SerComm Corporation SerComm Corporation Annual Report 2011 business, financial and industry leaders in Taiwan, important customers and technical cooperation

　

　

　

　

　

　

　

　

　

　

　

　

　

　

　

002　Letter to Shareholders

009　Company Overview

012　Corporate Organization

022　Capital & Shares

026　Dividend Policy

029　Business Overview

029　Business Scope

030　Industry Outlook

037　Sales & Marketing

043　Financial Review and Operating Results

043　Condensed Balance Sheets & Income Statements

045　Financial Analysis

047　Operating Results

048　Analysis of Cash Flow

049　Affiliated Companies Chart

050　Affiliates Information

051　Consolidated Financial Statements

SerComm Corporation Annual Report 2011 002

Letter to Shareholders

2011 was a very successful year for SerComm.

Thanks to strong growth in mobile broadband, SerComm

was able to leverage our many years of investment

in the telecommunications market, take advantage of

the opportunities in digital convergence and deliver

outstanding results over the past year. Morgan Stanley

Capital Investment (MSCI) even recognized SerComm's

business achievements by including us in its Global

Small Cap Indices in May. Consolidated net sales

for 2011 were NT$ 13.24 billion, which represents a

53.3% increase over NT$ 8.64 billion for year 2010.

Income before tax for 2011 were NT$ 701 million, which

represents a 81.1% year-over-year increase over NT$

387 million for 2010. Net income for 2011 were NT$ 583

million, which also represents a 85.7% increase compared

to NT$ 314 million for year 2010. Based on 177 million weighted average shares outstanding, EPS for

year 2011 were reported as NT$ 3.29.

2011 was year where mobile broadband went mainstream and ushered in a new era of digital

convergence. SerComm continued to engage in innovative R&D in networking and telecommunications

during this year and shipped up to 13 million wireless broadband devices. Both new business units and

new products produced exciting developments. Many of our key products including SMB networking

products, FTTx products, Smart HomeControl/Surveillance and Small Cell products all started bearing

fruit. In the Small Cell market, we not only released the fi rst NCC-certifi ed 3G+WiFi integrated Small

Cell but also became the first in the industry to offer the TD-SCDMA Small Cell. Commercial trials

are now being carried out by Suzhou Mobile, a subsidiary of China Mobile. At the same time, next-

generation DOCSIS 3.0 equipment is now being shipped for cable Internet. Integrated IAD products

are now being shipped to tier-1 telecommunications providers throughout Europe as well. We expect

all product lines to maintain a high rate of growth this year and continue to contribute signifi cantly to

our overall business.

This year marks the 20th anniversary of SerComm's founding. The support of our customers,

business partners and employees over the years has helped us mature in terms of R&D,

manufacturing and marketing. The opening ceremony of the commissioning of our SerNet II held on

November 23 last year was attended by more than 200 guests including cross-strait political leaders,

SerComm Corporation Annual Report 2011003

business, financial and industry leaders in Taiwan, important customers and technical cooperation

partners. SerComm thanks everyone for their guidance and encouragement. We will continue to focus

on R&D, develop our core businesses and enhance our added value.

For 2012, SerComm is optimistic about the new opportunities in the networking market from digital

convergence. We believe that the contributions from new products, new markets and new production

capacities as well as the combined efforts of the SerComm board and employees will see our business

live up to shareholders' expectations and reach new heights.

James Wang

President of SerComm Corporation


Review of 2011 Business ResultsUnit: Thousand NTD

Item 2011 2010 Year on Year Change (%)

Wired Product 1,809,001 1,844,810 -1.94

Wireless Product 8,595,981 6,019,683 42.80

Others 406,926 289,340 40.64

Total Revenue 10,811,908 8,153,833 32.60

Financial PositionUnit: Thousand NTD

Item 2011 2010 Difference Change %

Current Assets 4,529,486 3,752,691 776,795 20.70

Fixed Assets 665,982 511,298 154,684 30.25

Other Assets 58,115 139,885 -81,770 -58.46

Total Assets 7,809,103 6,020,683 1,788,420 29.70

Current Liabilities 3,540,050 2,535,261 1,004,789 39.63

LT Liabilities 873,744 873,691 53 0.01

Total Liabilities 4,536,494 3,423,503 1,112,991 32.51

Capital 1,827,960 1,760,873 67,087 3.81

Capital Reserves 308,989 196,598 112,391 57.71

Retained Earnings 973,481 658,256 315,225 47.89

Total Shareholders' Equity 3,272,609 2,597,180 675,429 26.01


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

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

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

sales units before R&D resources are invested.

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

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

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

7 projects were completed from our 2011 R&D plan. These were the EPON Gateway, GPON Gateway,

GPON/EPON RF Module, IP Camera Cloud Server, luh Residential Small Cell, Enterprise Small Cell

and Ethernet-over-Coax (EoC) Solutions.

Summary of 2012 Business Plan(1) Business Direction

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

solid profitability.

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

long-term cultivation of personnel.

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

operational efficiency.

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

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

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

demand.

(2) Projected Sales and Basis:

As we are now nearly running at full capacity, SerComm plans to continue expanding and

increase our output to 2 million units a month in the second half of 2012.

The trend towards digital convergence helped SerComm deliver a strong performance in

2011. Total shipments of wireless broadband reached 13 million units with deliveries of high

value-added products such as FTTx products, SMB networking products, Small Cell products,

cable DOCSIS 3.0 products and Smart HomeControl/Surveillance continuing to gain strength.

SerComm is also continuing to increase our share of the global telecommunications market and

telecommunications-grade products now account for more than 70% of our revenues. Growth is

expected to continue in 2012, driving up our revenues and profits.


For 2012, SerComm is continuing to engage in innovative R&D in network & telecommunications.

New product lines are expected to begin bearing fruit. For Small Cell products, we are not only

continuing to consolidate existing customers in Japan and France but also actively developing the

Western Europe and China markets. We became the first to release 4G LTE Small Cell and we are

now the clear market leader. Our fiber-access equipment has also been successful in the emerging

and European markets. For cable Internet, next-generation DOCSIS 3.0 equipment is now being

shipped to major North American system operators. Apart from the above, a convergence between

emerging cloud applications and the Internet of Things (IoT) has spurred the development of smart

home monitoring and shipments will grow several-fold this year. The contributions from new markets

and customers should be reflected in the continued growth of our business.

(3) Major Production and Marketing Policies

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

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

demand and changes in pricing.

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

to quickly meet market demand.

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

in European, North America and Asia.

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

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

market intelligence.

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

quality service.

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

competitive.

9. Enrich the properties and regions of our clients to avoid the risk of over-concentration.

Future Development Strategy

1. Expand the company’s market value to benefit shareholders and employees.

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

3. Strengthen technology research and development.

4. Improve market position and become the market leader.

5. Increase operational income and maximize profitability.

Effects of External Competition, Regulatory Environment, and Overall Business Environment

Pressure from the slowdown in the global economy has led developed countries such as the US,

Europe and Japan adopting a looser monetary policy to stimulate economic recovery. Some emerging


countries have begun loosening their own monetary policy by lowering interest or reserve rates as

well. The loose monetary policy by key nations means more funds are now available to the global

financial market and increasing the interest in risk-weighted assets. International hot money has begun

flowing to emerging markets as well. While international capital has returned to Asia in force, the

amount flowing into Taiwan is still relatively low compared to South Korea and India. Increased inflation

in Taiwan is also expected to make it more difficult for the central bank to reduce rates.

The more conservative economic outlook this year has led to the Directorate-General of Budgeting

and Statistics reducing Taiwan's economic growth to 3.85%. Standard Chartered Bank's own forecast

suggests that economic growth may even fall below 3 this year to just 2.7%. According to Tony Pho,

the chief economist at Standard Chartered, oil prices and the Euro-debt situation are the two main

risk factors affecting the Taiwanese economy. If the international crude price rises from US$120/barrel

to US$150/barrel, Taiwan's economic growth will drop by 1% and inflation will become more marked.

If the proposed increases to domestic oil and electricity prices are used as a guide, the Consumer

Price Index (CPI) will increase by 0.8%. Inflation will remain at very high levels this year and next year

with no signs of dropping within the next 12 months. Inflation may even increase and this will have an

impact on lower-income families.

As for the regulatory environment, amendments to the Securities and Exchange Act were

announced on January 4, 2012. The amendments to 26 articles included the following key changes:

1. Parts of the Business Accounting Act has been specifically excluded to allow publicly listed

companies to adopt International Financial Reporting Standards (IFRS) instead.

2. Starting in the 2013 financial year, the Q1, Q2 and Q3 financial statements must all be certified

by the accountant and submitted to the Board of Directors. The publication and reporting

deadline have been set as 45 days after the end of each quarter.

3. New regulations allow shareholders to request an investigation by the competent authority

of the issuer. If a shareholder that holds at least 3% of all issued shares believes over one

year that shareholders' interests are being seriously harmed , they may submit their reason,

evidence and explanation to the competent authority for investigation. The competent authority

may take any action it deems necessary.

4. Addition of special section on foreign companies.

New regulations issued by the Financial Supervisory Commission of the Executive Yuan also

requires public listed companies to compile financial reports based on approved international financial

reporting standards, international accounting principles, interpretations and bulletins (IFRSs) and the

financial reports of the issuer starting from 2013.

According to Jin-Guan-Zheng Order No. 0990004933 issued on February 2, 2010, the financial


report must disclose the following: 1. Description of IFRSs adoption plan and its current execution. 2.

Explanation of any major discrepancies between the current accounting policy and future accounting

policy after the adoption of IFRSs in the financial reports. 3. The accounting policy selected by the

company based on the requirements of IFRS 1: First-time Adoption of International Financial Reporting

Standards.

Jin-Guan-Zheng Order No. 1000032208 issued on July 7, 2011, revises the Guidelines Governing

the Preparation of Financial Reports by Securities Issuers. Key changes included: 1. Adjustments

to facilitate the adoption of IFRSs in Taiwan. 2. Regulations to ensure the consistency of compiled

financial reports. 3. Maintaining proper supervision over corporate financial reports. 4. Increase the

transparency of financial affairs.

Jin-Guan-Zheng Order No. 1000058425 issued on November 25, 2011, makes further

amendments to the Guidelines Governing the Preparation of Financial Reports by Securities Issuers.

Key changes included: 1. IAS 39 “Financial Instruments: Recognition and Measurement” will continue

to be used until IFRS 9: Financial Instruments is implemented. 2. With the exception of cost-based

financial assets or financial debts that may require re-classification on their conversion date, the

classification and measurement of all other existing financial assets and debts conform to IAS 39

requirements. Due to the necessity for consistency and continuity in accounting policy, re-classification

on conversion date is not recommended.

For the overall economic environment, Greece has now passed a new austerity budget that will

give it more time to implement financial reforms. The threat of a default on the debts that matured in

March has been defused so concerns about the funding and deadlines of sovereign debt in the Euro-

zone are now reduced. With the easing in the debt crisis in Greece, the pressure on sovereign debts

in the Euro-zone will ease as well. The French and Greek election results in May however introduces

uncertainties to the consolidation and recovery of the Euro.

The focus of export growth in Taiwan is now switching from China to the U.S. and ASEAN.

While trade reforms in Taiwan have concentrated mainly on lifting the restrictions against China, the

structural industrial reforms in China as part of the 12th 5-year plan and other factors means that

imports from Taiwan have slowed significantly. On the other hand, Taiwanese exports to the U.S. and

ASEAN nations have been solid performers. The structure of imports has remained much the same

compared to the second half of 2011. The importation of capital equipment remained the category to

experience the most reductions so Taiwanese vendors continue to remain cautious about the future.

In the future, SerComm will continue to monitor the situation and take any measures necessary as

part of our operations.


Company overview

Company Profile1992 SerComm Corporation Founded. First Asian Networking Company Dedicated in Embedded

Products Development

First in Asia to Launch Embedded Print Server

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

Certification

1997 Launched Broadband Router

SerComm Received ISO 9001 Certification

1999 First in Asia to Launch NAS Server

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

Established R&D Center in Suzhou, China

2000 First in Asia to Launch 802.11b Broadband Router

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

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

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

Launched Wireless IP Camera and Media Adapter

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

Listed Company" for the 2nd Consecutive Year

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

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

in 18 Months

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

Launched VoIP Business Gateway and IP PBX

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

Fi Gateway to European Market Exceeding 3 Million Units


2007 SerComm Was Awarded by Business Weekly Magazine as:

"100 Fast Growing Companies in Greater China Area"

"1000 Largest Listed Companies in Greater China Area"

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

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

Launched IAD Products and SATA NAS (Network Attached Storage)

2008 SerComm Was Awarded by CommonWealth Magazine as:

"Taiwan 1000 Largest Listed Manufacturers”

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

SerComm Was Ranked #211 as "2007 Taiwan Top 5000 Corporations" by China Credit

Information Service Ltd.

Taicang SerComm Technologies Corp. Founded

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

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

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

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

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

Application Connected to SerComm IP Video Camera.

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

Corporations Top 5000 in Taiwan”, Ranked #238.

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

Semiconductors for Multimedia Wi-Fi Home Networking Applications.

SerComm Was Awarded by CommonWealth Magazine as:

"Taiwan 1000 Largest Listed Manufacturers"

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

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

Production Tripled to Meet Future Capacity Requirement

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

and Data Network Company

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

Corporations Top 5000 in Taiwan”, Ranked #253.

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

Corporation)

SerComm Japan Corp. Founded


2011 Enrolled in "MSCI Global Small Cap Index"

First to Launch TD-SCDMA Femtocell

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

Commission)

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

Femto Forum

SerNet (Suzhou) Technologies II Grand Opening

SerComm France SARL Founded

SerComm Was Awarded by China Credit Information Service as 2010 the "Largest

Corporations Top 5000 in Taiwan", Ranked #258

2012 SerComm Was Awarded by CommonWealth Magazine as:

"Taiwan Top 50 Fast Growing Manufacturers"

"Taiwan 1000 Largest Listed Manufacturers"

"Taiwan Top 15 Largest Companies in Telecom / Networking Sector"

Announced Integrated LTE Small Cell Product and Live Demonstration at Small Cells Asia

2012

SerComm Was Awarded by China Credit Information Service as 2011 the "Largest

Corporations Top 5000 in Taiwan", Ranked #211


Organization Chart


Directors and SupervisorsAs of April 29, 2012

Name / Position Elected Date Term(Yrs)

Date first elected

Shareholdingwhen Elected

CurrentShareholding

Spouse & MinorShareholding Education &

Experience Current Position

Shares % Shares % Shares %

Paul Wang Chairman 2010.6.23 3 1992.7.29 3,444,577 2.01 3,684,577 1.89 1,142,745 0.59

Carnegie-Melon University, PhD inPhysics

Note 1

D.C. Cheng Director Representative of TLC Capital Co., Ltd. (Dismissed on 2011.11.25)

2010.6.23 3 2001.12.13 6,679,405 3.90 0 0.00 0 0.00

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

Note 2

I.D. LiuDirector 2010.6.23 3 2004.6.11 207,999 0.12 207,999 0.11 0 0.00

National Chiao-Tung University, MSVice Chairman of UMC

Note 3

Paul HsuDirectorRepresentative of Pacific Venture Partners Co. Ltd.

2010.6.23 3 2004.6.11 3,680,926 2.15 3,680,926 1.89 0 0.00

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

Note 4

James WangDirector &President

2010.6.23 3 2001.5.28 1,950,006 1.14 1,957,006 1.00 100,000 0.05

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

Note 5

Ben LinDirector &E. VicePresident

2010.6.23 3 2004.6.11 1,718,590 1.00 2,587,201 1.33 301,338 0.15

National Ching-Hwa University, MSDirector of IBM Subsidiary

Note 6

Danny T. ChiuIndependentDirector

2010.6.23 3 2008.6.13 0 0.00 0 0.00 0 0.00

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

Note 7

Hilo ChenIndependentDirector

2010.6.23 3 2008.6.13 0 0.00 0 0.00 0 0.00

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

Note 8

J.S.KuoSupervisor 2010.6.23 3 2004.6.11 1,428,281 0.83 2,468,281 1.27 10,290 0.01

University of New Hampshire, PhD inPhysicsChairman of Tajen Venture Capital

Note 9


Name / Position Elected Date Term(Yrs)

Date first elected

Shareholdingwhen Elected

CurrentShareholding

Spouse & MinorShareholding Education &

Experience Current Position

Shares % Shares % Shares %

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

University of Georgia, MBACertified Public Accountant (CPA)

Note 10

Cynthia HsiueSupervisor 2010.6.23 3 2010.6.23 0 0.00 0 0.00 0 0.00

Tamkang University, MBACEO of China Leader Management Inc.

Note 11

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

other.

Note1： Chairman of Pacific Venture Partners, Co., Ltd,; Chairman and CEO of Senslinq Inc.; Director

of Prosperity Dielectrics Co., Ltd., MiTAC Inc., Taiwan Cement Co., Ltd., and MiTAC Information

Technology Corp.; Independent Director of Taiwan Prosperity Chemical Corporation; Supervisor of

TECO Electric & Machinery Co., Ltd., Les Enphants Co., Ltd. and MediaTek Inc.

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

of TLC Capital Co., Ltd. and UMC Capital

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

Note4： Chairman of Phycos International Co., Ltd.; Independent director of Adimmune Corporation and

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

Co., Ltd.

Note5： Owner of SerComm Investments Ltd, SerComm Trading Co. and Zealous Investments Ltd.; Chairman

of ShuKuan Investments Ltd., SerNet Technology Ltd. and DWNet Technology Ltd.; Independent

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

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

SerNet Technology Ltd., Senslinq Inc., and SerComm Japan Corp.

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

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

Corporation ; Independent director of Spirox Corporation

Note9： Chairman of TECO Technology Foundation; Director of TECO IMAGE SYSTEM, and Taishin Financial

Holding Co., Ltd.

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

Director of MiTAC International Corp. and Vanguard International Semiconductor Corporation;

Supervisor of Chilisin Electronic Corp.

Note11：Director of AboCom Systems, Inc., Billionton Systems Inc.; Independent director of Simplo Tech. Co.,

Ltd., ASEC International Corp and FX Hotel Group.


Major Institutional Shareholders April 30, 2012

Name of Institutional Shareholder Primary Shareholder of Institutional Shareholder Shareholding %

Pacific Venture Partners Co. Ltd.

Paul Wang 60.50%

DaYuan Management Consultant 35.00%

Hui Su 2.00%

Management TeamAs of April 29, 2012

Name / Position Elected DateCurrent

ShareholdingSpouse & Minor

Shareholding Education & Experience

Current Position

Shares % Shares %

James WangPresident 2000.01.24 1,957,006 1.00 100,000 0.05

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

Note 1

Ben LinE. Vice President 1992.07.29 2,587,201 1.33 301,338 0.15

National Ching-Hwa University, MSDirector of IBM Subsidiary

Note 2

Charles ChuVPSales

2000.06.15 485,787 0.25 0 0.00

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

Note 3

Leo Chen CFO

2001.10.15 157,753 0.08 0 0.00

University of Illinois, MSADirector of Lite-On Group

Director ofShuKuanInvestmentsLtd.

Jemmy Lee VP Manufacturing Division

2002.04.24 26,171 0.01 0 0.00 Vice President of Proview Company China

Presidentof SerNetTechnologyLtd.

Hawk WuVP Product Development

2007.03.01 70,000 0.04 0 0.00

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

－

Michael LeeVP Business Development

2008.9.15 502,890 0.26 0 0.00

National Taiwan University, MSDirector of Hitron Technologies Inc.

