expenses of Himax Taiwan and its subsidiaries are included in our

consolidated financial statements at their historical amounts for all periods presented. Our historical results do

not necessarily indicate results expected for any future periods. The selected financial and operating data set

forth below should be read in conjunction with the consolidated financial statements and the notes to those

statements included herein.

For the Period

from

June 12, 2001

(Inception) to

December 31,
2001

Year Ended December 31,

2002

2003

2004

2005

(in thousands, except per share data)

Consolidated Statements of Operations Data:

Revenues .............................................................. $

8,980

$ 56,478

$131,843 $300,273 $ 540,204

Costs and expenses(1):

Cost of revenues ............................................

Research and development ...........................

General and administrative .............................

Sales and marketing ......................................

Total costs and expenses ...................................

Operating income (loss) .......................................

7,176

1,509

317

162

9,164

(184)

Net income (loss)(2) .............................................. $

45,313

100,102

235,973

419,380

7,800

1,489

884

21,077

24,021

41,278

4,614

2,669

4,654

2,742

6,784

4,762

55,486

128,462

267,390

472,204

992

513

3,381

32,883

68,000

(581)

$ 36,000 $ 61,558

Earnings (loss) per ordinary share(2)

and per ADS(3):

Basic ................................................................ $

Diluted .............................................................. $

0.00

$ (0.00)

0.21 $

0.35

0.34

Weighted-average number of shares used in

earnings per share computation:

Basic ................................................................

25,732

103,276

116,617

169,320

176,105

Diluted ..............................................................

26,057

104,739

116,617

173,298

180,659

Note: (1) The amount of share-based compensation included in applicable costs and expenses categories is summarized

as follows:

For the Period

from

June 12, 2001

(Inception) to

December 31,
2001

Year Ended December 31,

2002

2003

2004

2005

(in thousands)

Cost of revenues ................................................. $

172

827

291 $

188

Research and development ................................

344

3,057

11,666

4,288

General and administrative ..................................

Sales and marketing ............................................

353

348

2,124

1,349

721

537

6,336

848

1,241

Total .................................................................. $

430

$ 3,930

$ 15,966

5,837 $

8,613

(2) Under the ROC Statute for Upgrading Industries, we are exempt from income taxes for income attributable to

expanded production capacity or newly developed technologies. If we had not been exempt from paying this

income tax, net income and basic and diluted earnings per share would have been $52.4 million, $0.30 and

$0.29 for the year ended December 31, 2005, respectively. This tax exemption expires on March 31, 2009.

(3) Each ADS represents one ordinary share. Earnings (loss) per ADS are unaudited.

The following table presents our selected consolidated balance sheet data as of December 31, 2001, 2002,

2003, 2004 and 2005:

As of December 31,

2001

2002

2003

2004

2005

(in thousands)

Consolidated Balance Sheet Data:

Cash and cash equivalents ................................ $

2,067

$ 2,697

$ 2,529

5,577 $

7,086

Accounts receivable, net .....................................

Accounts receivable from related parties ..........

Inventories .............................................................

Total current assets .............................................

Total assets ..........................................................

Short-term debt ...................................................

Accounts payable .................................................

Total current liabilities ..........................................

Total liabilities .......................................................

Total stockholders’ equity ...................................

3,901

1,222

7,621

9,079

–

2,249

3,922

5,157

1,637

4,786

12,056

26,885

29,423

–

5,803

11,750

11,975

17,448

12,543

22,893

21,088

26,860

39,285

80,158

69,688

54,092

105,004

88,245

144,414

300,056

96,159

157,770

327,239

–

22,901

43,613

43,870

–

27,274

38,649

105,801

52,157

160,784

52,246

160,784

52,289

104,860

165,831

HISTORY AND DEVELOPMENT OF THE COMPANY

Himax launched IPO on Nasdaq on March 31, 2006

Himax Taiwan, our predecessor, was incorporated on June 12, 2001 as a limited liability company under the

laws of the ROC. On April 26, 2005, we established Himax Technologies Limited, an exempted company with

limited liability under the Companies Law Cap. 22 of the Cayman Islands, or the Companies Law, as a holding

company to hold the shares of Himax Taiwan in connection with our reorganization and share exchange. On

October 14, 2005, Himax Taiwan became our wholly owned subsidiary through a share exchange consummated

pursuant to the ROC Business Mergers and Acquisitions Law through which we acquired all of the issued and

outstanding shares of Himax Taiwan, and we issued ordinary shares to the shareholders of Himax Taiwan.

Shareholders of Himax Taiwan received one of our ordinary shares in exchange for one Himax Taiwan common

share. The share exchange was unanimously approved by shareholders of Himax Taiwan on June 10, 2005 with

no dissenting shareholders and by the ROC Investment Commission on August 30, 2005 for our inbound

investment in Taiwan, and on September 7, 2005 for our outbound investment outside of Taiwan. Acquisition

of our ordinary shares by non-ROC shareholders of Himax Taiwan is not subject to the approval of the ROC

Investment Commission. We effected this reorganization and share exchange to comply with ROC laws, which

prohibit a Taiwan incorporated company not otherwise publicly listed in Taiwan from listing its shares on an

overseas stock exchange. Our reorganization enables us to maintain our operations through our Taiwan subsidiary,

Himax Taiwan, while allowing us to list our shares overseas through our holding company structure.

Pursuant to the approval letters from the ROC Investment Commission, we and Himax Taiwan have to satisfy

certain documentation requirements in order to evidence the completion of the share exchange, some of which

have yet to be completed as of the date of this annual report. On November 24, 2005, Himax Taiwan submitted

to the ROC Investment Commission (1) the status report confirming the completion of the share exchange, (2)

the shareholders’ notice setting the record date of the share exchange and (3) the shareholders register

maintained by our registrar. In addition, on December 5, 2005, Himax Taiwan submitted to the ROC Investment

Commission its latest corporate registration card issued by the ROC Ministry of Economic Affairs. The ROC

Investment Commission is in the process of reviewing these documents and may request Himax Taiwan to

provide further documents to satisfy the documentation requirement. We do not anticipate any difficulties in

providing the required documentation to the ROC Investment Commission and expect that any further required

documents (if any) will be submitted on a timely basis in satisfaction of our obligations under the relevant

approval letter.

The common shares of Himax Taiwan were traded on the Emerging Stock Board from December 26, 2003 to

August 10, 2005, under the stock code “3222.” Himax Taiwan’s common shares were delisted from the

Emerging Stock Board on August 11, 2005. As a result of our reorganization, Himax Taiwan is no longer a

Taiwan public company, and its common shares are no longer listed or traded on any trading markets.

On September 26, 2005, we changed our name to “Himax Technologies, Inc.,” and on October 17, 2005 Himax

Taiwan changed its name to “Himax Technologies Limited” upon the approval of shareholders of both companies

and amendments to the respective constitutive documents. We effected the name exchange in order to

maintain continuity of operations and marketing under the trade name “Himax Technologies, Inc.,” which had

been previously used by Himax Taiwan.

We closed our initial public offering on April 4, 2006 and our ADSs have been quoted on the Nasdaq National

Market since March 31, 2006. Our ordinary shares are not listed or publicly traded on any trading markets.

As of May 1, 2006, approximately 199.4 million of our shares were outstanding. We believe that, of such shares,

approximately 56.7 million shares in the form of ADSs were held by approximately 6,125 holders in the United

States as of May 1, 2006.

Our principal executive offices are located at 10th Floor, No. 605, Chungshan Road, Hsinhua, Tainan County

712, Taiwan, Republic of China. Our telephone number at this address is +886 (6) 505-0880. Our registered

office in the Cayman Islands is located at Century Yard, Cricket Square, Hutchins Drive, P.O. Box 2681 GT,

Georgetown, Grand Cayman, Cayman Islands. Our telephone number at this address is +(1-345) 949-1040. In

addition, we have regional offices in Hsinchu and Taipei, Taiwan; Suzhou and Shenzhen, China; Yokohama,

Japan; and Anyangsi Kyungkido, South Korea. Investor inquiries should be directed to us at the address and

telephone number of our principal executive offices set forth above. Our website is www.himax.com.tw. The

information contained on our website is not part of this annual report. Our agent for service of process in the

United States is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

BUSINESS OPERATIONS

Himax is one of the world’s leading large-sized TFT-LCD panel

display driver suppliers, with a market share of approximately

15.8% in terms of revenues in 2005.

Overview

We design, develop and market semiconductors that are critical components of flat panel displays. We believe

we are among the world’s leading suppliers of large-sized TFT-LCD panel display drivers, with a market share

of approximately 15.8% in terms of revenues in 2005, according to iSuppli. Our principal products are display

drivers for large-sized TFT-LCD panels, which are used in desktop monitors, notebook computers and televisions,

and display drivers for small- and medium-sized TFT-LCD panels, which are used in mobile handsets and

consumer electronics products such as digital cameras, mobile gaming devices and car navigation displays. We

also offer display drivers for panels using OLED technology and LTPS technology. In addition, we are expanding

our product offering to include television semiconductor solutions, as well as LCOS products. Our customers

are panel and television makers. We believe that our leading design and engineering expertise, combined with

our focus on customer service and close relationships with semiconductor manufacturing service providers, has

contributed to our success.

Industry Background

We operate in the flat panel display semiconductor industry. As our semiconductors are critical components

of flat panel displays, our industry is closely linked to the trends and developments of the flat panel display

industry. According to iSuppli, global unit shipments of large-sized (ten inches and above in diagonal measurement)

flat panel displays are expected to grow from approximately 203.7 million units in 2005 to approximately

352.7 million units in 2009. iSuppli also forecasts global unit shipments of small- and medium-sized (less than

ten inches in diagonal measurement) flat panel displays to grow from approximately 1.5 billion units in 2005 to

approximately 1.8 billion units in 2009. This projected growth is expected to drive the demand for semiconductors

used in large-sized panels and small- and medium-sized panels. Panel manufacturers are primarily located in

Taiwan, South Korea, Japan and China. We believe that Taiwan-based semiconductor companies are well

positioned to take advantage of the geographic proximity to work closely with panel manufacturers to design

semiconductors to be integrated into such customers’ products.

Flat Panel Displays

Flat panel displays are thin displays that are widely used in a broad range of applications, including notebook

computers, desktop monitors, televisions, mobile handsets and consumer electronics products. Flat panel

displays have a number of attractive characteristics, including flat and thin screens, light weight, high resolution,

stable picture quality with no flickering, low power consumption and low radiation. Technological innovation and

production efficiency have resulted in the reduction in the price of flat panel displays and have narrowed the

price difference between flat panel displays and traditional cathode ray tube, or CRT, displays. For certain large-

sized applications such as desktop monitors and televisions, CRT displays are increasingly being replaced by

flat panel displays. This trend is expected to drive the demand for large-sized flat panel displays. Further, the

demand for low-cost, high-quality color displays for small-sized applications and consumer preferences for

multimedia color panels are expected to drive the demand for mobile handsets and other mobile devices.

There are several alternative flat panel display technologies at various stages of development and commercial

production, including the following:

• Amorphous silicon thin film transistor liquid crystal display technology, or a-Si TFT-LCD, is an advanced

active matrix technology that uses a matrix of transistors embedded on a thin film of silicon to change

the transparency of the LCD when voltage is applied. An a-Si TFT-LCD panel consists of two thin glass

substrates between which a layer of liquid crystals is deposited and behind which a light source is

mounted. The front glass substrate is fitted with a color filter, while the back glass substrate, also called

a TFT array, has a thin film of transistors, or TFT, formed on its surface. The liquid crystals are normally

aligned to allow the polarized light from the backlight unit to pass through the two glass panels to form

a picture element, or pixel. When voltage is applied to the transistors on the TFT array, the liquid crystals

change their alignment and alter the amount of light that passes through them. Meanwhile, the color filter

on the front glass substrate gives each pixel its own color. The combination of these pixels in different

colors and levels of brightness forms the image on the panel. A-Si TFT-LCD panels are used in devices

of different sizes ranging from one inch to greater than 50 inches for various applications. Unless otherwise

indicated, the term “TFT-LCD” is used generally in this prospectus to refer to a-Si TFT-LCD.

• LTPS is an alternative form of TFT-LCD technology and uses poly silicon instead of the amorphous silicon

used in standard TFT-LCD panels. LTPS is currently primarily used in small-sized panels.

• OLED technology uses electro-luminescent materials under active or passive matrix schemes. OLED is

currently primarily used in small-sized panels.

• Super twisted nematic, or STN, is a passive matrix LCD technology. STN is a low-power, low-cost

solution that has been widely used in small displays. There are two types of STN displays, monochrome

and color. Color STN displays have largely replaced monochrome STNs, with monochrome STNs primarily

used in low-end mobile handsets. However, color STN is gradually being replaced by TFT-LCD and other

technologies that offer superior image quality compared with color STN technology.

• Liquid crystal on silicon technology, or LCOS, is a microdisplay technology that creates high-resolution

images with liquid crystals and silicon chips. LCOS displays are constructed with a silicon chip, a layer

of liquid crystals and a glass cover plate in contrast to the more common TFT-LCD construction of liquid

crystals sandwiched between two glass plates. LCOS is at a relatively early stage of commercialization

and is currently used in large-sized projection televisions and certain small-sized applications.

• Digital light processing technology, or DLP, is another microdisplay technology. Instead of using liquid

crystals, the DLP chip is a reflective surface containing tiny mirrors. Each mirror represents a single pixel.

DLP technology is primarily used in large-sized projection televisions.

Of these technologies, TFT-LCD technology was the most widely used flat panel display technology in 2005 in

terms of revenues, with global sales of TFT-LCD driver products representing approximately 68.3% of the total

flat panel driver market, according to iSuppli. TFT-LCD is currently the dominant technology used in desktop

monitors and notebook computers and is becoming more widely adopted in televisions. The attractiveness of

the TFT-LCD market opportunity has spurred substantial investments in capital expenditures on new generation

fabs leading to expanded and improved manufacturing capacity and increased focus and spending on research

and development by panel manufacturers. Additionally, the TFT-LCD market opportunity has contributed to the

growth of a highly developed and specialized supply chain. The combination of these factors is expected to

continue to improve performance and reduce the unit cost of TFT-LCD panels and thereby further drive demand

for such products and their components.

Flat Panel Display Semiconductors

Flat panel displays require different semiconductors depending upon the display technologies and the application.

Some of the most important ones include the following:

• Display Driver. The display driver receives image data from the timing controller and delivers precise

analog voltages or currents to create images on the display. The two main types of display drivers for a

TFT-LCD panel are gate drivers and source drivers. Gate drivers turn on the transistor within each pixel

cell on the horizontal line on the panel for data input at each row. Source drivers receive image data from

the timing controller and generate voltage that is applied to the liquid crystal within each pixel cell on the

vertical line on the panel for data input at each column. The combination determines the colors generated

by each pixel. Typically multiple gate drivers and source drivers are installed separately on the panel.

However, for certain small-sized applications, gate drivers and source drivers are integrated into a single

chip due to space and cost considerations. The number of display drivers required for each panel

depends on the resolution. Large-sized panels typically have higher resolution and require more display

drivers than smaller-sized panels.

• Timing Controller. The timing controller receives image data and converts the format for the source

drivers’ input. The timing controller also generates controlling signals for gate and source drivers. Typically

the timing controller is a discrete semiconductor in large-sized TFT-LCD panels. For small-sized applications,

however, the timing controller may be integrated with display drivers.

• Scaler. For certain displays, a scaler is installed to magnify or shrink image data in order for the image

to fill the panel.

• Operational Amplifier. An operational amplifier supplies the reference voltage to source drivers in order

to make their output voltage uniform.

• Television Chipset. Television flat panel displays require chipsets that typically contain all or some of the

following components: an audio processor, analog interfaces, digital interfaces, a video processor, a

channel receiver and a digital television decoder. See “–Products–Television Semiconductor Solutions–

Television Chipsets” for a description of these components.

• Others. Flat panel displays also require multiple general purpose semiconductors such as memory,

power converters and inverters.

Characteristics of the Display Driver Market

Although we operate in several distinct segments of the flat panel display semiconductor industry, our principal

products are display drivers. Display drivers are critical components of flat panel displays. As a result, we believe

that the projected growth in the demand for flat panel displays will result in the growth in demand for display

drivers. According to iSuppli, shipments of display drivers are expected to grow from 4.2 billion units in 2005

to 6.3 billion units in 2009, with global sales revenues increasing from $7.8 billion in 2005 to $9.3 billion in 2009.

The display driver market has specific characteristics, including those discussed below.

Concentration of Panel Manufacturers

The global TFT-LCD panel industry consists of a small number of manufacturers, substantially all of which are

based in Asia. According to iSuppli, the top ten TFT-LCD panel manufacturers of large-sized panels in terms

of unit sales accounted for 95.7% of global sales in the first three quarters of 2005. All of these manufacturers

are based in Asia. In recent years, TFT-LCD panel manufacturers, in particular Taiwan- and Korea-based

manufacturers, have invested heavily to establish, construct and ramp up additional fab capacity. The capital

intensive nature of the industry often results in TFT-LCD panel manufacturers operating at a high level of

capacity utilization in order to reduce unit costs. This tends to create a temporary oversupply of panels, which

reduces the average selling price of panels and puts pricing pressure on display driver companies. Moreover,

the concentration of panel manufacturers permits major panel manufacturers to exert pricing pressure on

display driver companies such as us. The small number of panel manufacturers intensifies this as display driver

companies, in addition to seeking to expand their customer base, must also focus on winning a larger percentage

of such customers’ display driver requirements.

Customization Requirements

Each panel display has a unique pixel design to meet its particular requirements. To optimize the panel’s

performance, display drivers have to be customized for each panel design. The most common customization

requirement is for the display driver company to optimize the gamma curve of each display driver for each panel

design. Display driver companies must work closely with their customers to develop semiconductors that meet

their customers’ specific needs in order to optimize the performance of their products.

Mixed-Signal Design and High-Voltage CMOS Process Technology

Display drivers have specific design and manufacturing requirements that are not standard in the semiconductor

industry. Some display drivers require mixed-signal design since they combine both analog and digital devices

on a single semiconductor to process both analog signals and digital data. Manufacturing display drivers

requires high-voltage complementary metal oxide semiconductor, or CMOS, process technology typically operating

at eight to 16 volts for source drivers and 10 to 40 volts for gate drivers, levels of voltage which are not standard

in the semiconductor industry. For display drivers, the driving voltage must be maintained under a very high

degree of uniformity, which can be difficult to achieve using standard CMOS process technology. However,

manufacturing display drivers does not require very small-geometry semiconductor processes. Typically, the

manufacturing process for large panel display drivers requires geometries between 0.18 micron and 1 micron

because the physical dimensions of a high-voltage device do not allow for the economical reduction in geometries

below this range. We believe that there are a limited number of fabs with high-voltage CMOS process technology

that are capable of high-volume manufacturing of display drivers.

Special Assembly and Testing Requirements

Manufacturing display drivers requires certain assembly and testing technologies and equipment that are not

standard for other semiconductors and are offered by a limited number of providers. The assembly of display

drivers typically uses either tape automated bonding, also known as TAB, or chip-on-glass, also known as

COG, technologies. Display drivers also require gold bumping, which is a process in which gold bumps are

plated onto each wafer to connect the die and the processed tape, in the case of TAB packages, and the glass,

in the case of COG packages. TAB may utilize tape carrier package, also known as TCP, or chip on film, also

known as COF. The type of assembly used depends on the panel manufacturer’s design which is influenced

by panel size and application and is typically determined by the panel manufacturers. Display drivers for large-

sized applications typically require TAB package types and, to a lesser extent COG package types, whereas

display drivers for mobile handsets and consumer electronics products typically require COG packages. The

testing of display drivers also requires special testers that can support high-channel and high-voltage output

semiconductors. Such testers are not standard in the semiconductor industry.

Supply Chain Management

The manufacturing of display drivers is a complex process and requires several manufacturing stages such as

wafer fabrication, gold bumping and assembly and testing, and the availability of materials such as the processed

tape used in TAB packaging. We refer to these manufacturing stages and material requirements collectively as

the “supply chain.” Panel manufacturers typically operate at high levels of capacity utilization and require a

reliable supply of display drivers. A shortage of display drivers, or a disruption to this supply, may disrupt panel

manufacturers’ operations since replacement supplies may not be available on a timely basis or at all, given

the customization of display drivers. As a result, a display driver company’s ability to deliver its products on a

timely basis at the quality and quantity required is critical to satisfying its existing customers and winning new

ones. Such supply chain management is particularly crucial to fabless display driver companies that do not have

their own in-house manufacturing capacity. In the case of display drivers, supply chain management is further

complicated by the high-voltage CMOS process technology and the special assembly and testing requirements

that are not standard in the semiconductor industry. Access to this capacity also depends in part on display

driver companies having received assurances of demand for their products since semiconductor manufacturing

service providers require credible demand forecasts before allocating capacity among customers and investing

to expand their capacity to support growth.

Need for Higher Level of Integration

The small form factor of mobile handsets and certain consumer electronics products restricts the space for

components. Small-sized panel applications require one source driver, one gate driver and one timing controller,

which can be installed as separate semiconductors or as an integrated single-chip driver. Customers are

increasingly demanding higher levels of integration in order to manufacture more compact panels, simplify the

module assembly process and reduce unit costs. Display driver companies must be able to offer highly integrated

chips that combine the source driver, gate driver and timing controller, as well as semiconductors such as

memory, power circuit and image processors, into a single chip. Due to the size restrictions and stringent power

consumption constraints of such display drivers, single-chip drivers are complex to design. For large-sized

panel applications, integration is both more difficult to achieve and less important since size and weight are less

of a priority.

The Taiwan Advantage in the Flat Panel Display Driver Industry

The highly developed Taiwan semiconductor supply chain and the close proximity to panel manufacturers have

contributed to the growth of Taiwan’s display driver industry. Taiwan is one of the world’s leading locations for

outsourced semiconductor manufacturing and back-end services, with leading semiconductor manufacturing

service providers offering outsourced, high-volume and advanced manufacturing for each of the various stages

of the semiconductor manufacturing process, including wafer fabrication, gold bumping, assembly and testing.

This cluster effect gives Taiwan-based display driver companies access to significant capacity, economies of

scale, specialized expertise and manufacturing flexibility. Moreover, Taiwan-based semiconductor manufacturing

service providers can leverage Taiwan’s large pool of highly skilled engineers and other personnel suitable for

sophisticated manufacturing industries. The ready availability of semiconductor manufacturing in Taiwan helps

Taiwan-based display driver companies such as us to mass-produce their products at competitive prices.

Taiwan is also a key location for panel manufacturers. The close proximity to customers facilitates efficient joint

development and improved manufacturing processes and engineering support.

The Himax Solution

Our semiconductors and solutions provide our customers with the following benefits:

• Comprehensive Display Driver Solutions. We offer comprehensive display driver solutions and have

devoted substantial resources to satisfy our customers’ short- and long-term needs. We are highly skilled

in the design of customized, high-performance and cost-effective display drivers. We believe that we

design and offer display drivers that meet the various and fast-changing requirements of panel manufacturers.

We have in-depth knowledge of display technologies and liquid crystal characteristics and are committed

to working closely with our customers and using this know-how to solve their display-related problems

and to optimize the performance of their products.

• Broad Product Portfolio. We offer a broad range of display drivers to meet the requirements of our

customers. We provide display drivers to support a wide range of resolutions, panel sizes and various

interface technologies, including customized interfaces, as well as COF, COG and TCP package types.

