Edgar Filing: AU OPTRONICS CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ________________

Commission file number: 001-31335

(Exact name of Registrant as specified in its charter)

AU OPTRONICS CORP.

(Translation of Registrant’s name into English)

TAIWAN, REPUBLIC OF CHINA

(Jurisdiction of incorporation or organization)

1 LI-HSIN ROAD 2

HSINCHU SCIENCE PARK

HSINCHU, TAIWAN

REPUBLIC OF CHINA

(Address of principal executive offices)

Andy Yang

1 Li-Hsin Road 2

Hsinchu Science Park

Hsinchu, Taiwan

Republic of China

Telephone No.: +886-3-500-8800

Fascimile No.: +886-3-564-3370

Email: IR@auo.com

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class		Name of each exchange on which registered
Common Shares of par value NT$10.00 each		The New York Stock Exchange, Inc.*

*	Not for trading, but only in connection with the listing on the New York Stock Exchange, Inc. of American Depositary Shares representing such Common Shares

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 8,827,045,535 Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board oOther x

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 x Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

TABLE OF CONTENTS

	Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	1
CERTAIN CONVENTIONS	2
PART I	3
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3. KEY INFORMATION	3
3.A. Selected Financial Data	3
3.B. Capitalization and Indebtedness	6
3.C. Reason for the Offer and Use of Proceeds	6
3.D. Risk Factors	6
ITEM 4. INFORMATION ON THE COMPANY	28
4.A. History and Development of the Company	28
4.B. Business Overview	29
4.C. Organizational Structure	38
4.D. Property, Plants and Equipment	43
ITEM 4A. UNRESOLVED STAFF COMMENTS	46
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	46
5.A. Operating Results	46
5.B. Liquidity and Capital Resources	58
5.C. Research and Development	63
5.D. Trend Information	65
5.E. Off-Balance Sheet Arrangements	65
5.F. Tabular Disclosure of Contractual Obligations	65
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	67
6.A. Directors and Senior Management	67
6.B. Compensation	70
6.C. Board Practices	71
6.D. Employees	71
6.E. Share Ownership	72
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	73
7.A. Major Shareholders	73
7.B. Related Party Transactions	74
7.C. Interests of Experts and Counsel	76
ITEM 8. FINANCIAL INFORMATION	76
8.A. Consolidated Statements and Other Financial Information	76
8.A.7. Litigation	76
8.A.8. Dividends and Dividend Policy	79
8.B. Significant Changes	80
ITEM 9. THE OFFER AND LISTING	80
9.A. Offering and Listing Details	80
9.B. Plan of Distribution	80
9.C. Markets	80
9.D. Selling Shareholders	80
9.E. Dilution	81
9.F. Expenses of the Issue	81
ITEM 10. ADDITIONAL INFORMATION	81
10.A. Share Capital	81
10.B. Articles of Incorporation	81
10.C. Material Contracts	86
10.D. Exchange Controls	86
10.E. Taxation	87

10.F. Dividends and Paying Agents	91
10.G. Statement by Experts	91
10.H. Documents on Display	91
10.I. Subsidiary Information	91
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	91
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	94
12.A. Debt Securities	94
12.B. Warrants and Rights	94
12.C. Other Securities	94
12.D. American Depositary Shares	94
PART II	96
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	96
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	96
ITEM 15. CONTROLS AND PROCEDURES	96
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	98
ITEM 16B. CODE OF ETHICS	98
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	98
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	99
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	99
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	99
ITEM 16G. CORPORATE GOVERNANCE	99
PART III	103
ITEM 17. FINANCIAL STATEMENTS	103
ITEM 18. FINANCIAL STATEMENTS	103
ITEM 19. EXHIBITS	103

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Although these forward-looking statements, which may include statements regarding our future results of operations, financial condition, or business prospects, are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. The words “anticipate,” “believe,” “expect,” “intend,” “seek,” “plan,” “estimate” and similar expressions, as they relate to us, are intended to identify a number of these forward-looking statements. Our actual results of operations, financial condition or business prospects may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons, including, among other things and not limited to:

·	the impact of the global economic and financial crisis and the resulting slowdown in the global economy;

·	the cyclical nature of our industry;

·	further declines in average selling prices;

·	excess capacity in the thin film transistor liquid crystal display (“TFT-LCD”) industry;

·	our dependence on introducing new products on a timely basis;

·	our dependence on growth in the demand for our products;

·	our ability to compete effectively;

·	our ability to expand into new businesses or industries;

·	our ability to undertake mergers and acquisitions or investments;

·	changes in technology and competing products;

·	our ability to successfully expand our capacity;

·	our ability to acquire sufficient raw materials and key components;

·	our dependence on key personnel;

·	general political and economic conditions, including those related to the TFT-LCD industry;

·	litigation and regulatory investigations against us;

·	possible disruptions in commercial activities caused by natural and human-induced disasters, including terrorist activity and armed conflict;

·	fluctuations in foreign currency exchange rates; and

·	other factors in the “Risk Factors” section in this annual report. Please see “Item 3. Key Information—3.D. Risk Factors.”

Table of Contents

CERTAIN CONVENTIONS

We publish our financial statements in New Taiwan dollars (“NT dollars”), the lawful currency of the Republic of China (“ROC”). This annual report contains translations of NT dollar amounts, Renminbi (“RMB”) amounts, Japanese Yen (“JPY” or “YEN”) amounts and Euro (“EUR”) amounts, into United States dollars (“U.S. dollars”), at specific rates solely for the convenience of the reader. For convenience only and unless otherwise noted, all translations between NT dollars and U.S. dollars, between RMB and U.S. dollars, between JPY and U.S. dollars and between EUR and U.S. dollars in this annual report were made at a rate of NT$31.95 to US$1.00, RMB6.83 to US$1.00, JPY93.08 to US$1.00, and EUR0.70 to US$1.00, respectively, the noon buying rate in The City of New York for cable transfers in NT dollars per U.S. dollar, RMB per U.S. dollar, JPY per U.S. dollar and EUR per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2009. No representation is made that the NT dollar, RMB, JPY, EUR or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars, RMB, JPY, EUR or NT dollars, as the case may be, at any particular rate or at all. On May 7, 2010, the noon buying rates were NT$31.77 to US$1.00, RMB6.83 to US$1.00, JPY91.67 to US$1.00, and EUR0.79 to US$1.00, respectively. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

All references in this annual report to “Taiwan” or the “ROC” are to the island of Taiwan and other areas under the effective control of the Republic of China, and all references to the “ROC government” are references to the government of the Republic of China. All references to “our company,” “we,” “us” and “our” in the annual report are to AU Optronics Corp. and its consolidated subsidiaries, unless the context suggests otherwise. All references in this annual report to “subsidiary” are to companies owned directly or indirectly by AU Optronics Corp., unless the context suggests otherwise. All references in this annual report to the “PRC” or “China” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau.

All references in this annual report to “large-size panels” are to panels ten inches and above in diagonal length. All references to “small- to medium-size panels” refer to panels which are under ten inches in diagonal length.

Table of Contents

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

3.A. Selected Financial Data

The selected consolidated statement of operations data for the years ended December 31, 2007, 2008 and 2009 and selected consolidated balance sheet data as of December 31, 2008 and 2009 set forth below have been derived from our audited consolidated financial statements included herein. The selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 and selected consolidated statement of operations data for the years ended December 31, 2005 and 2006 have been derived from our audited consolidated financial statements that have not been included herein. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the accompanying notes included elsewhere in this annual report.

Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the ROC (“ROC GAAP”).

On October 1, 2006, we merged with Quanta Display Inc. (“QDI”), a company incorporated in the ROC, that manufactures and assembles TFT-LCD panels. Under the terms of the merger agreement, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock and we assumed substantially all of the assets, liabilities and personnel of QDI. Under both ROC GAAP and accounting principles generally accepted in the United States (“US GAAP”), the merger with QDI has been accounted for under the purchase method of accounting. Our financial statements, under both ROC GAAP and US GAAP, referenced herein for periods or as of dates prior to October 1, 2006, do not include the financial data of QDI.

For information relating to the nature and effect of significant differences between ROC GAAP and US GAAP as they relate to us, see note 28 to our consolidated financial statements.