－


Name / Position Elected DateCurrent

ShareholdingSpouse & Minor

Shareholding Education & Experience

Current Position

Shares % Shares %

Benjamin YehVP IP Surveillance BU

2007.11.12 378,943 0.19 0 0.00

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

－

Vincent HanVP Quality Assurance

2011.5.1 40,399 0.02 0 0.00

National Chengchi University, MBAVice President of Quanta Computer Inc.

－

SP Chen Director HR Division

2007.03.01 100,000 0.05 0 0.00

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

－

Note1： Owner of SerComm Investments Ltd, SerComm Trading Co. and Zealous Investments Ltd.

Chairman of ShuKuan Investments Ltd., SerNet Technology Ltd. and DWNet Technology

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

Note2： Owner of Smart Trade Inc. and SerComm Holding Limited; Director of ShuKuan Investments

Ltd., SerNet Technology Ltd., Senslinq Inc. and SerComm Japan Corp.

Note3： Supervisor of DWNet Technology Ltd. and SerComm Japan Corp.


Remuneration to DirectorsUnit: Thousand NTD

Name / Position

Compensation(A)

Profit Sharing(C)

Expenses & Special Allowance

(D)

Total Items to Net Income(%)

A+C+D

Bonus & SpecialAllowance

(E)

Retirement Pension(F)

Employee Bonuses from Allocated Earnings

(G)

Number of SharesObtained as Employee

Stock Options (H) (Thousands of shares)

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

SerCommConsolidatedSubsidiaries









CashBonuses

StockBonuses

CashBonuses

StockBonuses

Paul WangChairman

480 480 5,246 5,246 188 188 0.93 0.93 8,910 15,270 258 258 9,679 0 9,679 0 400 400 4.25 5.34

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

I.D. LiuDirector

Paul HsuDirector Representative of Pacific Venture Partners Co. Ltd.

James WangDirector & President

Ben LinDirector & E. Vice President

Danny T. ChiuIndependent Director

Hilo ChenIndependent Director


Compensation Range

Name of Director

Total AmountA+C+D

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

SerComm Consolidated Subsidiaries SerComm Consolidated

Subsidiaries

Below NTD 2,000,000

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

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

TLC Capital Co., Ltd., I.D. Liu, Pacific Venture Partners Co. Ltd., Danny T. Chiu, Hilo Chen

TLC Capital Co., Ltd., I.D. Liu, Pacific Venture Partners Co. Ltd., Danny T. Chiu, Hilo Chen

NTD 2,000,000～NTD 5,000,000 Paul Wang Paul Wang Paul Wang Paul Wang

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

NTD 10,000,000～NTD 15,000,000 James Wang

NTD 15,000,000～NTD 30,000,000

NTD 30,000,000～NTD 50,000,000

NTD 50,000,000～NTD 100,000,000

Over NTD 100,000,000

Total 8 8 8 8

Remuneration to SupervisorUnit: Thousand NTD

Name / Position

Compensation (A) Profit Sharing(B) Expenses & Special Allowance (C)

Total Items to NetIncome (%)

A+B+C

SerComm ConsolidatedSubsidiaries SerComm Consolidated

Subsidiaries SerComm ConsolidatedSubsidiaries SerComm Consolidated

Subsidiaries

J.S. KuoSupervisor

0 0 2,863 2,863 60 60 0.50 0.50Edward Y. WaySupervisor

Cynthia HsiueSupervisor


Compensation Range

Name of Supervisor

Total Amount A+B+C

SerComm Consolidated Subsidiaries

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

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

NTD 2,000,000～NTD 5,000,000

NTD 5,000,000～NTD 10,000,000

NTD 10,000,000～NTD 15,000,000

NTD 15,000,000～NTD 30,000,000

NTD 30,000,000～NTD 50,000,000

NTD 50,000,000～NTD 100,000,000

Over NTD 100,000,000

Total 3 3


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

Title Name

2011 Current Year to April 29

ShareholdingIncrease / Decrease

Stock Mortgage

ShareholdingIncrease / Decrease

Stock Mortgage

Chairman Paul Wang 40,000 0 0 0

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

(3,508,000) 0 NA NA

Director I.D. Liu 0 0 0 0

Director

Paul HsuRepresentative of Pacific Venture Partners Co. Ltd.

0 0 0 0

Director & President James Wang (739,000) 0 0 0

Director & E. Vice President Ben Lin 1,288,050 0 0 0

Independent Director Danny T. Chiu 0 0 0 0

Independent Director Hilo Chen 0 0 0 0

Supervisor J.S. Kuo 140,000 0 0 0

Supervisor Edward Y. Way 0 0 0 0

Supervisor Cynthia Hsiue 0 0 0 0

Vice President Charles Chu 57,000 0 (150,000) 0

Vice President Leo Chen (276,000) 0 0 0

Vice President Jemmy Lee (31,000) 0 (130,000) 0

Vice President Hawk Wu (182,562) 0 (40,000) 0

Vice President Michael Lee 92,000 0 (16,000) 0

Vice President Benjamin Yeh 88,000 (212,000) 0 0

Vice President Vincent Han 20,000 0 0 0

Director SP Chen 40,000 0 0 0


Long-Term Investments OwnershipUnit: Shares

InvesteeSerComm Investment Total Investment

Shares % Shares %

Senslinq Inc. 250,000 100.00% 250,000 100.00%

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

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

SerComm Trading Co., Ltd. 46,800,000 100.00% 46,800,000 100.00%

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

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

Smart Trade Inc. 16,000,000 100.00% 16,000,000 100.00%

DWNet Technology Ltd. 16,000,000 100.00% 16,000,000 100.00%

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

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

Ubiquisys Limited 874,508 3.78% 874,508 3.78%

SerComm Japan Corp. 540 100.00% 540 100.00%

SerComm France SARL 100,000 100.00% 100,000 100.00%

CapitalUnit: Shares, as of April 30, 2012

Type of ShareAuthorized Shares

Issued Shares Un-Issued Shares Total Shares

Common Stock 187,473,778 62,526,222 250,000,000


History of CapitalizationUnit: Shares/ NTD, as of April 30, 2012

Year/Month

IssuePrice

Authorized Paid-In CapitalSource of Capital

Shares Amount Shares Amount

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

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

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

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

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



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



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



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

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



Year/Month

IssuePrice




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

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

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

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

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

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

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

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


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

Capitalization of retained earnings and employee profit sharing; Conversion of stock options


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

Capitalization of retained earnings and employee profit sharing; Conversion of stock options



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



Year/Month

IssuePrice









2011/7 10 250,000,000 2,500,000,000 178,438,989 1,784,389,890 Conversion of bonds




Status of ShareholdersAs of April 29, 2012

Type ofShareholders

GovernmentAgencies

FinancialInstitutions

Other LegalEntities Individual

ForeignInstitutions /

IndividualTotal

Number ofShareholders 1 90 47 16,650 63 16,851

Shareholding 2,555,000 46,690,439 17,359,107 103,537,397 24,793,661 194,935,604

Ownership% 1.31% 23.95% 8.91% 53.11% 12.72% 100.00%


Distribution Profile of OwnershipUnit: Shares, as of April 29, 2012

Class of Shareholding Number of Shareholders Shareholding (share) %

1～999 4,466 950,426 0.49%

1,000～5,000 9,188 19,278,443 9.89%

5,001～10,000 1,556 12,698,799 6.51%

10,001～15,000 462 5,872,029 3.01%

15,001～20,000 351 6,592,462 3.38%

20,001～30,000 271 7,127,795 3.66%

30,001～40,000 120 4,348,068 2.23%

40,001～50,000 82 3,816,776 1.96%

50,001～100,000 131 9,262,988 4.75%

100,001～200,000 98 14,165,039 7.27%

200,001～400,000 51 15,486,449 7.94%

400,001～600,000 18 9,233,243 4.74%

600,001～800,000 19 13,187,335 6.76%

800,001～1,000,000 8 7,187,000 3.69%

Over 1,000,001 30 65,728,752 33.72%

Total 16,851 194,935,604 100.00%

Major ShareholdersUnit: Shares, as of April 29, 2012

Name of Shareholders Shareholding %

Oriental Securities Corporation 4,589,000 2.35%

Paul Wang 3,684,577 1.89%

Pacific Venture Partners Co., Ltd. 3,680,926 1.89%

ZhuoJian Investment Co., Ltd. 3,475,508 1.78%

LiJin Financial Consultant 3,035,434 1.56%

GOLDMAN SACHS INTERNATIONAL 3,003,320 1.54%

Yuanta Excellence Equity Fund 2,937,000 1.51%

HSBC Institutional Trust Services (Asia) Limited as trustee of Manulife Provident Funds Unit Trust Series 2,799,000 1.44%

First Commercial Bank in custody for JF (Taiwan) China Concept Fund 2,785,000 1.43%

Ben Lin 2,587,201 1.33%


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

Item 2010 2011 March 31, 2012

MarketPrice

Highest 31.95 47.90 47.50

Lowest 18.15 27.10 30.85

Average 26.71 35.50 40.16

Net Valueper Share

Before Distribution 15.09 17.90 19.50

After Distribution 13.54 －－

Earningsper Share

Weighted Average Shares 167,513 177,410 186,135

Earning per Shares

Original 1.88 3.29 0.86

Adjusted 1.87 －－

Dividends per Share(Note 1)

Cash Dividend 1.55 2.50 －

Stock Dividend

From RetainedEarnings 0 0 －

From CapitalSurplus 0 0 －

Accumulative Unditributed Dividends －－－

Return onInvestment(Note 2)

Price / Earning Ratio 14.21 10.79 46.70

Price / Dividend Ratio 17.23 14.20 －

Cash Dividend Yield Rate 5.80% 7.04% －

Note1： Pending for Shareholder's approval

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

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

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

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

amount is determined by the profit earning condition, financial condition and future operating needs for

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

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


Dividends Paid

Year EPS NT$

Cash Dividend NT$ per share

Share Dividend NT$ per share

2011 3.29 2.39 -

2010 1.88 1.47 -

2009 1.24 1.00 -

2008 1.88 1.50 -

2007 3.65 2.00 0.40

2006 2.69 0.99 0.99

2005 2.76 1.07 1.07

Distribution of ProfitSerComm's Board of Directors adopted a proposal for 2011 profit distribution. This proposal is

subject to approval by shareholders at the annual general meeting, scheduled for June 27, 2012.

Proposal of profit distribution for 2011Unit: NTD

Cash dividend $2.50 per share

Cash bouns to employees $78,710,595

Remuneraton to Directors and Supervisors $10,494,746

Convertible Bonds

Type of Corporate Bond 3rd Domestic Unsecured Convertible Bonds

Item 2010 2011 Current Year to March 31

Marekt Price of Convertible Bond

Highest 148.50 218.00 239.00

Lowest 107.00 131.50 155.00

Average 121.86 171.37 182.57

Conversion Price 21.16 20.33 20.33

Issuing Date and Conversion Price (NTD) 2010/8/6$22.24

2010/8/6$22.24

2010/8/6$22.24

Obligation of Conversion Issue of new shares Issue of new shares Issue of new shares


Type of Corporate Bond 4th Domestic Unsecured Convertible Bonds

Item 2010 2011 Current Year to March 31

Marekt Price of Convertible Bond

Highest － 107.00 117.90

Lowest － 97.90 100.50

Average － 101.79 109.38

Conversion Price － 40.76 40.76

Issuing Date and Conversion Price (NTD) －2011/8/30

$40.762011/8/30

$40.76

Obligation of Conversion － Issue of new shares Issue of new shares

Employee Stock OptionsAs of April 30, 2012

Category 2nd 3rd 4th

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

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

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

Number of Shares Issued / Total Issued Shares (%) 1.28% 2.67% 1.07%

Exercise Period 10 years 10 years 5 years

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

Number of Shares in Exercised Options (Share) 2,262,200 3,249,500 169,000

Total Amount in Exercised Options (NTD) 30,162,200 37,586,500 3,380,000

Number of Shares In Unexercised Options (Share) 0 1,463,000 1,791,000

Price per Share In Unexercised Options (NTD) 10.0 10.0 19.2

Number of Shares In Unexercised Options as Share of Total Issued Shares (%) 0.00% 0.78% 0.96%

Impact on Shareholders’ Equity (%) 0.00% 0.41% 0.95%


Business OverviewBusiness Scope

Item 2011 2010Wired Product 16.73% 22.63%Wireless Product 79.50% 73.83%

Others 3.77% 3.55%Total 100.00% 100.00%

Main Products(1) Router(2) ADSL Gateway(3) Integrated Access Device(4) Access Point(5) Wireless LAN Card(6) Print Server(7) IP Video Applications(8) Home Plug AV(9) VoIP Products(10) NAS (Network Attached Storage)(11) Cable Products (12) Smart Home Control/ Surveillance

(13) Small Cell Products(14) FTTx Products(15) Ethernet-over-Coax (EoC) Solutions

New Products Under Developing(1) FTTx Products

-EPON Integrated Gateway-GPON Integrated Gateway

(2) Smart Home Control/ Surveillance

- Home Security Sensors- Home Automation Sensors (binary switch & energy switch)

(3)Small Cell Products-LTE 4F Small Cell-TD-SCDMA Enterprise Small Cell

(4) Wireless Ethernet-over-Coax (EoC) Solutions(5) Outdoor Access Point

(6) High Speed 11ac Wireless Broadband Router


Industry Overview1. Industry Status and Development

For many people, network communications is now a part of everyday life. The evolution of

networking technology has changed our lives in significant ways as well. The network communications

industry encompasses everything from infrastructure such as base stations and switches for signal

transmission to consumer electronics such as the smart phones we hold in our hands.

In the past, fixed networks, mobile networks and network communications were three distinct

industries. Increasing penetration of smart phones and tablets however has led to the rise of the

"Next Generation Network" (NGN) that integrates mobile and fixed network services to provide

mobile Internet access. The industry is now undergoing a process of convergence and fusion. The

increased demand for broadband due to cloud operations represents a new opportunity for network

communications vendors as well. For the network communications industry, cloud computing, mobile

broadband and digital home are the three stars of 2012.

On the product-level, vendors are now targeting the digital home market in addition to

conventional wireless networking products, switches and broadband networking products. Digital

home products offer high profit margins and offers further opportunities for the integration of cloud

and network services. Vendors with a software niche will be able to leverage their ability to integrate

software and hardware.

At the same time, smart phones will continue to sell in large numbers. Prices should become more

affordable however and the penetration of smart phones will continue to climb rapidly this year. As

smart phone users consume far more data than users of conventional functional phones, telcos now

consider data network services to be a key source of revenue in addition to voice telephony. Telcos

are therefore rushing to roll-out WiFi hotspots and small cells in order to spread out mobile networking

traffic and provide better mobile connectivity.

A 2011 research report from CISCO forecasted that global mobile broadband data traffic will see

the most growth and reach 6.3EB (1EB = 1 Billion GB) (1EB = GB). The Asia-Pacific will grow at the

fastest rate and will account for 29.3% of all mobile bandwidth by 2015, surpassing North America

(15.7%) and Western Europe (26.3%). The explosion in demand for mobile bandwidth means that

telcos must solve the problem of base station roll-out and bandwidth allocation. The high cost of

installing medium and large base stations however means that small cells offer telcos a more cost-

effective option.


Rapid Increase in Global Demand for Mobile Bandwidth

　　　　　　　

Source: Cisco VNI report, 2011

Industry analysts estimate that mobile data traffic generated by all kinds of network devices will

far exceed the existing traffic from smart phones and tablets by 2020. As home appliances, cars,

watches and even door locks will all be connected to mobile Internet, wireless telcos will be faced with

a major challenge. For network operators, the return on investment from improving the efficiency of

their communications networks is gradually declining. Attempts to expand their network capacity have

also run into an increasing number of physical restrictions. Tod Sizer, the head of wireless research at

Alcatel-Lucent's Bell Labs, said that 5G won't be necessarily about more speed but it may help meet

people's expectations of service quality. According to Sizer, each generation of network technology

has enabled a new set of features. 2G was about voice, 3G was about data and 4G is about video. 5G

may be about intelligent networks that can handle billions of connected devices while remaining stable

and operational. Officially, 5G technology does not even exist. The standards-setting International

Telecommunication Union (ITU) has not yet created a definition for 5G so exactly when 5G networks

will be realized remains an unknown.

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

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

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

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

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


Upstream Midstream Downstream

CPU Vendor LAN NIC Average User

IC Supplier Hub System Integrator

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

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

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

Chip Network Application Server Network Hardware Vendor

Passive Component Network Operating System

Resistor and Capacitor Supplier

Adapter Supplier

DRAM and SRAM Supplier

Flash Memory Supplier

3. Summary of 802.11 Wireless Networking Specification Standards

4G is ushering in the era of high-speed data transfers through WiMAX and LTE. 4G theoretically

offers download and upload speeds of 100Mb/s and 50Mb/s respectively, making it several times

faster than the 7.2Mb/s of 3G and 21MB/s of 3.5G. Advantages such as improved transmission

efficiency have made it all the more attractive. MIC estimated that by 2011 there will be 7 million LTE

users around the world. By 2015, the introduction of FDD-LTE in the West and TDD-LTE in countries

like China and India should push the overall pool of LTE users to 240 million. For 3G or future LTE 4G

networks, data traffic is expected to grow several times over. Telcos are therefore aggressively rolling

out WiFi hotspots to maintain the quality of mobile broadband service for their users and help lower the

load on base stations. MIC estimated that China Telecom will set up 1 million WiFi hot spots in 2012.

While LTE has a higher theoretical bandwidth, its transmission speed is greatly reduced indoors.

Total coverage is also not the main aim of LTE (excessive cost) so this creates a market for small

cells. As small cells can improve indoor communications quality, increase multimedia download rates

and reduce setup costs, telcos are increasingly leasing them for free in order to increase end-user

utilization. iSuppli estimated that small cell shipments only entered the start of their rapid growth phase

in 2011. Shipments will surpass 24 million units in 2012 then 39.5 million units in 2013. Annual growth

will remain above 200% between 2010 and 2012. In-Stat also suggested that small cell sales may

reach US$14 Billion in 2015.

Future demand for small cells will rise rapidly due to bandwidth roll-out and allocation

requirements. As the following chart from IEK shows, global shipments reached 2 million units in 2010.

2011 shipments were estimated at 3.69 million units and will reach 10 million units in 2012.


Taiwanese vendors began laying the ground work for small cells quite early. Representative

vendors such as SerComm, Gemtek and Alpha Networks now count major telcos in Europe, America

and Japan among their downstream customers. SerComm in particular is the only vendor with NCC-

certified small cells in Taiwan. Nominated the "Residential Femtocell Access Point Design and

Technology Innovation" by Femto Forum also highlighted SerComm's technological leadership.

Continued Growth in Global Small Cell Shipments

Unit: Millions of units

Source: ABI, EIK

In fiber construction, the global market for fiber equipment is growing steadily. The Asia-Pacific

accounts for 76% of the market and provides the main source of growth. Within the Asia-Pacific,

Japan had the most subscribers in 2010 (19.6 million subscribers) followed by China (15.4 million

subscribers). The ITRI forecasted that China will surpass Japan in the number of fiber subscribers in

2011. China is therefore aggressively expanding its fiber infrastructure and this will benefit Taiwanese

suppliers of fiber networking products.


Asia-Pacific Accounts for the Largest Proportion of Global Fiber Subscribers

Unit: 10,000 households

Source: ITRI

Networking equipment products consist of modems, network cards and communication modules.