To further broaden our product portfolio, we are developing source and gate drivers with a higher number

of channels and higher-bit source drivers for large-sized TFT-LCD panels, expanding our portfolio of

display drivers for LTPS and developing display drivers for panels utilizing OLED technology.

• Customized Products That Optimize Panel Performance. We design many of our products based on

our customers’ specifications, and we work closely with our direct customers, and in some cases our

customers’ customers, to better understand their needs and to align our products with their product

roadmaps. For example, our continuing close relationship and collaboration with CMO, a leading panel

manufacturer, have improved our understanding of the requirements of panel manufacturers and enhanced

our ability to optimize panel performance. Our customized product approach allows our engineers to focus

on customer service and deliver engineering samples and offer engineering solutions. Finally, our ability

to quickly change the driving gamma curve allows us to optimize the performance of various liquid crystal

materials and customize our products.

• Fabless Model for Manufacturing Efficiency and Flexibility. We use semiconductor manufacturing service

providers such as foundries and assembly and testing houses. We engage foundries with high-voltage

CMOS process technology for our display drivers, and we work with assembly and testing houses that

specialize in TAB and COG assembly, thereby allowing us to take advantage of the economies of scale

and specialization of such semiconductor manufacturing service providers. In addition, we are able to

capture the financial and operational benefits of the fabless model, including reduced manufacturing

personnel, capital expenditures, fixed assets and fixed costs. Our fabless model also provides us with the

flexibility to use the most suitable technology and service provider for a particular product.

• Cost-Effective Solutions for High-Volume Manufacturing. We strive to design cost-effective semiconductors

for high-volume manufacturing by reducing manufacturing and material costs while maintaining the desired

level of performance. We believe that our relationships with our suppliers provide us with access to

processed tape used in TAB package and equipment at competitive prices. Since panel manufacturers

are price sensitive, we must leverage existing product design expertise to shrink the die size in order to

develop cost-effective products with desired features and performances. Moreover, we strive to achieve

cost savings by economies of scale, yield improvements, design improvements and manufacturing efficiency.

• Highly Integrated, Small and Power Efficient Display Drivers for Mobile Handsets and Consumer Electronics

Products. Our engineers are highly skilled at combining various multi-voltage, mixed signal functional

building blocks into a single chip. For example, our display drivers for mobile device applications combine

source drivers, gate drivers, power circuit, timing controllers and static random access memory, or SRAM,

into a single chip. We have devoted significant time and engineering resources collaborating with our

customers to simulate, characterize, and, as necessary, adapt these processes to design and develop our

products for higher performances and smaller die sizes. As a result, we believe our display drivers for

mobile handsets are currently among the smallest in the industry. Similarly, we work to reduce the power

consumption and heat generation of our products, as improved power efficiency extends battery life,

which is particularly important for mobile devices.

Strategy

We are a leading supplier of display drivers for large-sized TFT-LCD panels. Our aim is to become one of the

world’s leading providers of semiconductors for flat panel display applications. We intend to pursue this goal

through the following strategies:

Expand and Diversify Our Customer Base and Capture a Larger Percentage of Our Customers’ Large-sized

Panel Display Driver Requirements. We currently sell display drivers to many of the world’s leading panel

manufacturers, including CMO, CPT, Innolux Display, Samsung and SVA-SEC. We believe we are among the

world’s leading suppliers of display drivers for large-sized TFT-LCD panel display drivers, with a market share

of approximately 15.8% in terms of revenues in 2005, according to iSuppli. This position, which we achieved

in a relatively short period of time, reflects our customers’ confidence in our ability to scale up our production

to meet their volume requirements and our ability to provide customized, high-performance and cost-effective

products. We intend to leverage our market position to continue to enhance and strengthen our relationship

with existing customers and expand and diversify our customer base. We seek to capture a larger percentage

of their requirements by continuing to focus on customization and enhanced product performance. We are

actively working with existing and prospective customers on new designs. Additionally, the trend towards

display drivers with a higher number of channels with the advanced interface technologies required of higher-

resolution panels should offer opportunities for us to achieve additional design wins. We aim to capture growth

opportunities presented by these industry developments and to reduce our reliance on any one customer.

Target Leadership Position in Mobile Handset Display Driver Market. We aim to establish a leadership position

in the mobile handset display driver market. We offer display drivers for panels using TFT-LCD and LTPS

technologies and are developing display drivers for panels using OLED technology to further expand our

product offerings and market penetration. We commenced volume shipments of single-chip TFT-LCD display

drivers for use in mobile handsets in August 2004 and of our small-sized display drivers using our die shrink

know-how for mobile handsets in June 2005. We believe our display drivers for mobile handsets are currently

among the smallest in the industry. We believe that mobile handset display drivers will provide us with significant

growth opportunities as a result of the growing demand for low-cost, high-quality displays and as mobile

handsets increasingly incorporate multimedia features. Moreover, we believe that achieving a leadership position

in the mobile handset display driver market would enable us to diversify our sources of revenue.

Leverage Design and Engineering Expertise to Capture Other Growth Opportunities. We plan to leverage our

display-related semiconductor and engineering expertise to develop other products for which we believe there

are significant growth opportunities. For example, we are focusing on television chipsets for use in flat panel

and advanced CRT televisions. Our close collaboration with panel manufacturers that are focused on the LCD

television market enables us to better understand the requirements of LCD television makers. Additionally, we

have leveraged our design and process capabilities to develop and commercialize LCOS products, which are

targeted at projection TV and microdisplay opportunities.

Strengthen Our Semiconductor Manufacturing Supply Chain. We aim to strengthen our access to stable,

larger, more reliable, diverse and cost-efficient manufacturing capacity and supply of processed tape. We

believe this is important to our ability to meet our customers’ delivery requirements, since to do so our

semiconductor manufacturing service providers and suppliers must meet the schedules and quality specifications

that we set for them. Our customers expect us to have access to sufficient high-quality and diverse manufacturing

capacity to meet their long-term growth targets. We plan to strengthen our relationships with our existing

foundries and to begin sourcing from additional semiconductor manufacturing service providers.

Our focus on customer service and close relationships with

semiconductor manufacturing service providers has contributed

to our success.

Products

We have three principal product lines:

•

display drivers and timing controllers;

television semiconductor solutions; and

LCOS products.

We commenced volume shipments of our first source and gate driver for large-sized panels in July 2001 and

have developed a broad product portfolio of display drivers and timing controllers for use in large-sized TFT-

LCD panels. We commenced volume shipments of our first display drivers for use in consumer electronics

applications in April 2002, volume shipments of two-chip display drivers for mobile handsets in August 2003

and volume shipments of single-chip display drivers for mobile handsets in August 2004. In September 2004,

we commenced volume shipments of our first television semiconductor solutions. We commenced shipping

engineering samples of LCOS products in December 2003.

Display Drivers and Timing Controllers

Display Driver Characteristics

Display drivers deliver precise analog voltages and currents that activate the pixels on panels. The following is

a summary of certain display driver characteristics and their relationship to panel performance.

• Resolution and Number of Channels. Resolution refers to the number of pixels per line multiplied by the

number of lines, which determines the level of fine detail within an image displayed on a panel. For

example, a color display screen with 1,024 x 768 pixels has 1,024 red columns, 1,024 green columns

and 1,024 blue columns for a total of 3,072 columns and 768 rows. The red, green and blue columns

are commonly referred to as “RGB.” Therefore, the display drivers need to drive 3,072 column outputs

and 768 row outputs. The number of display drivers required for each panel depends on the resolution.

For example, an XGA (1,024 x 768 pixels) panel requires eight 384 channel source drivers (1,024 x 3 =

384 x 8) and three 256 channel gate drivers (768 = 256 x 3), while a SXGA (1,280 x 1,024 pixels) panel

requires ten 384 channel source drivers and four 256 channel gate drivers. The number of display drivers

required can be reduced by using drivers with a higher number of channels. For example, a SXGA panel

can have eight 480 channel source drivers or four 960 channel source drivers instead of ten 384 channel

source drivers. Thus, using display drivers with a higher number of channels can reduce the number of

display drivers required for each panel, although display drivers with a higher number of channels typically

have higher unit costs.

• Color Depth. Color depth is the number of colors that can be displayed on a screen, which is determined

by the number of shades of a color, also known as grayscale, that can be shown by the panel. For

example, a 6-bit source driver is capable of generating 26 x 26 x 26 = 218, or 262K colors, and similarly,

an 8-bit source driver is capable of generating 16 million colors. Typically, for TFT-LCD panels currently

in commercial production, 262K and 16 million colors are supported by 6-bit and 8-bit source drivers,

respectively.

• Operational Voltage. A display driver operates with two voltages: the input voltage (which enables it to

receive signals from the timing controller) and the output voltage (which, in the case of source drivers, is

applied to liquid crystals and, in the case of gate drivers, is used to switch on the TFT device). Source

drivers typically operate at input voltages from 3.3 to 1.8 volts and output voltages between eight to 16

volts. Gate drivers typically operate at input voltages from 3.3 to 1.8 volts and output voltages from 10

to 40 volts. Lower input voltage saves power and lowers electromagnetic interference, or EMI. Output

voltage may be higher or lower depending on the characteristics of the liquid crystal (or diode), in the case

of source drivers, or TFT device, in the case of gate drivers.

• Gamma Curve. The relationship between the light passing through a pixel and the voltage applied to

it by the source driver is nonlinear and is referred to as the “gamma curve” of the source driver. Different

panel designs and manufacturing processes require source drivers with different gamma curves. Display

drivers need to adjust the gamma curve to fit the pixel design. Due to the materials and processes used

in manufacturing, panels may contain certain imperfections which can be corrected by the gamma curve

of the source driver, a process which is generally known as “gamma correction.” For certain types of liquid

crystal, the gamma curves for RGB cells are significantly different and thus need to be independently

corrected. Some advanced display drivers feature three independent gamma curves for RGB cells.

• Driver Interface. Driver interface refers to the connection between the timing controller and display

drivers. Display drivers increasingly require higher bandwidth interface technology to address the larger

data volume necessary for video images. Panels used for higher data transmission applications such as

televisions require more advanced interface technology. The principal types of interface technologies are

transistor-to-transistor logic, or TTL, reduced swing differential signaling, or RSDS, and mini low voltage

differential signaling, or mini-LVDS. Among these, RSDS and mini-LVDS were developed as low power,

low noise and low amplitude method for high-speed data transmission using fewer copper wires and

resulting in lower EMI. In 2005, we introduced two new display driver interfaces: dual edge TTL, or DETTL,

and turbo RSDS. DETTL enables the interface to function with lower power (below 1.8V), thus reducing

power consumption. Turbo RSDS is an upgraded version of RSDS which increases the interface frequency

from 85MHz to 135MHz, thus reducing the bus width and panel costs.

• Package Type. The assembly of display drivers typically uses TAB and COG package types. COF and

TCP are two types of TAB packages. Customers typically determine the package type required according

to their specific mechanical and electrical considerations. In general, display drivers for small-sized panels

use COG package type whereas display drivers for large-sized panels primarily use TAB package types

and to a lesser extent COG package types.

Large-Sized Applications

We provide source drivers, gate drivers and timing controllers for large-sized panels principally used in desktop

monitors, notebook computers and televisions. Display drivers used in large-sized applications feature different

key characteristics, depending on the end-use application. For display drivers for use in notebook computers,

low power consumption is a key feature due to the portability of notebook computers and the need for long

battery life. For display drivers used in desktop monitors, low cost is more desirable than low power consumption.

For advanced televisions, display drivers must meet the requirements of larger panels, such as higher data

transmission rates, wider viewing angles, faster response time, higher color depth and better image performance.

The table below sets forth the features of our products for large-sized applications:

Product

Features

TFT-LCD Source

• 384 to 720 output channels

Drivers

• 6-bit (262K colors) or 8-bit (16 million colors)

• one gamma-type driver

• three gamma-type drivers (RGB independent gamma curve to enhance color

image)

• output driver voltage ranging from eight to 16V

• input logic voltage ranging from standard 3.3V to low power 1.8V

• low power consumption and low EMI

• supports TCP, COF and COG package types

• supports TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized interface

TFT-LCD Gate Drivers

• 192 to 400 output channels

technologies

• output driving voltage ranging from 10 to 40V

• input logic voltage ranging from standard 3.3V to low power 1.8V

• low power consumption

• supports TCP, COF and COG package types

Timing Controllers

• product portfolio supports a wide range of resolutions, from VGA (640 x 480

pixels) to HDTV (1,920 x 1,080 pixels)

• supports TTL, RSDS, mini-LVDS, DETTL, turbo RSDS and customized output

interface technologies

• input logic voltage ranging from standard 3.3V to low power 1.8V

• embedded overdrive function for television applications to improve response time

• supports TTL and LVDS input interface technologies

The industry trend for large-sized applications is towards low power consumption notebook computer display

drivers, low cost desktop monitor display drivers and display drivers that can support higher speed interface

technologies, have greater color depth and enhanced color through RGB independent gamma for use in

advanced televisions.

Mobile Handset Applications

We offer display drivers for mobile handset displays that combine source driver, gate driver and other functions

into a single chip. As mobile handsets become smaller and more compact, customers are increasingly demanding

smaller die sizes and higher levels of integration with source driver, gate driver, timing controller, as well as more

functional semiconductors such as memory, power circuit and image processors, integrated into a single chip.

Moreover, mobile handsets must operate for long durations without recharging the battery. Thus, display drivers

with lower power consumption are desired in order to extend the battery life. Low cost is also an important

feature as mobile handset manufacturers continue to reduce cost and customers increasingly seek out cost-

effective display drivers.

The following table summarizes the features of our products for mobile handsets:

Product

Features

TFT-LCD Drivers

• highly integrated single chip embedded with the source driver, gate driver, power

circuit, timing controller and memory

• product portfolio suitable for a wide range of resolutions including QQVGA (128

x 160 pixels), QCIF (132 x 176 pixels), QCIF+ (176 x 220 pixels), QVGA (240 x

320 pixels) and a range of panel sizes from 1.5 to 2.4 inches in diagonal

measurement

• supports 262K colors to 16 million colors

• input logic voltage ranging from standard 3.3V to low power 1.65V

• low power consumption and low EMI

• utilizes die shrink technology to reduce die size and cost

• slimmer die for compact module to fit smaller mobile handset designs

• application specific integrated circuits, or ASIC, can be designed to meet

customized requirements (e.g. drivers without memory or drivers without gate

driver embedded on the chip)

LTPS Drivers

• highly integrated single chip embedded with the source driver, power circuit,

timing controller and memory

• supports 262K colors to 16 million colors

• input logic voltage ranging from standard 3.3V to low power 1.65V

• utilizes die shrink technology to reduce die size and cost

• slimmer die for compact module

• ASIC can be designed to meet customized requirements

(e.g. gate-less or multi-bank output driver)

The industry trend for mobile handset display drivers is towards display drivers that can support high-speed

interfaces, have greater color depth and enhanced image quality as mobile handsets increasingly incorporate

multimedia functions.

Consumer Electronics Products

We offer source drivers, gate drivers, timing controllers and integrated drivers for consumer electronics products

like digital cameras, digital video recorders, personal digital assistants, mobile gaming devices, portable DVD

players and car navigation displays. We offer an extensive line of display drivers covering different applications,

interfaces and channel output and levels of integration. Similar to mobile handsets, consumer electronics

products are typically compact, battery-operated devices. Customers are increasingly demanding display drivers

with smaller and more compact die sizes and higher levels of integration with source driver, gate driver, timing

controller, as well as more functional semiconductors such as memory, power circuit and image processors,

integrated into a single chip. Moreover, display drivers with lower power consumption are desired in order to

extend the battery life.

The following table summarizes the features of our products used in consumer electronics products:

Product

Features

TFT-LCD Source Drivers

• 240 to 960 output channels

• products for analog and digital interfaces

• supports 262K colors to 16 million colors

• input logic voltage ranging from standard 3.3V to low power 2.5V

• low power consumption and low EMI

TFT-LCD Gate Drivers

• 96 to 480 output channels

• input logic voltage ranging from standard 3.3V to low power 2.5V

• output driving voltage ranging from 10 to 40V

TFT-LCD Integrated Drivers

• highly integrated single chip embedded with source driver, gate driver,

timing controller and power circuit

• products for analog or digital interfaces

Timing Controllers

• products for analog or digital interfaces

• supports various resolutions from 280 x 220 pixels to 800 x 600 pixels

The industry trend for display drivers used in medium-sized consumer electronics products is towards higher

channels and for the timing controller to be integrated into the video processor. The trend of display drivers

used in small-sized consumer electronics products is towards single-chip solutions combining source driver,

gate driver, timing controller and power circuit into a single chip.

Television Semiconductor Solutions

We provide television semiconductor solutions specifically designed to meet the requirements of advanced

television systems.

Set forth below are the various semiconductor components that may be utilized in advanced televisions:

Analog Video Signals

Analog Interfaces

Digital Video/Audio
Signals

Analog TV Signal

Digital TV Signal

Analog Audio Signals

Digital Interfaces

Analog Tuner

– –
–
–
–
–
–
–
––––
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– – – – – – – – – – – – – –
–
–
– – – – – – – – – – – – – – – –
–
– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

Channel Receiver

Digital Tuner

Video processor

Panel

DTV Decoder

–
–
–
–

Audiooo Processor/
Amplifier

Speakers

Video Signal Path

Audio Signal Path
– – – – – – – – – – – – – –

Television Chipsets

Television chipsets contain numerous components that process video and audio signals and thus enhance the

image and audio qualities of televisions. Advanced televisions typically require some or all of these components:

• Audio Processor/Amplifier. Demodulates, processes and amplifies sound from television signals.

• Analog Interfaces. Convert analog video signals into digital video signals. Video decoder and analog-

to-digital converter (ADC) are included.

• Digital Interfaces. Receive digital signals via digital receivers. Digital visual interfaces (DVI) and high-

definition multimedia interfaces (HDMI) are included.

• Channel Receiver. Demodulates input signals so that the output becomes compressed bit stream data.

• DTV Decoder. Converts video and audio signals from compressed bit stream data into regular video

and audio signals.

• Video Processor. Performs the scaling function that magnifies or shrinks the image data in order to fit

the panel’s resolution; provides real-time processing for improved color and image quality; converts output

video from an interlaced format to a progressive format in order to eliminate jaggedness; and supports

on-screen display and real-time video format transformation.

We are developing all of the above components, although we currently only offer and sell video processors in

volume. Our video processors are designed for use in advanced televisions and our product portfolio includes

high-performance video processors which target high-end segments as well as cost-effective video processors

which target entry-level segments.

The following table summarizes the features of our video processors:

Product

Features

Video Processors

• 3D noise reduction reduces spatial or temporal noise on the video image

• 3D de-interlacer converts output video from interlaced format to progressive

format to eliminate jaggedness

• dynamic exposure adaptation maximizes black and white contrast quality

• scaling function to convert the image resolution coming from video sources in

order to fit the panel’s resolution

• dynamic color adaptation adjusts video color to make it more saturated and

accurate

Television Tuner Modules

We offer a variety of digital and analog television tuner modules. We are highly skilled in designing compact,

high-performance tuner modules that integrate semiconductors and other components on the system board.

The semiconductors and components are purchased from third-party suppliers and are assembled by third-

party electronics manufacturing service providers. We design our television tuner modules in an advanced, coil-

free architecture to provide slim and small tuners.

Our tuners are suitable for most of the world’s signal transmission standards, including: Digital Video Broadcast-

Terrestrial, also known as DVB-T, the digital television standard (depending on the bandwidth) in Taiwan,

Australia and Europe; Advanced Television System Committee, or ATSC, the digital television standard in the

United States and Canada; National Television System Committee, or NTSC, the analog television standard in

the United States, Canada, Japan, the Philippines, Taiwan and South Korea; Phase Alternating Line, or PAL,

the analog television standard in Western Europe, Australia, Hong Kong and China; and Systeme Electronique

Couleur Avec Memoire, or SECAM, the analog television standard in France, Russia and Eastern Europe.

The following table sets forth the features of our television tuner modules:

Product

Features

Digital Television Tuner Modules

• DVB-T tuners for 6MHz bandwidth (for use in Taiwan), 7MHz

bandwidth (for use in Australia) and 8MHz bandwidth (for use in

Europe)

• ATSC RF tuners with NTSC function

• lower power RF tuners

Analog Television Tuner Modules

• global tuner combining NTSC, PAL and SECAM television

standards and FM radio tuner

• low power off-air tuner combining NTSC and PAL television

standards and FM radio tuner

• mobile analog tuner combining NTSC television standards and

FM radio tuner

• slim design to save space

LCOS Products

LCOS technology is still at a relatively early stage of commercial application but is expected to be utilized in

near-to-eye applications, rear projection televisions and mini-projectors. We design our LCOS products at our

subsidiary, Himax Display, which owns and operates a fab for the manufacture of such products.

The following table sets forth the features of our LCOS products:

Product

Features

LCOS Modules for Near-to-eye

• 640 x 360 pixels (Q720P), VGA and SVGA resolutions

and Mini-projector Applications

• 8-bit (16 million colors)

• high reflectivity and greater than 100:1 contrast ratio

• low power consumption

LCOS Modules for Projection

• WXGA and HDTV resolutions

Applications

• 8-bit (16 million colors)

• high reflectivity and greater than 1,000:1 contrast ratio

Other Products and Services

We established Amazion in July 2004 to design, develop and market semiconductors for power management

applications. To date, Amazion has not generated any revenues from such products. We also offer liquid crystal

injection services through our subsidiary Himax Display. In 2005, Himax Display generated NT$95.8 million

($2.9 million) in revenues from such services.

Core Technologies and Know-How

Driving System Technology. Through our collaboration with panel manufacturers, we have developed extensive

knowledge of circuit design, TFT-LCD driving systems, high-voltage processes and display systems, all of which

are important to the design of high-performance TFT-LCD display drivers. Our engineers have in-depth knowledge

of the driving system technology, which is the architecture for the interaction between the source driver, gate

driver, timing controller and power systems as well as other passive components. We believe that our

understanding of the entire driving system has strengthened our design capabilities. Our engineers are highly

skilled in designing power efficient and compact display drivers that enhance the performance of TFT-LCD. We

are leveraging our know-how of display drivers and driving system technology to develop display drivers for

panels utilizing other technologies such as OLED.

High-Voltage CMOS Circuit Design. Unlike most other semiconductors, TFT-LCD display drivers require a high

output voltage of eight to 40 volts. We have developed circuit design technologies using a high-voltage CMOS

process that enables us to produce high-yield, reliable and compact drivers for high-volume applications.

Moreover, our technologies enable us to keep the driving voltage at very high uniformity, which can be difficult

to achieve when using standard CMOS process technology.

High-Bandwidth Interfaces. In addition to high-voltage circuit design, TFT-LCD display drivers require high

bandwidth transmission for video signals. We have applied several high-speed interfaces, including TTL, RSDS,

mini-LVDS, DETTL, turbo RSDS and customized interfaces, in our display drivers. Moreover, we are developing

additional driver interfaces for special applications with optimized speed, lower EMI and higher system stability.

Die Shrink and Low-Power Technologies. Our engineers are highly skilled in employing their knowledge of

driving technology and high-voltage CMOS circuit design to shrink the die size of our display drivers while

leveraging their understanding of driving technology and panel characteristics to design display drivers with low

power consumption. Die size is an important consideration for applications with size constraints. Smaller die

size also reduces the cost of the chip. Lower power consumption is important for many portable devices such

as notebook computers, mobile handsets and consumer electronics products.