The table below sets forth certain financial data under ROC GAAP for the periods and as of the dates indicated.

	Year Ended and As of December 31,
	2005			2006			2007			2008			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except percentages and per share and per ADS data)
Consolidated Statement of Operations Data:
ROC GAAP
Net sales		217,388.4			293,106.8			480,183.6			423,928.2			359,331.3			11,246.7
Gross profit		29,848.0			29,850.3			86,178.2			55,327.9			7,040.9			220.4
Operating expenses		12,859.3			15,634.0			22,903.5			22,235.6			22,279.9			697.3
Operating income (loss)		16,988.7			14,216.3			63,274.8			33,092.3			(15,239.1	)		(477.0	)
Earnings (loss) before income tax and cumulative effect of changes in accounting principles		16,094.6			10,200.3			58,563.8			26,270.9			(27,267.4	)		(853.4	)
Income tax (expense) benefit		(473.4	)		(1,068.3	)		(2,087.9	)		(4,629.1	)		22.6			0.7
Cumulative effect of changes in accounting principles(1)		–			(38.6	)		–			–			–			–
Net income (loss)		15,621.2			9,093.4			56,475.9			21,641.8			(27,244.8	)		(852.7	)
Weighted average shares outstanding—Basic		6,742.1			7,397.9			8,695.1			8,760.3			8,796.7			8,796.7
Weighted average shares outstanding—Diluted (2)		6,742.1			7,511.3			9,115.8			9,111.1			8,796.7			8,796.7

Table of Contents

	Year Ended and As of December 31,
	2005			2006			2007			2008			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except percentages and per share and per ADS data)
Consolidated Statement of Operations Data:
ROC GAAP (continued)
Earnings (loss) per share—Basic		2.32			1.23			6.49			2.43			(3.04	)		(0.10	)
Earnings (loss) per share—Diluted(2)		2.32			1.14			6.16			2.34			(3.04	)		(0.10	)
Earnings (loss) per ADS equivalent—Basic		23.18			12.31			64.88			24.28			(30.43	)		(0.95	)
Earnings (loss) per ADS equivalent—Diluted(2)		23.18			11.41			61.64			23.39			(30.43	)		(0.95	)

Consolidated Balance Sheet Data:
ROC GAAP
Current assets		95,841.0			152,771.4			217,878.3			146,293.1			196,460.8			6,149.0
Property, plant and equipment		221,126.8			381,550.7			363,835.1			389,348.3			390,750.1			12,230.1
Goodwill and intangible assets		2,483.3			20,142.8			19,554.4			15,548.1			14,293.3			447.4
Total assets		329,796.3			578,157.9			617,459.2			566,935.6			622,612.8			19,487.1
Current liabilities		89,858.1			167,345.6			174,520.9			152,484.7			202,725.4			6,345.1
Long-term liabilities		83,940.3			179,716.0			142,097.2			115,170.9			144,829.2			4,533.0
Total liabilities		173,976.8			347,081.6			316,639.4			267,676.9			347,693.8			10,882.4
Capital stock		58,305.5			75,734.0			78,177.1			85,057.2			88,270.5			2,762.8
Total stockholders’ equity		155,819.5			231,076.3			300,819.9			299,258.7			274,919.0			8,604.7

Other Financial Data:
ROC GAAP
Gross margin(3)		13.7	%		10.2	%		17.9	%		13.1	%		2.0	%		2.0	%
Operating margin(4)		7.8	%		4.9	%		13.2	%		7.8	%		(4.2	)%		(4.2	)%
Net margin(5)		7.2	%		3.1	%		11.8	%		5.1	%		(7.6	)%		(7.6	)%
Capital expenditures		80,652.3			87,246.7			65,136.7			98,355.2			61,046.9			1,910.7
Depreciation and amortization		34,493.2			52,760.2			81,705.6			81,188.4			90,107.6			2,820.3
Cash dividend paid		5,935.2			1,749.2			1,514.8			19,670.6			2,551.7			79.9
Cash flows from operating activities		48,006.0			68,526.7			156,926.9			132,057.5			57,041.0			1,785.3
Cash flows from investing activities		(82,456.2	)		(83,300.6	)		(66,123.1	)		(101,257.4	)		(66,616.7	)		(2,085.0	)
Cash flows from financing activities		43,097.3			32,550.8			(44,816.6	)		(37,435.6	)		11,925.3			373.2

The table below sets forth certain financial data under US GAAP for the periods and as of the dates indicated.

	Year Ended and As of December 31,
	2005			2006			2007			2008			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except percentages and per common share and per ADS data)
Consolidated Statement of Operations Data:
US GAAP
Net sales		217,388.4			293,106.8			480,184.3			423,928.2			358,732.8			11,227.9
Gross profit		22,126.5			23,372.0			73,179.3			42,959.9			766.4			24.0
Operating expenses		12,642.7			15,819.3			21,328.3			22,811.7			29,076.1			910.0
Operating income (loss)		9,483.8			7,552.6			51,851.0			20,148.1			(28,309.7	)		(886.1	)
Earnings (loss) before income tax, extraordinary item and non-controlling interests		8,837.1			2,222.4			48,434.3			16,086.2			(29,662.3	)		(928.4	)
Income tax (expense) benefit		(473.4	)		(1,059.2	)		(3,053.1	)		(2,579.6	)		1,359.5			42.6
Non-controlling interests in (loss) income		(5.8	)		(10.0	)		25.7			416.9			367.5			11.5
Extraordinary item(6)		308.7			–			–			–			–			–
Net income (loss) attributable to stockholders of AU Optronics Corp.		8,678.2			1,173.2			45,355.5			13,089.7			(28,670.3	)		(897.3	)
Weighted average shares outstanding—Basic		6,356.6			7,089.0			8,409.6			8,606.7			8,785.2			8,785.2
Weighted average shares outstanding—Diluted(2)		6,356.6			7,089.1			8,818.3			8,817.6			8,785.2			8,785.2
Earnings (loss) per share—Basic:
Income (loss) before extraordinary item		1.32			0.17			5.39			1.52			(3.26	)		(0.10	)
Extraordinary item		0.05			–			–			–			–			–
Net income (loss)		1.37			0.17			5.39			1.52			(3.26	)		(0.10	)
Earnings (loss) per share—Diluted(2)

Table of Contents

	Year Ended and As of December 31,
	2005			2006			2007			2008			2009
	NT$			NT$			NT$			NT$			NT$			US$
	(in millions, except percentages and per common share and per ADS data)
Consolidated Statement of Operations Data:
US GAAP (continued)
Income (loss) before extraordinary item		1.32			0.17			5.17			1.49			(3.26	)		(0.10	)
Extraordinary item		0.05			–			–			–			–			–
Net income (loss)		1.37			0.17			5.17			1.49			(3.26	)		(0.10	)
Earnings (loss) per ADS equivalent—Basic:
Income (loss) before extraordinary item		13.17			1.65			53.93			15.21			(32.63	)		(1.02	)
Extraordinary item		0.49			–			–			–			–			–
Net income (loss)		13.66			1.65			53.93			15.21			(32.63	)		(1.02	)
Earnings (loss) per ADS equivalent—Diluted:(2)
Income (loss) before extraordinary item		13.17			1.65			51.67			14.89			(32.63	)		(1.02	)
Extraordinary item		0.49			–			–			–			–			–
Net income (loss)		13.66			1.65			51.67			14.89			(32.63	)		(1.02	)

Consolidated Balance Sheet Data:
US GAAP
Current assets		93,469.8			150,855.5			215,929.0			145,522.3			195,902.9			6,131.5
Property, plant and equipment		220,974.0			380,859.8			361,197.2			383,958.1			385,571.6			12,068.0
Goodwill and intangible assets		16,578.5			33,188.5			30,334.7			26,399.4			25,036.5			783.6
Total assets		342,809.3			588,431.5			623,655.0			568,985.6			626,141.8			19,597.6
Current liabilities		91,288.0			169,543.8			180,765.1			152,647.2			203,120.9			6,357.5
Long-term liabilities		84,485.1			179,927.6			142,182.1			115,209.3			145,004.4			4,538.5
Total liabilities		175,773.1			349,471.4			322,947.2			267,856.5			348,125.3			10,896.0
Non-controlling interests in subsidiaries		117.3			342.0			8,842.0			7,737.2			11,747.5			367.7
Total equity attributable to stockholders of AU Optronics Corp.		166,918.9			238,618.1			291,865.8			293,391.9			266,269.0			8,333.9