SerComm has many domestic competitors including Gemtek, D-Link, Cameo, ZyXEL, CyberTAN,

Accton, ASEKY, CNet and Foxconn. Other competitors include Amigo, Pro-Nets, RDC, Wontex,

Hauman, Kinpo, Netronix, PLANET, Alpha Networks, OPNET, UFOC, TAINET, YFC, Loop and Top

Century. SerComm's is the world's 3rd largest supplier of wireless broadband routers/gateways and

the 6th largest supplier of integrated access devices (IAD) in Taiwan. In the future, SerComm will

continue to diversify our product R&D efforts and also implement more rigorous quality controls in our

production process to ensure product quality and competitiveness. We are also actively working to

secure OEM/ODM orders from major international customers so our market share should continue to

grow each year.


Trends in Gross Margins for Taiwanese Networking Vendors

Source: DIGITIMES, 2012/3

Research & Development ExpensesUnit: Thousand NTD

Item 2011 1Q 2012

R&D Expenses 379,517 97,609

Net Sales 10,811,908 3,528,681

R&D/Net Sales (%) 3.51% 2.77%

R&D Achievements:(1) EPON Gateway

(2) GPON Gateway

(3) GPON/EPON RF Module

(4) IP Camera Cloud Server

(5) Iuh Residential Small Cell

(6) Enterprise Small Cell

(7) Ethernet-over-Coax (EoC) Solutions


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

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

develop core technology products.

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

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

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

international market.

2. Short-term Development Plans

(A) Marketing strategy

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

network; fully implement quality assurance and inspection measures. Set up a comprehensive

after-sales service to provide customers with professional advice and repair services for

products.

(B) Production strategy

Strengthen product planning and production process management. Provide employees with

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

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


Market, Production and Sales Outlook Revenue Breakdown by Geography

Unit: Thousand NTD

Region2011 2010

Amount % Amount %

Taiwan 61,497 0.57 120,053 1.47

Europe 3,358,229 31.06 3,614,980 44.34

North America 5,962,730 55.15 3,186,802 39.08

Asia ex-Taiwan 1,413,576 13.07 1,229,839 15.08

Other 15,876 0.15 2,159 0.03

Total 10,811,908 100.00 8,153,833 100.00

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

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

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

and broadband Internet access.

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

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

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

project may bring about profitable gains.

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

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

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

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

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

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

will see order volumes increase in the future.

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

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

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

and stability of wireless networking.


(E) As benefited from the Internet, cloud computing and the convergence of three networks, the network communication equipment will be more integrated, mobile and intelligent. The network communication industry is expected to move toward its Golden Decade from this year and thereby stimulate the rapid growth of demand for optical fiber network, 4G, wireless application, e-home and set-top box.

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

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

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

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

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

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

a. High level of flexibility in product combinations

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

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

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

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

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

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

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

and boost our market standing.

b. Leadership in technology R&D

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

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

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

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

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

international competitiveness and continued business expansion.


c. Suzhou capacity is now ready

Expansion of production capacity at Suzhou commenced in 2010 due to increased demand.

Monthly output is now up to 1.75 million sets and will increase to 2 million sets in the second half of

2012.

d. Layout of telecommunication service provider

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

gross profit market. In terms of QuadPlay (four in one) and Small cell, it is expected that the shipments

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

gross profit rate positively.

(B) Unfavorable Factors and Countermeasures

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

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

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

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

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

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

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

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

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

also driving the Company’s growth.

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

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

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

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

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

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

diversified professional broadband network communication products include broadband network

communication access points, Integrated Access Device, SMB network communication equipment,

FTTx Products and Smart Home Control/ Surveillance. No matter whether at home or in the office,

they may satisfy customers’ demands for diversified and all-in-one digital integration network

communication.


Product Manufacturing Process The manufacturing processes for our company’s products are divided into PCB assembly and final

product assembly.

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

follows:

The final product assembly process is as follows:


Production – A Unit: Thousand NTD; Unit

Main Products2011 2010

Capacity Quantity Amount Capacity Quantity Amount

Wired Product 4,000,000 1,144,586 1,131,976 4,000,000 1,194,726 1,726,557

Wireless Product 12,000,000 11,520,069 8,956,851 9,000,000 7,150,142 5,806,171

Total 16,000,000 12,664,655 10,088,827 13,000,000 8,344,868 7,532,728

Production – B Unit: Thousand NTD; Unit

Main Products

2011 2010

Export Domestic Export Domestic

Quantity Amount Quantity Amount Quantity Amount Quantity Amount

Wired Product 1,043,852 1,778,540 35,558 30,461 1,134,507 1,800,373 27,841 44,437

Wireless Product 11,235,757 8,971,871 55,484 31,036 6,741,815 6,233,408 181,522 75,615

Total 12,279,609 10,750,411 91,042 61,497 7,876,322 8,033,781 209,363 120,052

Employees

Year 2010 2011 2012/04/30

Headcount 439 468 486

Average Age 37.6 37.6 37.63

Employment Period (years) 4.7 5.12 5.36

As TotalEmployees %

Ph. D. 1% 1% 1%

Master 26% 26% 28%

College 61% 61% 58%

Senior High School 9% 9% 10%

Junior High School or Lower 3% 3% 3%


Environmental ExpenditureTotal value of losses or penalties due to environmental pollution in the most recent year and up to

the date of publication: None

Future response strategies and potential expenditure:

SerComm belongs to the high-tech electronics industry and our production process is used in

the assembly, testing and packaging of final products and semi-assemblies. No wastewater or gases

are emitted during production. Production noise is also very low so it is not a source of pollution and

not subject to environmental protection laws. Waste disposal is carried out in accordance with the

business waste disposal plan. Waste is disposed of legally and recycled.

Increasing global environmental awareness means that the European Union, North America

and Japan have all implemented environmental requirements. SerComm has introduced a lead-free

production process and green design is used during R&D to reduce environmental impact. Green

purchasing extends environmental requirements to components and raw materials. This is also

extended to the rest of the product lifecycle including usage and ultimate disposal.


Financial Review and Operating ResultsCondensed Balance Sheet

Unit: Thousand NTD

Item 2007 2008 2009 2010 2011 2012/03/31

Current Assets 3,150,339 2,953,601 2,651,058 3,752,691 4,529,486 4,897,533

Long-Term Investmentsand Funds 1,058,495 1,190,451 1,230,522 1,494,735 2,427,770 2,430,713

Fixed Assets 542,789 521,469 504,639 511,298 665,982 859,972

Intangible Assets 112,229 108,421 99,651 122,074 127,750 127,456

Other Assets 115,230 176,689 138,673 139,885 58,115 57,053

Total Assets 4,979,082 4,950,631 4,624,543 6,020,683 7,809,103 8,462,727

Current Liabilities

BeforeDistribution 2,193,131 2,063,382 1,821,367 2,535,261 3,540,050 3,858,645

After Distribution 2,517,141 2,312,122 1,987,752 2,803,077 －－

Long-Term Liabilities 400,142 376,673 361,801 873,691 873,744 872,361

Other Liabilities 7,149 5,208 5,546 14,551 122,700 126,790

Total Liabilities



Capital 1,562,817 1,707,233 1,709,450 1,760,873 1,827,960 1,942,716

Capital Reserve 142,419 146,569 149,171 196,598 308,989 423,484

Retained Earnings

BeforeDistribution 694,940 553,450 510,193 658,256 973,481 1,133,674

After Distribution 238,579 304,710 343,808 390,440 －－

Unrealized Loss/Gain onFinancial Assets 0 0 0 0 0 (10,102)

Cumulative Translation Adjustment 83,700 164,370 133,269 34,841 162,179 115,159

Unrealized Loss on Retirement 0 0 0 0 0 0

Shareholders'Equity




Condensed Statement of IncomeUnit: Thousand NTD

Item 2007 2008 2009 2010 2011 2012/03/31

Net Sales 10,170,774 8,488,652 6,794,111 8,153,833 10,811,908 3,528,681

Gross Profit 1,305,663 1,060,652 817,015 1,025,843 1,181,384 425,181

Operating Income 619,280 392,203 193,034 249,871 323,233 178,506

Non-Operating Income 106,833 39,644 88,105 152,719 362,389 32,078

Non-Operating Expenses 88,072 28,502 30,680 31,790 34,858 23,698

Pre-Tax Income fromContinuing Operations 638,041 403,345 250,459 370,800 650,764 186,886

Net Income/Loss formContinuing Operations 539,408 329,115 205,483 314,448 583,041 160,193

Cumulative Effect of Change in Accounting Principle

0 0 0 0 0 0

Net Income 539,408 329,115 205,483 314,448 583,041 160,193

EPS (NTD) 3.20 1.86 1.22 1.87 3.29 0.86


Financial Analysis

Item 2007 2008 2009 2010 2011 2012/03/31

FinancialRatio (%)

Total Liabilities to Total Assets 52.23 49.39 47.33 56.86 58.09 57.40

Long-term Funds to Fixed Assets 511.95 552.68 554.38 678.84 622.59 520.63

Liquidity (%)

Current Ratio 143.65 143.14 145.55 148.02 127.95 129.26

Quick Ratio 111.74 114.40 113.36 117.88 106.47 102.19

Time Interest Earned 10,905 4,700 2,444 2,535 2,055 1,605

OperatingPerformance

AR Turnover (Times) 7.41 6.38 5.99 6.52 7.71 11.67

AR Turnover (Days) 49.23 57.29 60.95 55.95 47.32 31.28

Inventory Turnover (Times) 10.38 12.10 10.74 11.18 13.59 15.03

AP Turnover (Times) 4.24 4.43 4.29 4.92 5.87 6.21

Inventory Turnover (Days) 35.18 30.18 33.99 32.65 26.86 24.28

Fixed Assets Turnover (Times) 19.7 15.95 13.24 16.05 18.37 18.50

Total Assets Turnover (Times) 2.09 1.71 1.42 1.53 1.56 1.73

Profitability

Return on Assets (%) 11.19 6.76 4.46 6.12 8.83 8.38

Return on Equity (%) 25.52 13.48 8.32 12.50 19.87 18.63

To Pay-in Capital %

Operating Income 39.63 22.97 11.29 14.19 17.68 36.75

Pre-Tax Income 40.83 23.63 14.65 21.06 35.60 38.48

Net Income / Sales (%) 5.30 3.88 3.02 3.86 5.39 4.54

EPS (NTD) 3.65 1.88 1.24 1.88 3.29 0.86

Cash Flow

Cash Flow Ratio (%) 23.95 14.82 21.59 3.03 6.74 10.50

Cash Flow Adequacy Ratio (%) 194.44 167.90 170.65 132.74 99.27 76.89

Cash Reinvestment Ratio (%) 14.22 (0.31) 5.11 (2.60) (0.70) 9.03

LeverageOperating Leverage 2.55 3.18 4.53 4.16 4.24 2.88

Financial Leverage 1.01 1.02 1.06 1.06 1.11 1.07


1. Financial Ratio

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

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

2. Ability to Pay Off Debt

(1) Current Ratio＝Current Assets／Current Liability

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

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

3. Ability to Operate

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

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

Notes Receivable from Operation) Balance

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

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

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

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

Payable from Operation）Balance

(5) Inventory Turnover Day＝365／Inventory Turnover

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

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

4. Earning Ability

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

Assets

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

(3) Net Income Ratio＝PAT／Net Sates

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

5. Cash Flow

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

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

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

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

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

6. Leverage

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

／Operating Income

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


Financial PositionUnit: Thousand NTD


Current Assets 4,529,486 3,752,691 776,795 20.70

Fixed Assets 665,982 511,298 154,684 30.25

Other Assets 58,115 139,885 -81,770 -58.46

Total Assets 7,809,103 6,020,683 1,788,420 29.70

Current Liabilities 3,540,050 2,535,261 1,004,789 39.63

Long-term Liabilities 873,744 873,691 53 0.01

Total Liabilities 4,536,494 3,423,503 1,112,991 32.51

Capital 1,827,960 1,760,873 67,087 3.81

Capital Reserves 308,989 196,598 112,391 57.17

Retained Earnings 973,481 658,256 315,225 47.89

Total Shareholders' Equity 3,272,609 2,597,180 675,429 26.01

Operating ResultsUnit: Thousand NTD


Sales Revenue 10,968,323 8,212,358 2,755,965 33.56

Sales Return /Allowances 156,415 58,525 97,890 167.26

Net Sales 10,811,908 8,153,833 2,658,075 32.60

Cost of Goods Sold 9,632,011 7,127,929 2,504,082 35.13

Gross Profit 1,179,897 1,025,904 153,993 15.01Unrealized Profit from Intercompany Transactions 1,487 -61 1,548 2,537.70

Realized Gross Profit 1,181,384 1,025,843 155,541 15.16

Operating Expenses 858,151 775,972 82,179 10.59

Operating Income 323,233 249,871 73,362 29.36

Non-operating Income 362,389 152,719 209,670 137.29

Non-operating Expenses 34,858 31,790 3,068 9.65

Pre-tax Income from Continuing Operation 650,764 370,800 279,964 75.50

Income Tax Benefit (Expenses) 67,723 56,352 11,371 20.18

Net Income from Continuing Operation 583,041 314,448 268,593 85.42

Cumulative Effect of Change in Accounting Principle 0 0 - -

Net Income 583,041 314,448 268,593 85.42


Analysis of Cash Flow

Item 2011 2010 Change%

Cash Flow Ratio (%) 6.74% 3.03% 122.44%

Cash Flow Adequacy Ratio (%) 99.27% 132.74% -25.21%

Cash Reinvestment Ratio (%) -0.70% -2.60% 73.08%

Projected Cash FlowUnit: Thousand NTD

BeginningCash Balance

Cash Flowsfrom Operating

Activities

Cash Flowsfrom Investing

& FinancingActivities

Projected EndingCash Balance

Source of Funding for Cash Shortfall

InvestingPlan

FinancingPlan

1,770,002 314,120 1,004,467 1,079,655 －－

Analysis for Investment Over 5% of Paid-in CapitalYear 2011

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

Senslinq Inc. US$250 US Marketing NA

SerComm Investment US$1,200 Foreign Investment NA

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

SerComm Trading Co., Limited. US$46,800 Foreign Investment NA

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

SerNet Technology Ltd. US$29,900 Global Manufacture NA

Smart Trade Inc. US$16,000 Foreign Investment NA

DWNet Technology Ltd. US$16,000 China Sales NA

Taicang SerComm Technologies Corp. US$0 Global Manufacture NA

SerComm Japan Corp. JP$27,000 Japan Marketing NA

SerComm France SARL. EU$100 Europe Marketing NA


Special DisclosuresAffiliated Companies Chart


Affiliated Companies

Company Date of Incorporation Paid-in Capital Major Business

Senslinq Inc 1996/09/25 USD$250,000 Sales of IT Products

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

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

SerComm Trading Co., Limited 2002/06/24 USD$46,800,000 Investment Overseas,

International Trading

Zealous Investments Ltd. 1999/08/12 USD$30,956,000 Investment Overseas, International Trading

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

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

Smart Trade Inc. 2003/03/21 USD$16,000,000 Investment Overseas, International Trading

DWNet Technology Ltd. 2004/01/14 USD16,000,000 R&D Center of Software; Sales and After-sales Service

Taicang SerComm Technologies Corp. 2008/01/08 Liquidated in 2011

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

SerComm Japan Corp. 2010/03/15 JPY$27,000,000 Sales of IT Products and International Trading

SerComm France SARL 2011/01/27 EUD$100,000 Sales of IT Products and International Trading


3

REPORT OF INDEPENDENT AUDITORS

English Translation of a Report Originally Issued in Chinese

To Sercomm Corporation We have audited the accompanying consolidated balance sheets of Sercomm Corporation and subsidiaries (the "Company$) as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with “Guidelines for Certified Public s Examination and Reporting on Financial Statements” and generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sercomm Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with “Business Entity Accounting Act”, “Regulation on Business Entity Accounting Handling” with respect to financial accounting standards, “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, and generally accecpted accounting principles in the Republic of China. As described in Note 3 to the consolidated financial statements, effective from January 1, 2011, the Company has adopted the third revision of the Statement of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement”, and the newly issued Statement of Financial Accounting Standards No. 41, “Operating Segments” of the Republic of China. March 9, 2012 Taipei, Taiwan Republic of China Notice to Readers The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China.

3

REPORT OF INDEPENDENT AUDITORS

English Translation of a Report Originally Issued in Chinese

To Sercomm Corporation We have audited the accompanying consolidated balance sheets of Sercomm Corporation and subsidiaries (the "Company$) as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with “Guidelines for Certified Public s Examination and Reporting on Financial Statements” and generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sercomm Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with “Business Entity Accounting Act”, “Regulation on Business Entity Accounting Handling” with respect to financial accounting standards, “Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, and generally accecpted accounting principles in the Republic of China. As described in Note 3 to the consolidated financial statements, effective from January 1, 2011, the Company has adopted the third revision of the Statement of Financial Accounting Standards No. 34, “Financial Instruments: Recognition and Measurement”, and the newly issued Statement of Financial Accounting Standards No. 41, “Operating Segments” of the Republic of China. March 9, 2012 Taipei, Taiwan Republic of China Notice to Readers The accompanying consolidated financial statements are intended only to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China.