Customers

Our direct customers for display drivers are primarily panel manufacturers, who in turn design and market their

products to manufacturers of end-use products such as notebook computers, desktop monitors, televisions,

mobile handsets and consumer electronics products. We sell our television semiconductors to manufacturers

of advanced televisions. As of December 31, 2005, we sold our products to more than 50 customers. In 2003,

2004 and 2005, CMO and its affiliates accounted for 78.0%, 63.2% and 58.9% of our revenues, respectively,

while CPT and its affiliates accounted for 5.7%, 19.5% and 16.2% of our revenues, respectively, in the same

periods. We expect that sales to CMO and CPT and their affiliates will continue to account for a substantial

majority of our revenues in the near term.

Set forth below (in alphabetical order) are our ten largest customers (and their affiliates) based on revenues for

the year ended December 31, 2005:

• Chi Mei Optoelectronics Corp.

• Chunghwa Picture Tubes

• HannStar Display Corporation

• InnoLux Display Corporation

• Lightsonic Optoelectronics Inc.

• Optrex Corporation

• Perfect Display Limited

• Samsung Electronics Taiwan Co., Ltd.

• Shanghai SVA-NEC Liquid Crystal Display

• Transcend Optronics (Yangzhou) Co, Ltd.

Our customers typically provide us with a long-term (12 month) forecast plus three-month rolling non-binding

forecasts and confirm orders with us one month ahead of scheduled delivery. In general, purchase orders are

not cancellable by either party, although from time to time we and our customers have agreed to amend the

terms of such orders.

Sales and Marketing

We focus our sales and marketing strategy on establishing business and technology relationships principally

with TFT-LCD panel manufacturers and increasingly also with panel manufacturers using LTPS or OLED

technologies and also with mobile display module and mobile handset manufacturers in order to work closely

with them on future semiconductor solutions that align with their product roadmaps. Our engineers collaborate

with our customers’ engineers to create products that comply with their specifications and provide a high level

of performance at competitive prices. Our end market for large-sized panels is concentrated around a limited

number of major panel manufacturers. We have also commenced marketing our products directly to mobile

device manufacturers so that our products can be qualified for their specifications and designed into their

products.

We primarily sell our products through our direct sales team located in Taiwan, South Korea, Japan and China.

We also have dedicated sales teams for certain of our most important current or prospective customers. We

have sales and technical support offices in Tainan, Taipei and Hsinchu in Taiwan, in Suzhou, China, in Anyangsi

Kyungkido, South Korea and in Yokohama, Japan, all in close proximity to our customers. We have dedicated

sales teams for our display driver and television semiconductor solutions businesses that cover each of the

markets of Taiwan, South Korea, Japan and China. For certain products or regions we may from time to time

sell our products through agents or distributors.

Our sales and marketing team possesses a high level of technical expertise and industry knowledge used to

support a lengthy and complex sales process. This includes a highly trained team of field applications engineers

that provides technical support and assistance to potential and existing customers in designing, testing and

qualifying display modules that incorporate our products. We believe that the depth and quality of this design

support are key to improving customers’ time-to-market and maintaining a high level of customer satisfaction.

Manufacturing

We are a fabless semiconductor company. We leverage our experience and engineering expertise to design

high-performance semiconductors and rely on semiconductor manufacturing service providers for wafer fabrication,

gold bumping, assembly and testing. We also rely on third-party suppliers of processed tape used in TAB

packaging. We engage foundries with high-voltage CMOS process technology for our display drivers and with

assembly and testing houses that specialize in TAB and COG packages, thereby taking advantage of the

economies of scale and the specialization of such semiconductor manufacturing service providers. Our fabless

model enables us to capture certain financial and operational benefits, including reduced manufacturing personnel,

capital expenditures, fixed assets and fixed costs. It also gives us the flexibility to use the technology and

service provider most suitable for any given product.

Manufacturing Stages

The diagram below sets forth the various stages in manufacturing display drivers according to the two different

types of assembly utilized: TAB or COG. The assembly type depends on the application of the panel and is

determined by our customers.

TAB

COG

Wafer Fabrication

Processed Tape

Tape Carrier

Chip on

Packaging
(TCP)

Film
(COF)

Gold Bumping

Chip Probe Testing

Inner-lead Bonding

Gold Bumping

Chip Probe Testing

Final Testing

COG Assembly and Testing

Wafer Fabrication: Based on our design, the foundry provides us with fabricated wafers. Each fabricated wafer

contains many chips, each known as a die.

Gold Bumping: After the wafers are fabricated, they are delivered to gold bumping houses where gold bumps

are plated on each wafer. The gold bumping process uses thin film metal deposition, photolithography and

electrical plating technologies. The gold bumps are plated onto each wafer to connect the die to the processed

tape, in the case of TAB package, or the glass, in the case of COG package.

Chip Probe Testing: Each individual die is electrically tested, or probed, for defects. Dies that fail this test are

discarded.

Assembly and Testing: Our display drivers use two types of assembly technology: TAB or COG. Display drivers

for large-sized applications typically require TAB package types and to a lesser extent COG package types,

whereas display drivers for mobile handsets and consumer electronics products typically require COG package

types.

TAB Assembly

We use two types of TAB technologies: TCP and COF. TCP and COF packages are both made of processed

tape that is typically 35mm or 48mm wide, plated with copper foil and has a circuit formed within it. TCP and COF packages

differ, however, in terms of their chip connections. With TCP packages, a hole is punched through the processed tape in the

area of the chip, which is connected to a flying lead made of copper. In contrast, with COF packages, the lead is mounted

directly on the processed tape and there is no flying lead.

• Inner-Lead Bonding: The TCP and COF assembly process involves grinding the bumped wafers into their required

thickness and cutting the wafers into individual dies, or chips. An inner lead bonder machine connects the chip to the

printed circuit processed tape and the package is sealed with resin at high temperatures.

• Final Testing: The assembled display drivers are tested to ensure that they meet performance specifications. Testing takes

place on specialized equipment using software customized for each product.

COG Assembly

COG assembly connects display drivers directly to LCD panels without the need for processed tape. COG assembly involves

grinding the tested wafers into their required thickness and cutting the wafers into individual dies, or chips. Each individual die

is picked and placed into a chip tray and is then visually or auto-inspected for defects. The dies are packed within a tray in

an aluminum bag after completion of the inspection process.

Quality Assurance

We maintain a comprehensive quality assurance system. Using a variety of methods from conducting rigorous simulations

during the circuit design process to evaluating supplier performance at various stages of our products' manufacturing process,

we seek to bring about improvements and achieve customer satisfaction. In addition to monitoring customer satisfaction

through regular reviews, we implement extensive supplier quality controls so that the products we outsource achieve our high

standards. Prior to engaging a third-party as our supplier, we perform a series of audits on their operations, and upon

engagement, we hold frequent quality assurance meetings with suppliers, evaluating such factors as product quality, production

costs, technological sophistication and timely delivery.

In November 2002, we received the ISO 9001:2000 certification which was renewed in February 2005.

Semiconductor Manufacturing Service Providers and Suppliers

Through our relationships with leading foundries, assembly, gold bumping and testing houses and processed tape suppliers,

we believe we have established a supply chain that enables us to timely deliver high-quality products to our customers.

Access to semiconductor manufacturing service providers is critical as display drivers require high-voltage CMOS process

technology and specialized assembly and testing services, all of which are different from industry standards. We have historically

obtained our foundry services from TSMC and Vanguard and have also recently established a relationship with Macronix and

Lite-on. These are among a select number of semiconductor manufacturers that provide high-voltage CMOS process technology

required for manufacturing display drivers. We engage assembly and testing houses that specialize in TAB and COG packages

such as Chipbond Technology Corporation, ChipMOS, and Siliconware Precision Industries Co., Ltd.

We plan to strengthen our relationships with our existing semiconductor manufacturing service providers and diversify our

network of such service providers in order to ensure access to sufficient cost-competitive and high-quality manufacturing

capacity. We are selective in our choice of semiconductor manufacturing service providers. It takes a substantial amount of

time to qualify alternative foundries, gold bumping, assembly and testing houses for production. As a result, we expect that

we will continue to rely on limited number of semiconductor manufacturing service providers for a substantial

portion of our manufacturing requirements in the near future.

The table below sets forth (in alphabetical order) our principal semiconductor manufacturing service providers

and suppliers:

Wafer Fabrication

Gold Bumping

Lite-on Semiconductor Corp.

Macronix International Co., Ltd.

Chipbond Technology Corporation

FuPo Electronics Corporation

Taiwan Semiconductor Manufacturing Company

International Semiconductor Technology Ltd.

Vanguard International Semiconductor Corporation

Megic Corporation

Processed Tape for TAB Packaging

Assembly and Testing

CASIO Micronics Co., Ltd.

Hitachi Cable, Ltd.

Chipbond Technology Corporation

ChipMOS Technologies Inc.

Mitsui Mining & Smelting Co., Ltd.

International Semiconductor Technology Ltd.

Samsung Techwin Co. Ltd.

Megic Corporation

Stemco., Ltd

Siliconware Precision Industries Co., Ltd.

Sumitomo Metal Mining Package Material Co., Ltd.

WUS Microelectronics Co., Ltd.

Chip Probe Testing

Ardentec Corporation

ChipMOS Technologies Inc.

International Semiconductor Technology Ltd.

King Yuan Electronics Co., Ltd

Siliconware Precision Industries Co., Ltd.

Research and Development

Our research and development efforts focus on improving and enhancing our core technologies and know-how

relating to semiconductor solutions for flat panel displays and advanced televisions with particular emphasis on

our three major product lines. Although a significant portion of the resources at our semiconductor design

center are invested in advanced research for future products, we continue to invest in improving the performance

and reducing the cost of our existing products. Our application engineers, who provide on-system verification

of semiconductors and product specifications, and field application engineers, who provide on-site engineering

support at our customers’ offices, work closely with panel manufacturers to co-develop display solutions for

their electronic devices. In 2003, 2004 and 2005, we incurred research and development expenses of $21.0

million, $24.0 million and $41.3 million, respectively, representing 16.0%, 8.0% and 7.6% of our revenues,

respectively.

Intellectual Property

As of December 31, 2005, we held a total of 80 patents, including 53 in Taiwan, 19 in the United States, four

in China, three in Korea and one in Japan. The expiration dates of our patents range from 2019 to 2024. We

also have a total of 135 pending patent applications in Taiwan, 105 in the United States and 75 in other

jurisdictions, including the PRC, Japan, Korea and Europe. In addition, we have registered “Himax” and our logo

as a trademark and service mark in Taiwan, China and Japan and have applications pending in Europe, the

United States and Korea.

Competition

The markets for our products are, in general, intensely competitive, characterized by continuous technological

change, evolving industry standards, and declining average selling prices. We believe key factors that differentiate

among the competition in our industry include:

• customer relations;

• product performance;

• design customization;

• development time;

• product integration;

• technical services;

• manufacturing costs;

• supply chain management;

• economies of scale; and

• broad product portfolio.

We continually face intense competition from other fabless display driver companies, including Cheertek

Incorporation, DenMOS Technology Inc., Novatek Microelectronics Corp., Ltd., and Solomon Systech Limited.

We also face competition from integrated device manufacturers, such as MagnaChip Semiconductor Ltd.,

Matsushita Electric Works, Ltd., NEC Electronics Corporation, Oki Electric Industry Co. Ltd., Renesas Technology

Corp., Seiko Epson Corporation and Toshiba Corporation, and panel manufacturers with in-house semiconductor

design capabilities, such as Samsung Electronics Co., Ltd. and Sharp Corporation. The latter are both our

competitors and potential customers.

Many of our competitors, some of which are affiliated or have established relationships with other panel

manufacturers, have longer operating histories, greater brand recognition and significantly greater financial,

manufacturing, technological, sales and marketing, human and other resources than us. Additionally, we expect

that as the flat panel semiconductor industry expands, more companies may enter and compete in our markets.

Our television semiconductor solutions compete against solutions offered by a significant number of semiconductor

companies including ATI Technologies, Inc., Genesis Microchip, Inc., Koninklijke Philips Electronics N.V., Mediatek

Corp., MStar Semiconductor, Inc., Pixelworks Inc., STMicroelectronics, Trident Microsystems, Inc. and Zoran

Corporation, among others, some of which focus solely on video processors and others that offer a more

diversified portfolio.

For LCOS products, we compete with diversified electronics companies such as Sony Corporation and Victor

Company of Japan, Limited, also known as JVC, and companies specializing in LCOS technology such as

eLCOS Microdisplay Technology Ltd, Brillian Corporation, Aurora Corporation and SpatiaLight, Inc.

Employees

As of December 31, 2005, we had 716 employees serving in the following functions:

Function

Research and development (1) ..................................................................................................

Engineering and manufacturing (2) ............................................................................................

Sales and marketing (3) .............................................................................................................

General and administrative .......................................................................................................

Total ......................................................................................................................................

Number

482

716

Notes: (1) Includes semiconductor design engineers, application engineers, assembly and testing engineers and quality control

engineers.

(2) Includes manufacturing personnel of Himax Display, our subsidiary focused on design and manufacturing of LCOS

products and liquid crystal injection services.

(3) Includes field application engineers.

As of December 31, 2005, we had a staff of 482 people in research and development, of which 20, 313, 114

and 35 hold a doctorate, master’s, bachelor’s and junior college degree, respectively.

Facilities

We lease our 4,082-square meter headquarters in Tainan, Taiwan under several leases; the principal lease

expires in September 2006. We also lease office space in Taipei and Hsinchu, Taiwan; Suzhou and Shenzhen,

China; Yokohoma, Japan; and Anyangsi Kyungkido, South Korea. The lease contracts may be renewed upon

expiration. Himax Display, our subsidiary, owns and operates a fab with 3,885 square meters of floor space

on land and in a building leased from CMO.

We have begun construction of our new headquarters located in the Tainan LCD-TV Industry Park. The

headquarters will house our research and development, engineering, sales and marketing, operations and

general administrative staff. Upon completion, the new headquarters is expected to have 21,200 square meters

of usable space and occupy 31,800 square meters of land owned by us. Construction has commenced in the

fourth quarter of 2005 and is expected to be completed in the third quarter of 2006. The total costs are

estimated to be approximately NT$905.8 million ($27.6 million), of which approximately NT$325.8 million

($9.9 million) is for the land and approximately NT$580 million ($17.7 million) is for the construction costs (which

includes the architect fees, general contractor fees, building materials, purchases and installation of office

equipment and other fixtures). We have already paid for the land purchased and approximately NT$26.1 million

($0.8 million) of the construction costs in 2005. We expect to pay the remainder of the construction costs in

2006. We intend to finance the remaining cost of our new headquarters with a portion of the net proceeds of

this offering.

Insurance

We maintain insurance policies on our buildings, equipment and inventories covering property damage and

damage due to, among other events, fires, typhoons, earthquakes and floods. We maintain these insurance

policies on our facilities and on inland transit of inventories. We do not have insurance for business interruptions.

We do not have key person insurance.

Environmental Matters

The business of semiconductor design does not cause any significant pollution. Himax Display maintains a

facility for our LCOS products where we have taken the necessary steps to obtain the appropriate permits and

believe that we are in compliance with the existing environmental laws and regulations in the ROC. We have

entered into various agreements with certain customers whereby we have agreed to indemnify them, and in

certain cases, their customers, for any claims made against them for hazardous material violations that are

found in our products.

Legal Proceedings

We are not involved in any litigation or other legal matters which could reasonably be expected to, if decided

adversely to us, have a material adverse impact on our business or operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We believe the following critical accounting policies affect our more significant judgments and estimates used

in the preparation of our consolidated financial statements.

Share-Based Compensation

As of December 31, 2005, we have not issued any stock options to employees or others. Share-based

compensation primarily consists of grants of nonvested or restricted shares of common stock and RSUs issued

to employees. We have applied SFAS No. 123R for our share-based compensation plans for all periods since

the incorporation of Himax Taiwan in 2001. The cost of employee services received in exchange for share-based

compensation is measured based on the grant-date fair value of the share-based instruments issued. The cost

of employee services is equal to the grant-date fair value of shares issued to employees and is recognized in

earnings over the service period. Share-based compensation expense estimates also take into account the

number of shares awarded that management believes will eventually vest. We adjust our estimate each period

to reflect the current estimate of forfeitures. As of December 31, 2005, we based our share-based compensation

cost on an assumed forfeiture rate of 12.2% and 27.0% for Himax Taiwan and Amazion Electronics Inc., or

Amazion, our subsidiary, respectively. If actual forfeitures occur at a lower rate, share-based compensation

costs will increase in future periods.

When estimating the fair value of our ordinary shares on the grant date, we review both internal and external

sources of information. During periods in which we were a private company, the sources we used to determine

the fair value of the underlying shares at the date of measurement have been subjective in nature and based

on, among other factors:

• our financial condition as of the date of grant;

• our financial and operating prospects at that time;

• for certain issuances in 2001 and early 2002, the price of new shares issued to unrelated third parties;

• for certain issuances in 2002, 2003 and 2004, an independent third-party retrospective analysis of the

historical value of our common shares, which utilized both a net asset based methodology and market

and peer group comparables (including average price/earnings, enterprise value/sales, enterprise value/

earnings before interest and tax, and enterprise value/earnings before interest, tax, depreciation and

amortization); and

• for our issuance of RSUs in 2005, an independent third-party analysis of the current and future value of

our ordinary shares, which utilized both discounted cashflow and market value approaches, using multiples

such as price/earnings, forward price/earnings, enterprise value/earnings before interest and tax, and

forward enterprise value/earnings before interest and tax.

Changes in any of these factors or assumptions could have resulted in different estimates of the fair value of

our common shares and the related amounts of share-based compensation.

Based on these factors, we estimated the fair value per share of nonvested shares issued to certain employees

in June 2001, November 2001, and January 2002 at NT$4.02 ($0.116) per share and the fair value of 596,897

shares (adjusted for stock splits) granted to two consultants in 2002 at $68,000. Similarly, we estimated the

fair value per share of employee bonus shares on the date of shareholder approval to be NT$39.44 ($1.15) per

share and NT$67.13 ($1.96) per share in 2003 and 2004, respectively. These employee bonus shares were

issued in relation to employee services provided in 2001, 2002 and 2003, respectively. We estimated the fair

value of treasury shares issued to employees at prices ranging from NT$15.32 ($0.46) per share to NT$19.93

($0.58) per share in 2002 and NT$20.17 ($0.58) per share to NT$52.10 ($1.54) per share in 2003. We

estimated the fair value of the ordinary shares underlying the RSUs granted to our directors and employees at

$8.62 per share in 2005.

Allowance for Sales Returns and Discounts

We record a reduction to revenues and accounts receivable by establishing a sales discount and return

allowance for estimated sales discounts and product returns at the time revenues are recognized based

primarily on historical discount and return rates. However, if sales discount and product returns for a particular

fiscal period exceed historical rates, we may determine that additional sales discount and return allowances are

required to properly reflect our estimated remaining exposure for sales discounts and product returns. The

movement in the allowance for sales returns and discounts for the years ended December 31, 2003, 2004 and

2005 is as follows:

Balance

Beginning

Amounts

Balance at

Year

of Year

Addition

Utilized

End of Year

December 31, 2003 ..........................................

December 31, 2004 ..........................................

December 31, 2005 ..........................................

–

240

(in thousands)

117

1,022

398

(89)

(810)

(457)

240

181

Inventory

Inventories are stated at the lower of cost or market value. Cost is determined using the weighted-average

method. For work-in-process and manufactured inventories, cost consists of the cost of raw materials (primarily

wafer fabrication and processed tape), direct labor and an appropriate proportion of production overheads. We

write down inventory to its estimated market value, which is based upon estimations about future demand and

market conditions. If actual market conditions are less favorable than those projected by management, additional

future inventory write-down may be required and could adversely affect our operating results. Once written

down, inventories are carried at this lower amount until sold or scrapped. If actual market conditions are more

favorable, we may have higher operating income when such products are sold. Sales to date of such products

have not had a significant impact on our operating income. The inventory write-down for the years ended

December 31, 2003, 2004 and 2005 was approximately $116,000, $847,000 and $927,000, respectively, and

are included in cost of revenues in our consolidated statements of operations.

Impairment of Long-Lived Assets

We routinely review our long-lived assets that are held and used for impairment whenever events or changes

in circumstances indicate that their carrying amounts may not be recoverable. The determination of recoverability

is based on an estimate of undiscounted cash flows expected to result from the use of the asset and its

eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about

expected future operating performance, average selling prices, utilization rates and other factors. If the sum of

the undiscounted cash flows (excluding interest) is less than the carrying value, an impairment charge is

recognized for the amount that the carrying value of the asset exceeds its fair value, based on the best

information available, including discounted cash flow analysis. However, due to the cyclical nature of our

industry and changes in our business strategy, market requirements, or the needs of our customers, we may

not always be in a position to accurately anticipate declines in the utility of our equipment or acquired technology

until they occur. We have not had any impairment charges on long-lived assets during the period from December

31, 2002 to December 31, 2005.

Product Warranty

Under our standard terms and conditions of sale, products sold are subject to a limited product quality

warranty. The stated limited warranty period is 60 days. We may receive warranty claims outside the scope of

the standard terms and conditions. We provide for the estimated cost of product warranties at the time revenue

is recognized based primarily on historical experience and any specifically identified quality issues. As of

December 31, 2005 and 2004, the accrued warranty cost was $545,000 and $507,000, respectively; in 2003

there was no accrued warranty costs. The movement in accrued warranty costs for the years ended December

31, 2003, 2004 and 2005 is as follows:

Balance

Beginning

Amounts

Balance at

Year

of Year

Addition

Utilized

End of Year

(in thousands)

December 31, 2003 ..........................................

December 31, 2004 ..........................................

December 31, 2005 ..........................................

–

507

960

1,415

453

(1,377)

–

507

545

Income Taxes

As part of the process of preparing our consolidated financial statements, management is required to estimate

income taxes and tax bases of assets and liabilities for us and our subsidiaries. This process involves estimating

current tax exposure together with assessing temporary differences resulting from differing treatment of items

for tax and accounting purposes and the amount of tax credits and tax loss carryforwards. These differences

result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. Management

must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and,

to the extent it believes that recovery is not more likely than not, a valuation allowance is provided.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not

that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax

assets and therefore the determination of the valuation allowance is dependent upon the generation of future

taxable income by the taxable entity during the periods in which those temporary differences become deductible.

Management considers the scheduled reversal of different liabilities, projected future taxable income, and tax

planning strategies in determining the valuation allowance.

Since Himax Taiwan’s subsidiaries have generated tax losses since inception and are not included in the

consolidated tax filing with Himax Taiwan, a valuation allowance of $11,000, $893,000 and $3.3 million as of

December 31, 2003, 2004 and 2005, respectively, was provided to reduce their deferred tax assets (consisting

primarily of operating loss carryforwards and unused investment tax credits) to zero because management

believes it is unlikely that these tax benefits will be realized. There was no change in the valuation allowance

for the year ended December 31, 2002 and the net change in valuation allowance for the years ended

December 31, 2003, 2004 and 2005 was an increase of $11,000, $882,000 and $2.4 million, respectively, as

a result of increases in deferred tax assets which we do not expect to realize.

RESULTS OF OPERATIONS

Our revenues increased 79.9% to $540.2 million in 2005 from

$300.3 million in 2004.