Other Financial Data:
US GAAP
Gross margin(3)		10.2	%		8.0	%		15.2	%		10.1	%		0.2	%		0.2	%
Operating margin(4)		4.4	%		2.6	%		10.8	%		4.8	%		(7.9	)%		(7.9	)%
Net margin(5)		4.0	%		0.4	%		9.4	%		3.1	%		(8.0	)%		(8.0	)%
Capital expenditures		80,801.0			87,408.9			65,300.5			98,330.6			61,331.5			1,919.6
Depreciation and amortization		36,067.1			54,940.0			84,984.5			83,680.4			91,506.9			2,864.1
Cash flows from operating activities		46,951.9			67,955.3			156,942.2			132,044.2			58,566.1			1,833.1
Cash flows from investing activities		(81,428.1	)		(83,130.7	)		(66,313.7	)		(101,242.4	)		(68,550.3	)		(2,145.5	)
Cash flows from financing activities		43,783.9			32,951.7			(44,816.6	)		(37,473.2	)		11,467.6			358.9

(1)	Represents the cumulative effect of our adoption of Republic of China Statement of Financial Accounting Standards (“ROC SFAS”) No. 34 “Financial Instruments: Recognition and Measurement” on January 1, 2006.

(2)	Diluted earnings per share in 2009 was not calculated due to the anti-dilutive effect of stock options and convertible bonds.

(3)	Gross margin is calculated by dividing gross profit by net sales.

(4)	Operating margin is calculated by dividing operating income by net sales.

(5)	Net margin is calculated by dividing net income by net sales.

(6)	Represents the proportionate share of extraordinary gain reported by equity-method investee in 2005.

Table of Contents

Exchange Rate

Fluctuations in the exchange rate between NT dollars and U.S. dollars will affect the U.S. dollar equivalent of the NT dollar price of our shares on the Taiwan Stock Exchange and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the U.S. dollar conversion by the depositary of cash dividends paid in NT dollars on, and the NT dollar proceeds received by the depositary from any sale of, our shares represented by ADSs.

The following table sets forth, for the periods indicated, information concerning the number of NT dollars for which one U.S. dollar could be exchanged based on the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York.

	NT Dollars per U.S. Dollar Noon Buying Rate
	Average		High		Low		Period-End
	(of month-end rates for years)
2005	NT$	32.13	NT$	33.77	NT$	30.65	NT$	32.80
2006		32.51		33.31		31.28		32.59
2007		32.85		33.41		32.26		32.43
2008		31.52		33.55		29.99		32.76
2009		32.96		35.21		31.95		31.95
November		32.32		32.58		32.12		32.20
December		32.25		32.38		31.95		31.95
2010: (through May 7)	31.78		32.14		31.30		31.77
January		31.87		32.04		31.65		31.94
February		32.06		32.14		31.98		32.12
March		31.83		32.04		31.70		31.73
April		31.48		31.74		31.30		31.31
May (through 7)	31.56		31.77		31.40		31.77

3.B. Capitalization and Indebtedness

Not applicable.

3.C. Reason for the Offer and Use of Proceeds

Not applicable.

3.D. Risk Factors

Risks Relating to Our Financial Condition, Business and Industry

The recent global economic and financial crisis and the resulting slowdown in the global economy could materially and adversely affect our business, results of operations and financial condition.

The recent global economic and financial crisis and the resulting slowdown in the global economy that have been affecting global business, banking and financial sectors have also been affecting the TFT-LCD market. The recent turmoil in global markets has resulted in sharp declines in electronic products sales from which we generate our income. There could be a number of side effects from such turmoil on our business, including significant decreases in orders from our customers, insolvency of key suppliers resulting in raw material constraints and product delays, inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies and counterparty failures negatively impacting our operations. If the global economic downturn continues or if any similar financial crisis or economic downturn occurs in the future, our business, results of operations and financial condition may be materially and adversely affected.

Table of Contents

Our industry is cyclical, with recurring periods of capacity increases. As a result, price fluctuations in response to supply and demand imbalances could harm our results of operations.

The TFT-LCD industry in general is characterized by cyclical market conditions. The industry has been subject to significant and rapid downturns as a result of an imbalance between excess supply and a slowdown in demand, resulting in sharp declines in average selling prices.

For example, average selling prices of our large-size panels decreased by 10.9% in the first quarter of 2007 from the fourth quarter of 2006 and then increased in the last three quarters of 2007 by 31.1% from the first quarter of 2007. Average selling prices of our large-size panels decreased throughout 2008 by 46.6% from the fourth quarter of 2007. On a year-to-year basis, average selling prices decreased by 24.9% in 2009 compared to 2008, decreased by 13.6% in 2008 compared to 2007.

Capacity expansion currently being undertaken or anticipated in the TFT-LCD industry may lead to excess capacity. For example, it is expected that as additional capacity provided by eighth and future generation fabs becomes available, the TFT-LCD industry may face excess capacity. We cannot assure you that any continuing or further decrease in average selling prices or future downturns resulting from excess capacity or other factors affecting the industry will not be severe or that any such continuation, decrease or downturn would not seriously harm our business, financial condition and results of operations.

Our ability to maintain or increase our revenues will primarily depend upon our ability to maintain market share, increase unit sales of existing products, and introduce and sell new products that offset the anticipated fluctuation and long-term declines in the average selling prices of our existing products. We cannot assure you that we will be able to maintain or expand market share, increase unit sales, and introduce and sell new products, to the extent necessary to compensate for market oversupply.

We may experience declines in the average selling prices of our display panels irrespective of cyclical fluctuations in the industry.

The average selling prices of our display panels have declined in general and are expected to continually decline with time irrespective of industry-wide cyclical fluctuations as a result of, among other factors, technology advancements and cost reductions. Although we may be able to take advantage of the higher selling prices typically associated with new products and technologies when they are first introduced into the market, such prices decline over time and in certain cases, very rapidly, as a result of market competition. If we are unable to effectively anticipate and counter the price erosion that accompanies our products, or if the average selling prices of our display panels decrease faster than the rate at which we are able to reduce our manufacturing costs, our profit margins will be adversely affected and our results of operations and financial condition may be materially and adversely affected.

Our results of operations have fluctuated in the past. If we are unable to achieve profitability in 2010 or beyond, the value of the ADSs and our shares may be adversely affected.

Our results of operations have fluctuated in the past. In 2007, our net sales increased by 63.8% to NT$480.2 billion and our net income increased to NT$56.5 billion compared to 2006. Primarily as a result of the recent global disruption in financial markets and adverse economic conditions and the decrease in average selling prices for our products, our net sales decreased by 11.7% to NT$423.9 billion in 2008 compared to 2007 and further decreased by 15.2% to NT$359.3 billion in 2009 compared to 2008. Our net income decreased by 61.7% to NT$21.6 billion in 2008 compared to 2007; however we incurred a net loss of NT$27.2 billion in 2009. We cannot assure you that we will be profitable in 2010 or beyond. In addition, we expect that average selling prices for many of our existing products will continue to decline over the long term. If we are unable to reduce our costs of manufacturing our products to offset expected declines in average selling prices and maintain a high capacity utilization rate, our gross margin will decline, which could seriously harm our business and reduce the value of our equity securities. If we are unable to achieve profitability in 2010 or beyond, the value of the ADSs and our shares may be adversely affected.

Our future net sales, gross profit and operating income may vary significantly due to a combination of factors, including, but not limited to:

Table of Contents

Our ability to develop and introduce new products to meet customers’ needs in a timely manner. The inability to develop or introduce new products in a timely manner may hurt our competitive position because customers may choose to source more advanced products from competitors.

Our ability to develop or acquire and implement new manufacturing processes and product technologies. If we are unable to successfully implement new manufacturing processes and product technologies in a timely manner, our competitors may seize new opportunities in new markets.

Our ability to control our fixed and variable costs and operating expenses. Increased fixed and variable costs and operating expenses may reduce our margins and adversely affect our results of operations.