English Translation of Consolidated Financial Statements Originally Issued in Chinese

SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010(Expressed in Thousands of New Taiwan Dollars)

2011 2010Assets Notes Amount % Amount % Liabilities and Stockholders' Equity Notes Amount % Amount %

Current assets Current liabilitiesCash 4 $3,868,609 32.16 $2,044,583 25.62 Short-term loans 12 $2,819,707 23.44 $1,482,803 18.58Financial assets at fair value through profit or loss-current 2 and 5 30,383 0.25 10,337 0.13 Notes payable 77,082 0.64 42,486 0.53Notes and Accounts receivable-net 2 and 6 2,623,584 21.81 1,790,293 22.44 Accounts payable 3,277,137 27.25 2,101,803 26.34Other receivables 6 290,635 2.42 133,606 1.67 Income tax payable 2, 3 and 23 82,170 0.68 121,662 1.53Inventories-net 2 and 7 1,907,917 15.86 1,316,917 16.50 Accrued expenses 25 654,121 5.44 520,644 6.52Other current assets 216,461 1.80 178,032 2.23 Financial liabilities at fair value through profit of loss-curre 2 and 5 284 - - - Deferred income tax assets-current 2, 3 and 23 31,073 0.26 20,426 0.26 Bond payable- current 2 and 13 425,426 3.54 - - Restricted assets 26 11,557 0.10 8,654 0.11 Lease payables-current 2 and 14 18,864 0.16 18,465 0.23

Total current assets 8,980,219 74.66 5,502,848 68.96 Other current liabilities 27 417,159 3.47 206,268 2.59Total current liabilities 7,771,950 64.62 4,494,131 56.32

Funds and investmentsFinancial assets as fair value through profit or loss-noncurrent 2 and 13 - - 1,487 0.02Other financial assets-noncurrent 27 80,045 0.67 - - Long-term liabilitiesFinancial assets measured at cost-noncurrent 2 and 8 108,034 0.90 105,714 1.32 Bonds Payable 2 and 13 542,840 4.51 526,760 6.60

Total funds and investments 188,079 1.57 107,201 1.34 Lease payables-noncurrent 2 and 14 330,904 2.75 346,931 4.35Total long-term liabilities 873,744 7.26 873,691 10.95

Property, plant and equipment 2, 9 and 26Land 43,230 0.36 - - Other liabilitiesBuildings 784,732 6.52 655,421 8.21 Accrued pension liabilities 2 and 15 5,687 0.05 5,673 0.07Machinery and equipment 1,268,127 10.54 919,503 11.52 Deferred income tax liabilities-noncurrent 2, 3 and 23 103,727 0.86 8,878 0.11Research and development equipment 303,920 2.53 255,462 3.20 Total other liabilities 109,414 0.91 14,551 0.18Office and other equipment 141,151 1.17 116,577 1.46 Total liabilities 8,755,108 72.79 5,382,373 67.45Leased assets 457,030 3.80 457,030 5.73

Total cost 2,998,190 24.92 2,403,993 30.12 Stockholders' equityLess: Accumulated depreciation (714,930) (5.94) (500,129) (6.27) Capital 16Construction in progress 101,911 0.85 39,725 0.50 Common stock 1,826,337 15.18 1,747,405 21.90Prepayments for equipment 111,502 0.93 33,117 0.42 Advance receipts for common stock 1,623 0.02 13,468 0.17 Property, plant and equipment-net 2,496,673 20.76 1,976,706 24.77 Capital reserve 18

Bonds conversion premiums 2 and 13 223,591 1.86 164,399 2.06Intangible assets 2 and 10 Employee stock option 2 27,666 0.23 26,253 0.32

Computer software cost-net 61,734 0.51 57,818 0.72 Stock option 2 57,732 0.48 5,946 0.08Other intangible assets 70,073 0.58 70,651 0.89 Retained earnings 19 and 20Land use right 26 115,189 0.96 102,039 1.28 Legal reserve 304,569 2.53 273,125 3.42

Total intangible assets 246,996 2.05 230,508 2.89 Unappropriated earnings 668,912 5.56 385,131 4.83Adjusting items in stockholders' equity

Other assets Cumulative translation adjustments 2 162,179 1.35 34,841 0.44Property not used in operations 2 and 11 14,370 0.12 83,385 1.05 Treasury stock 2 and 21 - - (53,388) (0.67)Refundable deposits 26 45,047 0.37 25,600 0.32 Total stockholders' equity 3,272,609 27.21 2,597,180 32.55Deferred charges 2 56,333 0.47 53,305 0.67

Total other assets 115,750 0.96 162,290 2.04

Total assets $12,027,717 100.00 $7,979,553 100.00 Total liabilities and stockholders' equity $12,027,717 100.00 $7,979,553 100.00

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

2011 2010As of December 31, As of December 31,

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4



SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31, 2011 and 2010

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

Notes Amount % Amount %Sales $13,515,344 102.07 $8,698,312 100.68Less : Sales returns and allowances (273,837) (2.07) (58,525) (0.68)

Net sales 2 13,241,507 100.00 8,639,787 100.00Cost of goods sold 7 and 22 (11,261,997) (85.05) (7,192,936) (83.25)

Gross profit 1,979,510 14.95 1,446,851 16.75

Operating expenses 22 and 25Selling expenses 381,905 2.88 295,447 3.42General and administrative expenses 470,692 3.55 344,439 3.99Research and development expenses 564,959 4.27 454,472 5.26Subtotal 1,417,556 10.70 1,094,358 12.67

561,954 4.25 352,493 4.08

Non-operating incomeInterest income 30 23,881 0.18 12,111 0.14Dividend income 2 831 0.01 831 0.01Gain on disposal of investments 2 12,094 0.09 - - Foreign exchange gain-net 2 124,485 0.94 36,796 0.43Gain on valuation of financial assets-net 2, 5, 13 and 30 19,079 0.14 13,199 0.15Other income 33,439 0.25 12,284 0.14 Total non-operating income 213,809 1.61 75,221 0.87

Non-operating expensesInterest expense 9, 13 and 30 65,797 0.50 32,328 0.37Loss on disposal of property, plant and equipment 2 4,728 0.04 1,464 0.02Other losses 3,782 0.03 7,284 0.08 Total non-operating expenses 74,307 0.57 41,076 0.47

Income from continuing operations before income tax 701,456 5.29 386,638 4.48Income tax expense 2, 3 and 23 (118,415) (0.89) (72,190) (0.84)Net income $583,041 4.40 $314,448 3.64

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

Net income $3.95 $3.29 $2.30 $1.87Minority interests - - - - Stockholders of the parent $3.95 $3.29 $2.30 $1.87

Diluted earnings per share (New Taiwan Dollars) 2 and 24Net income $3.38 $2.81 $2.16 $1.76Minority interests - - - - Stockholders of the parent $3.38 $2.81 $2.16 $1.76


2011 2010

Operating income

5



SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the years ended December 31, 2011 and 2010(Expressed in Thousands of New Taiwan Dollars)

Capital Capital Cumulativecollected Capital Unappropriated Translation Treasury

Description Notes Common Stock in advance Reserve Legal Rasorve Earnings Adjustments Stock TotalBalance as of January 1, 2010 $1,709,450 $- $149,171 $252,576 $257,617 $133,269 $(66,254) $2,435,829Appropriation of 2009 retained earning 20

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

Change in cumulative translation adjustments of investees 2 - - - - - (98,428) - (98,428)Exercise of employee stock options 17 18,910 - 3,288 - - - - 22,198Compensation costs for Treasury stock transfer to employees 2 - - 2,324 - - - - 2,324Treasury stock transfer to employees 2 and 21 - - - - - - 12,866 12,866Convertible bonds converted into common stock 2 and 13 19,045 13,468 35,869 - - - - 68,382Equity instrument from Convertible bonds 2 and 13 - - 5,946 - - - - 5,946Net income in 2010 - - - - 314,448 - - 314,448Balance as of December 31, 2010 1,747,405 13,468 196,598 273,125 385,131 34,841 (53,388) 2,597,180Appropriation of 2010 retained earning 20

Legal reserve - - - 31,444 (31,444) - - - Cash dividends - - - - (267,816) - - (267,816)

Change in cumulative translation adjustments of investees 2 - - - - - 127,338 - 127,338Exercise of employee stock options 17 13,060 - 1,306 - - - - 14,366Compensation costs for Treasury stock transfer to employees 2 - - 107 - - - - 107Treasury stock transfer to employees 2 and 21 - - - - - - 53,388 53,388Convertible bonds converted into common stock 2 and 13 65,872 (11,845) 59,192 - - - - 113,219Equity instrument from Convertible bonds 2 and 13 - - 51,786 - - - - 51,786Net income in 2011 - - - - 583,041 - - 583,041Balance as of December 31, 2011 $1,826,337 $1,623 $308,989 $304,569 $668,912 $162,179 $- $3,272,609

Retained Earnings


6



SERCOMM CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2011 and 2010(Expressed in Thousands of New Taiwan Dollars)

2011 2010Cash flows from operating activities: Net income $583,041 $314,448 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 264,121 200,383 Amortization of discount on bonds payable 14,866 5,321 Gain on valuation of financial assets (19,079) (719) Loss on disposal of property, plant and equipment 4,728 1,464 Compensation costs for treasury stock transfer to employees 107 2,324 Changes in assets and liabilities: Financial assets at fair value through profit or loss-current (7,609) (7,806) Notes and accounts receivable-net (833,291) (748,757) Inventories-net (591,000) (522,521) Other receivables (157,029) (56,972) Other current assets (40,892) (88,556) Deferred income tax assets (32,251) 5,130 Notes payable 34,596 8,474 Accounts payable 1,175,334 515,583 Income tax payable (39,563) 59,438 Accrued expenses 133,548 191,113 Financial liabilities at fair value through profit or loss-current 5,058 - Other current liabilities 130,846 84,169 Accrued pension liabilities 14 127 Deferred income tax liabilities 94,849 8,878 Net cash (used in) provided by operating activities 720,394 (28,479)Cash flows from investing activities: Decrease (increase) in restricted assets-current (2,903) 7,090 Acquisition of financial assets at cost-noncurrent - (58,260) Acquisition of property, plant and equipment (516,043) (719,240) Proceeds from disposal of property, plant and equipment 6,075 1,117 Increase in computer software cost (25,327) (39,397) Increase in other intangible assets (26,042) (24,786) Increase in land use right (7,004) (91,335) Decrease (increase) in refundable deposits (19,447) 13,550 Increase in deferred charges (37,812) (19,682) Net cash used in investing activities (628,503) (930,943)Cash flows from financing activities: Increase in short-term loans 1,336,904 618,709 Issurance of bonds payable 595,000 595,000 Decrease in lease payables (15,628) (14,440) Cash dividends (267,816) (166,385) Exercise of employee stock options 14,366 22,198 Treasury stock transfer to employees 53,388 12,866 Net cash provided by financing activities 1,716,214 1,067,948 Effects from exchange rate changes 15,921 (48,156)Net increase in cash 1,824,026 60,370Cash at beginning of the year 2,044,583 1,984,213Cash at end of the year $3,868,609 $2,044,583Supplemental disclosures of cash flows information: Cash paid for income tax $99,722 $24,383 Cash paid for interest $63,432 $28,399Financing activities not affecting cash flows: Idle asset transfer in fixed assets $78,566 $- Lease payables-current $18,864 $18,465 Bond payable-noncurrent $425,426 $-


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English Translation of Financial Statements Originally Issued in Chinese SERCOMM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2011 and 2010

(Expressed in Thousands of New Taiwan Dollars unless Otherwise Stated) 1. Organization and Operations

Sercomm Corporation ("the Company ) was incorporated on July 29, 1992 under the laws of the Republic of China (R.O.C.). The Company primarily engages in the research, development, manufacturing and sale of access server (router), print server and network server. The Company’s common shares were traded on the GreTai (Over-the-counter) Securities Market of the R.O.C. in May 1999, and its shares were publicly listed and traded on the Taiwan Stock Exchange (TSE) in December 2007. The numbers of employees of the Company and its subsidiaries as of December 31, 2011 and 2010 were 3,977 and 3,721, respectively.

2. Summary of Significant Accounting Policies

The consolidated financial statements were prepared in conformity with requirements of the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (R.O.C.). Summary of significant accounting policies is as follows: (1) Summary of consolidation

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

Percentage of ownership

Name of the Name of As of December 31,

investors subsidiaries Nature of Business 2011 2010

The Company Senslinq Inc. (Origin: Servecomm Inc.)

Sales of IT products 100.00% 100.00%

The Company Sercomm Investments Ltd.

Investment holding, international trading

100.00% 100.00%



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

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Percentage of ownership

Name of the Name of As of December 31, investors subsidiaries Business nature 2011 2010

The Company Sercomm Trading Co. Ltd.


100.00% 100.00%

The Company Shukuan Investment Ltd.

Investment activity 100.00% 100.00%

The Company Sercomm France SARL (Note A)

Sales of IT products 100.00% -

Sercomm Trading Co. Ltd.

Zealous Investments Ltd.


100.00% 100.00%


Smart Trade Inc. Investment holding, international trading

100.00% 100.00%


Sernet Technology (Suzhou) Limited

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

100.00% 100.00%


Taicang Sercomm Technology Limited (Note B)


- 100.00%

Smart Trade Inc. Dwnet Technology (Suzhou) Limited


100.00% 100.00%

Shukuan Investment Ltd.

Sercomm Japan Corp.

Sales of IT products 100.00% 100.00%

Note A: Sercomm France SARL was incorporated on Jan 27, 2011.

Note B: Taicang Sercomm Technology was liquidated in first quarter 2011. (2) Principles for consolidation

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




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

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

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

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

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

(3) Classification of current and noncurrent assets and liabilities

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

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

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




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The Company prepares consolidated financial statement. Financial statements of foreign

subsidiaries are translated into New Taiwan Dollars ("NTD ) at the exchange rates

prevailing at the balance sheet date for assets and liabilities accounts, historical exchange

rates for equity accounts, and weighted-average exchange rates during the reporting period

for profit and loss accounts. Translation differences resulting from the translation of such

financial statement into NTD are recorded as cumulative translation adjustments, a separate

component of stockholders’ equity.

(5) Financial assets and financial liabilities

In accordance with the R.O.C. SFAS No. 34, “Accounting for Financial Instruments” and

“Guidelines Governing the Preparation of Financial Reports by Securities Issuers”, financial

assets are classified as either financial assets at fair value through profit or loss, derivative

financial assets for hedging, financial assets measured at cost or available-for-sale financial

assets. When financial assets are recognized initially, they are measured at fair value, plus

transaction costs for all financial assets not measured at fair value through profit or loss.

Financial liabilities are to be classified as either financial liabilities at fair value through

profit or loss, derivative financial liabilities for hedging or financial liabilities measured at

cost.

The Company and its subsidiaries account for regular purchase or regular sale of financial

assets as of the trade date, which is the date the Company and its subsidiaries commit to

purchasing or selling the asset. Regular purchase or regular sale is that the delivery period

of a transaction for a financial asset is in a regular period or required period by law.

a. Financial assets and financial liabilities at fair value through profit or loss

Financial assets or financial liabilities at fair value through profit or loss are subsequently

measured at fair value and changes in fair value are recognized in profit and loss. This

category has two sub-categories: financial assets or liabilities held for trading and those

designated at fair value through profit or loss at inception.




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b. Available-for-sale financial assets

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

c. Derivative financial assets and liabilities for hedging

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

d. Financial assets measured at cost

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

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

(6) Assessment of impairment for account receivables

Prior December 31, 2010, recognition of an allowance for doubtful accounts was based on historical experience in analyzing the aging and determining the collectability of notes, accounts and other receivables as of the balance sheet date. Effective January 1, 2011, the Company first assesses as of balance sheet date whether objective evidence of impairment exists for notes, accounts and other receivables that are individually significant. If there is objective evidence that an impairment loss has occurred, the amount of impairment loss is assessed individually. For notes, accounts and other receivables other than those mentioned above, the Company groups those assets with similar credit risk characteristics and collectively assess them for impairment.




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(7) Inventories

Inventories are valued at the lower of cost and net realizable value. Costs incurred in bringing each product to its present location and condition is accounted for as follows: Raw materials - purchase cost on a weighted average cost formula basis. Work in progress and finished goods

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

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

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

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

(9) Property, plant and equipment

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




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Property being leased to others is classified as other assets and stated at the book value. Property not in use is classified to other assets and stated at the lower of book value or net realizable value. Upon disposal or sale of an item of property, plant and equipment, the related cost, accumulated depreciation and accumulated impairment loss are written off. Gains or losses on disposal of property, plant and equipment are recorded as non-operating income or expense. Depreciation is recognized on a straight-line basis using the estimated economic life of the assets less salvage value, if any. If the main property, plant and equipment are fully depreciated and sub property, plant and equipment are still in use, the depreciation is based on the newly estimated remaining useful life. The estimated economic life of the property, plant and equipment is as follows: Buildings 40-55 Years Machinery and equipments 3-10 Years Molding equipments 3-5 Years Research and development equipments 3-5 Years Office and other equipments 2-5 Years Leased assets 35-50 Years Equipments leased under capital lease are carried at the lower of the market value or the present value of the minimum lease payments at the inception date of the lease. Depreciation of leased assets is calculated based on the economic useful lives of 35-50 years, and recognized as the lease payable. The Company recognizes the implicit interest of rental payments as interest expense in the period. Property leased to others under operating leases is classified as other assets and stated at book value. The value of the assets is depreciated using the straight-line method over the estimated useful lives.

(10) Land use right

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




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(11) Intangible assets

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

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

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

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

Description Estimated economic life Amortization method Computer software cost 2-5 years Straight-line method Development expenditures 5 years Straight-line method




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(12) Deferred charges

Molding and product testing expenditures are amortized on a straight-line basis over their estimated economic lives, 2-5 years.

(13) Convertible bonds

The liability component of the convertible bonds is measured first, and the difference between the proceeds of the bond issued and the fair value of the liability is accounted for as the equity component. The embedded derivative is accounted for in accordance with the requirements under the R.O.C. SFAS No.34. The liability component is subsequently measured at amortized cost using effective interest rate method, and changes in fair value of the equity component are not recognized while changes in fair value of the embedded derivatives are reported to the income statement as valuation gains or losses on Financial Instruments. When the conversion option expires unexercised and at that time the market value of the common stock under conversion exceeds the put price, put premium should be credited to capital reserve, if the market value is otherwise lower than the put price, then it is recognized in profit or loss. When the bond holder exercises the conversion option before bond maturity, the adjusted carrying value of the liability components (including bonds and embedded derivatives) is credited to a capital stock account along with the carrying amount of the stocks converted. Bond issuance costs were allocated proportionately to the convertible bonds and embedded derivates based on their respective balances upon initial recognition.

(14) Derecognition of financial assets and liabilities

a. Financial assets

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

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




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b. Financial liabilities

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

(15) Impairment of financial assets

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

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

b. Available-for-sale financial assets

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




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(16) Assets impairment

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

(17) Pension plan

All regular employees are entitled to a defined benefit pension plan that is managed by an independently administered pension fund committee within the Company according to the Labor Standards Law of the R.O.C. Fund assets are deposited in the committee’s name in the Bank of Taiwan and hence, not associated with the Company. Therefore the fund assets are not be included in the Company’s financial statements. The Labor Pension Act of the R.O.C. (the Act), which adopts a defined contribution plan, became effective on July 1, 2005. In accordance with the Act, employees may choose to elect either the Act, by retaining their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. For employees who elect the Act, the Company will make monthly contributions of no less than 6% of the employees’ monthly wages to the employees’ individual pension accounts.




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The accounting for pension is computed in accordance with the R.O.C. SFAS No.18,

"Accounting for Pensions . Net pension costs of the defined benefit plan are recorded

based on an actuarial valuation. Pension cost components such as service cost, interest

cost, expected return on plan assets, the amortization of net obligation at transition, pension

gain or loss, and prior service cost, are all taken into consideration by the actuary. The

Company recognizes expenses from the defined contribution pension plan in the period in

which the contribution become due.

The pension plan of foreign subsidiaries is estimated at local related regulation.

(18) Employee stock option plan

The Company uses intrinsic value method to recognize compensation cost for its employee

stock options issued between January 1, 2004 and December 31, 2007, in accordance with

Accounting Research and Development Foundation interpretation Nos.92-070~072. For

stock options granted on or after January 1, 2008, the Company recognizes compensation

cost using the fair value method in accordance with R.O.C. SFAS No. 39 "Accounting for

Share-Based Payment.

In accordance with R.O.C. SFAS No. 39, share-based payment transaction is measured by

reference to the fair value of the equity instruments at the date on which they are granted;

the fair value is determined by an external expert using an appropriate pricing model.

The Company only enters into equity-settled share-based payment transaction with its and

its subsidiaries’ employees. Pursuant to R.O.C. SFAS No. 39, the goods or services

received under such transaction, and the corresponding increase in equity, shall be

measured by reference to the fair value of the equity instruments granted. If there is no

vesting condition attached, then the equity instrument is vested immediately, with the

employee compensation costs recognized as at the grant date, with a corresponding

increase in equity. If the equity instrument is vested over a certain period, then the

employee compensation costs are recognized over the period, with a corresponding

increase in equity.




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

(19) Employee bonuses and remunerations paid to directors and supervisors

In accordance with Accounting Research and Development Foundation interpretation No. 96-052 effective January 1, 2008, employee bonuses and remunerations paid to directors and supervisors are charged to expense at fair value and are no longer accounted for as an appropriation of earnings.

(20) Treasury stock

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

(21) Revenue recognition

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

(22) Capital expenditure versus operating expenditure

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




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

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

(24) Income tax

The Company and its subsidiaries have adopted inter-period and intra-period income tax allocation according to the R.O.C. SFAS No. 22, “Accounting for Income Tax”. Tax effects on taxable temporary differences are recognized as deferred tax liabilities. Tax effects on deductible temporary differences, operating loss carryforward, and investment tax credits are recognized as deferred tax assets. Valuation allowance is provided on deferred tax assets when they are not certain to be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. However, if a deferred asset or liability is not directly related to an asset or liability, then the classification is based on the expected length of time before it is settled or recovered. According to the R.O.C. SFAS No. 12, “Accounting for Income Tax Credits”, the Company recognized the tax benefit from research and development expenditure, employee training by the flow through method. Income tax (10%) on unappropriated earnings is recorded as expense in the year in which the shareholders have resolved earnings to be retained. The R.O.C. government has made the Alternative Minimum Tax Act (“AMT Act”) effective since January 1, 2006. Pursuant to AMT Act, the higher of the amount of income tax payable determined pursuant to the Income Tax Law or the minimum amount prescribed under the AMT Act is provided by the Company as income tax payable. In addition, the Company has considered the impact of AMT in future years when evaluating realized deferred tax asset.