Our business has evolved rapidly and significantly since we commenced operations in 2001. Our limited

operating history makes the prediction of future operating results very difficult. We believe that period-to-period

comparisons of operating results should not be relied upon as indicative of future performance. The following

table sets forth a summary of our consolidated statements of operations as a percentage of revenues:

Year Ended Decembe 31,

2003

2004

2005

Revenues .....................................................................................

100.0%

Costs and expenses:

Cost of revenues ....................................................................

Research and development ...................................................

General and administrative .....................................................

Sales and marketing ..............................................................

75.9

16.0

3.5

2.0

Total costs and expenses ...........................................................

97.4

Operating income ........................................................................

Other non operating income (loss) .............................................

Income tax (benefit) expenses ....................................................

Net income (loss) .........................................................................

2.6

(0.5)

2.5

(0.4)

78.6

8.0

1.5

0.9

89.0

11.0

0.4

(0.6)

12.0

77.6

7.6

1.3

0.9

87.4

12.6

0.4

1.7

11.4

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Revenues. Our revenues increased 79.9% to $540.2 million in 2005 from $300.3 million in 2004. This increase

was primarily due to an 118.4% increase in unit shipments of display drivers for large-sized applications,

partially offset by a 16.2% decrease in average selling prices of such products. The increase in unit shipments

was primarily due to the increased number of panels shipped by our customers as well as our increased market

share with certain major customers. The decrease in the average selling prices of our display drivers was

primarily due to a combination of the pricing pressure we faced from our customers, the general industry trend

of declining average selling prices of semiconductors over a product's life cycle, the introduction of newer,

lower-cost display drivers for large-sized applications, as well as our ability to reduce per unit cost of revenues

in order to meet such pressure. Revenues from related parties increased 69.2% to $322.8 million in 2005 from

$190.8 million in 2004 as a result of increased unit shipments to CMO (and its affiliates) and other related

parties. However, revenues from related parties as a percentage of our revenues decreased from 63.5% in 2004

to 59.8% in 2005 as our sales to other customers continued to grow, reflecting our effort in diversifying our

customer base and reducing our reliance on any one customer.

Costs and Expenses. Costs and expenses increased 76.6% to $472.2 million in 2005 from $267.4 million

in 2004. As a percentage of revenues, costs and expenses decreased to 87.4% in 2005 compared to 89.0%

in 2004.

• Cost of Revenues. Cost of revenues increased 77.7% to $419.4 million in 2005 from $236.0 million in

2004. The increase in cost of revenues was primarily due to an increase in unit shipments, partially offset

by a slight decrease in per units costs associated with the manufacturing, assembly, testing and delivery

of our products. This is a result of our cost reduction efforts achieved by improving designs and processes,

increasing manufacturing yields and leveraging our scale, volume requirements and close relationships

with semiconductor manufacturing service providers and suppliers, as well as our strategy of sourcing

from multiple service providers and suppliers in order to obtain better pricing.

• Research and Development. Research and development expenses increased 72.0% to $41.3 million

in the 2005 from $24.0 million in 2004, primarily due to the increase in salary expenses and share-based

compensation expenses. The increase in salary expenses was due to increased headcount and higher

average salaries. The increase was also partially as a result of increased mask costs and prototype wafer

and processed tape costs associated with an increased number of new products introduced. The increase

in share-based compensation expenses also resulted from our increase in headcount and our grant of

RSUs to certain employees on December 30, 2005.

• General and Administrative. General and administrative expenses increased 45.8% to $6.8 million in

2005 from $4.7 million in 2004, primarily due to an increase in salary expenses. The increase in salary

expenses was due to increased headcount and higher average salaries. The increase in general and

administrative expenses also partially resulted from increased costs associated with increased management

and other fees paid to our security company and increased fees relating to patent filings.

• Sales and Marketing. Sales and marketing expenses increased 73.7% to $4.8 million in 2005 from

$2.7 million in 2004, primarily due to an increase in salary expenses and share-based compensation

expenses. The increase in salary expenses was due to a 76.6% increase in headcount and higher average

salaries. The increase in share-based compensation expenses also resulted from our increase in headcount

and our grant of RSUs to certain employees on December 30, 2005. The increase in sales and marketing

expenses was also partially as a result of increased travel expenses reflecting increased sales activity.

Non-Operating Income (Loss). We had a non-operating income of $2.3 million in 2005 compared to

$1.3 million in 2004, primarily as a result of increases in both foreign exchange gain and interest income as

compared to 2004. Foreign exchange gain increased due to the weakening of the NT dollar and Japanese yen

relative to the U.S. dollar. The significant increase in interest income was due to the higher cash balance on

hand, which was primarily placed in higher yield U.S. dollar denominated time deposits beginning in August

2005.

Income Tax (Benefit) Expense. Income tax expenses increased to $8.9 million in 2005 compared to an income

tax benefit of $1.8 million in 2004. Our effective income tax rate increased from (5.2%) in 2004 to 12.7% in

2005, primarily due to: (a) the increase of valuation allowance provided to reduce certain subsidiaries’ deferred

tax assets to zero, (b) the increase of non-deductible share-based compensation expenses and (c) the absence

in 2005 of a tax benefit from the distribution of the prior year’s income compared to 2004, which was partially

offset by more investment tax credits and tax exempted income as compared to 2004.

Net Income. As a result of the foregoing, our net income increased to $61.6 million in 2005 from a net income

of $36.0 million in 2004.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues. Our revenues increased 127.8% to $300.3 million in 2004 from $131.8 million in 2003. This

increase was primarily due to a 151.3% increase in unit shipments of display drivers for large-sized applications,

partially offset by a 6.0% decrease in average selling prices of such products. The increase in unit shipments

was primarily due to the increased number of panels shipped by our customers, our increased market share

with certain major customers and our success in winning new customers. The decrease in the average selling

prices of our display drivers was primarily due to a combination of the pricing pressure we faced from our

customers, the general industry trend of declining average selling prices of semiconductors over a product’s life

cycle, the introduction of newer, lower-cost display drivers for large-sized applications, as well as our ability to

reduce per unit cost of revenues in order to meet such pressure. Revenues from related parties increased

85.6% to $190.8 million in 2004 from $102.8 million in 2003 as a result of increased unit shipments to CMO

(and its affiliates) and other related parties. However, revenues from related parties as a percentage of our

revenues decreased from 78.0% in 2003 to 63.5% in 2004 as our sales to CPT (and its affiliates) and other

customers continued to grow, reflecting our effort in diversifying our customer base and reducing our reliance

on any one customer.

Costs and Expenses. Costs and expenses increased 108.2% to $267.4 million in 2004 from $128.5 million

in 2003. As a percentage of revenues, costs and expenses decreased to 89.0% in 2004 from 97.4% in 2003.

• Cost of Revenues. Cost of revenues increased 135.8% to $236.0 million in 2004 from $100.1 million

in 2003. The increase in cost of revenues was primarily due to an increase in unit shipments and the

associated costs to manufacture, assemble, test and deliver these products. This increase was partially

offset by a decrease in the per unit cost of revenues as a result of our cost reduction efforts achieved

by improving designs and processes, increasing manufacturing yields and leveraging our scale, volume

requirements and close relationships with semiconductor manufacturing service providers and suppliers

as well as our strategy of sourcing from multiple service providers and suppliers in order to obtain better

pricing. Our cost of revenues as a percentage of total revenues increased 2.7% to 78.6% in 2004 from

75.9% in 2003 primarily as a result of a decrease in 2004 of average selling prices in order to attract new

customers and revenues received in 2003 from ChipMOS for LCOS technology advisory services and

sales of panel molds to CMO, both of which have relatively low cost of revenues. These transactions are

not part of our core business, and we do not expect to generate meaningful revenues from these sources

in the future.

• Research and Development. Research and development expenses increased 14.0% to $24.0 million

in 2004 from $21.1 million in 2003, primarily as a result of increased mask costs and prototype wafer and

processed tape costs associated with an increase in the number of new products introduced, increased

salary expenses and employee welfare related costs reflecting higher headcount and increased depreciation

expense as we installed additional research and development equipment as part of our expanded research

and development efforts. The increase in research and development expenses was partially offset by a

decrease in share-based compensation expenses, which decreased 63.2% to $4.3 million in 2004 from

$11.7 million in 2003. The decrease in share-based compensation expenses was primarily as a result of

our decision to grant less share-based compensation in 2004 with the expectation that we would be

granting more share-based compensation to our employees under our long-term incentive plan after our

initial public offering.

• General and Administrative. General and administrative expenses increased 0.9% to $4.7 million in 2004

from $4.6 million in 2003, primarily as a result of increases in staffing expenses and expenses relating to

patent filings. This increase was partially offset by a decrease in share-based compensation expenses,

which decreased 66.1% to $0.7 million in 2004 from $2.1 million in 2003, primarily as a result of our

decision to grant less share-based compensation in 2004 with the expectation that we would be granting

more share-based compensation to our employees under our long-term incentive plan after our initial

public offering.

• Sales and Marketing. Sales and marketing expenses increased 2.7% to $2.7 million in 2004, primarily

as a result of an increase in product sample costs, increased salary expense due to higher headcount and

increased travel expenses, all as a result of the increase in our unit sales and our expanded sales and

marketing efforts. The increase in sales and marketing expenses was partially offset by a decrease in

share-based compensation expenses, which decreased 60.2% to $0.5 million in 2004 from $1.4 million

in 2003, primarily as a result of our decision to grant less share-based compensation in 2004 with the

expectation that we would be granting more share-based compensation to our employees under our long-

term incentive plan after our initial public offering.

Non-Operating Income (Loss). We had a non-operating income of $1.3 million in 2004 compared to a non-

operating loss of $0.6 million in 2003, primarily as a result of a foreign exchange gain of $0.8 million in 2004

compared to a foreign exchange loss of $0.8 million in 2003 and a gain on sale of marketable securities of $0.4

million in 2004 compared to a gain on sale of marketable securities of $0.1 million in 2003.

Income Tax (Benefit) Expenses. We recorded an income tax benefit of $1.8 million in 2004 compared to an

income tax expense of $3.3 million in 2003. Our effective tax rate decreased in 2004 due primarily to the fact

that we generated more investment tax credits related to research and development expenditures and less non-

deductible share-based compensation expenses in 2004 as compared to 2003, as well as a result of our

qualifying for an income tax exemption on the incremental income generated from sales of newly designed

display drivers starting in April 2004.

Net Income. As a result of the foregoing, our net income increased significantly to $36.0 million in 2004 from

a net loss of $0.6 million in 2003.

Selected Unaudited Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations for the six quarters for the period

beginning July 1, 2004 and ending December 31, 2005. You should read the following table in conjunction with

the consolidated financial statements and related notes contained elsewhere in this annual report. We have

prepared the unaudited information on the same basis as our audited consolidated financial statements. This

information reflects all adjustments, consisting only of normal recurring adjustments, which are in the opinion

of our management necessary for fair presentation of our results of operations for the quarters presented.

Three Months Ended

September December

March

30,
2004

31,
2004

31,
2005

June

30,
2005

September December

30,
2005

31,
2005

(unaudited)

(in thousands, except per share data)

Revenues ............................................... $ 75,496 $ 89,004 $ 96,417 $ 111,633 $ 154,820 $ 177,334

Costs and expenses(1):

Cost of revenues ...............................

60,032

70,754

75,027

86,214

118,475

139,664

Research and development ..............

General administrative .......................

Sales and marketing .........................

6,130

1,119

737

7,519

1,496

764

Total costs and expenses .....................

68,018

80,533

Operating income ..................................

7,478

8,471

8,191

1,187

818

85,223

11,194

8,896

1,392

873

10,234

13,957

1,649

1,053

2,556

2,018

97,375

131,411

158,195

14,258

23,409

19,139

Net income(2) .......................................... $

8,344 $

9,554 $ 10,133 $ 13,069 $ 21,376 $ 16,980

Basic earnings per ordinary
share and per ADS(2) ...................

Diluted earnings per ordinary
share and per ADS(2) .....................

Weighted-average number of shares used
in basic and diluted earnings per
share computation (in thousand):

0.05 $

0.06 $

0.07 $

0.12 $

0.10

0.05 $

0.06 $

0.07 $

0.12 $

0.09

Basic ..........................................

168,087

174,764

175,660

176,231

176,854

Diluted ........................................

172,757

178,574

180,124

180,464

180,606

180,707

Note: (1) The amount of share-based compensation included in applicable costs and expenses is summarized as follows:

Three Months Ended

September December

March

30,
2004

31,
2004

31,
2005

June

30,
2005

September December

30,
2005

31,
2005

(unaudited)

(in thousands, except per share data)

Cost of revenues ...................................

72 $

74 $

37 $

33 $

29 $

Research and development ..............

1,060

1,084

1,117

1,126

1,060

3,033

General and administrative ................

Sales and marketing ..........................

178

133

182

135

164

205

166

203

138

205

380

628

Total ........................................................ $

1,443 $

1,475 $

1,523 $

1,528 $

1,432 $

4,130

Note: (2) Under the ROC Statute for Upgrading Industries, we are exempt from income taxes for income attributable to

expanded production capacity or newly developed technologies. If we had not been exempt from paying this income

tax, net income and (basic and diluted) earnings per share would have been as follows:

Three Months Ended

September December

March

June

September December

30,

2004

31,

2004

31,

2005

30,

2005

30,

2005

31,

2005

(unaudited)

(in thousands, except per share data)

Net income ........................................... $

6,071 $

7,083 $

8,629 $ 11,236 $ 18,224 $ 14,280

Basic earnings per ordinary

share and per ADS .......................... $

0.04 $

0.05 $

0.06 $

0.10 $

0.08

Diluted earnings per ordinary

share and per ADS(2) ....................... $

0.04 $

0.05 $

0.06 $

0.10 $

0.08

Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the periods indicated:

Year Ended Decembe 31,

2003

2004

2005

(in thousands)

Net cash provided by (used in) operating activities ...............

(1,593) $

(8,688) $

12,464

Net cash provided by (used in) investing activities ................

Net cash provided by financing activities ................................

Net increase (decrease) in cash ..............................................

Cash at beginning of period ....................................................

Cash at end of period .............................................................

(28,915)

30,341

(167)

2,696

2,529

11,001

735

3,048

2,529

5,577

(25,363)

14,404

1,509

5,577

7,086

From our inception, we financed our operations primarily through the issuance of shares in Himax Taiwan. As

of December 31, 2005, we had $7.1 million in cash.

Operating Activities. Net cash provided by operating activities for the year ended December 31, 2005 was

$12.5 million compared to net cash used in operating activities of $8.7 million for the year ended December

31, 2004. Net cash provided by operating activities increased in 2005 primarily as a result of an increase in

operating profit and accounts payable due to the extension of payment terms received from certain vendors,

which was partially offset by an increase in accounts receivable. We negotiated an extension of payment terms

with two of our main third-party semiconductor manufacturing service providers in order to better balance our

cash flows with payment terms that we offer our customers. The increase in accounts receivable was primarily

as a result of the significant increase in sales in the second half of 2005 and the extension of payment terms

for certain of our customers in the fourth quarter of 2005. Net cash used in operating activities was $8.7 million

for the year ended December 31, 2004, an increase of $7.1 million over net cash used in operating activities

of $1.6 million for the year ended December 31, 2003. Our net cash used in operating activities increased in

2004 primarily as a result of an increase in inventory of $33.0 million and accounts receivable (including from

related parties) of $30.7 million due to increased sales which were offset by increases in accounts payable of

$15.7 million. Additionally, in 2003 and 2004 we operated with negative cash flow from operating activities

primarily due to high working capital needs characteristic of our industry, which result from a combination of

factors, including our rapid growth, the long lead-time required of work-in-process typical in our industry, our

need to maintain high levels of inventory to meet our customers' requirements and the difference between

accounts receivable and accounts payable. If we continue to experience these factors, we expect that we will

operate with negative cash flow from operating activities.

Investing Activities. Net cash used in investing activities in the year ended December 31, 2005 was $25.4 million

compared to net cash provided by investing activities of $11.0 million in the year ended December 31, 2004.

This change was primarily due to a decrease in net proceeds generated from the purchase and sale of

available-for-sale marketable securities of $15.2 million, when compared to the year ended December 31, 2004,

an increase in the purchase of property and equipment and a pledge of restricted cash equivalents and

marketable securities of $13.7 million. Net cash provided by investing activities for the year ended December

31, 2004 was $11.0 million, an increase of $39.9 million compared to net cash used in investing activities of

$28.9 million for the year ended December 31, 2003. This increase was primarily as a result of a $41.0 million

increase in the net proceeds generated from the purchase and sale of marketable securities when compared

to that of 2003, which was partially offset by an increase in the purchase of property and equipment. Additionally,

we currently expect remaining fixed asset purchases to be approximately $27.7 million in 2006, which is

significantly higher than in previous years, as a result of the payment of construction costs in connection with

our new headquarters in the Tainan LCD-TV Industry Park.

Financing Activities. Net cash provided by financing activities in the year ended December 31, 2005 was

$14.4 million compared to net cash provided by financing activities of $0.7 million in the year ended December

31, 2004, primarily due to proceeds received from borrowings of short-term debt and the issuance of Amazion’s

shares, which was offset by a distribution of special cash dividends and the repayment of long-term debt. Net

cash provided by financing activities for the year ended December 31, 2004 was $0.7 million compared to net

cash provided by financing activities of $30.3 million for the year ended December 31, 2003. The substantial

decrease in net cash provided by financing activities in 2004 was attributable to the fact that there was no

issuance and sale of common shares in 2004 compared with 2003. In 2003, the increases in net cash provided

by financing activities were primarily due to proceeds from the sales of our common shares.

Our liquidity could be adversely affected by our obligation to meet certain conditions set by the ROC Investment

Commission (including a requirement to make substantial investments in research and development) in connection

with its approval for the share exchange as further described below under “-Contractual Obligations.”

Moreover, our liquidity could be negatively impacted by a decrease in demand for our products. Our products

are subject to rapid technological change, among other factors, which could result in revenue variability in future

periods. Further, we expect to continue increasing our headcount, especially for engineering and sales, to

pursue growth opportunities and keep pace with changes in technology. Should demand for our products slow

down or fail to grow as expected, our increased headcount would result in sustained losses and reductions in

our cash balance. We have at times agreed to extend the payment terms for certain of our customers. Other

customers have also requested extension of payment terms and we may grant such requests for extension in

the future. The extension of payment terms for our customers could adversely affect our cash flow, liquidity and

our operating results.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2005:

Payment Due by Period

Less than

Total

1 year

1-3 years

3-5

years

More than

5 years

(in thousands)

Long and short term debt .................

27,363

Operating lease obligations ................

Purchase obligations(1) ........................

Other obligations(2) ..............................

1,529

94,118

59,127

1,148

94,118

27,959

–

381

31,168

Total ................................................

$ 182,137

$ 150,588

31,549

–

Notes: (1)

Includes obligations for wafer fabrication, raw materials and supplies.

(2)

Includes obligations under a license agreement for the use of certain central processing unit cores and the investment

obligations required by the ROC Investment Commission.

In August 2004, we entered into a license agreement for the use of certain central processing unit cores for

product development. In accordance with the agreement, we are required to pay a license fee based on the

progress of the project development and a royalty based on shipments. The initial license fee of $100,000 is

charged to research and development expense in 2004; no fees or royalties were paid in 2005.

In addition, we have begun construction of our new headquarters located in the Tainan LCD-TV Industry Park.

The headquarters will house our research and development, engineering, sales and marketing, operations and

general administrative staff. Upon completion, the new headquarters is expected to have 21,200 square meters

of usable space and occupy 31,800 square meters of land. The land is owned by us. Construction has

commenced in the fourth quarter of 2005 and is expected to be completed in the third quarter of 2006. The

total costs are estimated to be approximately NT$905.8 million ($27.6 million), of which approximately NT$325.8

million ($9.9 million) is for the land and approximately NT$580 million ($17.7 million) is for the construction costs

(which includes architect fees, general contractor fees, building materials, purchases and installation of office

equipment and other fixtures). We have already paid for the land purchased and approximately NT$26.1 million

($0.8 million) of the construction costs in 2005. We expect to pay the remainder of the construction costs in

2006. We intend to finance the remaining cost of our new headquarters with a portion of the net proceeds from

our initial public offering.

Our current corporate structure was established as a result of a share exchange between us and the former

shareholders of Himax Taiwan. The ROC Investment Commission has approved the share exchange, subject

to our satisfying the following undertakings we gave in connection with our application seeking approval of the

share exchange: Himax Taiwan is required to (1) purchase three hectares of land in connection with the

construction of its new headquarters in Tainan, Taiwan; (2) increase the number of Taiwanese employees to 430

employees, 475 employees and 520 employees by the end of 2005, 2006 and 2007, respectively; and (3) invest

no less than NT$800 million ($24.4 million), NT$900 million ($27.4 million) and NT$1.0 billion ($30.5 million) for

research and development in Taiwan in 2005, 2006 and 2007, respectively. The required research and development

expenditure may be satisfied through cash-based compensation but cannot be satisfied through non-cash

share-based compensation. Himax Taiwan is required to submit to the ROC Investment Commission its annual

financial statements audited by a certified public accountant and other relevant supporting documents in

connection with the implementation of the above-mentioned conditions within four months after the end of each

of 2005, 2006 and 2007.

We plan to finance the commitments required under our undertakings to the ROC Investment Commission

through a portion of the proceeds from our initial public offering and working capital. We believe that the

undertakings under the ROC Investment Commission approval are in line with our business plan. In August

2005, we purchased 3.18 hectares of land for an aggregate purchase price of approximately NT$325.8 million

($9.9 million) in satisfaction of the first condition. As of December 31, 2005, we had satisfied the conditions

with respect to the Taiwan employees requirements for 2005 (with 549 Taiwan employees) and had spent

approximately NT$1,012 million ($30.9 million) in research and development expenditures.

Although we intend to discharge our undertakings to the ROC Investment Commission, we cannot assure you

that we will be able to do so under all circumstances. To the extent that we experience no or negative revenue

growth as a result of significant company-specific or industry-wide events, we would be limited in our ability

to adjust our headcount and research and development expenditures in response to those events. In this case,

these undertakings would restrict our operational flexibility and adversely affect our operating margins and

results of operations. See “Item 3.D. Risk Factors-Political, Geographical and Economic Risks - If we failed to

satisfy the undertakings we made to the ROC Investment Commission in connection with our application

seeking approval of the share exchange, the ROC Investment Commission could take actions against us that

would materially and adversely affect our business, financial condition and results of operations and decrease

the value of our ADSs.”

Under the ROC Labor Standard Law, we established a defined benefit plan and were required to make monthly

contributions to a pension fund in an amount equal to 2% of wages and salaries of our employees. Under the

newly effective ROC Labor Pension Act, beginning on July 1, 2005, we are required to make a monthly

contribution for employees that elect to participate in the new defined contribution plan of no less than 6% of

the employee’s monthly wages, to the employee’s individual pension fund account. Substantially all participants

in the defined benefit plan have elected to participate in the new defined contribution plan. Participants’

accumulated benefits under the defined benefit plan are not impacted by their election to change plans. We

are required to make contributions to the defined benefit plan until it is fully funded. As a result, our monthly

contribution to the pension fund increased to $68,211 in July 2005 compared to $15,646 in June 2005, and

we expect to contribute at this increased rate in the future. This increase has not, and is not expected to have,

a material effect on our cash flows or results of operations.