Our ability to expand capacity. We may not be able to meet market demand in a timely manner if we are unable to successfully implement our expansion plans.

Our ability to manage our product mix. Our results of operations may fluctuate if we are unable to manage our product mix to meet our customers’ demand in a timely manner.

Our ability to obtain raw materials and components at acceptable prices and in a timely manner. A shortage in raw materials and components could result in increased raw materials and components costs and put downward pressure on gross margins as well as cause delays to our production and delivery schedules, which may result in the loss of customers and revenues.

Lower than expected growth in demand for TFT-LCD panels resulting in oversupply in the market. When oversupply conditions occur, we may reduce the price of our panels to maintain high capacity utilization rates or adjust our utilization rate.

Our ability to obtain adequate external financing on satisfactory terms. Our business is capital-intensive and if we are unable to obtain adequate external financing on satisfactory terms, it will have a material adverse effect on our business, results of operations and future prospects.

Fines and penalties payable. We and certain of our subsidiaries, along with various competitors in the TFT-LCD industry, are under investigation for alleged violation of antitrust and competition laws. Any penalties, fines or settlements made in connection with this investigation and/or these lawsuits may have a material adverse effect on our business, results of operations and future prospects.

Our results of operations fluctuate from quarter to quarter, which makes it difficult to predict our future performance.

Our results of operations have varied significantly in the past and may fluctuate significantly from quarter to quarter in the future due to a number of factors, many of which are beyond our control. Our business and operations may be adversely affected by the following factors, among others:

changes in general political, economic and legal conditions, such as the impact of the recent global financial crisis on economic growth and the resulting slowdown in the global economy;

the cyclical nature of both the TFT-LCD industry, including fluctuations in average selling prices, and the markets served by our customers;

the speed at which we and our competitors expand production capacity;

access to raw materials and components, equipment, electricity, water and other required utilities on a timely and economical basis;

technological changes;

the loss of a key customer or the postponement, rescheduling or cancellation of large orders from customers;

Table of Contents

the outcome of ongoing and future litigation and government investigations;

changes in end-users’ spending patterns;

changes to our management team;

access to funding on satisfactory terms;

our customers’ adjustments in their inventory; and

natural disasters, such as typhoons and earthquakes, and industrial accidents, such as fires and power failures, as well as geo-political instability as a result of terrorism or political or military conflicts.

Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future performance. Unfavorable changes in any of the above factors may seriously harm our business, financial condition and results of operations. In addition, our results of operations may be below the expectations of public market analysts and investors in some future periods, which may result in a decline in the price of the ADSs or shares.

Our results of operations may be adversely affected if we cannot introduce new products on a timely basis or if our new products do not gain market acceptance.

Early product development by itself does not guarantee the success of a new product. Success also depends on other factors such as product acceptance by the market. For example, although TFT-LCD technology was initially introduced commercially in the early 1990s, its application to the consumer electronics sector began to gain wide market acceptance only in the last few years. New products are developed in anticipation of future demand. Our delay in the development of commercially successful products with anticipated technological advancement may adversely affect our business. We cannot assure you that the launch of any new product will be successful, or that we will be able to produce sufficient quantities of these products to meet market demand.

We plan to continue to expand our operations to meet the needs of high-growth applications in computer products, consumer electronics, LCD television and other markets as demand increases. Because these products, such as mobile phones, digital photo frames, digital still cameras, portable navigation display, portable DVD players and LCD televisions, are expected to be marketed to a diversified group of end-users with demands for different specifications, functions and prices, we have developed different marketing strategies to promote our panels for these products. We cannot assure you that our strategies to expand our market share for these panels will be successful. If we fail to successfully market panels for these products, our results of operations will be adversely affected.

Our net sales and results of operations depend on continuing demand for televisions, notebook computers, desktop monitors and other products with TFT-LCD panels. Our sales may not grow at the rate we expect if there is a downturn in the demand for, or a further decrease in the average selling prices of, panels for these products.

Currently, our total sales are derived principally from customers using our products in televisions, notebook computers, desktop monitors and other products with display devices. In particular, a substantial percentage of our sales is increasingly derived from our panels for LCD televisions, which accounted for 41.8%, 44.4% and 46.3% of our net sales in 2007, 2008 and 2009, respectively. A substantial portion of our sales is also derived from our panels used in desktop monitors, which accounted for 27.8%, 22.0% and 19.0% of our net sales in 2007, 2008 and 2009, respectively, and our panels used in notebook computers accounted for 18.5%, 19.1% and 16.8% of our total net sales in 2007, 2008 and 2009, respectively. We will continue to be dependent on the growth of the television and personal computer industries for a substantial portion of our net sales, and any downturn in these industries would result in reduced demand for our products, reduced net sales, lower average selling prices and/or reduced margins and our business prospects and results of operations may be materially and adversely affected.

Table of Contents

If we are unable to achieve high capacity utilization rates, our results of operations will be adversely affected.

High capacity utilization rates allow us to allocate fixed costs over a greater number of panels produced. Increases or decreases in capacity utilization rates can significantly impact our gross margins. Accordingly, our ability to maintain or improve our gross margins will continue to depend, in part, on achieving high capacity utilization rates. In turn, our ability to achieve high capacity utilization rates will depend on the ramp-up progress of our advanced production facilities and our ability to efficiently and effectively allocate production capacity among our product lines, as well as the demand for our products and our ability to offer products that meet our customers’ requirements at competitive prices.

Although we achieved high capacity utilization rates in certain quarters in 2007, 2008 and 2009, our results of operations in the past have been adversely affected by low capacity utilization rates. For example, in the fourth quarter of 2008 and the first quarter of 2009, we had adjusted our utilization rates to as low as approximately 55% and 65%, respectively, in order to offset the impact of excess inventory that was accumulating in the market. We cannot assure you that we will be able to achieve high capacity utilization rates in 2010 or beyond. If we are unable to efficiently ramp-up our advanced production facilities or demand for our products does not meet our expectations, our capacity utilization rates will decrease, our gross margins will suffer and our results of operations will be materially and adversely affected.

We may experience losses on inventories.

Frequent new product introductions in the computer and consumer electronics industries can result in a decline in the average selling prices of our panels and the obsolescence of our existing TFT-LCD panel inventory. This can result in a decrease in the stated value of our TFT-LCD panel inventory, which we value at the lower of cost or net realizable value.

We manage our inventory based on our customers’ and our own forecasts. Although we regularly make adjustments based on market conditions, we typically deliver our goods to our customers one month after a firm order is placed. While we maintain open channels of communication with our major customers to avoid unexpected decreases in firm orders or subsequent changes to placed orders, and try to minimize our inventory levels, such actions by our customers may have a material adverse effect on our inventory management.

We depend on a small number of customers for a substantial portion of our net sales, and a loss of any one of these customers, or a significant decrease in orders from any of these customers, would result in the loss of a significant portion of our net sales.

We depend on a small number of customers for a substantial portion of our business. In 2007, 2008 and 2009, our five largest customers accounted for 32.1%, 39.4% and 37.3%, respectively, of our net sales. In addition, certain customers individually accounted for more than 10% of our net sales in the last three years. For example, Samsung Electronics Co., Ltd. (“Samsung”) accounted for 12.7%, 14.8% and 16.9% of our net sales in 2007, 2008 and 2009, respectively.

As some of our major customers are brand companies which also provide original equipment manufacturing services for other brand companies, such as Samsung, our panels shipped to these customers include both panels ordered for their own account as well as panels ordered by or on behalf of their brand company customers.

In recent years, our largest customers have varied due to changes in our product mix. We expect that we will continue to depend on a relatively small number of customers for a significant portion of our net sales and may continue to experience fluctuations in the distribution of our sales among our largest customers as we periodically adjust our product mix. Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our business. If any of our significant customers reduces, delays or cancels its orders, or the financial condition of our key customers deteriorate, our business could be seriously harmed. Similarly, a failure to manufacture sufficient quantities of panels to meet the demands of these customers may cause us to lose customers, which may adversely affect the profitability of our business as a result.

Table of Contents

If we are found to have violated antitrust and competition laws, we may be subject to severe fines or penalties that would have a material adverse effect on our business and operations.