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(25) Earnings per share

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

(26) Derivatives financial instrument and hedge activities

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

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

b. Cash flow hedges

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




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c. A net investment in a foreign operation hedges

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

Hedges which meet the strict criteria for hedge accounting are accounted for as follows: Fair value hedges Fair value hedges are hedges of the Company’s exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss. The Company and its subsidiaries shall discontinue prospectively the hedge accounting for an existing hedge if any one of the following occurs: a. The derivative is expired or sold, or terminated, or exercised. b. Any criterion for hedge accounting is no longer met. c. The Company removes the designation of the fair value hedge.

(27) Operating segment information

An operating segment is a component of an entity that has the following characteristics: a. engaging in business activities from which it may earn revenues and incur expenses; b. whose operating results are regularly reviewed by the entity’s chief operating decision

maker to make decisions about resources to be allocated to the segment and assess its performance; and

c. for which discrete financial information is available. The Company discloses its operating segment information in the consolidated financial statements of Sercomm Corporation and subsidiaries.




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3. Accounting changes

(1) Effective January 1, 2011, the Company adopted the third revised SFAS No. 34, "Financial instruments: Recognition and Measurement. Such changes in accounting principle did not have significant effect on the Company’s financial statements for the year ended December 31, 2011.

(2) Effective January 1, 2011, the Company adopted R.O.C SFAS No. 41, “Operating

Segments” (R.O.C. SFAS41), to present operating segment information. The newly issued R.O.C SFAS 41 replaced SFAS No.20, “Segment Reporting”, the comparative operating segment information has been presented accordingly. This change in accounting principles had no effect on consolidated net income or consolidated earnings per share for the years ended December 31, 2011 and 2010.

(3) In accordance with the amended tax laws effective on May 27, 2009, the corporate tax rate

has been reduced from 25% to 20%. And in accordance with the amended tax laws effective on June 15, 2011, corporate tax rate further reduced from 20% to 17%. The adoption resulted in increasing effect on net gain NT$5,268 thousand, thereby increasing gain per share by $ 0.03 for the year ended December 31, 2010.

4. Cash

As of December 31, 2011 2010

Cash on hand $2,694 $2,054 Checking and savings accounts 1,851,028 719,872 Time deposits 2,014,887 1,322,657 Total $3,868,609 $2,044,583

As of December 31, 2011 and 2010, the savings accounts outside Taiwan were NT$2,007 thousand (USD$66 thousand) and NT$1,102 thousand (USD$38 thousand), respectively.

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

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




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Financial assets held for trading - current As of December 31, 2011 2010 Foreign currency forward contracts $- $10,337 Foreign currency option contracts 24,122 - Convertible bond embedded derivatives 6,261 - $30,383 $10,337

Financial liabilities held for trading - current As of December 31, 2011 2010 Foreign currency forward contracts $(284) $- The Company entered into the above-mentioned derivative financial instruments primarily for the purpose of hedging exchange risk associated with the assets, liabilities, or commitments denominated in foreign currencies. However these financial instruments do not satisfy the criteria of hedge accounting and thus are classified under "financial assets at fair value through profit or loss-current and "financial liabilities at fair value through profit or loss-current .

(b) The details of the Company’s foreign exchange forward contracts are as follows:

December 31, 2011 Currency Nominal amount Maturity date

Sell foreign exchange forward USD/NTD USD$1,000 thousand 2012.1.11

December 31, 2010 Currency Nominal amount Maturity date

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

(c) The details of the Company’s foreign exchange option contracts are as follows:

December 31, 2011 Nominal Amount Strike Price Maturity date

Call Options EUR$5,000 thousand 1.45 (EUR/USD) 2012.1.5-2012.5.25




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(d) Please refer to Note 13 for the Company’s third domestic unsecured convertible bonds

payable related to embed derivatives financial asset. (e) Net gain on financial assets and financial liabilities held for trading during 2011 and 2010

were NT$10,950 thousand and NT$12,480 thousand, respectively. (f) Please refer to Note 30 for financial risk information.

6. Notes and accounts receivable-net


Notes receivable $732,669 $- Accounts receivable 1,897,495 1,795,969 Subtotal 2,630,164 1,795,969 Less: Allowance for doubtful accounts (6,580) (5,676) Net $2,623,584 $1,790,293 The Company entered into account receivable factoring agreements (without recourse) with several financial institutes in Taiwan. Under the agreements, the Company has surrendered control over the receivable to the factors. The factors had fully paid out the sales proceeds and assumed substantially all risks of collection as receivable were transferred. The details of accounts receivable derecognized for the year ended December 31, 2011 and 2010 are summarized as follows:

As of December 31, The Factor (Transferee) 2011 2010 Credit line

HSBC Bank (Taiwan) $1,137 $6,855 USD ,800 thousand Taishin Bank 805,589 25,349 USD 50,000 thousand Fubon Financial Bank 44,205 - USD 5,000 thousand DBS Bank (Taiwan) 35,225 - USD 5,000 thousand One of the Company's foreign customers has filed for restructuring in September 2010. As of December 31, 2010, the Company's Accounts Receivable from this customer amounted to NT$36,580 thousand of which NT$34,597 thousand is recoverable from an insurance claim made and has been reclassified to other receivables. Provisions for bad debts have been made for the remaining unrecoverable amount and have been written off in 2011.




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7. Inventories


Raw materials $979,474 $808,898 Work in process 306,112 362,924 Finished goods 709,151 224,372 Subtotal 1,994,737 1,396,194 Less: Allowance for loss on decline in market value and

obsolescence (86,820) (79,277)

Net $1,907,917 $1,316,917

For the ended December 31, 2011 and 2010, cost of goods sold were NT$11,223,196 thousand and NT$7,192,936 thousand, including NT$60,334 thousand and NT$39,717 thousand of write-down of inventories to net realizable value, respectively.

8. Financial assets measured at cost-noncurrent


Unlisted stocks Industrial Bank of Taiwan $40,000 $40,000 TECO Nanotech Co., Ltd. 10 10 Cerpass Consultancy Corp. 7,444 7,444 Ubiquisys Ltd. 60,580 58,260

Total $108,034 $105,714

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

9. Property, plant and equipment

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




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

Year Total interest expense Interest capitalized Interest rates applied

2011 $65,797 $399 1.48%-1.66% 2010 32,328 5,442 0.77%-3.06%

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

10. Intangible assets

As of December 31, 2011 Computer

software cost Development expenditures Land use right Total

Cost: Beginning of the year $165,663 $268,678 $103,472 $537,813 Purchase 23,271 30,684 7,004 60,959 Translation adjustment (2,499) - 9,065 6,566 End of the year 186,435 299,362 119,541 605,338

Accumulated amortization:

Beginning of the year 107,845 198,027 1,433 307,305 Amortization 19,700 31,262 2,750 53,712 Translation adjustment (2,844) - 169 (2,675) End of the year 124,701 229,289 4,352 358,342

Book value:

Beginning of the year $57,818 $70,651 $102,039 $230,508 End of the year $61,734 $70,073 $115,189 $246,996



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




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

Book value:

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

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

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

11. Property not used in operations

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


Leased assets-land $10,020 $10,020 Leased assets-buildings 5,752 5,752 Idle assets - 68,858 Less: Accumulated depreciation (1,402) (1,245) Net $14,370 $83,385

Oriental Technopolis, the building where the Company’s office premises were located, suffered fire damage on May 12, 2001. Although the Company’s office was not deranged during the fire incident, some research and development equipments and office equipments were partially damaged. Since the building was required to be renovated before it can be re-used, the Company had relocated its office after the incident. The book value of the land and building of the original office in the Oriental Technopolis had been reclassified as Idle Assets in 2001. In December 2002, the Company reclassified the Idle Assets as Land and Construction-In-Progress due to that the Reconstruction Committee of Oriental Technopolis had approved to proceed with competitive price bidding process for the renovation project.




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The renovation project had been delayed because the financing difficulties of the original contractor. In 2007, the Reconstruction Committee of Oriental Technopolis had sought a new contractor to execute the contract. The Company reclassified the land and damaged building at their carrying amount of NT$43,230 thousand and NT$25,628 thousand, respectively, to "Idle Asset . The reconstruction was completed and ready to use in June 2011. Related land and building are transfer from idle assets to fixed assets. The Company rented the building’s parking lot to others and thus had recorded them as “assets leased to others”.

12. Short-term loans

As of December 31, 2011

Items Amounts Interest rate Collateral Secured loans $236,521 2.32%-3.27% Land use right and Building Credit loans 2,388,977 0.94%-1.75% None L/C loans 194,209 Total $2,819,707

As of December 31, 2010

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

13. Bonds payable

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

As of December 31 Item 2011 2010

The third domestic unsecured convertible bonds payable $460,851 $586,498 The fourth domestic unsecured convertible bonds payable 600,000 - Less: discount on bonds payable (92,585) (59,738) Total 968,266 526,760 Less: Current portion (425,426) - Net $542,840 $526,760




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As of December 31

Item 2011 2010 Embedded derivatives (Note 1) Financial asset- non current $6,261 $1,487 Less: Current portion (Note 2) (6,261) - Net $- $1,487 Equity instrument (Note 3) $57,732 $5,946

Note 1: Including bonds holder’s put option value and the Company’s call option value,

which are recorded as financial assets at fair value through profit or loss. Note2: According to the Company’s third unsecured convertible bonds payable issuing

clause (refer to term (f)), bonds holders could exercise put option in August 2012; therefore, the Company reclassify bonds payable due in one year and related derivatives financial assets to current liabilities and assets.

Note 3: Conversion option value, which is recorded as additional paid-in capital-option. B. The Company’s Board of Directors resolved on June 24, 2010 and June 17, 2011 to issue the

third and fourth domestic unsecured convertible bonds, which were issued on August 6, 2010 and August 30, 2011, respectively. The terms and conditions of the bonds are as follows:

Third domestic unsecured convertible bond:

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

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

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

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




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

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

As of December 31, 2011, the conversion price was adjusted to $20.33 per share.

(e) The Company’s call option:

Under the following circumstances, effective from 1 year after the issuance until 40 days prior to maturity, the Company may recall the convertible bonds at par value plus 2% real yield per year: i. The closing price of the Company’s common stocks exceeds 30% of the last adjusted

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

lower than 10% of the par value.

(f) Bondholder’s put option: The period of 40 days prior to reaching two years and four years after issuance, bondholders may notify the Company’s stockholders’ service entity in writing to request the Company to buy back the convertible bonds at the par value plus 2% yearly yield of the bonds.




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Fourth domestic unsecured convertible bond:

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

issued based on 100% of par value. (b) Par Value’s annual interest rate:0%. (c) Issuing period: from August 30, 2011 to August 30, 2016. (d) Conversion method:

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

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

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

at NT$40.76 per share at the time of issue, and following the issue of the convertible bonds, the conversion price is to be adjusted in accordance with stipulations set by the convertible bonds’ issuing provisions, when the Company increased the common stocks (except when the Company reissues or stages a private solicitation of common stocks with convertible rights or staging for an exchange of the common stocks through share pledging of a variety of marketable securities, or when the Company increases the common stocks already issued or solicited, including but not limited to capital reinvestment, earnings converting to capital reinvestment, capital reserve converting to capital reinvestment, employee bonuses converting to capital reinvestment, merger or new share issue by an invested entity, stock division and cash capital reinvestment for participating in offshore depository certificates and the like through solicitation issue or private solicitation), or when the common stock cash dividends of a given year against the ratio of the current price per share exceed 1.5%, or when the Company converts at a conversion price lower than the going price per share for a variety of marketable securities through share pledging reissue or private solicitation of common stocks with convertible rights or share pledging right, or when the Company reduces the common stocks in a capital reduction due to cancellation of the common stocks held in vault.

As of December 31, 2011, the conversion price remains the same.




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(e) The Company’s call option:

Under the following circumstances, effective from 1 year after the issuance until 40 days prior to maturity, the Company may recall the convertible bonds at par value per year: i. The closing price of the Company’s common stocks exceeds 30% of the last adjusted

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

lower than 10% of the par value.

(f) Bondholder’s put option: The period of 40 days prior to reaching three years after issuance, bondholders may notify the Company’s stockholders’ service entity in writing to request the Company to buy back the convertible bonds at the par value.

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

For the years ended December 31, 2011 Converted Par value Shares (thousand) Balance, beginning of period $68,800 3,251 Converted during this period 113,800 5,403 Balance, ending of period $182,600 8,654

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




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

the value of the bonds’ conversion option as an equity instrument from the net value of the

bonds, which was accounted as capital reserve in the amount of NT$57,732 thousand. As the

Company’s call option and Bondholder’s put option were not closely related to the

economic characteristics and risks of the host contract, they are bifurcated as embedded

derivates and accounted for as the financial liabilities at fair value through profit or loss.

E. For the year ended December 31, 2010 and 2011, the related discount amortization was

NT$14,866 thousand and NT$5,321thousand, which was recorded as interest expenses

under the non-operating expenses. As for the gain on valuation on financial liabilities, it was

NT$8,129 and NT$349 thousand for the year ended December 31, 2010 and 2011, which

was recorded as valuation gain on financial liabilities at fair value through profit or loss

under the non-operating income.

14. Lease payables

As of December 31,

2011 2010

Lease payables $349,768 $365,396

Less: current portion (18,864) (18,465)

Total $330,904 $346,931

The Company signed a contract with Industrial Development Bureau, Ministry of Economic

Affairs to lease an office space in Nankang Software Industrial Park on August 15, 2003 and

July 31, 2007, respectively. These capital leases expire on various dates from August 2003 to

August 2013 and from July 2007 to July 2017, respectively. The annual lease payment is

adjusted according to Industrial Development Bureau’s prescribed rental rate yearly. The

prescribed rental rate is adjusted every January 1 and July 1 semi-annually based on the interest

rate of long-term loan and annual base on Consumer Price Index. In addition, the Company

has bargain purchase option within the lease term. According to the contract, the minimum

lease payments (include interest expenses) for the future are as follows:




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Year Amounts Discounted present value

2012 $26,287 $22,543

2013 26,287 22,063

2014 26,287 21,594

2015 26,288 21,134

2016 26,288 20,685

2017-2021 86,486 63,362

2022-2023 24,447 16,693

Total $242,370 $188,074

15. Pension plan

The defined benefit plan under the Labor Standard Law is disbursed based on the units of

service years and the average salary in the last month of the service year.

The Company contributes an amount equivalent to 4% of the employees’ total salaries and

wages basis to the pension fund deposited at the Bank of Taiwan in the name of an administered

pension fund committee. Since March 2005, the Company decreases the contributive ratio

from 4% to 2%. As of December 31, 2011 and 2010, the Company has contributed the amount

of NT$61,884 thousand and NT$58,895 thousand, respectively.

The Labor Pension Act of R.O.C. (the Act), which adopts a defined contribution plan, became

effective on July 1, 2005. In accordance with the Act, employees may choose to elect either

the Act, by retaining their seniority before the enforcement of the Act, or the pension

mechanism of the Labor Standards Law. For employees who elect the Act, the Company will

make monthly contribution of no less than 6% of the employees’ monthly salaries to the

employee’s individual pension accounts. In accordance with the Act, the Company has

established a pension plan and contribution 6% of the employee’s salaries to employee’s

individual pension account since July 1, 2005. According to the Act, the Company recognized

pension cost and contributed NT$18,622 thousand and NT$17,002 thousand to employee’s

individual accounts for the years ended December 31, 2011 and 2010, respectively.




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(1) The components of net pension cost are as follows:

For the year ended December 31, 2011 2010

Service cost $620 $812 Interest cost 1,627 1,983 Expected return on plan assets (1,024) (1,232) Amortization and deferral 1,597 1,450 Net pension cost $2,820 $3,013

(2) The funding status of the pension plan is as follows:


Benefit obligation Vested benefit obligation $2,090 $2,800 Non-vested benefit obligation 65,163 60,283 Accumulated benefit obligation 67,253 63,083 Effect from projected salary increase 30,485 29,892 Projected benefit obligation 97,738 92,975

Fair value of plan assets (61,884) (58,513) Fund status 35,854 34,462 Unrecognized net transitional benefit obligation (422) (562) Unrecognized loss (29,745) (28,227) Accrued pension liabilities $5,687 $5,673

(3) Vested benefit of retirement based on Labor Standard

Law

$2,196 $2,800 (4) The actuarial assumptions are as follows:


Discount rate 1.90% 1.75% Growth rate in future compensation level 3.00% 3.00% Expected long-term rate of return on plan assets 1.90% 1.75%




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16. Capital stock

(1) As of January 1, 2010, the authorized and issued capital of the Company was NT$2,100,000 thousand and NT$1,709,450 thousand, respectively. The par value of the Company’s common stock is NT$10 per share.

(2) For the year ended December 31, 2010, the Company issued NT$18,910 thousand for

conversion of employee stock option exercise, each with par value of NT$10. The issuance had been approved by the relevant authority.

(3) The third issue of domestic unsecured convertible bonds of the Company had been

converted by bond holders into 3,251 thousand common stocks in 2010. As a result, the capital increased by NT$32,513 thousand. The issuance had been approved by the relevant authority.

(4) For the year ended December 31, 2011, the Company issued NT$13,060 thousand for

conversion of employee stock options exercise, each with par value of NT$10. The issuance had been approved by the relevant authority.

(5) The third issue of domestic unsecured convertible bonds of the Company had been

converted by bond holders into 5,403 thousand common stocks in 2011. As a result, the capital increased by NT$54,027 thousand. As of December 31, 2011, there are still 162 thousand common stocks amount NT$1,623 thousand has not been approved by the relevant authority which was accounted for as advanced receipts for common stock.

(6) As of December 31, 2011, the authorized and issued capital of the Company was

NT$2,500,000 thousand and NT$1,826,337 thousand, respectively. The par value of the Company’s common stock is NT$10 per share.

17. Employee stock options

On October 16, 2003, November 11, 2005 and December 3, 2007, the Company was authorized by the Securities and Futures Bureau of the Financial Supervisory Commission, Executive Yuan, to issue employee stock options with a total number of 24,000, 50,000 and 20,000 units, respectively. Each unit entitles an optionee to subscribe to 100 share of the Company’s common stock. Settlement upon the exercise of the options will be made through the issuance of new shares by the Company. An optionee may exercise the options in accordance with certain schedules as prescribed by the plan starting 2 years from the date of grant. The compensation costs for employee stock options for the years ended 31, December 2011, and 2010, were both NT$0. Detailed information relevant to the employee stock options is disclosed as follows:




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Date of grant

Total number of options granted

(units)

Total number of options outstanding

(units)

Original exercise price

(NTD)

Adjusted exercise

price (NTD) October 23, 2003 24,000 - $26.0 $10.0 November 14, 2005 50,000 14,630 $23.0 $10.0 December 14, 2007 20,000 18,310 $27.8 $19.2 (1) As of December 31, 2011, there had been no cancellations or amendments to the stock

options plan. The contractual life of options is 10 years and 5 years. There is no cash settling option and the Company does not have past practice of settling in cash.