We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from our

initial public offering will be sufficient to meet our anticipated cash needs, including our cash needs for working

capital and capital expenditures for the foreseeable future. We may, however, require additional cash resources

due to higher than expected growth in our business or other changing business conditions or other future

developments, including any investments or acquisitions we may decide to pursue.

Off-Balance Sheet Arrangements

As of December 31, 2005, we did not have any off-balance sheet guarantees, interest rate swap transactions

or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded

contracts. Furthermore, as of December 31, 2005, we did not have any interests in variable interest entities.

Inflation

Inflation in Taiwan has not had a material impact on our results of operations in recent years. The rate of inflation

(deflation) in Taiwan was -0.1%, 1.6% and 2.3% in 2003, 2004 and 2005, respectively.

Dividends and Dividend Policy

Our dividend policy is to retain most, if not all, of our available funds and any future earnings for use in the

operation and growth of our business.

In November 2005, we distributed a special cash dividend to our shareholders in the amount of approximately

$13.6 million, or the equivalent of approximately $0.075 per share based on our total shares outstanding as

of a certain record date. This dividend was paid to our shareholders in respect of our performance prior to our

initial public offering. We decided to pay the dividend in cash instead of shares because our ordinary shares

at the time of the dividend payment was not listed on any stock exchange and therefore had limited liquidity.

This dividend was approved by our board of directors and was financed through a loan. This special dividend

should not be considered representative of the dividends that would be paid in any future periods or our

dividend policy.

Our board of directors has full discretion as to whether we will distribute dividends in the future. Even if our

board of directors decides to distribute dividends, the form, frequency and amount of such dividends will

depend upon our future operations and earnings, capital requirements and surplus, general financial condition,

contractual restrictions and other factors as the board of directors may deem relevant.

Our ability to pay cash or stock dividends will depend upon the amount of distributions, if any, received by us

from our direct and indirect subsidiaries, which must comply with the laws and regulations of their respective

countries and respective articles of association. Since its inception in June 2001, Himax Taiwan has paid stock

dividends in an amount of 13,517,773 shares on September 1, 2003 and 42,976,372 shares on September

20, 2004 with respect to the fiscal years 2002 and 2003, respectively. However, Himax Taiwan has not paid

cash dividends in the past. In accordance with ROC laws and regulations and Himax Taiwan’s articles of

incorporation, Himax Taiwan is permitted to distribute dividends after allowances have been made for:

• payment of taxes;

• recovery of prior years' deficits, if any;

• legal reserve (in an amount equal to 10% of annual net income after having deducted the above items

until such time as its legal reserve equals the amount of its total paid-in capital);

• special reserve based on relevant laws or regulations, or retained earnings, if necessary;

• dividends for preferred shares, if any; and

• cash or stock bonus to employees (in an amount less than 10% of annual net income) and remuneration

for directors and supervisor(s) (in an amount less than 2% of the annual net income); after having

deducted the above items, based on a resolution of the board of directors; if stock bonuses are paid to employees, the

bonus may also be appropriated to employees of subsidiaries under the board of directors’ approval.

Furthermore, if Himax Taiwan does not record any net income for any year as determined in accordance with generally accepted

accounting principles in Taiwan, it generally may not distribute dividends for that year.

If we are not able to satisfy our undertakings to the ROC Investment Commission, Himax Taiwan may not be able to pay

dividends to us, which may adversely affect your ability to receive dividends because we rely on Himax Taiwan and our other

subsidiaries for dividend payments, if any, to our shareholders. See “Item 3.D. Risk Factors-Political, Geographical and Economic

Risks-If we failed to satisfy the undertakings we made to the ROC Investment Commission in connection with our application

seeking approval of the share exchange, the ROC Investment Commission could take actions against us that would materially

and adversely affect our business, financial condition and results of operations and decrease the value of our ADSs.”

Any dividend we declare will be paid to the holders of ADSs, subject to the terms of the deposit agreement, to the same extent

as holders of our ordinary shares, to the extent permitted by applicable law and regulations, less the fees and expenses payable

under the deposit agreement. Any dividend we declare will be distributed by the depositary bank to the holders of our ADSs.

Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Himax Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Himax Technologies, Inc. (a Cayman Islands Company) and

subsidiaries, as of December 31, 2004 and 2005, and the related consolidated statements of operations, comprehensive

income (loss), stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2005.

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express

an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts

and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits

provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial

position of Himax Technologies, Inc. and subsidiaries as of December 31, 2004 and 2005, and the results of their operations

and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally

accepted accounting principles.

/s/ KPMG Certified Public Accountants

Taipei, Taiwan (the Republic of China)

February 21, 2006

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2004 and 2005

(in thousands of US dollars)

December 31,

2004

2005

Assets

Current assets:

Cash ...........................................................................................................

Marketable securities available-for-sale ........................................................

Restricted cash equivalents and marketable securities ...............................

Accounts receivable, less allowance for sales returns and discounts

of $240 and $181 at December 31, 2004 and 2005, respectively .......

Accounts receivable from related parties ....................................................

Inventories ...................................................................................................

Deferred income taxes ................................................................................

Prepaid expenses and other current assets ...............................................

Total current assets ...........................................................................

Property and equipment, net .........................................................................

Deferred income taxes ...................................................................................

Intangible assets, net .....................................................................................

Investments in non-marketable securities ....................................................

Refundable deposits .......................................................................................

5,577

7,840

329

26,860

39,285

54,092

5,731

4,700

144,414

10,990

109

1,942

298

13,356

Total assets ........................................................................................

157,770

7,086

3,989

14,053

80,158

69,688

105,004

8,965

11,113

300,056

24,426

151

1,813

712

27,183

327,239

See accompanying notes to consolidated financial statements.

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2004 and 2005

(in thousands of US dollars)

December 31,

2004

2005

Liabilities and Stockholders’ Equity

Current liabilities:

Short-term debt ...........................................................................................

Current portion of long-term debt ...............................................................

–

178

Accounts payable .......................................................................................

38,649

Income tax payable .....................................................................................

Accrued share-based compensation expenses ..........................................

Other accrued expenses and other current liabilities .................................

Total current liabilities ..................................................................

Long-term debt, less current portion ...........................................................

Total liabilities ...............................................................................

Minority interest ..............................................................................................

Stockholders’ equity:

Ordinary share, US$0.0001 par value, 500,000,000 shares authorized;

180,769,265 and 182,088,880 shares issued and outstanding at

December 31, 2004 and 2005, respectively ..........................................

Additional paid-in capital .............................................................................

Accumulated other comprehensive income ................................................

Retained earnings:

Legal reserve ........................................................................................

Unappropriated earnings ......................................................................

2,773

4,331

6,226

52,157

52,246

664

85,508

2,180

17,147

27,274

105,801

13,625

–

13,995

160,784

–

160,784

624

98,450

2,180

65,147

Total stockholders’ equity ............................................................

104,860

165,831

Commitments and contingencies

Total liabilities and stockholders’ equity ....................................

157,770

327,239

See accompanying notes to consolidated financial statements.

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2003, 2004 and 2005

(in thousands of US dollars, except per share data)

Year Ended December 31,

2003

2004

2005

Revenues

Revenues from third parties, net ...................................

29,050

Revenues from related parties, net ................................

Costs and expenses:

Cost of revenues ...........................................................

Research and development ...........................................

General and administrative .............................................

Sales and marketing ......................................................

Total costs and expenses ........................................

Operating income ..............................................................

Non operating income (loss):

Interest income ..............................................................

Gain on sale of marketable securities, net ....................

Other than temporary impairment loss on investments

in non-marketable securities .......................................

Foreign exchange gains (losses), net ............................

Interest expense .............................................................

Other income, net ..........................................................

Income before income taxes and minority interest .......

Income tax (benefit) expense ...........................................

Income (loss) before minority interest .............................

Minority interest net of tax ...............................................

Net income (loss) ...............................................................

Basic earnings (loss) per ordinary share ........................

Diluted earnings (loss) per ordinary share ......................

102,793

131,843

100,102

21,077

4,614

2,669

128,462

3,381

123

–

(759)

(1)

(619)

2,762

3,343

(581)

–

(581)

(0.00)

109,514

190,759

300,273

235,973

24,021

4,654

2,742

267,390

32,883

401

–

847

(6)

1,319

34,202

(1,771)

35,973

36,000

0.21

217,420

322,784

540,204

419,380

41,278

6,784

4,762

472,204

68,000

580

105

(129)

1,808

(125)

2,258

70,258

8,923

61,335

223

61,558

0.35

0.34

See accompanying notes to consolidated financial statements.

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

Years ended December 31, 2003, 2004 and 2005

(in thousands of US dollars, except per share data)

Year Ended December 31,

2003

2004

2005

Net income (loss) ...................................................................

(581)

36,000

61,558

Other comprehensive income (loss):

Unrealized gains on securities, not subject to tax:

Unrealized holding gains on available-for-sale marketable

securities arising during the period ................................

181

334

129

Reclassification adjustment for realized gains included

in net income (loss) ........................................................

Foreign currency translation adjustments, net of tax of $3 ....

(123)

–

(401)

–

(105)

Comprehensive income (loss) ..............................................

(523)

35,933

61,587

See accompanying notes to consolidated financial statements.

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2003, 2004 and 2005

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HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2004 and 2005

(in thousands of US dollars)

Year Ended December 31,

2003

2004

2005

Cash flows from operating activities:

Net income (loss) ............................................................................

(581)

36,000

61,558

Adjustments to reconcile net income (loss) to net cash

provided by (used in) operating activities:

Depreciation and amortization ................................................

Share-based compensation expenses ..................................

Minority interest, net of tax ....................................................

Loss on disposal of property and equipment .......................

Gain on sales of subsidiary shares .......................................

Gain on sale of marketable securities, net ............................

Impairment loss on investments in non-marketable securities

Deferred income taxes ...........................................................

1,238

15,966

–

(123)

–

(37)

2,761

5,837

(27)

–

(401)

–

3,613

8,613

(223)

–

(19)

(105)

129

(4,986)

(3,371)

Changes in operating assets and liabilities:

Accounts receivable ...............................................................

(6,225)

(14,317)

(53,297)

Accounts receivable from related parties ..............................

(22,717)

(16,392)

(30,403)

Inventories ..............................................................................

(9,032)

(33,004)

(50,912)

Prepaid expenses and other current assets .........................

(960)

(3,296)

(6,413)

Accounts payable ..................................................................

17,098

15,748

Income tax payable ................................................................

Other accrued expenses and other current liabilities ............

2,487

1,293

(761)

4,081

67,152

10,852

5,290

Net cash provided by (used in) operating activities ...

(1,593)

(8,688)

12,464

Cash flows from investing activities:

Purchase of land, property and equipment ....................................

(5,026)

(8,046)

(14,733)

Purchase of intangible assets .........................................................

(140)

–

Purchase of available-for-sale marketable securities .......................

(47,044)

(47,163)

(38,048)

Sales and maturities of available-for-sale marketable securities .....

25,180

66,312

42,028

Purchase of investments in non-marketable securities ...................

(1,813)

Proceeds from sale of subsidiary shares by Himax

Technologies Limited ...................................................................

Purchase of subsidiary shares from minority interest .....................

–

Increase in refundable deposits ......................................................

(77)

(137)

Release (pledge) of restricted cash equivalents and

marketable securities ...................................................................

Net cash provided by (used in) investing activities .........

(28,915)

11,001

–

(523)

(414)

(13,724)

(25,363)

See accompanying notes to consolidated financial statements.

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows-continued

Years ended December 31, 2003, 2004 and 2005

(in thousands of US dollars)

Year Ended December 31,

2003

2004

2005

Cash flows from financing activities:

Distribution of special cash dividends ................................. $

–

Proceeds from issuance of ordinary shares ........................

29,510

Proceeds from issuance of new shares by subsidiaries .....

Purchase of treasury stock ..................................................

Proceeds from issuance of treasury stock to employees ...

Proceeds from borrowing of short-term debt ......................

Proceeds from borrowing of long-term debt .......................

Repayment of long-term debt ..............................................

–

(558)

1,279

–

110

–

Net cash provided by financing activities ..............

30,341

Effect of exchange rate changes on cash ................................

Net increase (decrease) in cash ............................................

Cash at beginning of period ..................................................

Cash at end of period ............................................................ $

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest .............................................................................. $

Income taxes .................................................................... $

–

(167)

2,696

2,529

920

Supplemental disclosure of non-cash investing and

financing activities:

Payable for purchase of equipment and construction

–

803

–

(68)

735

–

3,048

2,529

5,577

3,867

(13,558)

–

866

–

27,274

–

(178)

14,404

1,509

5,577

7,086

125

1,130

in progress ....................................................................... $

(40)

(71)

(2,285)

See accompanying notes to consolidated financial statements.

HIMAX TECHNOLOGINES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2003, 2004 and 2005

Note 1. Background, Principal Activities and Basis of Presentation

Background

Himax Technologies Limited (“Himax Taiwan”) was incorporated on June 12, 2001. On April 26, 2005, Himax Technologies, Inc.

was established as a new holding company in the Cayman Islands to hold the shares of Himax Taiwan in connection with the

reorganization and share exchange described below.

On June 10, 2005, Himax Taiwan’s shareholders resolved the exchange of shares between Himax Taiwan and Himax Technologies,

Inc. (the “Company”) pursuant to Republic of China (ROC) Business Mergers and Acquisitions Law. Upon obtaining all necessary

approvals from ROC authorities, the share exchange became effective on October 14, 2005, whereby all issued and outstanding

common shares of Himax Taiwan were exchanged with Himax Technologies, Inc.’s new shares at a 1:1 ratio. The approval of

the ROC Investment Commission is conditioned upon the satisfaction of certain undertakings the Company made to the ROC

Investment Commission, including undertakings relating to the Company’s plans to expand its investment in the ROC as well

as undertakings to submit certain documentation after the effectiveness of the share exchange. Many of these undertakings

are prospective, on-going obligations and have yet to be satisfied to date. Refer to Note 21 ( j ) for further details. Upon

completion of the share exchange, Himax Taiwan became Himax Technologies, Inc.’s directly and wholly-owned subsidiary.

Principal Activities

Himax Technologies, Inc. and subsidiaries (collectively, the Company) designs, develops and markets semiconductors that are

critical components of flat panel displays through Himax Taiwan and its subsidiaries. The Company’s principal products are

display drivers for large-sized thin film transistor liquid crystal displays (TFT-LCD) panels, which are used in desktop monitors,

notebook computers and LCD TVs and display drivers for small- and medium-sized TFT-LCD panels which are used in mobile

handset, personal digital assistants, mobile gaming devices, digital cameras and camcorders. The Company has expanded its

product offering to include other semiconductors for digital TVs such as video processors and tuners, as well as liquid crystal

on silicon (LCOS) products. The Company's customers are TFT-LCD panel manufacturers, mobile device module manufacturers

and TV manufacturers.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Himax Technologies, Inc. and its subsidiaries as

if the Company had been in existence for all periods presented. As a result of the above-mentioned share exchange, all of the

outstanding ordinary shares of Himax Technologies, Inc. are owned by former shareholders of Himax Taiwan. This transaction

is a change in legal organization for which no change in accounting basis is appropriate. Therefore, in presenting the consolidated

financial statements of the Company, the assets and liabilities, revenues and expenses of Himax Taiwan and its subsidiaries

are included at their historical amounts for all periods presented.

The accompanying consolidated financial statements of the Company have been prepared in conformity with US generally

accepted accounting principles (“US GAAP”).

Note 2. Summary of Significant Accounting Policies

(a) Principles of Consolidation

The consolidated financial statements include the accounts and operations of the Himax Technologies, Inc., Himax Taiwan

and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates

and assumptions relating to the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities

at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting

period. Significant items subject to such estimates and assumptions include the carrying value of property, equipment and

intangible assets, valuation allowances for receivables and deferred income tax assets, inventory realizable values, potential

impairment of marketable securities and other equity investments, valuation of derivative financial instruments and share-

based compensation, and valuation of assets and obligations related to employee retirement benefits. Actual results could

differ from those estimates.

On July 18, 2002, Himax Taiwan’s stockholders approved a stock split pursuant to which it issued 17,468,400 shares of

common stock to the then holders of its outstanding shares of common stock.

On June 27, 2003, Himax Taiwan’s stockholders approved stock dividends at par value per share of NT$2.16 pursuant to

which it issued 13,517,773 shares of common stock to the then holders of its outstanding shares of common stock.

On September 30, 2004, Himax Taiwan’s stockholders approved stock dividends at par value per share of NT$3.63 and

a stock split, pursuant to which it issued 42,976,372 shares and 11,837,166 shares of common stock to the then holders

of its outstanding shares of common stock.

These transactions resulted in increases of 39.75%, 21.64% and 46.31% of the then outstanding common shares for 2002,

2003 and 2004, respectively, which are accounted for as either stock split or a stock split effected in the form of a dividend.

However, retained earnings were charged for the stock splits effected in the form of a dividend to comply with Taiwanese

legal requirements. All references in the consolidated financial statements and notes to the number of shares outstanding,

per share amounts and stock option data of the Company's common stock have been retroactively adjusted to reflect the

effect of these stock splits for all periods presented.

(d) Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time

of purchase to be cash equivalents. The Company had no cash equivalents at December 31, 2004. As of December 31,

2005, the Company had $13,600 thousand of cash equivalents consisting of U.S. dollar denominated time deposits with

an original maturity of two months, which had been pledged as collateral on short-term debt and is recorded as restricted

cash equivalents on the consolidated balance sheets.

(e) Marketable Securities

As of December 31, 2004 and 2005, all of the Company’s investments in debt and marketable equity securities are classified

as available-for-sale securities and are reported at fair value with changes in fair value, net of related taxes, excluded from

earnings and reported in other comprehensive income (loss). Available-for-sale securities, which mature or are expected to

be sold in one year, are classified as current assets.

Declines in market value are charged against earnings at the time that a decline has been determined to be other than

temporary, which is based primarily on the financial condition of the issuer and the extent and length of time of the decline.

The cost of the securities sold is computed based on the moving average cost of each security held at the time of sale.

At December 31, 2004 and 2005, the Company had $329 thousand and $453 thousand, respectively, of restricted marketable

securities, consisting of time deposits with an original maturity of more than three months, which had been pledged as

collateral for long-term debt or custom duty.

( f ) Inventories

Inventories primarily consist of raw materials, work-in-process and finished goods awaiting final assembly and test, and are

stated at the lower of cost or market value. Cost is determined using the weighted-average method. For work-in-process

and manufactured inventories, cost consists of the cost of raw materials (primarily fabricated wafer and processed tape),

direct labor and an appropriate proportion of production overheads. The Company also writes down excess and obsolete

inventory to its estimated market value based upon estimations about future demand and market conditions. If actual market

conditions are less favorable than those projected by management, additional future inventory write-down may be required

that could adversely affect the Company's operating results. Once written down, inventories are carried at this lower amount

until sold or scrapped. If actual market conditions are more favorable, the Company may have higher operating income when

such products are sold. Sales to date of such products have not had a significant impact on the Company’s operating

income.

(g) Investments in Non-Marketable Securities

Non-marketable equity securities in which the Company does not have the ability to exercise significant influence over the

operating and financial policies of the investee are stated at cost. Dividends, if any, are recognized into earnings when

received.

An impairment of an investment in non-marketable securities that is deemed to be other-than-temporary results in a

reduction in its carrying amount to its estimated fair value. The resulting impairment loss is charged to earnings at that time.

To determine whether an impairment is other-than-temporary, the Company primarily considers the financial condition of the

investee, reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to period

end and forecasted performance of the investee.

( h ) Property and Equipment

Property and equipment consists primarily of land purchased in August 2005 in connection with the construction of the

Company’s new headquarters, and machinery and equipment used in the design and development of products, and is

stated at cost. Depreciation on machinery and equipment commences when the asset is ready for its intended use and is

calculated on the straight-line method over the estimated useful lives of the assets, generally three to six years. Leasehold

improvements are amortized on a straight line basis over the shorter of the lease term or the estimated useful life of the

asset. Software is amortized on a straight line basis over estimated useful lives ranging from two to four years. Depreciation

of buildings has not commenced as the headquarters is under construction and not yet ready for its intended use.

( i ) Intangible Assets

The Company’s acquired technology is recorded at acquisition cost and amortized over its estimated useful life of five years

on a straight-line basis.

( j ) Derivative Financial Instruments

All derivative financial instruments are recognized as either assets or liabilities and are reported at fair value at each balance

sheet date. As none of the derivative financial instruments qualify for hedge accounting, changes in the fair value of derivative

financial instruments are recognized in earnings and are included in other income (expense) in the accompanying consolidated

statements of operations.

(k) Impairment of Long-Lived Assets

The Company's long-lived assets, which consist of property and equipment and intangible assets, are reviewed for impairment

whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset to its estimated

undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds such estimated cash

flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its estimated

fair value. The Company generally determines fair value based on the estimated discounted future cash flows expected to

be generated by the asset.

( l ) Revenue Recognition

The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, the product has

been delivered, the price is fixed and determinable and collection is reasonably assured. For all sales, the Company uses

a binding purchase order as evidence of an arrangement. The Company considers delivery to occur upon shipment provided

title and risk of loss has passed to the customer based on the shipping terms, which is generally when the product is

shipped to the customer from the Company’s facilities or the outsourced assembly and testing house.

The Company records a reduction to revenue and accounts receivable by establishing a sales discount and return allowance

for estimated sales discounts and product returns at the time revenue is recognized based primarily on historical discount

and return rates. However, if sales discount and product returns for a particular fiscal period exceed historical rates, the

Company may determine that additional sales discount and return allowances are required to properly reflect the Company's

estimated remaining exposure for sales discounts and product returns.

(m)Product Warranty

Under the Company’s standard terms and conditions of sale, products sold are subject to a limited product quality warranty.

The standard limited warranty period is 60 days. The Company may receive warranty claims outside the scope of the

standard terms and conditions. The Company provides for the estimated cost of product warranties at the time revenue is

recognized based primarily on historical experience and any specifically identified quality issues.

(n) Research and Development and Advertising Costs

The Company’s research and development and advertising expenditures are charged to expense as incurred. Advertising

expenses for the years ended December 31, 2003, 2004 and 2005, were $67 thousand, $78 thousand and $29 thousand,

respectively.

The Company recognizes government grants to fund research and development expenditures as a reduction of research

and development expense in the accompanying consolidated statements of operations based on the percentage of actual

qualifying expenditures incurred to date to the most recent estimate of total expenditures which they are intended to

compensate.

(o) Employee Retirement Plan

The Company has established an employee noncontributory defined benefit retirement plan (the “Defined Benefit Plan”)

covering full-time employees in the ROC. Retirement benefits are based on years of service and the average salary for the

six-month period before the employee’s retirement.

The measurement of pension costs and liabilities is determined in accordance with SFAS No. 87, Employees’ Accounting

for Pension, or SFAS No. 87. Under SFAS No. 87, changes in the amount of either the projected benefit obligation or plan

assets resulting from actual results different from that assumed and from changes in assumptions can result in gains and

losses not yet recognized in the consolidated financial statements. Amortization of an unrecognized net gain or loss is

included as a component of the net periodic pension cost for a year if, as of the beginning of the year, that unrecognized

net gain or loss exceeds 10 percent of the greater of (1) the projected benefit obligation or (2) the fair value of that plan’s

assets. In such case, the amount of amortization recognized is the resulting excess divided by the average remaining service

period of active employees expected to receive benefits under the plan. The expected long-term rate of return on plan

assets used for pension accounting is determined based on the historical long-term rate of return on plan assets. The

discount rate is determined based on the rates of return of high-quality fixed-income investments currently available and

expected to be available during the period to maturity of the pension benefits. The rate of increase in compensation levels

is determined based on the historical rate of increase in salaries.