We and certain of our subsidiaries, along with various competitors in the TFT-LCD industry, are under investigation for alleged violation of antitrust and competition laws. Specifically, since December 2006, we and certain of our overseas subsidiaries have become involved in antitrust investigations by the United States Department of Justice (“U.S. DOJ”), the Commission of the European Communities Directorate-General for Competition (“DG COMP”), the Canada Competition Bureau, the Taiwan Fair Trade Commission, the Korea Fair Trade Commission and the Japan Fair Trade Commission, concerning the allegations of price fixing by manufacturers of TFT-LCD panels. In January 2009, the Taiwan Fair Trade Commission visited our office in Taiwan and requested certain information from us as part of its investigations into the TFT-LCD industry. In November 2009, the Taiwan Fair Trade Commission notified us of the termination of its investigation. The Japan Fair Trade Commission and the Korean Fair Trade Commission also requested certain information from us as part of their respective investigations in 2007 and 2009, respectively. In 2009, the DG COMP issued a “Statement of Objections” to a number of LCD manufacturers, including us, alleging anti-competitive activities. We received DG COMP’s Statement of Objections in May 2009 and submitted our reply in July 2009. We and certain LCD manufacturers attended the hearing held by the DG COMP regarding its investigation in September 2009. The result of DG COMP’s investigation is still pending. We intend to continue to cooperate with these investigations as warranted as part of our ongoing defense of these matters.

We, certain of our subsidiaries, and certain of our respective current or former officers and/or employees may be indicted in the United States for possible violations of antitrust and/or competition laws. If we and certain of our subsidiaries are found to have violated antitrust and/or competition laws, we and our subsidiaries will likely have to pay a fine or penalty. It is also possible that certain of our current or former officers and/or employees may be held criminally liable and subject to imprisonment or fines or both. We and our subsidiaries may also agree to pay a fine or penalty as part of any plea bargain or settlement. To our knowledge, certain of our competitors that pled guilty and entered into plea bargain agreements with the U.S. DOJ have agreed to pay fines ranging from US$35 million to US$400 million. While we do not know all the facts and circumstances that led each of these competitors to enter into these pleas, we are aware of the outcome of those plea bargain agreements which may or may not be the amounts which we and our subsidiaries may agree to pay and/or which the U.S. DOJ may agree to accept as part of any plea bargain and/or settlement.

The ultimate outcome of the pending antitrust investigations cannot be predicted with certainty. Any penalties, fines or settlements made in connection with these investigations and/or lawsuits may have a material adverse effect on our business, results of operation and future prospects.

Moreover, there are also over 100 civil lawsuits filed against us and/or our subsidiaries in the United States and several civil lawsuits in Canada alleging, among other things, antitrust violations. The putative antitrust class actions filed in the United States have been consolidated for discovery in the United Stated District Court for the Northern District of California. In the amended consolidated complaints, the plaintiffs are seeking, among other things, unspecified monetary damages and an enjoinment from the alleged antitrust conspiracy. The class actions are in the discovery phase. The court has recently issued an order certifying two types of classes that may proceed against us and other TFT-LCD companies, including direct and indirect purchasers.

In addition, in the fourth quarter of 2009, AT&T Corp and its affiliates (collectively, “AT&T”), Motorola Inc. (“Motorola”) and Nokia Corporation (“Nokia”), respectively filed civil lawsuits against a number of LCD manufacturers including us, claiming among other things, unspecified monetary damages and an enjoinment from the alleged antitrust conspiracy. These lawsuits are still in the early stages.

We have made provisions for certain potential litigation losses and others, as may be applicable, and we will adjust the amounts from time to time as we deem appropriate. See note 25(e) to our consolidated financial statements.

We intend to defend these lawsuits vigorously and we have retained legal counsel to represent us. At this stage, the final outcome of these matters is uncertain, and the amount of possible loss, if any, is currently not estimable. We are reviewing the merits of these civil lawsuits on an ongoing basis. Any penalties, fines or settlements made in connection with these lawsuits may have a material adverse effect on our business, results of operation and future prospects.

Table of Contents

Our customers generally do not place purchase orders far in advance, which makes it difficult for us to predict our future revenues and allocate capacity efficiently and in a timely manner.

Our customers generally provide rolling forecasts four to six months in advance of, and do not place firm purchase orders until one month before, the expected shipment date. In addition, due to the cyclical nature of the TFT-LCD industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenues in future periods. Moreover, we incur expenses and adjust inventory levels of raw materials and components based in part on customers’ forecast, and we may be unable to allocate production capacity in a timely manner to compensate for shortfalls in sales. We expect that, in the future, our sales in any quarter will continue to be substantially dependent upon purchase orders received in that quarter. The inability to adjust production costs, to obtain necessary raw materials and components or to allocate production capacity quickly to respond to the demand for our products may affect our ability to maximize results of operations, which may result in a negative impact on the value of your investment in the ADSs or our shares.

Our future competitiveness and growth prospects could be adversely affected if we are unable to successfully expand our capacity in our second 7.5-generation fab or complete the construction and installation of our second 8.5- generation fab as scheduled.

We commenced construction of our second 7.5-generation fab in the third quarter of 2006 and it began commercial production in the second quarter of 2009. As of April 30, 2010, our second 7.5-generation fab had an input capacity of approximately 25,000 substrates per month. If market demand increases in the future, we may decide to expand to its maximum input capacity of approximately 60,000 substrates per month.

We also commenced construction of our second 8.5-generation fab in the second quarter of 2009 and we expect to start equipment move-in by the end of 2010. Our second 8.5-generation fab is designed to process substrates of 2,200 mm x 2,500 mm which can produce large-size panels with high efficiency and with capabilities of cutting, for example, eight 46-inch panels, six 55-inch panels or three 65-inch panels in wide format. The location of our second 8.5-generation fab is in the Seven Star Farm of Central Taiwan Science Park in the ROC (“Seven Star Farm”). In July 2006, the Environmental Protection Agency of the ROC Executive Yuan issued its opinion (“EPA Opinion”) on an environmental impact assessment report submitted by the Central Taiwan Science Park Development Office relating to the development of Seven Star Farm (“Environmental Impact Assessment Report”), which among other things, required a wider scope of environmental impact assessment and additional environmental control measures for projects constructed on Seven Star Farm compared to the scope and measures proposed in the Environmental Impact Assessment Report. The EPA Opinion was disputed and finally appealed to Taiwan Supreme Administrative Court. On January 21, 2010, the Taiwan Supreme Administrative Court dismissed the case. Notwithstanding the dismissal, the Central Taiwan Science Park Development Office may still be required to make additional environmental assessment for the construction of Seven Star Farm. We have been approved to commence construction of our second 8.5-generation fab on Seven Star Farm and as of December 31, 2009, the development cost we incurred for our second 8.5-generation fab was approximately NT$9 billion. We cannot assure you that further queries or challenges presented by the EPA will not adversely affect our construction and we cannot assure you that we would be able to complete construction and installation of our second 8.5-generation fab as scheduled. We may also incur additional expenses in connection with dealing with queries or challenges by the EPA, which may adversely affect our business and results of operations.

In addition, the successful expansion of our second 7.5-generation fab or completion of our second 8.5-generation fab is dependent upon a number of other factors, including timely delivery of equipment and machinery and the hiring and training of new skilled personnel. Although we believe that we have the internal capabilities and know-how to expand our second 7.5-generation fab and install and operate our second 8.5-generation fab, no assurances can be given that we will be successful. We cannot assure you that we will be able to obtain from third parties, if necessary, the technology, intellectual property or know-how that may be required for our second 7.5-generation fab or second 8.5-generation fab on acceptable terms. In addition, delays in the delivery of equipment and machinery as a result of increased demand for such equipment and machinery or the delivery of equipment and machinery that do not meet our specifications could delay the establishment or expansion of these fabs.

Table of Contents

If we face unforeseen disruptions in the construction, installation, expansion and/or manufacturing processes with respect to our second 7.5-generation fab or our second 8.5-generation fab, we may not be able to realize the potential gains from the manufacturing of panels and may face disruptions in capturing the growth opportunities associated with the expected expansion of the market for LCD TV panels.

If capital resources required for our expansion plans are not available, we may be unable to successfully implement our business strategy.