Detailed information relevant to the employee stock options is disclosed as follows:


Option (units)

Weighted- average exercise

price (NTD) Option (units)

Weighted- average exercise

price (NTD) Outstanding at beginning of year (Note) 46,448 $13.63 65,358 $13.70 Granted - - - - Exercised (13,060) 10.00 (18,910) 11.65 Forfeited - - - - Expired (448) 10.00 - - Outstanding at end of year (Note) 32,940 15.11 46,448 14.54

Exercisable at end of year (Note) 32,940 46,448

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

$-

$-

Note: These stock options were granted for employees prior to adopting R.O.C SFAS

No.39; therefore the Company did not recognize these stock options in accordance with R.O.C SFAS No.39. These stock options have not supervised sustained, so they do not adopt R.O.C. SFAS No.39.

The weighted-average stock price was NT$41.22 and NT$26.93 when the exercise date of the options exercised for the years ended December 31, 2011 and 2010, respectively.




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(2) The information of the Company’s outstanding stock options as of December 31, 2011 is as

follows:

Outstanding Stock Options Exercisable Stock Options

Authorization

date

Range of

exercise

price (NTD) Option (units)

Weighted-average

remaining contractual

life (years)

Weighted-average

exercise price

(NTD) Option(units)

Weighted-average

exercise price

(NTD)

2005.11.14 11.00 $14,630 0.425 10.00 $14,630 10.00

2007.12.14 20.00 18,310 - 19.20 18,310 19.20

$32,940 $32,940

(3) The fair value of these options was calculated at the grant date using the Black-Scholes

option pricing model with the following assumptions for the years ended December 31, 2011 and 2010:

2011 2010

Expected dividend yields 5.35%-14.19% 5.35%-14.19% Volatility factors of the expected market price 39.48%-56.41% 39.48%-56.41% Risk-free interest rate 1.85%-2.69% 1.85%-2.69% Weighted-average expected life of the options 3.5-6.55 year 3.5-6.55 year

Note: The assumptions adopting for the years ended December 31, 2011 and 2010 before

the effective date of were used for disclosure of the pro-forma information.

The expected duration of the stock option is according to historical information, might not be the condition that the employee carry out actually. The expected volatility index forecast that, the tendency in the future by means of historical volatility index, and it might be incompatible with the real condition.

(4) The Company used the intrinsic value method to recognize compensation costs for its

employee stock options issued from 2004 to 2007. The compensation costs for the years ended December 31, 2011 and 2010 was both $0. Pro forma information using the fair value method on net income and earnings per share is as follows:




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For the year ended December 31, 2011

Basic earnings per share Diluted earnings per share

Net income $583,041 $589,777

Earnings per share (NTD) 3.29 2.81

Pro forma net income $583,041 589,777

Pro forma earnings per share (NTD) 3.29 2.81


Basic earnings per share Diluted earnings per share

Net income $314,448 $317,274

Earnings per share (NTD) 1.87 1.76

Pro forma net income 311,955 314,781

Pro forma earnings per share (NTD) 1.85 1.74

18. Capital reserve

Pursuant to the Company Law, capital reserve can only be used to offset an accumulated deficit

or be increase common stock. However, only the capital reserve of the following nature can be

transferred to capital (i) the income derived from the issuance of new share premium; (ii) the

income from endowments received by the company. In addition, the Company can only use

the capital reserve to make up its deficit when the legal reserve or other special reserve is

insufficient to make up such losses and the total amount used each year cannot exceed 10% of

the issued capital.

19. Legal reserve

The Company Law stipulates that companies must retain at least 10% of their annual earnings,

as defined in the Law, until such retention equals to the amount of paid-in capital. This retention

is accounted for as a legal reserve account upon approval at the shareholders’ meeting.

According to the revised Company Act issued on January 4, 2012, the legal reserve may be used

to offset a deficit, or be distributed as dividends in cash or stocks for the portion in excess of

25% of the paid-in capital if the Company incurs no loss.




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20. Distribution of earnings and dividend policies

According to the Company’s Articles of Incorporation, the Company’s annual earnings shall be used to offset an accumulated deficit, if any, and be retained at a rate of 10% as legal reserve, as defined in the Company Law, except when such retention equals the amount of issued common stock. After the aforementioned deduction, 15% of remaining earnings should be distributed as employees’ bonus. 2% of remaining earnings should be distributed as directors’ and supervisors’ remuneration. The distribution of any remaining earnings, after deducting employees’ bonuses and directors’ and supervisors’ remuneration, is subject to shareholders’ approval. A special reserve is equal to the reduction in stockholders’ equity (for example, cumulative translation adjustments and unrealized loss on long-term investment in stock, etc). If the aforementioned reduction in stockholders’ equity is reserved, the same amount could be removed from special reserve and transferred to unapporpriated earnings. Any appropriations of the profits are recorded in the year of stockholder approval and given effect to in the financial statements of that year. Distribution of profits may also be made by way of cash dividend, and the amount of that should in principle exceed or equal 10% of total dividends. This cash dividend percentage may be adjusted depending on actual profit of the year and operational conditions. The policy for dividend distribution should reflect factors such as current and future investment environment, fund requirements, domestic and international competition and capital budgets, as well as the benefit of stockholders, share bonus equilibrium, and long-term financial planning. The appropriations of earnings for 2010 had been approved in the stockholders’ meetings, and the date of payment was August 25, 2011. During the year ended December 31, 2011, the Company estimated the amounts of the employee bonuses and remuneration to directors and supervisors for 2011 to be $78,710 thousand and $10,495 thousand, respectively, and recognized as operating costs or operating expense for the period. The estimates were based on post-tax net income for 2011 and the Company’s Articles of Incorporation, and considered factors such as appropriation to legal reserve etc. The number of shares distributed as stock dividends was calculated based on the closing price one day earlier than the date of shareholders’ meeting of 2011 and considered the impacts of ex-right/ex-dividend. The difference between the estimation and the resolution of shareholders’ meeting will be recognized in profit or loss of 2012.




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The Company has paid employees’ bonuses and directors and supervisors’ remunerations of NT$42,450 thousand and NT$5,660 thousand in 2010, respectively, and there is no difference between the amount estimated and paid. Information on the board of directors’ recommendations and stockholders’ approvals is available at “Market Observation Post System” on the Website of Taiwan Stock Exchange Corporation. The Company’s distributions of 2010 and 2009 earnings were approved by the stockholders’ meetings on June, 2011 and June, 2010, respectively, and the detailed information is as follows: 2010 Distribution of Earnings 2009 Distribution of Earnings

Cash dividend NT$1.55 per share NT$1 per share 21. Treasury stock

Details of the treasury stock transactions are as follows: For the year ended December 31,

(In thousand shares) Purpose Beginning Increase Decrease Ending

2011 For transfer to employees 4,029 - 4,029 -

2010 For transfer to employees 5,000 - 971 4,029

According to Securities and Exchange Law of the R.O.C., total shares of treasury stock shall not exceed 10% of the Company’s stock issued. Total purchase amount shall not exceed sum of retained earnings, capital reserve-premiums, and realized capital reserve. Treasury stock shall not be pledged, nor should it be entitled voting rights or receive dividends, in compliance with Securities and Exchange Law of the R.O.C.




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22. Operating cost and expense

The Company’s personnel, depreciation, and amortization expense are summarized as follows: For the year ended December 31,

Item

2011 2010 Operating

cost Operating expenses

Total

Operating cost

Operating expenses

Total

Personnel expenses Salaries $538,537 $560,041 $1,098,578 $410,900 $573,097 $983,997 Labor and health insurance

5,420 37,963 43,383 3,009 30,604 33,613

Pension 1,863 19,579 21,442 1,848 18,167 20,015 Other personnel expenses

9,608 31,657 41,265 9,837 26,082 35,919

Depreciations 110,518 72,718 183,236 72,850 57,392 130,242 Amortization 41,895 38,990 80,885 42,463 27,678 70,141

23. Income tax

(1) The components of deferred tax assets (liabilities) as of December 31, 2011 and 2010 are summarized as follows:


(A) Total deferred income tax assets $101,743 $109,102

(B) Total deferred income tax liabilities $(116,794) $(59,941)

(C) Total valuation allowance $(57,603) $(37,613)

(D) Deferred income tax assets-current $35,956 $22,183

Deferred income tax liabilities-current (4,883) (1,757) Valuation allowance for deferred income tax

assets-current

-

- Net deferred income tax assets-current $31,073 $20,426




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As of December 31, Deferred income tax assets-noncurrent $65,787 $86,919 Deferred income tax liabilities-noncurrent (111,911) (58,184) Valuation allowance for deferred income tax

assets-noncurrent

(57,603)

(37,613) Net deferred income tax liabilities -noncurrent $(103,727) $(8,878)

(E) The temporary differences of deferred tax assets (liabilities), loss carryforward, and

income tax credits were summarized as follows:


Amount Income tax

effect Amount Income tax

effect Unrealized sales discounts $17,734 $3,015 $12,993 $2,209 Unrealized gross profit 671 114 31,122 5,291 Loss on inventory value decline

and obsolescence

66,979 11,386 52,263 8,884 Unrealized foreign exchange loss

(gain)

(4,693) (798) 18,689 3,177 Development expenditures

capitalization

(70,073) (11,912) (70,651) (12,011) Investment income accounted for

under the equity method

(588,229) (99,999) (225,150) (38,275) Pension liabilities 2,300 391 2,286 388 Unrealized loss (gain) on valuation

of financial assets

(9,447) (1,606) (10,337) (1,757) Accrued service expenses 567 96 1,805 307 Accrued expenses 104,382 17,745 3,683 626 Accrued repair liabilities for idle

asset

- - 2,568 437 Amortization of discount on bonds

payable

18,875 3,209 5,083 864 Foreign currencies of cumulative

translation adjustments on long-term equity

(14,584) (2,479) (46,459) (7,898) Unused investment tax credit - 65,787 - 83,818 Loss carryforward - - 27,072 3,101




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(2) Reconciliation between the income tax expense and the income tax calculated on pre-tax

financial statement income based on the statutory rate is as follows:


Income tax on pre-tax income at statutory rate $161,322 $78,874 Tax effect of following:

Permanent differences 6,972 (475) Temporary differences (61,740) (23,100)

Income tax payable for continuing operation $106,554 $55,299 (3) The components of tax expenses are as follows:


Income tax payable $106,554 $55,299 Used investment tax credits (24,625) (19,988) Estimated tax at 10% on unappropriated earnings 1,519 1,855 Deferred income tax expense (benefit) resulting from:

Unrealized sales discounts (806) 3,589 Unrealized gross profit 5,177 (1,928) Loss on inventory value decline and obsolescence (2,502) (421) Unrealized foreign exchange loss (gain) 3,975 (1,809) Development expenditures capitalization (99) 197 Investment income accounted for under the equity

method 61,724 25,639

Pension liabilities (3) (17) Unrealized loss (gain) on valuation of financial

assets (151) 1,561

Accrued service expenses 211 216 Accrued expenses (17,119) - Accrued repair liabilities for idle asset 437 1,351 Amortization of discount on bonds payable (2,345) (1,017) Investment tax credits 18,031 (8,894) Loss carryforward - 3,102

Deferred tax assets-valuation allowance - 7,447 Effect on deferred income tax assets/ liabilities

resulting form changes in tax rates

-

(5,268) Adjustment of prior year’s tax expense (31,563) 11,276 Income tax expense $118,415 $72,190




47

(4) The integrated income tax information of the Company is as follows:

As of December 31,

2011 2010

Imputation credit account (ICA) $30,316 $23,129

For the year ended December 31,

2011 2010

Actual (estimated) creditable ratio for the

appropriation of retained earnings

16.90% 11.55%

The imputation credit allocated to shareholders is based on its balance as of the date of

dividend distribution. The estimated creditable ratio may change when the actual

distribution of imputation credit is made.

(5) As of December 31, 2011, investment tax credit of the Company consisted of the follows:

Total tax credit Unused tax credit Year of expiration

$25,731 $15,052 2011

62,503 50,735 2013

$88,234 $65,787

(6) The R.O.C. income tax authorities had assessed the income tax returns of the Company

through 2009. The 2003 to 2007 income tax return have been assessed by the authorities for

additional tax payable NT$91,193 thousand due to research and development and the ratio

of tax exemption. The Company disagreed with the assessment about the ratio of tax

exemption and subsequently filed a tax appeal. The appeal is still under review.

(7) The income tax of foreign subsidiaries is estimated at local tax rate.




48

24. Earnings per share

The calculation of earnings per share is provided as follows:


Amounts (Numerator) Earnings per share (NTD)

Income before

income tax Net income

Share expressed

(Denominator) (In thousands)

Income before


Basic

Net income $701,456 $583,041 177,410 $3.95 $3.29

Less: Minority interests gain - - - -

Shareholders of the parent income $701,456 $583,041 $3.95 $3.29

Effect of dilution

Convertible bonds payable $6,736 $6,736 27,712

Employee stock option in 2005 $- $- 1,046

Employee stock option in 2007 $- $- 828

Employees� bonuses $- $- 2,527

Diluted

Net income $708,192 $589,777 209,523 $3.38 $2.81

Less: Minority interest gain - - - -



Amounts (Numerator) Earnings per share (NTD)

Income before


Share expressed

(Denominator) (In thousands)

Income before


Basic

Net income $386,638 $314,448 168,433 $2.30 $1.87

Less: Minority interests gain - - - -


Effect of dilution

Convertible bonds payable $3,405 $2,826 8,820


Employee stock option in 2005 $- $- 1,425


Employees� bonuses $- $- 1,562

Diluted

Net income $390,043 $317,274 180,527 $2.16 $1.76

Less: Minority interest gain - - - -





49

25. Related party transactions

(1) Name and relationship of related parties

Name of related parties Relationship with the Company Eight people including Por-Yuan, Wang Directors of the Company Three people including Ruei-song, Guo Supervisors of the Company Nine people including Por-Yuan, Wang Vice president and other key management

personnel of the Company (2) Significant related party transactions

Compensation of key management personnel

Categories 2011 2010 Salaries, bonuses, and other remuneration $52,441 $35,767

The Company’s key management personnel includes directors, supervisors and management that is vice president or above. For details of total compensation paid to the Company’s key management personnel including Directors, Supervisors, President and Vice-President, please refer to the annual report for the Company.

26. Assets pledged as collateral

The assets pledged of the Company and its subsidiaries were as follows:

As of December 31, Assets pledged Purpose of pledge 2011 2010

Restricted assets-cash L/C guarantee $11,557 $8,654 Property, plant and equipment-building Bank loan 281,396 300,003 Intangible assets-land use right Bank loan 11,198 10,704 Refundable deposits-time deposit and cash Custom duty guarantee 2,592 2,592 Total $306,743 $321,953




50

27. Commitments and contingent liabilities

(1) As of December 31, 2011, significant commitments and contingent liabilities not included in

the financial statements are as follows:

The future minimum payments under existing lease agreements are as follows:

Period Amount

2012 $2,946

2013 - 2016 120

$3,066

(2) As of December 31, 2011, the Company signed a contract for buying plant total amount

NT$298,454 thousand. The Company paid NT$90,000 thousand when signing the contract

and the unpaid portion of the contracts, which was not accrued, was approximately

NT$208,454 thousand.

(3) The company signed an agreement with an oversea customer; the agreement stated that the

oversea customer need to pay to the Company License Royalty Rate to the price of the Good

and the company shall be liable for any third party infringement claims. The received

amount of License Royalty Rate has been set up a trust fund by the Company. As of

December 31, 2011, the Company recognized the trust fund as "other financial

assets-noncurrent and "other current liabilities were NT$80,045 thousand.

28. Significant disaster loss

None.

29. Significant subsequent events

None.




51

30. Others

(1) Financial risk management objectives and policies

The Company’s and its subsidiaries’ principal financial instruments, other than derivatives, are comprised of cash and cash equivalents, common stock and loans. The main purpose of these financial instruments is to manage financing for the Company’s and its subsidiaries’ operations. The Company and its subsidiaries also hold various other financial assets and liabilities such as accounts receivable and accounts payables, which arise directly from its operations. The Company and its subsidiaries also enter into derivative transactions, including foreign forward exchange contracts. The purpose is to avoid the foreign currency exchange risk arising from the Company’s and its subsidiaries’ operation activities. The Company’s and its subsidiaries’ policies are not enter into trading purpose derivative transactions. The main risks arising from the Company’s and its subsidiaries’ financial instruments include cash flow interest rate risk, foreign currency risk, credit risk, and liquidity risk. Cash flow interest rate risk The floating interest rate and fixed rates are used to hedge floating interest rate fluctuations of long-term bank loan, lease payable, and bonds payable. Foreign currency risk The Company and its subsidiaries have foreign currency risk arising from purchases or sales. The Company and its subsidiaries utilize forward contracts to avoid foreign currency risk. The Company and its subsidiaries buy or sell the same amount of foreign currency with hedged items through forward contracts. Credit risk The Company and its subsidiaries trade only with established and creditworthy third parties. It is the Company’s and its subsidiaries’ policies that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis, which consequently minimizes the Company’s and its subsidiaries’ exposure to bad debts.




52

With respect to credit risk arising from the other financial assets of the Company and its subsidiaries, which are comprised of cash and cash equivalents available-for-sale financial assets and certain derivative instrument, the Company’s and its subsidiaries’ exposure to credit risk arising from the default of counter-parties are limited to the carrying amount of these instruments. As the Company and its subsidiaries trade only with established third parties, it does not for any collateral from third parties. Liquidity risk The Company’s and its subsidiaries’ objective are to maintain a balance of funding continuity and flexibility through the use of financial instruments such as bank loans and cash and cash equivalents.

(2) Information of financial instruments

(A) Fair value of financial instruments


Financial assets Book value Fair value Book value Fair value Non-derivative financial instruments Assets

Cash $3,868,609 $3,868,609 $2,044,583 $2,044,583 Notes and accounts receivable-net 2,623,584 2,623,584 1,790,293 1,790,293 Other receivables 290,635 290,635 133,606 133,606 Restricted assets 11,557 11,557 8,654 8,654 Financial assets measured at cost-noncurrent 108,034 - 105,714 -

Refundable deposits 45,047 - 25,600 -

Liabilities Short-term loans 2,819,707 2,819,707 1,482,803 1,482,803 Notes payable 77,082 77,082 42,486 42,486 Accounts payable 3,277,137 3,277,137 2,101,803 2,101,803 Accrued expenses 654,121 654,121 520,644 520,644 Lease payables 349,768 349,768 365,396 365,396 Bonds payable 968,266 968,266 526,760 526,760




53


Financial assets Book value Fair value Book value Fair value Derivative financial instruments Assets

Foreign exchange forward contracts

$- $- $10,337 $10,337

Foreign exchange Option 24,122 24,122 - - Asset components of convertible bonds-embedded derivative contract

6,261 6,261 1,487 1,487

Liabilities


284 284 - -

(B) The methods and assumptions used to estimate the fair value of financial instruments are

as follows:

(a) The book value of short-term financial instruments approximates to the fair value due to their short maturities. Short-term financial instruments include cash, notes and accounts receivable, other receivables, restricted assets, refundable deposits, short-term loans, notes payable, accounts payable and accrued expenses.

(b) Refundable deposits are based on book value because the maturity date is uncertain. (c) The fair value of financial assets measured at cost is unable to be estimated since

there is no active market in trading those unlisted investments. (d) Lease payables are estimated based on the present values of future cash flow. For

bank loans associated with floating interest rate, the carrying value represents its fair value. The fair values of convertible bonds are determined based on their market price which was provided by financial institution.