The Company has adopted a defined contribution plan (the “Defined Contribution Plan”) covering full-time employees in the

ROC beginning July 1, 2005 pursuant to ROC Labor Pension Act. Pension costs for a period is determined based on the

contribution called for in that period. Substantially all participants in the Defined Benefit Plan have been provided the option

of continuing to participate in the Defined Benefit Plan, or to participate in the Defined Contribution Plan on a prospective

basis from July 1, 2005. Accumulated benefits attributed to participants that elect to change plans are not impacted by their

election.

(p) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for

the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the

financial statements and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and

liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary

differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates

is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax

assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

(q) Foreign Currency Translation

The functional currency for the Company’s operations is the United States dollar. Accordingly, the assets and liabilities of

a subsidiary whose functional currency is other than the United States dollar are included in the consolidation by translating

the assets and liabilities into the reporting currency (the United States dollar) at the exchange rates applicable at the end

of the reporting period. Equity accounts are translated at historical rates. The statements of operations and cash flows are

translated at the average exchange rates during the year. Translation gains or losses are accumulated as a separate

component of stockholders’ equity in accumulated other comprehensive income (loss). Foreign currency denominated

monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary

assets and liabilities, including inventories, prepaid expenses and other current assets, property and equipment, other assets

and equity, are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates

in effect during each period. Gains or losses from foreign currency remeasurement are included in other income (loss) in

the accompanying consolidated statements of operations.

( r ) Earnings (Loss) Per Share

Basic earnings (loss) per share is computed using the weighted average number of ordinary shares outstanding during the

period. Diluted earnings (loss) per share is computed using the weighted average number of ordinary and diluted ordinary

equivalent shares outstanding during the period. Ordinary equivalent shares consist of nonvested shares and unvested

treasury stock issued to employees that are contingently returnable until lapse of the requisite service period and ordinary

shares that are contingently issuable upon the vesting of unvested restricted share units (RSUs) granted to employees and

independent directors.

Basic and diluted earning (loss) per ordinary share have been calculated as follows:

Year December 31,

2003

2004

2005

Net income (loss) (in thousands) ............................................................

(581 )

36,000

61,558

Denominator for basic earnings (loss) per share:

Weighted average number of ordinary shares outstanding

(in thousands) ................................................................................

116,617

169,320

176,105

Basic earnings (loss) per share ....................................................

(0.00 )

0.21

0.35

Contingently returnable nonvested shares and unvested treasury stock issued to employees and contingently issuable

ordinary shares underlying the unvested RSUs granted to employees and independent directors are included in the calculation

of diluted earnings (loss) per share based on treasury stock method. In 2003, 3,698 thousand ordinary equivalent shares

were excluded from the diluted earnings (loss) per ordinary share computation as their effect would be anti-dilutive.

Year December 31,

2003

2004

2005

Net income (loss) (in thousands) ............................................................

(581 )

36,000

61,558

Denominator for diluted earnings (loss) per share:

Weighted average number of ordinary shares outstanding

(in thousands) ................................................................................

116,617

169,320

176,105

Nonvested ordinary shares and RSUs (in thousands) ......................

–

3,978

4,554

Diluted earnings (loss) per share ..................................................

(0.00 )

0.21

0.34

116,617

173,298

180,659

(s) Share-Based Compensation

The Company has applied SFAS No.123 (revised 2004), Share-Based Payment, from its incorporation in June 2001 for its

share-based compensation plan. The cost of employee services received in exchange for share-based compensation is

measured based on the grant-date fair value of the share-based instruments issued. The cost of employee services is equal

to the grant-date fair value of shares issued to employees and is recognized in earnings over the service period. Compensation

cost also considers the number of awards management believes will eventually vest. As a result, compensation cost is

reduced by the estimated forfeitures. The estimate is adjusted each period to reflect the current estimate of forfeitures, and

finally, the actual number of awards that vest.

(t) Sale of Newly Issued Subsidiary Shares

A gain resulting from the issuance of shares by a subsidiary to a third-party that reduces the Company’s percentage

ownership ("dilution gain") is recognized as additional paid in capital in the Company's consolidated statement of stockholders’

equity. For the year ended December 31, 2004, the Company recognized a dilution gain of $112 thousand resulting from

the issuance to third parties of new shares (representing a 5.39% interest) by Himax Display, Inc. (“Himax Display” a

consolidated subsidiary) for cash proceeds of $803 thousand. For the year ended December 31, 2005, the Company

recognized a dilution gain of $170 thousand and $52 thousand, respectively, resulting from the issuance to third parties of

new shares (representing a 20.73% interest) and the issuance to employees of nonvested shares (representing a 6.60%

interest) by Amazion Electronics Inc. (“Amazion,” a consolidated subsidiary) for cash proceeds of $866 thousand and for

employees’ future service with a fair value of $392 thousand, respectively.

(u) Recently Issued Accounting Pronouncements

In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 03-1, or EITF 03-

1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides

guidance for identifying impaired investments and new disclosure requirements for investments that are deemed to be

temporarily impaired. On September 30, 2004, the FASB issued a final staff position EITF Issue 03-1-1 that delays indefinitely

the effective date for the measurement and recognition guidance included in paragraphs 10 through 20 of EITF 03-1. The

guidance in paragraph 10 through 20 of EITF 03-1 has been replaced by guidance in FASB Staff Position (FSP) FAS 115-

1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments issued by

FASB in November 2005. Quantitative and qualitative disclosures required by EITF 03-1 remain effective for fiscal 2005. The

Company has adopted the disclosure requirements of EITF 03-01.

FSP FAS 115-1 and FAS 124-1 amend EITF 03-1 and address when an investment is considered impaired and whether that

impairment is other-than-temporary, and also measure an impairment loss. The FSP also addresses the accounting after an

entity recognizes an other-than-temporary impairment, and requires certain disclosures about unrealized losses that the entity

did not recognize as other-than-temporary impairments. The FSP is effective for reporting periods beginning after December

15, 2005. The Company does not expect the adoption of this FSP will have a material impact on its consolidated financial

position, results of operations or cash flows.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, or SFAS No.

151. SFAS No. 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling

costs and wasted material (spoilage) should be recognized as current period charges. In addition, SFAS No. 151 requires that

allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities.

The provision of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005.

The Company does not expect the initial adoption of SFAS No. 151 to have a material impact on its consolidated financial

position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No.

29, Accounting for Nonmonetary Transaction, or SFAS No. 153. SFAS No. 153 eliminates the exception from fair value

measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting

for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS

No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected

to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15,

2005. The Company does not currently plan any such nonmonetary transactions and therefore does not expect the adoption

of SFAS No. 153 to have a material impact on its consolidated financial position, results of operations or cash flows.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, or FIN

47. FIN 47 clarifies that an entity must record a liability for a “conditional” asset retirement obligation if the fair value of the

obligation can be reasonably estimated. The types of asset retirement obligations that are covered by this interpretation are

those for which an entity has a legal obligation to perform; however, the timing and/or method of settling the obligation are

conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would

have sufficient information to estimate reasonably the fair value of an asset retirement obligation. FIN 47 is effective no later

than the end of fiscal years ending after December 15, 2005. The initial adoption of FIN 47 did not have an impact on the

Company’s financial condition and consolidated statement of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, or SFAS No. 154. SFAS No. 154

replaces APB No. 20 and SFAS No. 3 and requires retrospective application to a prior period’s financial statements of voluntary

changes in accounting principle and changes required by new accounting standards when the standard does not include

specific transition provisions, unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and

corrections of errors in fiscal years beginning after December 15, 2005. The Company does not currently plan to undertake

any voluntary changes in accounting principle and therefore does not expect the adoption of SFAS No. 154 to have a material

impact on its consolidated financial position, results of operations or cash flows.

In September, 2005, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 04-13, or EITF

04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. EITF 04-13 provides guidance for

circumstances under which two or more transactions involving inventory with the same counterparty should be viewed as a

single nonmonetary transaction within the scope of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and

whether there are circumstances under which nonmonetary exchanges of inventory within the same line of business should be

recognized at fair value. EITF 04-13 is effective for new arrangements entered into in reporting period beginning after March

15, 2006. The Company does not expect the adoption of EITF 04-013 to have a material impact on its consolidated financial

position, results of operations or cash flows.

Note 3. Marketable Securities

Following is a summary of marketable securities as of December 31, 2004 and 2005:

Time deposit with original maturities

more than three months .............................

Open-ended bond fund ...................................

Total ..................................................................

Time deposit with original maturities

more than three months .............................

Open-ended bond fund ...................................

Total ..................................................................

Amortized
Cost

December 31, 2004
Gross Unrealized Gross Unrealized

Gains

Losses

Market
Value

777

7,056

7,833

(in thousands)

–

777

7,063

7,840

Amortized
Cost

December 31, 2005
Gross Unrealized Gross Unrealized

Gains

Losses

Market
Value

152

3,804

3,956

(in thousands)

–

152

3,837

3,989

The Company’s portfolio of available for sale marketable securities by contractual maturity as of December 31, 2004 and 2005

is as follows:

Due in one year or less ..................................................................................................

Due after one year ..........................................................................................................

December 31,

2004

2005

(in thousands)

7,735

105

7,840

3,989

–

3,989

Information on sales of available for sale marketable securities for the years ended December 31, 2003, 2004 and 2005 is

summarized below.

Period

Proceeds
from sales

Gross realized
gains

Gross realized
losses

Year ended December 31, 2003 ....................................................

Year ended December 31, 2004 ....................................................

Year ended December 31, 2005 ....................................................

25,180

66,312

42,028

(in thousands)
123

401

105

–

Note 4. Allowance for Sales Returns and Discounts

The activity in the allowance for sales returns and discounts for the years ended December 31, 2003, 2004 and 2005 follows:

Period

Balance at
beginning of
period

For the year ended December 31, 2003 .........
For the year ended December 31, 2004 .........
For the year ended December 31, 2005 .........

$
$
$

–
28
240

Addition

Amounts
utilized

Balance at
end of period

(in thousands)
117
1,022
398

(89 )
(810 )
(457 )

28
240
181

Note 5. Inventories

As of December 31, 2004 and 2005, inventories consisted of the following:

Merchandise ..................................................................................................................
Finished goods .............................................................................................................
Work in process ...........................................................................................................
Raw materials ...............................................................................................................
Supplies ........................................................................................................................

December 31,

2004

2005

(in thousands)
357
23,010
22,716
7,951
58
54,092

38
32,192
51,769
20,877
128
105,004

Note 6. Intangible Asset

The gross carrying amount of the Company’s acquired technology was $140 thousand at December 31, 2004 and 2005. The

related accumulated amortization was $31 thousand and $59 thousand at December 31, 2004 and 2005, respectively.

Amortization expense for the years ended December 31, 2003, 2004 and 2005, was $3 thousand, $28 thousand and $28

thousand, respectively. Future amortization expense for the net carrying amount of this intangible asset at December 31, 2005

is estimated also to be $28 thousand in 2006 and 2007, and $25 thousand in 2008.

Note 7. Property and Equipment

Land ..............................................................................................................................
Machinery ......................................................................................................................
Research and development equipment .......................................................................
Software ........................................................................................................................
Office furniture and equipment ....................................................................................
Others ...........................................................................................................................

Accumulated depreciation and amortization ...............................................................
Prepayment for purchases of equipment and software .............................................
Construction of buildings in progress ..........................................................................

December 31,

2004

2005

(in thousands)

–
4,711
3,138
2,869
898
2,898
14,514
(3,981)
457
–
10,990

10,160
6,184
5,464
3,590
1,534
3,474
30,406
(7,566)
798
788
24,426

Depreciation and amortization of these assets for 2003, 2004 and 2005, was $1,235 thousand, $2,733 thousand and $3,585

thousand, respectively.

Note 8. Investments in Non-marketable Securities

Following is a summary of such investments as of December 31, 2004 and 2005:

Jemitek Electronic Corp. ..............................................................................................

Lightmaster System Inc. ...............................................................................................

Integrated Microdisplays Limited ..................................................................................

December 31,

2004

2005

(in thousands)

313

1,500

129

1,942

313

1,500

–

1,813

In 2005, the Company considered its investment in equity of Integrated Microdisplays Limited to be other than temporarily

impaired due to a significant operating deficit. The carrying amount of $129 thousand was fully written off with an impairment

loss recognized in other non-operating loss in the accompanying consolidated statements of operations.

Note 9. Prepaid Expenses and Other Current Assets

Refundable business tax ..............................................................................................

Fair value of foreign currency forward contract ..........................................................

Prepaid rental, software maintenance fee and others ................................................

Note 10. Other Accrued Expenses and Other Current Liabilities

December 31,

2004

2005

(in thousands)

2,599

448

1,653

4,700

7,953

250

2,910

11,113

December 31,

2004

2005

(in thousands)

Accrued payroll, pension and related expenses .........................................................

1,342

Accrued commission ....................................................................................................

Accrued warranty costs ...............................................................................................

Accrued mask and mold fees .....................................................................................

Payable for purchases of equipment ...........................................................................

Accrued insurance, welfare expenses, etc. .................................................................

799

507

1,469

186

1,923

6,226

2,855

2,534

545

3,039

2,471

2,551

13,995

The movement in accrued warranty costs for the years ended December 31, 2003, 2004 and 2005, is as follows:

Balance at

beginning of

Period

period

Addition

Amounts

utilized

Balance at

end of period

Year ended December 31, 2003 ......................

Year ended December 31, 2004 ......................

Year ended December 31, 2005 ......................

–

507

(in thousands)

960

1,415

(453 )

(1,377 )

–

507

545

Note 11. Short-Term Debt

Short-term debt borrowed in 2005 are bank loans used to finance the payment of a special cash dividend that the Company

distributed to its shareholders of record as of November 2, 2005 and to support the working capital requirements for general

corporate purposes.

As of December 31, 2005, short-term debt consisted of a $13,600 thousand loan, denominated in US dollars, and which has

a maturity date that has been extended to May 2, 2006. The remaining balance of short-term debt of approximately $13,674

thousand, is comprised of three separate loans in the amounts of NT$250,000 thousand ($7,596 thousand), NT$40,000

thousand ($1,216 thousand) and NT$160,000 thousand ($4,862 thousand), all of which are denominated in New Taiwan dollars

and which have maturity dates that have been extended to March 26, 2006, March 26, 2006 and March 27, 2006, respectively.

As of December 31, 2004 and 2005, unused credit lines amounted to $37,676 thousand and $26,727 thousand, respectively.

Interest rates per annum on short-term debt outstanding as of December 31, 2005 ranged from 1.70% to 4.61%. Cash

equivalents in the form of time deposits of $13,600 thousand are held as collateral for certain short-term debt at December

31, 2005.

Note 12. Government Grant and Long-Term Debt

The Company entered into several contracts with Industrial Development Bureau of Ministry of Economic Affairs (IDB of MOEA),

Department of Industrial Technology of Ministry of Economic Affairs (DOIT of MOEA) and the Administrative Bureau of Science-

Based Industrial Park (SBIP) during 2001, 2002, 2003 and 2004 for the development of certain new leading products or

technologies. Details of these contracts are summarized below:

Authority

Total Grant

(in thousands)

Execution Period

Product Description

IDB of MOEA

NT$ 5,940 (US$171)

January 2002 to June 2003

LCOS development

IDB of MOEA

22,700 (US$654)

September 2003 to February 2005

Mobile phone TFT driver IC

SBIP

3,800 (US$112)

October 2004 to July 2005

Application of LCOS

DOIT of MOEA

19,500 (US$610)

December 2004 to November 2005

Multimedia high definition TV SOC

The LCOS development contract above was jointly entered into by the Company and Chi Mei Optoelectronics Corp. (CMO)

with IDB of MOEA, which offers a grant with maximum amount of $340 thousand, in which the Company and CMO each are

entitled to one half of the grant.

Government grants recognized by the Company as a reduction of research and development expense in the accompanying

consolidated statements of operations in 2003, 2004 and 2005 were $52 thousand, $556 thousand and $381 thousand,

respectively.

In 2002, IDB of MOEA provided an interest free loan of $335 thousand to the Company. The loan is to be repaid in eight equal

quarterly installments starting from July 1, 2004. Furthermore, the Company is required to pay a return fee equal to 2% of the

sales of certain developed products with a ceiling at 30% of the interest free loan within three years commencing from the sales

of the project product. In 2004, a return fee of $0.45 thousand was accrued and recognized as a reduction of sales in the

accompanying consolidated statements of operations. No return fee occurred in 2005.

As of December 31, 2005, all of the long-term debt will become due during 2006.

As of December 31, 2004 and 2005, time deposits pledged to bank for repayment guarantee of the above-mentioned matching

fund amounted to $267 thousand and $361 thousand, respectively.

Note 13. Retirement Plan

The Company established the Defined Benefit Plan covering full-time employees in the ROC. In accordance with the Defined

Benefit Plan, employees are eligible for retirement or are required to retire after meeting certain age or service requirements.

Retirement benefits are based on years of service and the average salary for the six-month period before the employee's

retirement. Each employee earns two months of salary for each of the first fifteen years of service, and one month of salary

for each year of service thereafter. The maximum retirement benefit is 45 months of salary. Retirement benefits are paid to

eligible participants on a lump-sum basis upon retirement.

Defined Benefit Plan assets consist entirely of a Pension Fund (the “Fund”) denominated solely in cash, as mandated by ROC

Labor Standard Law. The Company contributes an amount equal to 2% of wages and salaries paid every month to the Fund

(required by law). The Fund is administered by a pension fund monitoring committee (the “Committee”) and is deposited in the

Committee’s name in the Central Trust of China.

Beginning July 1, 2005, pursuant to the newly effective ROC Labor Pension Act, the Company is required to make a monthly

contribution for full-time employees in the ROC that elected to participate in the Defined Contribution Plan at a rate no less

than 6% of the employee’s monthly wages to the employees’ individual pension fund accounts at the ROC Bureau of Labor

Insurance. Expense recognized in 2005, based on the contribution called for was $356 thousand.

Substantially all participants in the Defined Benefit Plan had elected to participate in the Defined Contribution Plan. The transfer

of participants to the Defined Contribution Plan did not have a material effect on the Company’s financial position or results

of operations. Participants’ accumulated benefits under the Defined Benefit Plan were not impacted by their election to change

plans and their seniority remains regulated by the ROC Labor Standard Law, such as the retirement criteria and the amount

payable. The Company is required to make contributions to the Defined Benefit Plan until it is fully funded. Pursuant to relevant

regulatory requirements, the Company expects to make a cash contribution of $189 thousand to its pension fund maintained

with the Central Trust of China and $733 thousand to the employees’ individual pension fund accounts at the ROC Bureau of

Labor Insurance in 2006.

The Company uses a measurement date of December 31, for the Defined Benefit Plan. The changes in projected benefit

obligation, plan assets and details of the funded status of the Plan are as follows:

December 31,

2004

2005

(in thousands)

Change in projected benefit obligation:

Benefit obligation at beginning of year ....................................................................

Service cost ..............................................................................................................

Interest cost ..............................................................................................................

Actuarial loss .............................................................................................................

Benefit obligation at end of year .............................................................................

Change in plan assets

Fair value at beginning of year ................................................................................

Actual return on plan assets ....................................................................................

Employer contribution ...............................................................................................

Fair value at end of year ..........................................................................................

Funded status ...............................................................................................................

Unrecognized net actuarial loss ...................................................................................

Accrued pension liabilities ............................................................................................

208

170

414

103

110

215

(199 )

170

(29 )

414

150

622

215

195

414

(208 )

206

(2 )

The accumulated benefit obligation for the Defined Benefit Plan was $168 thousand and $288 thousand at December 31, 2004

and 2005, respectively.

As of December 31, 2004 and 2005, no employee was eligible for retirement or was required to retire.

For the years ended December 31, 2003, 2004 and 2005, the net periodic pension cost consisted of the following:

Year Ended December 31,

2003

2004

2005

(in thousands)

Service cost ..................................................................................................

Interest cost ..................................................................................................

Expected return on plan assets ..................................................................

Net amortization and deferral ......................................................................

Net periodic pension cost ............................................................................

(2 )

–

170

(3 )

178

150

(6 )

163

The weighted-average assumptions used in computing the benefit obligation are as follows:

Discount rate .............................................................

Rate of increase in compensation levels ..................

2003

2.50%

4.00%

Year Ended December 31,

2004

2005

Himax

Taiwan

3.00%

4.00%

Himax

Display

Himax

Display

& Amazion

Taiwan

& Amazion

3.00%

1.00%

3.50%

4.00%

3.50%

3.00%

For the years ended December 31, 2003, 2004 and 2005, the weighted average assumptions used in computing net periodic

benefit cost are as follows:

Year Ended December 31,

2004

2005

Himax

Display

Himax

Display

2003

Taiwan

& Amazion

Taiwan

& Amazion

Discount rate ....................................................................

4.00%

Rate of increase in compensation levels .........................

3.00%

Expected long-term rate of return on pension assets ...

4.00%

2.50%

4.00%

2.50%

3.00%

1.00%

3.00%

3.50%

4.00%

3.50%

3.00%

3.50%

The Company determines the expected long-term rate of return on plan assets based on the yields of twenty year ROC central

government bonds and the historical long-term rate of return on the above mentioned Fund mandated by the ROC Labor

Standard Law.

Benefits payments to be paid during the next ten years are estimated as follows:

2006 ................................................................................................................................................

2007 ................................................................................................................................................

2008 ................................................................................................................................................

2009 ................................................................................................................................................

2010 ................................................................................................................................................

2011 - 2015 ...................................................................................................................................

Amount

(in thousands)

–

Note 14. Share-Based Compensation

The amount of share-based compensation expenses included in applicable costs of sales and expense categories is summarized

as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

Cost of revenues ..........................................................................................

827

Research and development .........................................................................

General and administrative ...........................................................................

Sales and marketing .....................................................................................

11,666

2,124

1,349

15,966

291

4,288

721

537

5,837

188

6,336

848

1,241

8,613

(a) Employee stock bonuses

Through December 31, 2003, employees were entitled to bonuses in cash, shares, or a combination of both, based on

annual distributable earnings defined in Himax Taiwan’s articles of incorporation, subject to certain annual limits. Sales of

these shares are subject to restrictions. Employees were permitted to sell 50%, 25% and 25% of their bonus shares

immediately, after a one year and after a two year period, respectively. If an employee leaves Himax Taiwan within one year

after the share issuance date, the employee is not permitted to sell the remaining 50% of the shares until two years after

the date of grant. If the employee violates specific provisions stipulated in the employment contract, the shares are forfeited.

Employee bonuses are accrued and recognized as compensation expense in the period services are provided. Bonuses are

determined based on ROC generally accepted accounting principles (“ROC GAAP”) financial results and are subject to

shareholder approval. The difference between estimated bonuses and actual amounts paid, either in cash or through

common shares issuance, is charged to earnings upon shareholder approval such bonuses. Amounts charged for share

issuances are based upon the estimated fair value of such shares at the date of shareholder approval. The shares through

December 31, 2003 have been valued retrospectively since no valuation was performed when the shares were granted and

Himax Taiwan’s shares were not publicly traded. Management was primarily responsible for estimating the fair value of Himax

Taiwan’s shares. When estimating fair value, management considered a number of factors, including in some cases retrospective

valuations from the independent third-party valuer.