Historically, we have been able to finance our capital expenditures through cash flow from our operating activities and financing activities, including the issuance of equity securities, long-term borrowings and the issuance of convertible and other debt securities. Our ability to expand our production facilities and establish next generation fabs will continue to largely depend on our ability to obtain sufficient cash flow from operations as well as external funding. In April 2010, our Board of Directors resolved to issue up to US$800 million in principal amount of unsecured global convertible bonds for the purpose to purchasing machinery and equipment overseas in line with the growth of our business. In addition, we expect to make capital expenditures in connection with the expansion of our business and production capacity, including investments in 2010 in connection with the installation of our second 8.5-generation fab. If market demand increases in the future, we may also decide to expand the input capacity of our second 7.5-generation fab to approximately 60,000 substrates per month. These capital expenditures will be made well in advance of any additional sales to be generated from these expenditures. Our results of operations may be adversely affected if we do not have the capital resources to complete our expansion plans or if our actual expenditures exceed planned expenditures for any number of reasons, including changes in:

our growth plan and strategy;

manufacturing process and product technologies;

market conditions;

prices of equipment;

costs of construction and installation; and

interest rates and foreign exchange rates.

We cannot assure you that our planned issuance of unsecured global convertible bonds will be successful and we cannot assure you that required additional financing will be available to us on satisfactory terms, if at all. If adequate funds are not available on satisfactory terms at appropriate times, we may have to curtail our expansion plans, which could result in a loss of customers, adversely affect our ability to implement successfully our business strategy and limit the growth of our business.

We operate in a highly competitive environment, and we may not be able to sustain our current market position if we fail to compete successfully.

The markets for our products are highly competitive. We experience pressure on our prices and profit margins, due largely to additional and growing industry capacity from competitors in Taiwan, Korea, Japan and the PRC. The ability to manufacture on a large scale with greater cost efficiencies is a competitive advantage in our industry. Some of our competitors have expanded through mergers and acquisitions. For example, in March 2010, Chimei Innolux Corp. was established as a result of the merger of three Taiwan-based LCD panel makers: Innolux Display Corp., Chi Mei Optoelectronics and TPO Display Corp. The merged entity has overtaken our position as Taiwan’s largest and the world’s third largest LCD panel maker in terms of revenue. Some of our competitors have greater access to capital and substantially greater production, research and development, intellectual property, marketing and other resources than we do. Some of our competitors have announced their plans to develop, and have already invested substantial resources in, eighth or higher generation capacity. Our competitors may be able to introduce products manufactured using such capacity in advance of our schedule. In addition, some of our larger competitors have more extensive intellectual property portfolios than ours, which they may use to their advantage when negotiating cross-licensing agreements for technologies. As a result, these companies may be able to compete more aggressively over a longer period of time than we can.

Table of Contents

The principal elements of competition in the TFT-LCD industry include:

price;

·	product performance features and quality;

·	customer service, including product design support;

·	ability to reduce production cost;

·	ability to provide sufficient quantity of products to fulfill customers’ needs;

·	research and development;

·	time-to-market; and

·	access to capital.

Our ability to compete successfully in the TFT-LCD industry also depends on factors beyond our control, including industry and general political and economic conditions as well as currency fluctuations.

If brand companies do not continue to outsource the manufacturing of their products to original equipment manufacturing service providers with production operations in Taiwan, the PRC, Eastern Europe and Mexico, our sales and results of operations could be adversely affected.

In recent years, brand companies have increasingly outsourced the manufacturing of their products to original equipment manufacturing service providers in Taiwan, or such providers with part or all of their production operations in the PRC, Eastern Europe and Mexico. We believe that we have benefited from this outsourcing trend in large part due to our production locations in Taiwan, the PRC and Eastern Europe, which has allowed us to better coordinate our production and services with our customers’ requirements, especially in the areas of delivery time and product design support. We cannot assure you that this outsourcing trend will continue. If brand companies do not continue to outsource the manufacturing of their products to original equipment manufacturing service providers with their production operations in Taiwan, the PRC, Eastern Europe and Mexico, our sales and results of operations could be adversely affected.

If we are unable to manage our growth effectively, our business could be adversely affected.

We have experienced, and expect to continue to experience, growth in the scope and complexity of our operations and in the number of our employees. For example, we are currently devoting significant resources to the installation of our second 8.5-generation fab and the expansion of our second 7.5-generation fab. This growth may strain our existing managerial, financial and other resources. In order to manage our growth, we must continue to implement additional operating and financial controls and hire and train additional personnel for these functions. We cannot assure you that we will be able to do so in the future, and our failure to do so could jeopardize our expansion plans and seriously harm our operations.

We may encounter difficulties expanding into new businesses or industries, which may adversely affect our results of operations and financial condition.

We may encounter difficulties and face risks in connection with our expansion into the new businesses or industries. For example, we entered the green energy business at the end of 2008 and formed our Solar Photovoltaic Business Unit in October 2009. We also obtained a controlling interest in M. Setek Co., Ltd. (“M. Setek”), a major polysilicon and solar wafer manufacturer in Japan through equity investments in 2009. We cannot assure you that our expansion into the green energy business will be successful as we have little experience in this industry. In addition, we expect to further expand our investment in the green energy business in the future and we may need to devote significant additional resources. We cannot assure you that we may be able to generate sufficient profits to justify the costs of expanding into new businesses or industries. If any new business in which we invest or which we intend to develop does not progress as planned, our results of operations and financial condition may be adversely affected.

Table of Contents

We may undertake mergers, acquisitions or investments to expand our business that may pose risks to our business and dilute the ownership of our existing shareholders, and we may not realize the anticipated benefits of these mergers, acquisitions or investments.

As part of our growth and product diversification strategy, we may continue to evaluate opportunities to acquire or invest in other businesses, intellectual property or technologies and expand the breadth of markets we can address or enhance our technical capabilities. For example, in March 2010, our Board of Directors and that of TPV Technology Limited approved to establish a joint venture involved in TFT-LCD module production in Gorzow, Poland. In April 2010, we entered into a definitive agreement with Toshiba Mobile Display Co., Ltd. (“Toshiba”) to purchase 100% of the shares of AFPD Pte., Ltd., a Singapore-incorporated subsidiary of Toshiba and a manufacturer of LCD panels. In April 2010, our Board of Directors and that of TCL King Electrical Appliances (Huizhou) Co., Ltd., approved to establish a joint venture involved in TFT-LCD TV panel and module production in Huizhou city, Guangdong Province, the PRC. In April 2010, our Board of Directors and that of Haier Group approved to establish a joint venture involved in TFT-LCD TV panel module production in Qingdao city, Shandong Province, the PRC.

Mergers, acquisitions or investments that we have entered in, and may enter into in the future entail a number of risks that could materially and adversely affect our business, operating and financial results, including, among others:

• problems integrating the acquired operations, technologies or products into our existing business and products;

• diversion of management’s time and attention from our core business;

• conflicts with joint venture partners;

• adverse effects on our existing business relationships with customers;

• need for financial resources above our planned investment levels;

• failures in recognizing anticipated synergies;

• difficulties in retaining business relationships with suppliers and customers of the acquired company;

• risks associated with entering markets in which we lack experience;

• potential loss of key employees of the acquired company; and

• potential write-offs of acquired assets.

Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition or investment will likely require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, the value of your ADSs and the underlying ordinary shares may be diluted. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that can, among other things, restrict us from distributing dividends.

The loss of any key management personnel or the undue distraction of any such personnel may disrupt our business.

Our success depends on the continued services of key senior management, including our Chairman, Chief Executive Officer and President. We do not carry key person life insurance on any of our senior management personnel. If we lose the services of key senior management personnel, we may not be able to find suitable replacements or integrate replacement personnel in a timely manner or at all, which would seriously harm our business. In addition, our continuing growth will, to a large extent, depend on the attention of key management personnel to our daily affairs. For example, we expect that Mr. Kuen-Yao (K.Y.) Lee’s time will be divided among serving as Chairman of our company, Chairman of Qisda and Chairman of BenQ Corporation. If Mr. Lee is not able to devote enough time to our company, our operations may be adversely affected.