(e) The fair value of derivative financial instruments is based on the amount the

Company expects to receive and to pay assuming that the contracts are settled at the balance sheet date. The fair value includes the unrealized gain on unsettled contracts in current period generally. The Company refers to quoted prices provided by financial institutions for its derivative financial instruments.




54

(C) The fair value of the Company’s and its subsidiaries’ financial assets and liabilities

determined by the quoted prices in active markets or valuation technique as follows:

As of December 31, Active market quotation Valuation technique

Financial assets 2011 2010 2011 2010 Non-derivative financial instruments Assets

Cash $3,868,609 $2,044,583 $- $- Notes and accounts receivable-net - - 2,623,584 1,790,293 Other receivables - - 290,635 133,606 Restricted assets - - 11,557 8,654 Refundable deposits - - 45,047 25,600

As of December 31, Active market quotation Valuation technique

Financial assets 2011 2010 2011 2010 Non-derivative financial instruments Liabilities

Short-term loans - - 2,819,707 1,482,803 Notes payable - - 77,082 42,486 Accounts payable - - 3,277,137 2,101,803 Accrued expenses - - 654,121 520,644 Lease payables - - 349,768 365,396 Bonds payable - 968,266 526,760

Derivative financial instruments Assets


- - - 10,337

Foreign exchange option - - 24,122 - Asset components of convertible bonds-embedded derivative contract

- - 6,261 1,487 Liabilities Foreign exchange forward

contracts

- - 284 -




55

(D) As of December 31, 2011 and 2010, the Company and its subsidiaries’ financial

liabilities with fair value interest rate risk exposure amounted to NT$4,137,741 thousand and NT$2,374,959 thousand, respectively.

(E) For the year ended December 31, 2011, total interest revenue and interest expense for

financial assets or liabilities that are not at fair value through profit or loss were NT$23,881 thousand and NT$65,797 thousand, respectively, while interest revenue and interest expense for the year ended December 31, 2010 amounted to NT$12,111 thousand and NT$32,328 thousand, respectively.

(F) Guarantee for letter of credit of subsidiaries in pledge refers to Note 26. (G) Financial risk information

(a) Market risk

Forward contracts held as of December 31, 2011 and 2010 were intended for hedging purposes. Gains or losses arising from the fluctuations in exchange rates are likely to be offset against the gains or losses from the hedged items. As a result, no significant exposure to market risk is anticipated.�

(b) Credit risk

Financial assets are influenced by potential effects of transaction counterparties’ non-fulfillment of contract. Effects include the concentration of credit risk of the Company’s and its subsidiaries’ financial instruments, components, amount of contracts, and other receivables. There is no significant credit risk exposure.

(c) Liquidity risk

No significant cash flow risk is anticipated since the working capital is sufficient to meet the cash flow requirements. The Company and its subsidiaries entered into foreign exchange forward contracts, since the forward rate has been fixed, no significant cash flow risk is anticipated. In addition, the Company and its subsidiaries invest unlisted stocks. The significant liquidity risk is expected.




56

(d) Cash flow interest rate risk

The Company and its subsidiaries’ bank loan and lease payable were floating rate liabilities; therefore, changes in the market interest rates may cause future cash flows to be volatile. Bonds payable expose the Company to market interest rate and stock price volatility risk.

(3) Significant intercompany transactions among consolidated entities for the years ended

December 31, 2011 and 2010 are disclosed in Attachment 1. (4) The information of foreign currency financial assets / liabilities is as follows:

(Unit : Foreign currency : thousand, NTD: thousand) As of December 31, 2011 Foreign currency Exchange rate NTD

Financial assets-monetary items Cash RMB 333,678 4.8125 $1,605,823 Cash USD 27,088 30.2900 820,496 Cash JPY 68,676 0.3905 26,818 Accounts receivable RMB 320,918 4.8125 1,544,418 Accounts receivable USD 27,753 30.2900 840,638 Other receivables RMB 18,628 4.8125 89,647 Other receivables USD 6,067 30.2900 183,769 Restricted assets RMB 2,401 4.8125 11,555 Refundable deposits RMB 6,229 4.8125 29,977 Refundable deposits JPY 7,665 0.3905 2,993

Financial assets-non monetary items Financial assets measured at cost-noncurrent

USD 2,000 30.2900 60,580

Financial liabilities-monetary items

Short term loan USD 93,090 30.2900 2,819,707 Accounts payable USD 64,558 30.2900 1,955,462 Accounts payable RMB 149,363 4.8125 718,809 Accrued expenses USD 746 30.2900 22,596 Accrued expenses RMB 28,187 4.8125 135,650




57

As of December 31, 2010 Foreign currency Exchange rate NTD

Financial assets-monetary items Cash RMB 152,076 4.42 $672,257 Cash USD 2,645 29.13 77,052 Cash JPY 17,773 0.37 6,637 Accounts receivable RMB 75,825 4.42 335,187 Accounts receivable USD 42,976 29.13 1,251,904 Other receivables RMB 3,613 4.42 15,971 Other receivables USD 884 29.13 25,752 Restricted assets RMB 1,958 4.42 8,654 Refundable deposits RMB 2,520 4.42 11,141 Refundable deposits JPY 7,336 0.37 2,739

Financial assets-non monetary items Financial assets measured at cost-noncurrent

USD 2,000 29.13 58,260

Financial liabilities-monetary items

Short term loan RMB 282,392 4.42 1,248,323 Accounts payable RMB 367,948 4.42 1,626,526 Accrued expenses USD 170 29.13 4,970 Accrued expenses RMB 23,087 4.42 102,056

(5) The Financial Supervisory Commission ("FSC ) requires companies with shares listed on

the TSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market to prepare their financial statements in accordance with the International Financial Reporting Standards, International Accounting Standards, and Interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as recognized by the FSC (collectively referred to as "IFRSs ), and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, starting 2013. Under Rule No. 0990004943 issued by the FSC on February 2, 2010, the Company makes the following pre-disclosures on the adoption of IFRSs as follows:




58

(a) The main contents of the plan to adopt IFRSs and the current status:

The Company has set up a project team and made a plan to adopt IFRSs. Leading the implementation of this plan is Leo Chen. The main contents of the plan, estimated completion schedule and status of execution as of December 31, 2011, were as follows:

Contents of Plan Responsible Department

or Personnel Status of

Execution 1. Establish a project team Accounting department Completed 2. Make a plan to adopt IFRSs Accounting department Completed 3. Identify differences between the existing

accounting policies and IFRSs Accounting department

Completed

4. Identify consolidated entities under IFRSs Accounting department Completed 5. Select voluntary exemptions under IFRS 1

"First-time Adoption of International Financial Reporting Standards and assess the impact of these exemptions

Accounting department Completed

6. Assess the adjustments required for IT system

Accounting and IT department

Completed

7. Assess the adjustments required for internal controls

Accounting and Internal Control department

Completed

8. Finalize the accounting policies under IFRSs Accounting department Completed 9. Finalize the selection of voluntary

exemptions under IFRS 1 "First-time Adoption of International Financial Reporting Standards

Accounting department Completed

10. Prepare opening IFRS statement of financial position

Accounting department In progress

11. Prepare IFRSs comparative information for 2012

Accounting department In progress

12. Finalize adjustments to the internal control (including financial statements process and the associated IT system)

Accounting department, Internal Control department, and IT department

In progress




59

(b) Material differences between the existing accounting policies and the accounting policies

to be adopted under IFRSs and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers are described in the table below. The Company assesses the material differences in accounting polices based on the IFRSs as recognized by the FSC and the Guidelines Governing the Preparation of Financial Reports by Securities Issuers expected to become effective in 2013. However these assessments may be changed as the FSC may recognize different versions of IFRSs or amend the Guidelines Governing the Preparation of Financial Reports by Securities Issuers in the future. Furthermore, the Company has decided the accounting policies to be adopted under IFRSs based on the current circumstances, should circumstances change in the future, the accounting policies to be adopted may change accordingly. The material differences in accounting policies described in the table below may not result in any adjustment on the date of transition to IFRSs, due to the voluntary exemptions selected under IFRS 1 "First-time Adoption of International Financial Reporting Standards .

Accounting Issues Description of differences

Translation of foreign currencies

Under the requirements of ROC GAAP, as the Company is not a foreign operation, the Company does not need to determine its functional currency. However under the requirements of IAS 21 "The Effects of Changes in Foreign Exchange Rates , all entities (including the parent) included in the reporting entity is required to determine their respective functional currencies.

Financial assets measured at cost

Under the requirements of the existing Guidelines Governing the Preparation of Financial Reports by Securities Issuer, equity investments in unlisted entities or entities traded on Emerging Stock market should be measured at cost. However under the requirements of IAS 39, only investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured could be measured at cost. The fair value of investments in equity instruments that do not have a quoted market price in an active market is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that instrument or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.




60


Fixed assets

For fixed assets acquired prior to the issuance of Accounting Research and Development Foundation Interpretation No 97-340, even if the cost of a component of the asset is significant relative to the total cost of such asset, that component is not depreciated separately. Furthermore, for fixed assets acquired prior to the issuance of Accounting Research and Development Foundation Interpretation No 97-340, the cost of such assets does not include the costs of dismantling and removing the asset and restoring the site on which it is located, and related provision is not recognized. However under the requirements of IAS 16 "Property, Plant and Equipment , each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The cost of an item of property, plant and equipment comprises the costs of dismantling and removing the asset and restoring the site on which it is located.

The cost of regular major inspections is expensed as incurred under ROC GAAP. However under the requirements of IAS 16, when each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection is derecognized. Properties held to be leased out or for long-term capital appreciation are currently classified under fixed assets, as there is no clear guidance under ROC GAAP. However under the requirements of IAS 40 "Investment Property , properties which meet the definition of investment property should be classified as such.

Employee benefits

There is no guidance under ROC GAAP for short-term compensated absences. The Company recognizes the cost as expense as employees take these absences. However under the requirements of IAS 19 "Employee Benefits , the Company shall recognize and accrue for the accumulating compensated absences.




61


Employee benefits

The Company has selected a rate of return on relatively high-safety

fixed-income investment as the discount rate under ROC GAAP.

However under the requirements of IAS 19, the rate used to

discount post-employment benefits obligations shall be determined

by reference to market yields on high quality corporate bonds. In

countries where there is no deep market in such bonds, the market

yields on government bonds shall be used.

Under the requirements of ROC GAAP, minimum pension liability

is to be recognized for the excess of the accumulated benefit

obligation over the pension plan assets. There is no such

requirement under IAS 19.

Under the requirements of ROC GAAP, the unrecognized

transitional net assets (or net benefit obligation) should be

amortized on a straight-line basis over the average remaining

service period of employees still in service and expected to receive

benefits. There is no such requirement under IAS 19.

Share-based

payment

The Company’s share-based payment arrangements have applied

intrinsic value method in accordance with Accounting Research and

Development Foundation Interpretation No 92-070-072; however

under IFRS 2 “Share-based Payment”, such arrangements should be

measured using fair value method.

Income taxes

Under the requirements of ROC GAAP, deferred tax assets are

recognized in full, however, if there is over 50% possibility that the

economic benefits of a deferred tax asset become unrealizable, a

valuation allowance account should be established to reduce the

carrying amount of the deferred tax asset. However under the

requirements of IAS 12 “Income Taxes”, a deferred tax asset shall

be recognized to the extent that it is probable that it would be

utilized.




62


Income taxes

Under the requirements of ROC GAAP, a deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or noncurrent. If a deferred tax asset or liability is not related to an asset or liability for financial reporting, it should be classified as current or noncurrent according to the expected reversal date of the temporary difference. However under the requirements of IAS 1 "Presentation of Financial Statements , deferred tax assets or liabilities are classified as noncurrent.

There is no guidance under ROC GAAP that deals with the applicable tax rates for related deferred tax assets or liabilities arising from unrealized intergroup profits and losses. Under the Company’s existing accounting policy, the Company’s tax rate is used to calculate deferred tax assets or liabilities arising from unrealized profits and losses of upstream intergroup transactions. For downstream or side stream intergroup transactions, the Company’s tax rate is also used to recognize deferred tax assets or liabilities by adjusting investment gains or losses. However under the requirements of IAS 12, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. Therefore buyer’s tax rate should be used to calculate the deferred tax assets or liabilities arising from unrealized intergroup profits and losses.

(6) In order to compare and analysis, some of the accounts in financial statements were

reclassify in 2010. 31. Additional disclosures

The following are additional disclosures for the Company and its affiliates as required by the R.O.C. Securities and Futures Bureau:




63

(1) Major transactions information:

(A) Financing provided: Refer to Attachment 2. (B) Endorsement/guarantee provided: Refer to Attachments 3. (C) Securities held as of December 31, 2011: Refer to Attachment 4. (D) Marketable securities acquired or disposed of with accumulated amount exceeding the

lower of NT$100 million or 20 percent of the capital stock: Refer to Attachment 5. (E) Acquisition of individual real estate with amount exceeding the lower of NT$100

million or 20 percent of the capital Stock: Refer to Attachment 6. (F) Disposal of individual real estate with amount exceeding the lower of NT$100 million or

20 percent of the capital stock: None. (G) Related party transactions for purchases and sales amounts exceeding the lower of

NT$100 million or 20 percent of the capital stock: Refer to Attachment 7. (H) Receivables from related parties with amount exceeding the lower of NT$100 million or

20 percent of the capital stock: Refer to Attachment 8. (I) Financial instruments and derivative transactions: Refer to Note 5.

(2) Information on re-invested enterprises:

(A) For those who directly or indirectly have major influence or control over the investee

company: Please refer to Attachment 9. (B) For those who directly or indirectly have control over the investee company, the investee

company’s transaction information listed under items A to I shall be disclosed: Please refer to Attachment 2, 4~9.

(3) Information on Mainland China investments: Please refer to Attachment 10.




64

32. Segment financial information

For management purposes, the Company is organized into business units based on its area and services and has two reportable segments as follows: a. Taiwan: segment engages in Management of Group, Technology R&D and Sales of products. b. Mainland China: segment engages in Manufacturing, Repairing, and Sales of products in

Mainland China. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. However, group finance costs, finance income and income taxes are managed on a group basis and are not allocated to operating segments. The transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. a. Information about reportable segment profit or loss, assets and liabilities


Taiwan

Segment

Mainland China

Segment Total segments All other Adjustments and

eliminations Consolidated Revenue External customers $10,602,184 $2,821,821 $13,424,005 $7,430 $- $13,431,435 Inter-segment 275,699 277,773 553,472 48,226 (601,698) -

Interest revenue 13,120 26,685 39,805 2 (15,926) 23,881

Total revenue $10,891,003 $3,126,279 $14,017,282 $55,658 $(617,624) $13,455,316

Interest expense 33,295 48,336 81,631 92 (15,926) 65,797 Depreciation and amortization

98,160

164,728

262,888

1,233

-

264,121

Investment gain 831 - 831 - - 831 Reportable segment profit

$1,341,241 $426,141 $1,767,382 $(37,590) $(1,028,336) $701,456

Reportable segment assets

$5,542,682 $8,857,129 $14,399,811 $49,577 $(2,671,206) $11,778,182

Reportable segment liabilities

$4,571,358 $6,610,682 $11,182,040 $69,480 $(2,496,412) $8,755,108




65


Taiwan

Segment

Mainland China

Segment Total segments All other Adjustments and

eliminations Consolidated

Revenue

External customers $8,055,002 $647,816 $8,702,818 $79 $- $8,702,897

Inter-segment 127,924 17,111 145,035 56,065 (201,100) -

Interest revenue 6,067 8,991 15,058 1 (2,948) 12,111

Total revenue $8,188,993 $673,918 $8,862,911 $56,145 $(204,048) $8,715,008

Interest expense 15,230 20,046 35,276 - (2,948) 32,328

Depreciation and amortization

91,786

108,521

200,307

76

-

200,383

Investment gain 831 - 831 - - 831

Reportable segment profit

$628,509 $155,240 $783,749 $4,227 $(401,338) $386,638

Reportable segment assets

$4,526,264 $5,342,954 $9,869,218 $23,472 $(2,051,101) $7,841,589

Reportable segment liabilities

$3,431,352 $3,996,366 $7,427,718 $5,747 $(2,051,092) $5,382,373

1. Inter-segment revenues are eliminated upon consolidation and reflected in the

"adjustments and eliminations column. All other adjustments and eliminations are part of detailed reconciliations presented further below.

2. Segment profit including operating activities with inter-segment. Inter-segment profit are eliminated upon consolidation and reflected in the &adjustments and eliminations’ column.

3. Segment asset not include deferred tax asset, investment, and derivatives financial instruments. The assets described above are controlled by the group basis.

b. Reconciliations of reportable segment revenues, profit or loss, assets and liabilities

(i) Revenues

2011 2010 Total revenues for reportable segments $14,017,282 $8,862,911 Other revenues 55,658 56,145 Elimination of intersegment revenues (617,624) (204,048) Group revenues $13,455,316 $8,715,008




66

(ii) Profit or loss

2011 2010 Total profit or loss for reportable segments $1,767,382 $783,749 Other profit or loss (37,590) 4,227 Elimination of intersegment profits (1,028,336) (401,338) Income before income tax expense $701,456 $386,638

(iii) Assets

As of December 31, 2011 2010 Total assets for reportable segments $11,778,182 $7,841,589 Group assets $11,778,182 $7,841,589

(iv) Liabilities

As of December 31, 2011 2010 Total liabilities for reportable segments $8,755,108 $5,382,373 Group liabilities $8,755,108 $5,382,373

(v) Other material items For the year ended December 31, 2011

Reportable segment

totals Adjustments Group totals Interest revenue $39,807 $(15,926) $23,881 Interest expense (81,723) 15,926 (65,797) Depreciation and amortization (264,121) - (264,121) For the year ended December 31, 2010

Reportable segment

totals Adjustments Group totals Interest revenue $15,059 $(2,948) $12,111 Interest expense (35,276) 2,948 (32,328) Depreciation and amortization (200,383) - (200,383)




67

(3) Geographical information

For the year ended December 31,

Area 2011 2010 Europe $3,358,229 $3,614,980 America 5,962,730 3,186,802 Asia 1,164,788 1,116,168 Other 15,875 2,159 Total $10,501,622 $7,920,109

Revenues are attributed to countries on the basis of the customer's location.