The share valuation methodologies included the net asset approach and the market comparable approach using four

multiples: average price/earnings; enterprise value/sales; enterprise value/earnings before interest and tax; enterprise value/

earnings before interest, tax, depreciation and amortization.

The estimated fair value per share of employee stock bonuses on the date of shareholder approval was determined to be

NT$39.44 (US$1.145) and NT$67.13 (US$1.955) in 2003 and 2004, respectively. These employee bonus shares were issued

in relation to employee services provided in 2001, 2002 and 2003, respectively.

On June 27, 2003 and June 30, 2004, Himax Taiwan’s shareholders approved the issuance of 3,490,121 shares and 7,584,065

shares, respectively, as employee bonuses.

The allocation of compensation expenses from the employee stock bonuses is summarized as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

Cost of revenues .....................................................................................

787

Research and development ....................................................................

General and administrative ......................................................................

Sales and marketing ...............................................................................

10,905

1,933

1,205

14,830

–

(b) Employee Annual Bonus Plan

In June 2005, Himax Taiwan discontinued the above-mentioned employee stock bonus program with effect from December

31, 2004. Due to a history of paying bonus based on annual operating results, the Company’s employees have developed

an expectation of receiving a bonus of some form. In order to meet such expectation and to retain and motivate employees,

management communicated to all employees that they would receive a competitive bonus for services rendered beginning

in 2004 and up to the effectiveness of a long-term incentive plan which was expected to be adopted after the completion

of the share exchange referred to in Note 1 and approval of the Company’s shareholders.

Based on a compensation package analysis with the Company’s primary domestic competitors, an annual bonus on top

of the cash compensation was accrued. The revised bonus plan allows the bonus to be paid in cash or shares. If a cash

payment is not made, the shares given will have the same value as the cash award. Employee compensation expense of

$4,141 thousand was accrued in 2004 relating to such bonus plan.

In order to settle the above mentioned accrued bonus payable, on December 27, 2005, pursuant to the authorization of

the Company’s shareholders and the delegation by the Company's board of directors, the Company’s compensation

committee approved a grant of 990,220 RSUs to employees for their service provided in 2004 and the ten months ended

October 31, 2005. All RSUs granted to employees as a bonus vested immediately on the grant date.

The amount of compensation expense from the annual bonus plan was determined based on the estimated fair value of

the ordinary shares underlying the RSUs granted on the date of grant, which was $8.62 per share.

The allocation of compensation expenses from the annual bonus plan is summarized as follows:

Cost of revenues .....................................................................................

Research and development ....................................................................

General and administrative ......................................................................

Sales and marketing ...............................................................................

Year Ended December 31,

2003

2004

2005

(in thousands)

–

220

3,045

540

336

4,141

3,215

454

628

4,395

On October 25, 2005, the Company’s shareholders approved a long-term incentive plan. The plan permits the grants of

options or RSUs to the Company’s employees, directors and service providers where each unit of RSU represents one

ordinary share of the Company.

On December 27, 2005, the Company’s compensation committee made grants of 1,297,564 RSUs and 20,000 RSUs to

its employees and independent directors, respectively. The vesting schedule for the RSUs granted to employees is as

follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on each of September

30, 2006, 2007 and 2008, subject to certain forfeiture events. The vesting schedule for the RSUs granted to independent

directors is as follows: 25% of the RSU grant vested immediately on the grant date, and a subsequent 25% will vest on

each of June 30, 2006, 2007 and 2008, subject to certain forfeiture events.

The amount of compensation expense from the long-term incentive plan was determined based on the estimated fair value

of the ordinary shares underlying the RSUs granted on the date of grant, which was $8.62 per share.

Management is primarily responsible for estimating the fair value of the Company’s ordinary shares underlying the RSUs

granted on December 30, 2005. When estimating fair value, management considers a number of factors, including

contemporaneous valuations from an independent third-party appraiser. The share valuation methodologies used include the

discounted cash flow approach and the market value approach where a different weight to each of the approaches is

assigned to estimate the value of the Company when the RSUs were granted. The discounted cash flow approach involves

applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. The market value

approach incorporates certain assumptions including the market performance of comparable companies as well as the

Company’s financial results and business plan. These assumptions include: no material changes in the existing political,

legal, fiscal and economic conditions in Taiwan; the Company’s ability to retain competent management, key personnel and

technical staff to support its ongoing operations; and no material deviation in industry trends and market conditions from

economic forecasts.

RSUs activity under the long-term incentive plan during the periods indicated is as follows:

Number of

Underlying

Weighted

Average Grant

Shares for RSUs

Date Fair Value

Balance at January 1, 2005 ...................................................................

–

Granted ...............................................................................................

1,317,564

Vested .................................................................................................

(329,395 )

Forfeited ..............................................................................................

–

Balance at December 31, 2005 .............................................................

988,169

–

8.62

–

8.62

As of December 31, 2005, the total compensation cost related to the unvested RSUs not yet recognized was $7,510

thousand. The weighted-average period over which it is expected to be recognized is 1.75 years.

The allocation of compensation expenses from the RSUs granted to employees and independent directors is summarized

as follows:

Cost of revenues .....................................................................................

Research and development ....................................................................

General and administrative ......................................................................

Sales and marketing ...............................................................................

Year Ended December 31,

2003

2004

2005

(in thousands)

–

2,080

262

436

2,840

(d) Nonvested Shares Issued to Employees

In June 2001, November 2001 and January 2002, Himax Taiwan granted nonvested shares of common stock to certain

employees for their future service. The shares will vest five years after the grant date. If employees leave Himax Taiwan before

completing the five year service period, they must sell these shares back to Himax Taiwan at NT$1.00 (US$0.03) per share.

Because the shares had not vested, the capital increase recorded when the shares were issued was fully offset by an equal

amount of deferred compensation expense. Compensation expense is recognized on a straight-line basis over the five-year

service period with a corresponding reduction of deferred compensation expense, resulting in a net increase in equity. The

Company recognized compensation expenses of $130 thousand, $130 thousand and $92 thousand in 2003, 2004 and

2005, respectively. Such compensation expense was recorded as research and development expenses in the accompanying

consolidated statements of operations since the employees who received such nonvested shares were assigned to the

research and development department. The fair value of shares on grant date was estimated based on the then most recent

price of new shares issued to unrelated third parties, which was NT$4.02 (US$0.116) per share.

Nonvested share activity during the periods indicated is as follows:

Weighted

Average Grant

Number of Shares

Date Fair Value

Balance at January 1, 2003 .............................................................

3,750,502

Granted .........................................................................................

Forfeited ........................................................................................

Balance at December 31, 2003 .......................................................

Granted .........................................................................................

Forfeited ........................................................................................

Balance at December 31, 2004 .......................................................

Granted .........................................................................................

Forfeited ........................................................................................

–

(69,638 )

3,680,864

–

(484,979 )

3,195,885

–

(2,487)

Balance at December 31, 2005 .......................................................

3,193,398

0.116

–

0.116

–

0.116

–

0.116

The forfeiture of nonvested shares issued to employees is based on the original number of shares granted, not including

the shares issued pursuant to subsequent stock splits or dividends.

As of December 31, 2005, the total compensation cost related to nonvested shares not yet recognized was $68 thousand,

which is expected to be recognized in 2006.

In September 2005, Amazion Electronics Inc. (a consolidated subsidiary) granted nonvested shares of its common stock to

certain employees for their future service. The shares will vest four years after the grant date. If employees leave Amazion

Electronics Inc. before completing the four year service period, they must sell these shares back to Amazion Electronics Inc.

at NT$1.00 (US$0.03) per share. The Company recognized compensation expenses of $33 thousand in 2005. Such

compensation expense was recorded as research and development expenses in the accompanying consolidated statements

of operations with a corresponding increase to minority interest in the accompanying consolidated balance sheets. The fair

value of shares on grant date was estimated based on the then most recent price of new shares issued to unrelated third

parties, which was NT$10 (US$0.3190) per share.

Nonvested share activity of this award during the period indicated is as follows:

Weighted

Average Grant

Number of Shares

Date Fair Value

Balance at January 1, 2005 .............................................................

Granted .........................................................................................

Forfeited ........................................................................................

Balance at December 31, 2005 .......................................................

–

1,250,000

(445,000 )

805,000

–

0.3190

As of December 31, 2005, the total compensation cost related to this award not yet recognized was $253 thousand. The

weighted-average period over which it is expected to be recognized is 3.54 years.

(e) Treasury Stock Issued to Employees

In 2002 and 2003, treasury shares were issued to employees with a three year vesting period. The excess of the fair value

of these common shares over any amount that an employee paid for treasury stock is recorded as deferred compensation

expense which is reflected as an offset to equity upon issuance of the treasury shares. Deferred compensation expense is

amortized to compensation expense on a straight-line basis over the three-year service period with a corresponding increase

to equity.

Management is primarily responsible for estimating the fair value of its share. When estimating fair value, management

considered a number of factors, including retrospective valuations from an independent third-party valuer. The estimated

grant date fair value per share in 2002 and 2003 range from NT$15.32 (US$0.459) to NT$19.93 (US$0.577) and NT$20.17

(US$0.583) to NT$52.10 (US$1.538), respectively.

Treasury stock activity during the periods indicated is as follows:

Weighted Average

of Excess of Grant

Date Fair Value over

Number of Shares

Employee Payment

Balance at January 1, 2003 .............................................................

Granted .........................................................................................

Forfeited ........................................................................................

2,928,076

5,546,872

–

Balance at December 31, 2003 .......................................................

8,474,948

Granted .........................................................................................

Forfeited ........................................................................................

Balance at December 31, 2004 .......................................................

Granted .........................................................................................

Forfeited ........................................................................................

Vested ...........................................................................................

Balance at December 31, 2005 .......................................................

–

(1,289,280 )

7,185,668

–

(2,706,593 )

4,479,075

0.356

0.740

–

0.607

–

0.662

0.597

–

0.356

0.743

The forfeiture of treasury stock issued to employees is based on the original number of shares granted, not including the

shares issued pursuant to subsequent stock splits or dividends.

As of December 31, 2005, the total compensation cost related to treasury stock not yet recognized was $548 thousand,

which is expected to be recognized in 2006.

The allocation of compensation expenses from the treasury stock issued to employees is summarized as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

Cost of revenues .....................................................................................

Research and development ....................................................................

General and administrative ......................................................................

Sales and marketing ...............................................................................

631

191

144

1,006

1,113

181

201

1,566

916

132

177

1,253

Note 15. Stockholders’ Equity

(a) Share capital

On April 26, 2005, Himax Technologies, Inc. was incorporated with an authorized share capital of $50,000 divided into

500,000,000 ordinary shares with par value of US$0.0001 per share. The issued share capital is US$0.0001 divided into

one ordinary share credited as fully paid.

On October 14, 2005, the shareholders of Himax Taiwan exchanged an aggregated of 180,769,264 common shares of

Himax Taiwan for an aggregate of 180,769,264 ordinary shares of Himax Technologies, Inc. Accordingly, as of October 14,

2005, Himax Technologies, Inc. has an authorized share capital of 500,000,000 ordinary shares with par value of US$0.0001

per share, and 180,769,265 ordinary shares issued and outstanding. There was no change in the amount of total stockholders’

equity as a result of this transaction.

(b) Earnings distribution

As a holding company, and prior to the proposed overseas listing, the only asset of the Company is the 100% ownership

interest in Himax Taiwan. Dividends received from the Company’s subsidiaries in Taiwan, if any, will be subjected to

withholding tax under ROC law. The ability of the Company’s subsidiaries to pay dividends, repay intercompany loans from

the Company or make other distributions to the Company may be restricted by the availability of funds, the terms of various

credit arrangements entered into by the Company’s subsidiaries, as well as statutory and other legal restrictions. The

Company’s subsidiaries in Taiwan are generally not permitted to distribute dividends or to make any other distributions to

shareholders for any year in which it did not have either earnings or retained earnings (excluding reserve). In addition, before

distributing a dividend to shareholders following the end of a fiscal year, a Taiwan company must recover any past losses,

pay all outstanding taxes and set aside 10% of its annual net income (less prior years’ losses and outstanding taxes) as

a legal reserve until the accumulated legal reserve equals its paid-in capital, and may set aside a special reserve.

Pursuant to the approval of the board of directors on October 25, 2005, the Company distributed a special cash dividend

to its shareholders of record as of November 2, 2005 in the amount of $13,558 thousand or the equivalent of $0.075 per

outstanding share as of that date. This dividend was paid to the Company’s shareholders in respect of the Company’s

performance before 2006. The Company decided to pay the dividend in cash instead of shares because its ordinary shares

at the time of the dividend payment were not listed on any stock exchange and therefore had limited liquidity.

The Company accounts for treasury stock acquisitions using the cost method.

In accordance with a board of directors’ resolution on April 22, 2002, Himax Taiwan repurchased 2,628,540 shares of its

outstanding common stock in 2003. The purchase price per share range from NT$6.50 (US$0.187) to NT$9.84 (US$0.291)

in 2003.

Note 16. Income Taxes

Substantially all of the Company’s pre-tax income is derived from the operations in the ROC and substantially all of the

Company's income tax expense (benefit) is incurred in the ROC.

An additional 10% corporate income tax will be assessed on undistributed income for the consolidated entities in the ROC,

but only to the extent such income is not distributed before the end of the following year. As a result, the undistributed and

distributed income is subjected to a corporate tax rate of 32.5% and 25%, respectively. The Company initially measures its

income tax expense, including the tax effects of temporary differences, using the undistributed rate in the period the income

is earned, and the reduction in the tax liability is recognized in the period the distribution to shareholders is finalized.

In accordance with the ROC Statute for Upgrading Industries, the Company’s 2003 capital increase related to the manufacturing

of newly designed TFT-LCD driver was approved by the government authorities as a newly emerging, important and strategic

industry. The incremental income derived from selling the above new product is tax exempt for a period of five years, effective

on April 1, 2004 and expiring on March 31, 2009. The aggregate per share effect of such income tax exemption for the years

ended December 31, 2004 and 2005, is a $0.04 and $0.05 increase to earnings per share, respectively.

The components of income tax expense (benefit) are summarized as follows:

Current income tax expense ........................................................................

Deferred income tax benefit .........................................................................

Year Ended December 31,

2003

2004

2005

3,380

(37 )

3,343

(in thousands)

3,215

(4,986 )

(1,771 )

12,294

(3,371 )

8,923

The differences between expected income tax expense, computed based on the statutory undistributed income tax rate of

32.5%, and the actual income tax expense (benefit) as reported in the accompanying consolidated statements of operations

for the years ended December 31, 2003, 2004 and 2005 are summarized as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

Expected income tax expense .....................................................................

Tax-exempted income ..................................................................................

Nontaxable gains on sale of marketable securities ....................................

Increase of investment tax credits ...............................................................

Increase in valuation allowance ...................................................................

Non deductible share-based compensation expenses ...............................

Tax benefit resulting from distribution of prior year’s income ....................

Foreign tax rate differential ...........................................................................

Others ...........................................................................................................

898

–

(40 )

(2,278 )

5,189

(380 )

(67 )

11,115

(6,328)

(130 )

(7,586)

882

1,897

(1,650)

(12 )

Actual income tax expense (benefit)

3,343

(1,771)

22,834

(9,189 )

(38 )

(10,647 )

2,421

2,799

–

660

8,923

As of December 31, 2004 and 2005, the components of deferred income tax assets (liabilities) were as follows:

December 31,

2004

2005

(in thousands)

Deferred tax assets:

Inventory .................................................................................................................

Unrealized foreign exchange loss ..........................................................................

Capitalized expense for tax purposes ...................................................................

Accrued compensated absences ..........................................................................

Allowance for sales return, discounts and warranty ............................................

Accrued commission ..............................................................................................

Unused investment tax credits ..............................................................................

Unused loss carry-forward .....................................................................................

Investments in non-marketable securities .............................................................

Other .......................................................................................................................

Total gross deferred tax assets .......................................................................

Less: valuation allowance .............................................................................................

Net deferred tax assets ...................................................................................

Deferred tax liabilities:

Unearned government grants ................................................................................

Unrealized foreign exchange gain ..........................................................................

Foreign currency translation adjustments ..............................................................

Prepaid pension cost .............................................................................................

Total gross deferred tax liabilities ....................................................................

440

444

188

243

210

4,662

404

–

6,669

(893)

5,776

–

Net deferred tax assets ...................................................................................

5,748

643

145

236

–

9,407

1,851

12,442

(3,314)

9,128

–

$9,116

The valuation allowance for deferred tax assets as of January 1, 2003, 2004 and 2005 was $0 thousand, $11 thousand and

$893 thousand, respectively. The net change in the valuation allowance for the years ended December 31, 2003, 2004 and

2005, was an increase of $11 thousand, $882 thousand and $2,421 thousand, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion

or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the

generation of future taxable income during the periods in which those temporary differences become deductible and tax loss

carryforwards utilizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income,

and tax planning strategies in making this assessment.

Since Himax Taiwan’s subsidiaries have generated tax losses since inception and are not included in the consolidated tax filing

with Himax Taiwan, a valuation allowance of $893 thousand and $3,314 thousand as of December 31, 2004 and 2005,

respectively, was provided to reduce their deferred tax assets (consisting primarily of operating loss carryforwards and unused

investment tax credits) to zero because management believes it is unlikely these tax benefits will be realized. The total tax loss

carryforwards for these subsidiaries at December 31, 2005 was $5,747 thousand, which will expire if unused by 2010. The

remaining investment tax credit for these subsidiaries at December 31, 2005 was $1,459 thousand, which will expire if unused

by 2009.

According to the Statute for Upgrading Industries, the purchase of machinery for the automation of production, expenditure

for research and development and training of professional personnel entitles the Company to tax credits. This credit may be

applied over a period of five years. The amount of the credit that may be applied in any year except the final year is limited

to 50% of the income tax payable for that year. There is no limitation on the amount of investment tax credit that may be applied

up to the amount of the tax actually payable in the final year.

As of December 31, 2005, all of the Company’s remaining investment tax credits of NT$309,572 thousand (US$9,407 thousand),

which will expire if unused by 2009.

Himax Taiwan’s income tax returns have been examined and assessed by the ROC tax authorities through 2002.

Pursuant to the Statute of Income Basic Tax Amount (the “IBTA Statute”) announced in late 2005, an alternative minimum tax

system will be effective commencing January 1, 2006 in Taiwan. When a taxpayer’s income tax amount is less than the basic

tax amount (“BTA”), a taxpayer will be required to pay the regular income tax and the difference between the BTA and the

regular income tax amount. For enterprises, BTA is determined using regular taxable income plus specific add-back items

applied with a tax rate ranging from 10% to 12%. The add-back items include exempt gain from nonpublicly traded security

transactions and exempt income under tax holidays. Currently, the tax rate set by the tax authority is 10%. As there are

grandfathered treatments for the tax holidays approved by the tax authorities before the IBTA Statute took effect, the Company

believes that the IBTA Statute will not have a significant impact on the Company.

Note 17. Derivative Financial Instruments

The Company operates in Taiwan and internationally, giving rise to exposure to changes in foreign currency exchange rates.

The Company enters into foreign currency forward contracts to reduce such exposure. None of the Company’s existing

derivatives qualify for hedge accounting pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging

Activities. Accordingly, the derivative instruments are recorded at fair value on the consolidated balance sheets with the change

in fair value being reflected immediately in earnings in the consolidated statements of operations.

The table below shows the fair value and notional principal of the Company’s derivative financial instruments as of December

31, 2004 and 2005. The estimated fair value of the derivative instruments is recorded in other current assets on the accompanying

consolidated balance sheet as of December 31, 2004 and 2005. The fair value of the derivative financial instruments as of

December 31, 2004 and 2005 is estimated based on quoted market prices from brokers or banks. Although the following table

reflects the notional principal and fair value of amounts of derivative financial instruments, it does not reflect the gains or losses

associated with the exposures and transactions that these financial instruments are intended to hedge. The amounts ultimately

realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures will

depend on actual market conditions during the remaining life of the instruments.

As of December 31, 2004 and 2005, the details of foreign currency exchanges contracts outstanding are summarized as

follows:

December 31, 2004

BUY

SELL

Contract amount

Fair Value

Settlement date

Maturity amount

(in thousands)

NTD

JPY

USD

$ 15,000

$ 12,000

$ 270

$ 178

January 12, 2005 - February 22, 2005

NT$

485,007

January 24, 2005 - February 23, 2005

JPY 1,247,660

BUY

SELL

Contract amount

Fair Value

Settlement date

December 31, 2004

(in thousands)

NTD

JPY

USD

$ 12,000

$ 10,000

$ 213

January 25, 2006

January 25, 2006 - February 22, 2006

JPY 1,177,925

Maturity amount

(in thousands)

NT$

400,348

As of December 31, 2003, 2004 and 2005, unrealized gains included in earnings related to the above foreign currency forward

contracts were $27 thousand, $448 thousand and $250 thousand, respectively. The realized gains resulting from foreign

currency forward contracts were $56 thousand, $677 thousand and $108 thousand in 2003, 2004 and 2005, respectively.

Note 18. Fair Value of Financial Instruments

The fair values of cash, cash equivalents, accounts receivable, short-term debt accounts payable and accrued liabilities

approximate their carrying values due to their relatively short maturities. Marketable securities consisting of open-ended bond

funds are reported at fair value based on quoted market prices at the reporting date. Marketable securities consisting of time

deposits with original maturities more than three months is determined using the discounted present value of expected cash

flows. Derivative financial instruments are also reported at fair value based on quoted market prices from brokers or banks. The

fair value of investments in non-marketable securities has not been estimated as there are no identified events or changes in

circumstances that may have significant adverse effects on the carrying value of these investments, and it is not practicable

to estimate their fair values. The fair value of the Company’s long-term debt is $85 thousand at December 31, 2004, and is

estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt

instruments of comparable maturities by the Company's bankers.

Note 19. Significant Concentrations

Financial instruments that currently subject the Company to concentrations of credit risk consist primarily of cash, cash

equivalents, marketable securities, accounts receivable and derivative financial instruments. The Company places its cash

primarily in checking and saving accounts with reputable financial institutions. The Company has not experienced any material

losses on deposits of the Company’s cash and cash equivalents. Marketable securities consist of time deposits with original

maturities of greater than three months and investments in an open-ended bond fund identified to fund current operations. All

marketable securities are classified as available-for-sale. The Company enters into foreign currency forward contracts to reduce

exposure to changes in foreign currency exchanges rates. The Company entered into such contracts with major international

foreign banks or reputable local banks. The likelihood of default on the part of the banks is considered remote.

The Company derived substantially all of its revenues from sales of display drivers that are incorporated into TFT-LCD

panels. The TFT-LCD industry is intensely competitive and is vulnerable to cyclical market conditions and subject to price

fluctuations. The Company expects to be substantially dependent on sales to the TFT-LCD industry for the foreseeable future.

The Company depends on two customers for a substantial majority of its revenues and the loss of, or a significant reduction

in orders from, either of them would significantly reduce the Company’s revenues and adversely impact the Company’s

operating results. The largest customer (CMO and its affiliates), a related party, accounted for approximately 78.0%, 63.2% and

58.9%, respectively, of the Company’s revenues in 2003, 2004 and 2005. The second largest (Chunghwa Picture Tubes and

its affiliates) accounted for 5.7%, 19.5% and 16.2%, respectively. Each of these two customers also represented more than

10% of the Company’s accounts receivable balance at December 31, 2004 and 2005. CMO and its affiliates accounted for

approximately 58.3% and 45.5% of the Company’s accounts receivable balance at December 31, 2004 and 2005, respectively.