Table of Contents

In May 2007, Mr. Lee was indicted by the Taoyuan District Prosecutors’ Office for alleged insider trading of Qisda stock and other related charges. In August 2009, the Taoyuan court acquitted Mr. Lee of all charges. The case was appealed by the prosecutor to the superior court in September 2009. See “Item 8.A.7. Litigation.” While we are not a party to these proceedings, adverse publicity surrounding this case could have an adverse impact on our company. If an adverse judgment is rendered against Mr. Lee, and he resigns or is otherwise no longer able to serve in his capacity as Chairman of our company, our operations may be materially and adversely affected.

If we are not able to attract and retain skilled technical personnel, including research and development and other personnel, our operations and expansion plans would be adversely affected.

Our success depends on our ability to attract and retain skilled employees, particularly engineering and technical personnel in the research and development and manufacturing processing areas. We have also established a professional on-the-job training program for employees. Without a sufficient number of skilled employees, our operations and production quality would suffer. Competition for qualified technical personnel and operators in Taiwan is intense and the replacement of skilled employees is difficult. We may encounter this problem in the future, as we require increased numbers of skilled employees for our expansion. If we are unable to attract and retain our technical personnel and other employees, this may adversely affect our business, and our operating efficiency may deteriorate.

Potential conflicts of interest with our affiliates may cause us to lose opportunities to expand and improve our operations.

We face potential conflicts of interest with our affiliates, such as Qisda and its subsidiaries, including BenQ Corporation. Qisda is our largest shareholder, owning directly and indirectly 7.56% of our outstanding shares as of April 20, 2010 and is also one of our major customers. Qisda and its subsidiaries accounted for 5.7%, 4.6% and 3.4% of our net sales in 2007, 2008 and 2009, respectively. Qisda and its subsidiaries’ substantial interest in our company may lead to conflicts of interest affecting our sales decisions or allocations. In addition, as of April 30, 2010, two of our nine directors are representatives of Qisda, and Mr. Kuen-Yao (K.Y.) Lee, our Chairman, and Mr. Hui Hsiung, our director, are also the Chairman and President of Qisda, respectively. Mr. Kuen-Yao (K.Y.) Lee, our Chairman also serves as Chairman of BenQ Corporation, a subsidiary of Qisda. As a result, conflicts of interest between their duties to Qisda and/or its subsidiaries and us may arise. We cannot assure you that when conflicts of interest arise with respect to representatives of Qisda and/or its subsidiaries, the conflicts of interest will be resolved in our favor. These conflicts may result in lost corporate opportunities, including opportunities that are never brought to our attention, or actions that may prevent us from taking advantage of opportunities to expand and improve our operations.

We need to comply with certain financial and other covenants under the terms of our debt instruments, the failure to comply with which would put us in default under those instruments.

Our long-term loans and facilities contain financial and other covenants and the failure to comply with the covenants could trigger a requirement for early payment. The financial covenants primarily include current ratios, indebtedness ratios, interest coverage ratios and minimum equity requirements. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. In addition, such covenants restrict our ability to raise future debt financing. In 2009, our subsidiary M. Setek breached certain financial covenants under its loan agreements. See “Item 5.B. Liquidity and Capital Resources.” If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt.

Table of Contents

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

The United States Securities and Exchange Commission (the “SEC”), as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of the company’s internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our independent registered public accounting firm may conclude that our internal controls over financial reporting are not effective. Furthermore, during the course of the evaluation, documentation and attestation, we may identify deficiencies that we may not be able to remedy in a timely manner. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act of 2002. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs. Furthermore, we have incurred considerable costs and used significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002.

Our planned international expansion poses additional risks and could fail, which could cost us valuable resources and adversely affect our results of operations.

To meet our clients’ requirements, we are currently expanding our operations internationally, which may lead to operations across many countries. For example, we have established LCD module assembly operations in Europe and TV set assembly operations in China and Europe in order to provide more immediate services to our European and Chinese customers. We intend to run our operations in compliance with local regulations, such as tax, civil, environmental and other laws in conjunction with our business activities in each country where we may have presence or operations. However, there are inherent legal, financial and operational risks involved in having international operations and we cannot assure you that we will be able to successfully develop and expand our international operations or that we will be able to overcome the significant obstacles and risks of expanding our overseas operations.

Risks Relating to Manufacturing

Our manufacturing processes are highly complex, costly and potentially vulnerable to disruptions that can significantly increase our production costs and delay product shipments to our customers.

Our manufacturing processes are highly complex, require advanced and costly equipment and are periodically modified to improve manufacturing yields and production efficiency. We face the risk of production difficulties from time to time that could cause delivery delays and reduced production yields. These production difficulties include capacity constraints, construction delays, difficulties in upgrading or expanding existing facilities, difficulties in changing our manufacturing technology and delays in the delivery or relocation of specialized equipment. We may encounter these difficulties in connection with the adoption of new manufacturing process technologies. We cannot assure you that we will be able to expand our second 7.5-generation fab and install our second 8.5-generation fab without equipment delays or difficulties, or that we will not encounter manufacturing difficulties in the future.

If we are unable to obtain raw materials and components in suitable quantity and quality from our suppliers, our production schedules would be delayed and we may lose substantial customers.

Raw materials and component costs represent a substantial portion of our cost of goods sold. We must obtain sufficient quantities of high quality raw materials and components at acceptable prices and in a timely manner. We source most of our raw materials and components, including critical materials like color filters, driver-integrated

Table of Contents

circuits, cold cathode fluorescent lamps (“CCFL”), polarizer and glass substrates and light emitting diodes (“LED”), from a limited group of suppliers, both foreign and domestic. For example, in both the second half of 2007 and 2009, we experienced constraints in the supply of glass substrates due to an industry-wide decline in supply and demand outgrowing supply significantly. Our operations would be adversely affected if we could not obtain raw materials and components in sufficient quantity and quality at acceptable prices. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by TFT-LCD manufacturers, including our company, without a corresponding increase in the supply of raw materials and components. The impact of any shortage in raw materials and components will be magnified as we establish new fabs and continue to increase our production capacity.

Although approximately 58.0% of our raw materials and components was sourced locally in Taiwan in 2009, we depend on supplies of certain principal raw materials and components mainly from suppliers in Japan and Korea. We cannot assure you that we will be able to obtain sufficient quantities of raw materials and components and other supplies of an acceptable quality in the future. Our inability to obtain high-quality raw materials and components in a timely and cost-effective manner may cause us to delay our production and delivery schedules, which may result in the loss of our customers and revenues.

If we are unable to obtain equipment and services from our suppliers, we may be forced to delay our expansion plans.

We have purchased, and expect to purchase, a substantial portion of our equipment from foreign suppliers for our capacity expansion projects and new generation fabs. These foreign suppliers also provide assembly, testing and/or maintenance services for our purchased equipment. From time to time, increased demand for new equipment may cause lead times to extend beyond those normally required by equipment vendors. For example, in the past, increased demand for equipment caused some equipment suppliers to satisfy only partially our equipment orders in the normal time frame. The unavailability of equipment, delays in the delivery of equipment or the delivery of equipment that does not meet our specifications could delay implementation of our expansion plans and impair our ability to meet customer orders. Furthermore, if our equipment vendors are unable to provide assembly, testing and/or maintenance services in a timely manner or at all, our expansion plan may be adversely affected. We may have to use assembly, testing and/or maintenance service providers with which we have no established relationship, which could expose us to potentially unfavorable pricing, unsatisfactory quality or insufficient capacity allocation. As a result of these risks, we may be unable to implement our expansion plans on schedule or in line with customer expectations and our business may be materially and adversely affected.

If we are unable to manufacture successfully our products within the acceptable range of quality, our results of operations will be adversely affected.

TFT-LCD manufacturing processes are complex and involve a number of precise steps. Defective production can result from a number of factors, including but not limited to:

the level of contaminants in the manufacturing environment;

human error;

equipment malfunction;

use of substandard raw materials and components; and

inadequate sample testing.

From time to time, we have experienced, and may in the future experience, lower than anticipated production yields as a result of the above factors, particularly in connection with the expansion of our capacity or change in our manufacturing processes. We remediate our customers mainly through repairing or replacing the defective products or refunding the purchase price relating to defective products if they are within the warranty period. In addition, our production yield on new products will be lower than average as we develop the necessary expertise and experience to produce those products. If we fail to maintain high-production yields and high quality production standards, our reputation may suffer and our customers may cancel their orders or return our panels for rework, which will adversely affect our results of operations.