(4) Major customers Individual customer accounts for at least 10% of net sales were as follows:


Customers Amount Percentage Amount Percentage Customer A $2,530,794 19.11% $552,798 6.40% Customer B 2,310,254 17.45% 1,964,165 22.73% Customer E 1,412,042 10.66% 107,676 1.25% Customer F 1,227,503 9.27% 683,357 7.91%


SERCOMM CORPORATION AND SUBSIDIARIES (Expressed in Thousands of New Taiwan Dollars Unless Otherwise Stated)

Attachment 1 Significant intercompany transactions between consolidated entities Transactions

No. (Note1) Name of related parties Counterparty

Nature of relationship

(Note 2) Account Amount Terms

Percentage of consolidated

operatingrevenues or consolidated total assets (Note 3)


0 Sercomm Corporation SenslinqInc.(origin:Servecomm Inc.) 1 Commission expenses $21,295 - 0.16%

0 Sercomm Corporation SenslinqInc.(origin:Servecomm Inc.) 1 Other current assets 889 - 0.01%

0 Sercomm Corporation SenslinqInc.(origin:Servecomm Inc.) 1 Other payable 2,659 - 0.02%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Sales revenue 248,788 Note 4 1.84%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Accounts receivable 190,317 Note 4 1.58%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Other receivable 364,707 - 3.03%

0 Sercomm Corporation Sernet Technology (Suzhou) Limited 1 Sales revenue received

in advance 42,872 - 0.36%

0 Sercomm Corporation Sercomm Japan Corp. 1 Commission expenses 9,333 - 0.07%

0 Sercomm Corporation Sercomm Japan Corp. 1 Other receivables 60,921 - 0.51%

0 Sercomm Corporation Sercomm France SARL 1 Commission expenses 12,227 - 0.09%

0 Sercomm Corporation Sercomm Trading Co. Ltd. 1 Other receivable 2,995 - 0.02%

1 Zealous Investments Ltd. Sercomm Trading Co. Ltd. 2 Temporary payments 3,938 - 0.03%

2 Sercomm Investments Ltd. Sercomm Trading Co. Ltd. 3 Temporary payments 6,967 - 0.06%

3 Sernet Technology (Suzhou) Limited

Dwnet Technology (Suzhou) Limited 3 Accounts receivable 225,294 - 1.87%


Dwnet Technology (Suzhou) Limited 3 Rent revenue 3,802 - 0.03%


Dwnet Technology (Suzhou) Limited 3 Sales revenue 280,135 - 2.07%


Dwnet Technology (Suzhou) Limited 3 Interest revenue 14,423 - 0.11%

3 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Commission expenses 27,587 - 0.20%

3 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Other current liabilities 7,582 - 0.06%

4 Sercomm Japan Corp. Sernet Technology (Suzhou) Limited 3 Sales revenue 5,220 - 0.04%

Note 1 The Company and its subsidiaries are coded as follows: 1.The Company is coded 0. 2.The subsidiaries should be coded consecutively beginning from "1" in the order presented in the table above. Note 2 Transactions are categorized as follows: 1.The parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary. Note 3 The percentage with respect to the consolidated asset/revenues for transactions of balance sheet items are based on each items balance at

period-end. For profit or loss items, cumulative balances are used as basis. Note 4 The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection

period for related parties was month-end 90-210 days, while the terms for domestic third party sales was net 30-75 days. The collectionperiod for overseas sales was net 30-240 days.

Note 5 The list of significant intercompany transactions doesn't include transactions as the Company purchased materials on its subsidiary, Sernet Technology (Suzhou) Limited's behalf, sold the materials to Sernet Technology (Suzhou) Limited, and then bought the final products from Sernet Technology (Suzhou) Limited. In 2011, the Company purchased materials for such transactions amounted to $1,886,755 thousand. The Company bought the final products from Sernet Technology (Suzhou) Limited amounted to $8,542,148 thousand. In order to avoid double counting for such transactions above, the Company did not recognize related sales and cost of goods sold of materials andwork-in-process until selling the final products. In addition, the Company reversed the amount which have not been bought back from Sernet Technology (Suzhou) Limited to inventory account and reversed the related accounts receivable/payable balance.



Attachment 1-1 Significant intercompany transactions between consolidated entities Transactions

No. (Note1) Name of related parties Counterparty

Nature of relationship

(Note 2) Account Amount Terms

Percentage of consolidated

operatingrevenues or consolidated total assets (Note 3)


0 Sercomm Corporation SenslinqInc.(origin:Servecomm Inc.) 1 Commission expenses $17,779 - 0.20%

0 Sercomm Corporation SenslinqInc.(origin:Servecomm Inc.) 1 Other current assets 1,171 - 0.01%

0 Sercomm Corporation SenslinqInc.(origin:Servecomm Inc.) 1 Accrued expenses 92 - -

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Sales revenue 113,671 Note 4 1.31%

0 Sercomm Corporation Dwnet Technology (Suzhou) Limited 1 Accounts receivable 77,778 Note 4 0.98%

0 Sercomm Corporation Sercomm Japan Corp. 1 Commission expenses 8,268 - 0.10%

0 Sercomm Corporation Sercomm Japan Corp. 1 Other payable 6,641 - 0.08%

1 Zealous Investments Ltd. Sercomm Trading Co. Ltd. 2 Other current assets 3,361 - 0.04%


Dwnet Technology (Suzhou) Limited 3 Other receivables 119,722 - 1.50%


Dwnet Technology (Suzhou) Limited 3 Accounts receivable 14,889 - 0.19%


Dwnet Technology (Suzhou) Limited 3 Rent revenue 729 - 0.01%

2 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Commission expenses 14,135 - 0.16%

2 Sernet Technology (Suzhou) Limited Sercomm Trading Co. Ltd. 2 Other current liabilities 4,391 - 0.06%

3 Sercomm Japan Corp. Sernet Technology (Suzhou) Limited 3 Sales revenue 29,481 - 0.34%

Note 1 The Company and its subsidiaries are coded as follows: 1.The Company is coded 0. 2.The subsidiaries should be coded consecutively beginning from "1" in the order presented in the table above. Note 2 Transactions are categorized as follows: 1.The parent company to subsidiary. 2. Subsidiary to parent company. 3. Subsidiary to subsidiary. Note 3 The percentage with respect to the consolidated asset/revenues for transactions of balance sheet items are based on each items balance at

period-end. For profit or loss items, cumulative balances are used as basis. Note 4 The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collection

period for third party was month-end 90 days, while the terms for domestic sales was net 30-75 days. The collection period for overseas sales was net 30-240 days.

Note 5 The list of significant intercompany transactions doesn't include transactions as the Company purchased materials on its subsidiary, Sernet Technology (Suzhou) Limited's behalf, sold the materials to Sernet Technology (Suzhou) Limited, and then bought the final products from Sernet Technology (Suzhou) Limited. In 2010, the Company purchased materials for such transactions amounted to $2,209,886 thousand. The Company bought the final products from Sernet Technology (Suzhou) Limited amounted to $6,168,886 thousand. In order to avoiddouble counting for such transactions above, the Company did not recognize related sales and cost of goods sold of materials andwork-in-process until selling the final products. In addition, the Company reversed the amount which have not been bought back fromSernet Technology (Suzhou) Limited to inventory account and reversed the related accounts receivable/payable balance.



Attachment 2 Financing provided for the year ended December 31, 2011

Assets pledged

NumberName of financeprovider

Name of counterparty Account

Maximumbalanceduring 2011

Ending balance

Actualamountprovided

Interestrate

Nature offinancing activity

Totaltransaction

amount

Reason forfinancing

Allowance for

doubtful accounts Item Value

Loan limit per

entity (Note l(2))

Maximumamount

availablefor law (Note 2)

0

0

0

1

SercommCorporation

SercommCorporation

SercommCorporation

SernetTechnology (Suzhou)Limited

DwnetTechnology (Suzhou)Limited

SercommJapan Corp.

SernetTechnology (Suzhou)Limited

DwnetTechnology (Suzhou)Limited

Otherreceivables-relatedparty




$500,693

151,725

455,175

335,606

$499,785

151,450

454,350

334,670

$403,436

60,580

-

262,955

0-2.50%

2.50%

2.50%

5.00%

Note 3(2)

Note 3(2)

Note 3(2)

Note 3(2)

$-

-

-

-

Operating

Operating

Operating

Operating

$-

-

-

-

-

-

-

-

$-

-

-

-

$621,456

621,456

621,456

1,553,640

$1,242,912

1,242,912

1,242,912

3,107,281

Note 1 According the Company's Operational Procedures for Loaning Funds to Others, the maximum amount permitted to a single borrower as follows:(1) Trading partner: The amount shall not exceed the higher of the sales or purchases amount from the counterparty at the time of the

leading event or one year, whichever is lesser. (2) Short-term financing: The amount shall not exceed 20 percent of stockholders' equity as stated in its latest financial statement. (3) The company loan to 100% overseas equity investee is not limited to 40% of stockholder's equity as stated in its latest financial

statememt. However the agreegate amount should not exceed 100% net assets. Loan to individual investee should not exceed 50% netassets.

Note 2 The aggregate amount of loans for subsidary to others shall not exceed 40% of stockholders' equity as stated in its latest financial statement. Note 3 The nature of financing activities as follows:

(1) Trading partner. (2) Short-term financing



Attachment 3: Endorsement / guarantee provided for others for the year ended December 31, 2011

Endorsee

Number Name of endorsers

Name of endorsees Relationship

Endorsement limit for a

single entity

Maximum balance for the period

Ending balance

Amount of collateral

guarantee/endorsement

Percentage of accumulated

guarantee amount to net assets value

from the latest financial statement

Limit of total guarantee/endorsement

amount

0

1

The Company

The Company


Dwnet Technology (Suzhou) Limited

The Company's equity investee


$776,820

776,820

$610,120 (USD 20,000 thousand)

610,120 (USD 20,000 thousand)

$605,800 (USD 20,000 thousand) (Note2)

605,800 (USD 20,000 thousand) (Note3)

$-

-

19.50%

19.50%

$1,553,640(Note1)

1,553,640(Note1)

Note 1 The limit of endorsement for any single entity shall not exceed 25% of stockholders' equity as stated in its latest financial statement; the total amount of transaction of endorsement shall not exceed 50% of stockholders' equity as stated in its latest financial statement.

Note 2 Sernet Technology (Suzhou) Limited's actual amount provided was $545,220 thousand for the year ended December 31, 2011. Note 3 Dwnet Technology (Suzhou) Limited's actual amount provided was $605,800 thousand for the year ended December 31, 2011.



Attachment 4 Securities held as of December 31, 2011 Period ended

Held company name Securities type and name

Relationshipwith the

Company Financial statement account Shares/units

(in thousands) Book value

Percentageof

ownership (%)

Market value or Net asset

value

Note

Sercomm Corporation Stocks

Senslinq Inc. (origin:Servecomm Inc.)


Long-term investments accounted for under the equity method 250 $4,695 100.00 $4,695 Note 1

Sercomm Investments Ltd.


Long-term investments accounted for under the equity method 1,200 7,355 100.00 7,355 Note 1



Long-term investments accounted for under the equity method 46,800 2,290,787 100.00 2,290,787 Note 3

Shukuan Investment Ltd.


Long-term investments accounted for under the equity method 2,800 (13,286) 100.00 (13,286) Note 3

Sercomm France SARL


Long-term investments accounted for under the equity method 100 4,878 100.00 4,878 Note 1

Industrial Bank of Taiwan - Financial assets measured at

cost-noncurrent 4,154 40,000 0.17 - Note 2

TECO Nanotech Co., Ltd. - Financial assets measured at

cost-noncurrent - 10 - - Note 2

Shukuan Investment Ltd. Stocks

Cerpass Technology Corp. - Financial assets measured at

cost-noncurrent 747 7,444 3.69 - Note 2

Sercomm Japan Inc. The Company's equity investee

Long-term investments accounted for under the equity method 1 (29,476) 100.00 (29,476) Note 1

Sercomm Trading Co. Ltd. Stocks




Smart Trade Inc. The Company's equity investee


Zealous Investments Ltd. Stocks




Ubiquisys Limited - Financial assets measured at cost-noncurrent 875 60,580 3.78 - Note 2

(USD2,000 thousand)

Smart Trade Inc. Stocks




Note 1: Amount was recognized based on the unreviewed or unaudited financial statements in 2011. Note 2: Can't obtain the financial statements of the company in time. Note 3: Amount was recognized based on the audited financial statements.



Attachment 5 Marketable securities acquired or disposed of with accumulated amount exceeding the lower of NT$100 million or 20 percent of the capital stock for the year ended December 31, 2011

Beginning balance Addition Disposal Ending balance

Company name

Securities type and name

Financial statement account

Counter party Relationship

Shares/ Units(in thousands)

Amount (Note)

Shares/ Units(in thousands) Amount Shares/ Units

(in thousands) Amount Book value

Gain(loss) from

disposal

Shares/ Units(in thousands)

Amount (Note)

The Company


Long-term investments accounted for under the equity method

Purchase of newly issued shares


$34,300 $1,409,594 12,500 $368,545 - $- $- $- 46,800 $2,290,787


Smart Trade Inc.




3,500 59,951 12,500 368,545 - - - - 16,000 570,902






24,900 1,131,848 5,000 147,090 - - - - 29,900 1,675,545

Smart Trade Inc.





3,500 59,948 12,500 368,545 - - - - 16,000 570,901

Note : The amount of ending balances of long-term investments accounted for under the equity method include adjustment under the equity method.



Attachment 6 Acquisition of individual real estate with amount exceeding the lower of NT$100 million or 20 percent of the capital stock for the year ended December 31, 2011

Prior transaction of related counter-party Name of

propertiesTypes of property

Transactiondate

Transactionamount

Payment status

Counter-party

Nature ofrelationship

Owner Relationships Transfer date Amount

Pricereference

Purpose ofAcquisition

Othercommitments

TheCompany Buildings 100.10.12 $298,454

(thousand)$90,000

(thousand)AboCom

Systems,Inc None N/A N/A N/A N/A Landappraisal

Plant expansion None



Attachment7 Related party transactions for purchases and sales amounts exceeding the lower of NT$100 million or 20 percent of the capital stock for the year ended December 31, 2011

Related party Relationship Transactions Details of non-arm's length transaction

Notes and accounts receivable (payable) Note

Purchases (Sales)

Company Purchases (Sales) Amount

Percentage oftotal

purchases(sales) (%)

Term Unit price Term Balance

Percentage of total

receivables(payable)

(%)

Sercomm Corporation

DwnetTechnology

(Suzhou)Limited

TheCompany's

equity investee

Sales $248,788 2.30 210 (Note1) (Note1) $190,317 15.03 (Note2)

DwnetTechnology

(Suzhou)Limited

Sercomm Corporation

TheCompany Purchases 250,292 10.99 210 - - 230,273 20.66

Sercomm Corporation

Sernet Technology

(Suzhou)Limited

TheCompany's

equity investee

Purchases 6,279,673 67.65 30 - - 1,191,881 76.74 (Note3)

Sernet Technology

(Suzhou)Limited

DwnetTechnology

(Suzhou)Limited

TheCompany's

equity investee

Sales 280,135 3.24 120 - - 219,281 15.52

DwnetTechnology

(Suzhou)Limited

Sernet Technology

(Suzhou)Limited

TheCompany's

equity investee

Purchases 280,135 12.34 120 - - 219,281 19.65

Note 1 The sales price to the above related parties was determined through mutual agreement based on the market conditions. The collectionperiod for related parties was month-end 90-210 days, while the terms for domestic third party sales was net 30-75 days. The collection period for overseas sales was net 30-240 days.

Note 2 The company's accounts receivable from Dwnet Technology (Suzhou) Limited amounted to $230,273 thousand. Overdue amount $39,956 thousand reclassified to other receivable.

Note 3 The company designate Sernet Technology (Suzhou) Limited for outward processing, please refer to Note25.



Attachment 8 Receivables from related parties with amount exceeding the lower of NT$100 million or 20 perceat of the capital stock as of December 31, 2011

Overdue receivables The name of the

company Name of

counterparty Relationship Endingbalance

Turnoverrate Amount

Action adopted for overdue

accounts

Subsequent collections

Allowance for

doubtfulaccounts

TheCompany

DwnetTechnology

(Suzhou)Limited

The Company's equity investee $230,273 - $39,956 Recorded in

other receivable $- $-

Sernet

Technology (Suzhou)Limited

TheCompany

The ultimate parent company 1,191,881 - - - 85,417

(USD2,800 thousand) -

Sernet

Technology (Suzhou)Limited

DwnetTechnology

(Suzhou)Limited

Affiliate with the same parnet

company 219,281 - - - - -



Attachment 9 For those who directly or indirectly have major influence or control over the investee company

Original investment amount Balance as of December 31, 2011

Investorcompany Investee company Main businesses and

products December 31,

2011

December 31,

2010

Shares (in thousands)

Percentage of

ownership

Bookvalue

Net income (loss)of the

investee

Investmentincome (loss)

recognized

Note

Sercomm Corporation

Senslinq Inc. (origin:Servecomm Inc.)

Sales of IT products $7,939 $7,939 250 100.00 $4,695 $(190) $(190) Note 1

Sercomm Investments Ltd.

Investment overseas, technology R&D and international trading

40,037 40,037 1,200 100.00 7,355 (33) (33) Note 1



1,471,187 1,102,642 46,800 100.00 2,290,787 362,299 362,299 Note 2

Shukuan Investment Ltd. Investment activity 28,000 28,000 2,800 100.00 (13,286) (40,640) (40,640) Note 2

Sercomm France SARL Sales of IT products 4,004 - 100 100.00 4,878 1,002 1,002 Note 1




989,358 989,358 30,956 100.00 1,728,861 261,124 261,124 Note 2

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

481,829 113,284 16,000 100.00 570,902 107,724 107,724 Note 2

ZealousInvestmentsLtd.


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

912,672 765,582 29,900 100.00 1,675,545 270,078 270,078 Note 2

Taicang Sercomm Technology Corp.

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

- 156,125 - - - - - Note 2

Smart Trade Inc.


R&D center of software; sales and after-sales service

481,829 113,284 16,000 100.00 570,901 107,725 107,725 Note 2

ShukuanInvestmentLtd.

Sercomm Japan Inc. Sales of IT products 9,617 9,617 1 100.00 (29,476) (40,754) (40,754) Note 2

Note 1: Amount was recognized based on the unreviewed or unaudited financial statements. Note 2: Amount was recognized based on the audited financial statements.



Attachment 10 Information on Mainland China investments

Investment flows Investeecompany

Main businesses and products

Totalamount of

paid-in capital

Method of investment

Accumulated outflow of investment

from Taiwan as of January

1, 2011 Outflow Inflow

Accumulated outflow of investment

from Taiwan as of December

31, 2011

Percentageof

ownership

Investment income

(loss)recognized

Carryingvalue as of December31, 2011

Accumulated inward

remittance of earnings as

of December 31, 2011

SernetTechnology

(Suzhou)Limited

Manufacture of routers,

communication products, Wlan

products; sales and after-sales service

$916,872Investment

in cash (Note 1)

$765,582 (USD23,900

thousand)

$147,090 (USD5,000

thousand)

$-$912,672

(USD28,900 thousand)

100.00 % $270,078 (Note4) $1,675,545 $-

DwnetTechnology

(Suzhou)Limited

R&D center of software; sales and after-sales service

$481,709Investment

in cash (Note 2)

$113,284 (USD3,500 thousand)

$368,545 (USD

125,000 thousand)

$-$481,829

(USD16,000 thousand)

100.00 % $107,725 (Note4) $570,901 $-

TaicangSercomm

Technology Corporation

Manufacture of routers,

communication products, Wlan

products; sales and after-sales service

$-Investment

in cash (Note 1)

$156,125 (USD4,800 thousand)

$-

$156,125 (USD4,800

thousand)

$-(Note3) 100.00 % $- $- $-

Accumulated investment in Mainland China as of December 31, 2011

Investment amounts authorized by Investment Commission, MOEA Upper limit on investment

$1,394,501(USD 44,900 thousand) USD 45,154 thousand Unlimited

(Note 5)

Note 1 The Company established Sercomm Trading Co. Ltd. in the third country. The Company reinvest Zealous Investments Ltd. (throughSercomm Trading Co. Ltd.) and then invest in Mainland China.

Note 2 The Company established Sercomm Trading Co. Ltd. in the third country. The Company reinvest Smart Trade Inc. (through SercommTrading Co. Ltd.) and then invest in Mainland China.

Note 3 Taicang Sercomm Technology Corporation was liquidated in first quarter 2011. Note 4 Amount was recognized based on the audited financial statements. Note 5 The Mainland China investment limit is without limit of stockholders' equity on December 31, 2011 according to "Examine Standards of

Investments and Technical Cooperation in Mainland of China Area", published by Investment Commission, MOEA.

Documents

SerComm Corporation SerComm Corporation Annual Report 2011 business, financial and industry leaders in Taiwan, important customers and technical cooperation