Chunghwa Picture Tubes and its affiliates accounted for 23.0% and 27.6%, respectively. As a result, a default by any such

customer, or a prolonged delay in the payment of accounts receivable, would adversely affect the Company’s cash flow, liquidity

and operating results. The Company performs ongoing credit evaluations of each customer and adjusts credit limits based upon

payment history and the customer’s credit worthiness, as determined by the review of their current credit information. The

Company regularly monitors collections and payments from customers and has not provided any valuation allowance because

it believes all accounts receivable are collectible and has never had historical bad debt expense. See Notes 20 and 22 for

additional information.

The Company focuses on design, development and marketing of its products and outsources all its semiconductor fabrication,

assembly and test. The Company primarily depends on two foundries to manufacture its wafer, and any failure to obtain

sufficient foundry capacity or loss of any of the foundries it uses could significantly delay the Company’s ability to ship its

products, cause the Company to lose revenues and damage the Company's customer relationships. The Company is currently

seeking to identify and secure additional foundry capacity in order to diversify the Company's foundry sources.

There are a limited number of companies which supply processed tape used to manufacture the Company’s semiconductor

products and therefore, from time to time, shortage of such processed tape may occur. If any of the Company’s suppliers

experience difficulties in delivering processed tape used in its products, the Company may not be able to locate alternative

sources in a timely manner. Moreover, if shortages of processed tape were to occur, the Company may incur additional costs

or be unable to ship its products to customers in a timely manner, which could harm the Company’s business and negatively

impact its earnings.

A limited number of third-party assembly and testing houses assemble and test substantially all of the Company’s current

products. As a result, the Company does not directly control its product delivery schedule, assembly and testing costs and

quality assurance and control. If any of these assembly and testing houses experiences capacity constraints or financial

difficulties, or suffers any damage to its facilities, or if there is any other disruption of its assembly and testing capacity, the

Company may not be able to obtain alternative assembly and testing services in a timely manner. Because the amount of time

the Company usually takes to qualify assembly and testing houses, the Company could experience significant delays in product

shipments if it is required to find alternative source. Any problems that the Company may encounter with the delivery, quality

or cost of its products could damage the Company’s reputation and result in a loss of customers and orders.

Note 20. Related-Party Transactions

(a) Name and relationship

Name of related parties

Relationship

Chi Mei Optoelectronics Corp. (CMO)

Shareholder represented on the Company’s Board of

Directors; the Company’s Chairman represented on CMO’s

Board of Directors

International Display Technology Ltd. (IDTech)

Wholly owned subsidiary of CMO

Jemitek Electronic Corp. (JEC)

The Company’s CEO represented on JEC’s Board of

Directors

Chi Mei Corporation (CMC)

Major shareholder of CMO

NEXGEN Mediatech Inc. (NEXGEN)

CMC nominated more than half of the seats on NEXGEN’s

Board of Directors

Chi Mei Communication System, Inc.(CMCS)

CMC nominated more than half of the seats on CMCS’s

Board of Directors

Chi Lin Technology Co., Ltd.(Chi Lin Tech)

CMC nominated more than half of the seats on Chi Lin

Chi Lin Optronics Corp.

Wholly owned subsidiary of Chi Lin Tech

NingBo Chi Mei Optoelectronics Ltd.

The subsidiary of CMO

Tech’s Board of Directors

(CMO-NingBo)

(b) Significant transactions with related parties

( i ) Revenues and accounts receivable

Revenues from related parties are summarized as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

CMO ....................................................................................................

100,115

189,095

317,012

IDTech ..................................................................................................

2,678

Chi Lin Tech ........................................................................................

JEC ......................................................................................................

NEXGEN ..............................................................................................

CMO-NingBo .......................................................................................

–

775

290

599

–

275

2,841

1,565

370

721

102,793

190,759

322,784

A breakdown by product type for sales to CMO is summarized as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

Display driver for large-size applications ...........................................

98,569

188,526

315,841

Display driver for consumer electronics applications ........................

Others ..................................................................................................

528

1,018

528

1,165

100,115

189,095

317,012

The sales prices CMO receives are comparable to those offered to unrelated third parties.

The related accounts receivable resulting from the above sales as of December 31, 2004 and 2005, were as follows:

December 31,

2004

2005

(in thousands)

CMO ....................................................................................................................

38,582

Chi Lin Tech ........................................................................................................

JEC ......................................................................................................................

NEXGEN ..............................................................................................................

CMO-NingBo .......................................................................................................

203

500

–

67,392

1,234

120

221

721

39,285

69,688

The credit terms granted to IDTech and Chi Lin Tech were 30 days and the credit terms granted to other related parties

were 60 days, comparable to that offered to unrelated third parties.

(ii) Purchases and accounts payable

Purchases from related parties are summarized as follows:

CMO ....................................................................................................

CMC ....................................................................................................

Chi Lin Tech ........................................................................................

Year Ended December 31,

2003

2004

2005

(in thousands)

–

176

–

176

703

743

The related accounts payable resulting from the above purchases as of December 31, 2004 and 2005, were as follows:

CMO ....................................................................................................................

–

The terms of payment to related parties were approximately 30~60 days after receiving, comparable to that from third

December 31,

2004

2005

(in thousands)

parties.

(iii) Property transactions

In 2003, the Company entered into a construction contract for an LCOS factory with CMO. The contract price amounted

to $1,246 thousand and was recorded as leasehold improvements in the accompanying consolidated balance sheets.

CMO offered technology management for setting the layout and guidance of the LCOS factory, and the related payment

resulting from the aforementioned transaction amounted to $321 thousand and was recorded as general and administrative

expenses in the accompanying consolidated statements of operations. As of December 31, 2003, the related payables

resulting from the aforementioned transactions were paid.

In 2005, the Company purchased equipment amounting to $2 thousand from Chi Lin Optronics Corp. The purchase had

been full paid as of December 31, 2005.

(vi) Joint development plan: please see Note 12.

( v ) Lease

The Company entered into a lease contract with CMO for leasing office space and equipment. For the years ended

December 31, 2003, 2004 and 2005, the related rent and utility expenses resulting from the aforementioned transactions

amounted to $438 thousand, $633 thousand and $619 thousand, respectively, and were recorded as cost of revenue

and operating expenses in the accompanying consolidated statements of operations. As of December 31, 2004 and

2005, the related payables resulting from the aforementioned transactions amounted to $47 thousand and $55 thousand,

respectively, and were recorded as other accrued expenses in the accompanying consolidated balance sheets.

(vii) Sales agent

The Company entered into sales agent contracts with CMO and CMCS. For the years ended December 31, 2003, 2004

and 2005, the sales commission resulting from such contracts amounted to $20 thousand, $48 thousand and $49

thousand, respectively. The sales commission expenses were recorded as a deduction from revenue in the accompanying

consolidated statements of operations.

(viii) Others

In 2003, the Company purchased $57 thousand of supplies from CMO, which were charged to cost of revenue and

operating expense. This purchase had been fully paid as of December 31, 2003.

In 2004 and 2005, the Company purchased consumable and miscellaneous amounting to $121 thousand and $78

thousand, respectively, from CMO, CMC, Chi Lin Tech and NEXGEN, which were charged to operating expense. As of

December 31, 2005, the related payables resulting from the aforementioned transactions were $19 thousand.

In 2004 and 2005, Chi Lin Tech provided IC bonding service on prototype panels for the Company’s research activities

for a fee of $12 thousand and $43 thousand, respectively, which was charged to research and development expense.

As of December 31, 2005, the related process fee resulting from the aforementioned transactions had been fully paid.

Note 21. Commitments and Contingencies

(a) As of December 31, 2004 and 2005, amounts of outstanding letters of credit for the purchase of machinery and equipment

were $2,826 thousand and $25 thousand, respectively.

(b) As of December 31, 2004, and 2005 the Company had entered into several contracts for the acquisition of equipment and

computer software and the construction of its new headquarters. Total contract prices amounted to $627 thousand and

$8,861 thousand, respectively. As of December 31, 2004 and 2005, the remaining commitments were $347 thousand and

$8,150 thousand.

(c) On July 30, 2004, the Company entered into contracts with a vendor for software licenses and maintenance services for

a period of three years. The total license fees include maintenance services for the three-year period amounted to $1,724

thousand.

As of December 31, 2005, future license fees payments resulting from the aforementioned contracts were as follows:

January 1, 2006~December 31, 2006 .......................................................................................

569

Duration

Amount

(in thousands)

(d) The Company leases its office and buildings pursuant to operating lease arrangements with unrelated third parties. The lease

arrangement will expire gradually from 2005 to 2008. As of December 31, 2004 and 2005, deposits paid amounted to $210

thousand and $371 thousand, respectively, and were recorded as refundable deposit in the accompanying consolidated

balance sheets.

As of December 31, 2005, future minimum lease payments under noncancelable operating leases are as follows:

Duration

January 1, 2006 - December 31, 2006 .....................................................................................

January 1, 2007 - December 31, 2007 .....................................................................................

January 1, 2008 - December 31, 2008 .....................................................................................

Amount

(in thousands)

1,148

322

1,529

Rental expense for operating leases amounted to $609 thousand, $981 thousand and $1,305 thousand in 2003, 2004 and

2005, respectively.

(e) The Company entered into several sales agent agreements commencing from 2003. Based on these agreements, the

Company shall pay commissions at the rates ranging from 0.5% to 5% of the sales to a customer in the specific territory

or referred by agent as stipulated in these agreements on a monthly basis. Total commissions incurred amounting to $66

thousand, $2,604 thousand and $4,478 thousand, respectively, in 2003, 2004 and 2005, respectively.

(f)

In August of 2004, the Company entered into a license agreement for the use of certain central processing unit cores for

product development. In accordance with the agreement, the Company is required to pay an initial license fee based on

the progress of the project development and a royalty based on shipments. The license fee paid and charged to research

and development expense in the fourth quarter of 2004 was $100 thousand. No license fee or royalty occurred in 2005.

In March 2005, the Company entered into a license agreement for the use of USB 2.0 relevant technology for product

development. In accordance with the agreement, the Company is required to pay an initial license fee based on the progress

of the project development and a royalty based on shipments. No license fee or royalty occurred to date.

In February 2005, the Company placed a refundable deposit amounting to $250 thousand to a bank for its issuance of a

standby letter of credit as a guarantee of the Company’s compliance with a contract covenant pursuant to a license

agreement entered into for the use of digital consumer decoder technology. Based on the license agreement, if the

Company sells the project products to any customer other than those approved by the licensor, the Company should pay

the licensor a fee determined based on the formula prescribed in the license agreement.

(g) The Company from time to time is subject to claims regarding the proprietary use of certain technologies. Currently, the

Company is not aware of any such claims that it believes could have a material adverse effect on its financial position or

results of operations.

(h) Since Himax Taiwan is not a listed company, it will depend on Himax Technologies, Inc. to meet its equity financing

requirements in the future. Any capital contribution by Himax Technologies, Inc. to Himax Taiwan may require the approval

of the relevant ROC authorities. The Company may not be able to obtain any such approval in the future in a timely manner,

or at all. If Himax Taiwan is unable to receive the equity financing it requires, its ability to grow and fund its operations may

be materially and adversely affected.

( i ) The Company has entered into several wafer fabrication or assembly and testing service arrangements with service providers.

The Company may be obligated to make payments for purchase orders entered into pursuant to these arrangements.

( j ) The current corporate structure of the Company was established through a share exchange, which became effective on

October 14, 2005, between the Company and the former shareholders of Himax Taiwan. The ROC Investment Commission

(an agency under the administration of the ROC Ministry of Economic Affairs) approved the share exchange on September

7, 2005. In connection with the application seeking approval of the share exchange, the Company made the following

undertakings to expand its investment in the ROC, the approval of which was conditional upon the satisfaction of such

undertakings: (1) Himax Taiwan must purchase three hectares of land in connection with the construction of its new

headquarters in Tainan, Taiwan, (2) Himax Taiwan must increase the number of employees in the ROC to 430 employees,

475 employees and 520 employees by the end of 2005, 2006 and 2007, respectively, (3) Himax Taiwan must invest no less

than NT$800.0 million ($24.4 million), NT$900.0 million ($27.4 million) and NT$1.0 billion ($30.5 million) for research and

development in Taiwan in 2005, 2006 and 2007, respectively, which may be satisfied through cash-based compensation

paid to research and development personnel but not through non-cash share-based compensation and (4) Himax Taiwan

must submit to the ROC Investment Commission its annual financial statements audited by a certified public accountant and

other relevant supporting documents in connection with the implementation of the above-mentioned conditions within four

months after the end of each of 2005, 2006 and 2007.

If the Company does not satisfy the undertakings set by the ROC Investment Commission in approving the share exchange,

the ROC Investment Commission may revoke Himax Taiwan’s right to repatriate profits to the Company and/or its approval

of the share exchange, the occurrence of either of which would materially and adversely affect the Company’s business,

financial condition and results of operations and decrease the value of the Company’s American depositary shares (ADSs).

The material adverse consequences include: (1) difficulty in obtaining approval for additional investments in Himax Taiwan,

(2) restrictions on transfer of net proceeds of overseas offerings, (3) limitation on ability to raise capital through the Company

and (4) the loss of certain protections under the status as a foreign-invested company under the ROC Statute for Investment

by Foreign Nationals, including the protection from expropriation of Himax Taiwan’s assets.

Before distributing a dividend to the Company, Himax Taiwan must recover any accumulated losses in prior years, pay all

outstanding taxes and set aside 10% of its annual net income as a legal reserve until the accumulated legal reserve equals

Himax Taiwan’s paid-in capital. Refer to Note 15 (b) of the Company’s consolidated financial statements for further details.

However, if the Company does not satisfy the undertakings with the ROC Investment Commission, the ROC Investment

Commission may deny Himax Taiwan’s right to repatriate dividends to the Company. Himax Taiwan’s ability to make

advances or repay intercompany loans with terms of less than one year to the Company will not be restricted as such

activities are not subject to the ROC Investment Commission’s approval.

The ROC Investment Commission has the right (at its discretion) to revoke its approval of the share exchange based on

the undertakings described above. Prior to the ROC Investment Commission exercising its discretionary right to revoke its

approval of the share exchange or Himax Taiwan’s right to repatriate profits to the Company, in practice the Company and

Himax Taiwan would be notified and given an opportunity to be heard. There are no promulgated rules or regulations setting

forth the factors that the ROC Investment Commission would consider in exercising its discretion. Each case is determined

individually. Should the approval be revoked, the Company and Himax Taiwan would be entitled to appeal such decision

to the Committee of Appeal of the ROC Ministry of Economic Affairs and/or initiate court proceedings to reverse such

decision. A revocation by the ROC Investment Commission would not (1) invalidate the effectiveness of the share exchange

pursuant to which the Company’s ownership structure was established, (2) limit Himax Taiwan’s ability to issue equity or debt

securities or incur debt or (3) otherwise restrict Himax Taiwan's operations (other than as set out in the undertakings).

In August 2005, the Company purchased 3.18 hectares of land for an aggregate purchase price of approximately NT$325.

8 million ($9.9 million) which satisfied the first condition. As of December 31, 2005, the Company had satisfied the 2005

undertakings the Company made with the ROC Investment Commission. Himax Taiwan had 549 employees as of December

31, 2005 and had spent NT$1,012 million ($30.9 million) in research and development expenditures in 2005.

With regard to 2006 and 2007 conditions, the Company expects that it will spend at or above the research and development

expenditures requirements in 2006 and 2007, even if its business suffers a slowdown (unaudited). Based on the nature of

the fabless semiconductor design industry, even if the Company experience no or negative revenue growth as a result of

company-specific or industry-wide events, the Company believes it still must commit to the necessary resources in both

headcount and research and development expenditures in order to support its plans for further growth and competitiveness

(unaudited). The Company’s business plan contemplates an increase in headcount (mostly research and development

personnel) and research and development expenditures to improve and enhance its core technologies and know-how

(unaudited). Based on the historical trend of increasing headcount and research and development expenditures and the

Company’s projected headcount and research and development expenditures, the Company believes that the above-

mentioned headcount and research and development expenditures requirements with respect to 2006 and 2007 could be

satisfied with a very high level of certainty (unaudited). In the event that the Company’s operating performance is below its

current expectations, the Company believes it could still access unused letters of credit from several financial institutions

to finance its working capital requirements in order to meet the increased headcount and/or research and development

expenditures undertakings (unaudited), Moreover, the Company believes that Himax Taiwan could access the capital markets

through the issuance of equity or debt securities or through the incurrence of debt (unaudited).

Therefore, the Company believes that the uncertainty that may arise from the restrictions that could potentially be imposed

by the ROC Investment Commission mentioned above is not so severe that would cast significant doubt on the Company’s

ability to control Himax Taiwan. The Company has determined that the likelihood of the Company failing to satisfy the

undertakings given to the ROC Investment Commission conditions is remote and there is no significant impact to the

Company’s financial position or results of operation (unaudited).

Note 22. Segment Information

The Company is engaged in the design, development and marketing of semiconductors for flat panel displays. Based on the

Company’s internal organization structure and its internal reporting, management has determined that the Company does not

have any operating segments as that term is defined in SFAS No. 131, Disclosures about Segments of an Enterprise and

Related Information.

Revenues from the Company’s major product lines are summarized as follows:

Year Ended December 31,

2003

2004

2005

(in thousands)

Display driver ICs for large-size applications ..............................................

108,784

258,006

470,631

Display driver ICs for mobile handset applications .....................................

Display drivers for consumer electronics applications ................................

Others ...........................................................................................................

5,695

11,795

5,569

12,607

21,754

7,906

31,123

18,571

19,879

131,843

300,273

540,204

The following tables summarize information pertaining to the Company’s revenues from customers in different geographic region

(based on customer’s headquarter location):

Taiwan ...........................................................................................................

Other Asia Pacific .........................................................................................

Year Ended December 31,

2003

2004

2005

122,311

9,532

131,843

(in thousands)

284,569

15,704

300,273

482,991

57,213

540,204

The tangible long-lived assets relating to above geographic areas were as follows:

Taiwan ...........................................................................................................................

China .............................................................................................................................

December 31,

2004

2005

(in thousands)

10,908

10,990

24,344

24,426

Revenues from significant customers, those representing approximately 10% or more of total revenue for the respective periods,

is summarized as follows:

CMO and its affiliates, a related party ........................................................

Chunghwa Picture Tubes and its affiliates ..................................................

Year Ended December 31,

2003

2004

2005

102,793

7,566

110,359

(in thousands)

189,870

58,430

248,300

318,008

87,534

405,542

Accounts receivable from significant customers, those representing approximately 10% or more of total accounts receivable for

the respective periods, is summarized as follows:

CMO and its affiliates, a related party ........................................................................

Chunghwa Picture Tubes and its affiliates ..................................................................

December 31,

2004

2005

(in thousands)

38,582

15,193

53,775

68,113

41,369

109,482

Note 23. Himax Technologies, Inc. (the Company only)

As a holding company, the only asset of the Company is its 100% ownership interest in Himax Taiwan. Dividends received from

the Company’s subsidiaries in Taiwan, if any, will be subjected to withholding tax under ROC law as well as statutory and other

legal restrictions. The current corporate structure of the Company was established as a result of a share exchange between

the Company and the former shareholders of Himax Taiwan. The ROC Investment Commission has approved the share

exchange, subject to the certain conditions as disclosed in the first paragraph of Note 21 (j). If the Company were unable to

satisfy any of the conditions imposed by ROC Investment Commission, the ROC Investment Commission may revoke the

Company’s right to repatriation of profits to be distributed by Himax Taiwan or rescind its approval of the share exchange

pursuant to which the Company's ownership structure was established.

As of December 31, 2005, the amount of restricted net assets of Himax Taiwan, which may not be transferred to the Company

in the forms of cash dividends by Himax Taiwan if the Company were unable to satisfy any of the conditions imposed by ROC

Investment Commission was $179,564 thousand.

The Company believes that the above-mentioned restrictions of the ROC Investment Commission represent a limitation on

distribution of assets from its subsidiary to the Company, therefore, the condensed separate financial information of the

Company, as if the Company had been in existence for all periods, are presented as follows:

Condensed Balance Sheets

December 31,

2004

2005

(in thousands)

Cash ..............................................................................................................................

Investment in subsidiary ...............................................................................................

Total assets ............................................................................................................

Liabilities ........................................................................................................................

Total stockholders’ equity ............................................................................................

Total liabilities and stockholder’s equity ................................................................

–

104,860

–

104,860

–

179,564

13,733

165,831

179,564

The Company had no long-term obligations or guarantees as of December 31, 2004 and 2005.

Condensed Statements of Operations

Revenues ......................................................................................................

Costs and expenses ....................................................................................

Operating income (loss) ..........................................................................

Equity in earnings (loss) from subsidiary .....................................................

Other non operating income (loss) ..............................................................

Income (loss) before income taxes .........................................................

Income tax ....................................................................................................

Year Ended December 31,

2003

2004

2005

(in thousands)

–

(581 )

–

(581 )

–

(77 )

36,000

61,733

–

(98 )

36,000

61,558

–

Net Income (loss) ....................................................................................

(581 )

36,000

61,558

Condensed Statements of Cash Flows

Year Ended December 31,

2003

2004

2005

(in thousands)

Cash flows from operating activities:

Net income (loss) ....................................................................................

(581 )

36,000

61,558

Adjustments to reconcile net income (loss) to net cash used in

operating activities:

Equity in (earning) loss from subsidiary ..................................................

581

(36,000 )

(61,733 )

Changes in operating assets and liabilities:

Increase in other accrued expenses and other current liabilities ......

Net cash used in operating activities ..................................................

Net cash provided by (used in) investing activities ............................

Cash flows from financing activities:

Distribution of special cash dividends ....................................................

Proceeds from borrowing of short-term debt ........................................

Net cash provided by financing activities ...........................................

Net increase (decrease) in cash ................................................................

Cash at beginning of period .................................................................

Cash at end of period ...........................................................................

–

133

(42 )

–

(13,558 )

13,600

–

Corporate Information

Board of Directors

Investor Information

Chairman

Dr. Biing-Seng Wu

Directors

Jordan Wu

Jung-Chun Lin

Dr. Chun-Yen Chang

Yuan-Chuan Horng

Senior Management

Jordan Wu

Chief Executive Officer

Max Chan

Chief Financial Officer

Chih-Chung Tsai

Shareholder Services for American Depositary

Shares (ADSs)

Deutsche Bank Trust Company Americas

60 Wall Street

New York, NY 10005

Stock Listings

The company’s common stock trades on the NASDAQ

National Market under the symbol “HIMX”

Independent Auditors

KPMG Certified Public Accountants

Investor Contacts

Jackson Ko

Investor Relations

Chief Technology Officer, Senior VP

Himax Technologies, Inc.

Baker Bai

Engineering Center, VP

John Chou

Quality Assurance Center, VP

Corporate Headquarters

Himax Technologies, Inc.

10F, No.605, Chungshan Road

Hsinhua, Tainan County 712, Taiwan

+886-2-33930877#22240

jackson_ko@himax.com.tw

David Pasquale

Executive Vice President

The Ruth Group

757 Third Avenue

New York, NY 10017

+646-536-7006

Hsinhua, Tainan County 712, Taiwan

dpasquale@theruthgroup.com

Tel: +886-6-505-0880

Fax:+886-6-510-6620

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