Table of Contents

If we violate environmental regulations, we may be subject to fines or restrictions that could cause our operations to be delayed or interrupted and our business to suffer.

Our operations can expose us to the risk of environmental claims which could result in damages awarded or fines imposed against us. We must comply with regulations relating to storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes resulting from our manufacturing processes. We incurred small fines in 2009 for failure to meet certain effluent standards in Taiwan. We also incurred small fines in 2007 and 2008 for failure to meet certain effluent standards and air pollution control regulations.

Future changes to existing environmental regulations or unknown contamination of our sites, including contamination by prior owners and operators of our sites, may give rise to additional compliance costs or potential exposure to liability for environmental claims that may seriously affect our business, financial condition and results of operations.

Risks Relating to Our Technologies and Intellectual Property

If we cannot successfully introduce, develop or acquire advanced technologies, our profitability may suffer.

Technology and industry standards in the TFT-LCD industry evolve quickly, resulting in steep price declines in the advanced stages of a product’s life cycle. To remain competitive, we must continually develop or acquire advanced manufacturing process technologies and build next generation fabs to lower production costs and enable the timely release of new products. In addition, we expect to utilize other display technologies, such as low temperature poly-silicon (“LTPS”) technologies to develop new products. Our ability to manufacture products by utilizing more advanced manufacturing process technologies to increase production efficiency will be critical to our sustained competitiveness. We plan to make investments in connection with the expansion of our second 7.5-generation fab and installation of our second 8.5-generation fab. However, we cannot assure you that we will be successful in completing our expansion plans or in the development of other future technologies for our fabs, or that we will be able to complete them without material delays or at the expected costs. If we fail to do so, our results of operations and financial condition may be materially and adversely affected. We also cannot assure you that there will be no material delays in connection with our efforts to develop new technology and manufacture more technologically advanced products. If we fail to develop or make advancements in product technologies or manufacturing process technologies on a timely basis, we may become less competitive.

Other flat panel display technologies or alternative display technologies could render our products uncompetitive.

We currently manufacture products primarily using TFT-LCD technology, which is currently one of the most commonly used flat panel display technologies. We may face competition from flat panel display manufacturers utilizing alternative flat panel technologies, including plasma discharge panel (“PDP”) and organic light emitting device (“OLED”) technologies. Currently, PDP technology is primarily used to produce panels larger than 50-inches for use in television, as compared to the TFT-LCD technology which is primarily used to produce panels less than 50-inches for use in monitors, notebooks and LCD television. However, as the demand for LCD televisions with panel sizes as large as that of televisions using PDP technology continues to grow, competition between these two technologies is expected to increase in the large-size television market. We also face competition in the large-size television market from alternative display technologies, particularly those utilizing projection technology, such as front digital mirror device projector, digital light processing projector, LCD projector and liquid crystal on silicon projector technologies. These alternative forms of display technology may be competitive in terms of performance-to-price ratio. If alternative display technologies gain a larger market share in the market for large-size television, our business prospects may be adversely affected.

Another commercially available flat panel technology is OLED. OLED technology is currently primarily used, and is beginning to compete with TFT-LCD technology, in small- to medium-size applications, such as mobile phones, digital still cameras and small-size televisions. Future development of OLED technology may also allow it to compete with TFT-LCD technology in larger applications such as monitors, notebooks and LCD television and render our products uncompetitive.

Table of Contents

Field emission display (“FED”) technology has also become commercially available. FED technology is currently primarily used in, and will compete with, medium- to large- sized applications, such as monitors. FED technology may also potentially be used in high-end applications, such as monitors for medical facilities and broadcasting equipments. In January 2010, we acquired FED technology from Field Emission Technologies Inc. (“FET”) and FET Japan, Inc. However, we cannot assure you that we will be able to develop commercialized FED products successfully and in a timely manner.

In addition, there are other alternative flat panel technologies currently either in the research and development stage or in the initial commercial promotion stage, such as inorganic electroluminescent (“IEL”) and surface-conduction electron-emitter (“SED”) display technologies. If the various alternative flat panel technologies currently commercially available, or in the research and development stage are developed to have better performance-to-price ratios, or they begin mass production, such technologies may compete with TFT-LCD technology and render our products uncompetitive.

Advancement and changes in alternative flat panel technologies are dependent on manufacturing economics and consumer demand. In 2008, we restarted our research and development efforts in OLED technology to ensure that we remain competitive with other manufacturers that utilize OLED technology. However, even though we seek to remain competitive through research and development of flat panel technologies, we may invest in research and development in certain technologies that do not come to fruition.

If we lose the support of our technology partners or the legal rights to use our licensed manufacturing process or product technologies, our business may suffer.

Enhancing our manufacturing process and product technologies is critical to our ability to provide high quality products to our customers at competitive prices. We intend to continue to advance our manufacturing process and product technologies through internal research and development and licensing from other companies. We currently have licensing arrangements with Fujitsu Limited, Sharp Corporation (“Sharp”), Samsung, Semiconductor Energy Laboratory Co., Ltd., Hitachi Displays Ltd. (“Hitachi”), IPS Alpha Technology, Ltd. and other companies for product and manufacturing process technologies related to the production of certain products including certain TFT-LCD panels. Our licensing arrangements with Sharp and Samsung will expire by the end of 2010. If we are unable to renew our technology licensing arrangements with some or all of these companies on mutually beneficial economic terms, we may lose the legal right to use certain of the processes and designs which we may have employed to manufacture our products. Similarly, if we cannot license or otherwise acquire or develop new manufacturing process and product technologies that are critical to the development of our business or products, we may lose important customers because we are unable to continue providing our customers with products based on advanced manufacturing process and product technologies.

We have entered into patent and intellectual property license or cross license agreements that require periodic royalty payments. In the future, we may need to obtain additional patent licenses or renew existing license agreements. We cannot assure you that these license agreements can be obtained or renewed on acceptable terms. If these license agreements are not obtained or renewed on acceptable terms, our business and future results of operations may be materially and adversely affected.

Disputes over intellectual property rights could be costly and deprive us of the technology to stay competitive.

As technology is an integral part of our manufacturing process and product, we have, in the past, received communications alleging that our products or processes infringe product or manufacturing process technology rights held by others, and expect to continue to receive such communications. We are currently involved in intellectual property disputes with several companies. See “Item 8.A.7. Litigation.” There is no means of knowing all of the patent applications that have been filed in the United States or elsewhere and whether, if the applications are granted, such patents would have a material adverse effect on our business. If any third party were to make valid intellectual property infringement claims against our customers or us, we may be required to:

Table of Contents

discontinue using disputed manufacturing process technologies;

pay substantial monetary damages;

seek to develop non-infringing technologies, which may not be feasible;

stop shipment to certain areas; or

seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all.

If our products or manufacturing processes are found to infringe third-party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or products. This could restrict us from making, using, selling or exporting some of our products, which could in turn materially and adversely affect our business and financial condition. In addition, any litigation, whether to enforce our patents or other intellectual property rights or to defend ourselves against claims that we have infringed the intellectual property rights of others, could materially and adversely affect our results of operations because of the management attention required and legal costs incurred.

Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.

We believe that the protection of our intellectual property rights is, and will continue to be, important to the success of our business. We rely primarily on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise. Although we have patent applications pending, our pending patent applications and any future applications may not result in issued patents or may not be sufficiently broad to protect our proprietary technologies. Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.

Our rapid introduction of new technologies and products may increase the likelihood that third parties will assert claims that our products infringe upon their proprietary rights.

Although we take and will continue to take steps to ensure that our new products do not infringe upon third-party rights, the rapid technological changes that characterize our industry require that we quickly implement new processes and components with respect to our products. Often with respect to recently developed processes and components, a degree of uncertainty exists as to who may rightfully claim ownership rights in such processes and components. Uncertainty of this type increases the risk that claims alleging that such components or processes infringe upon third party rights may be brought against us. If our products or manufacturing processes are found to infringe upon third party rights, we may be subject to significant liabilities and be required to change our manufacturing processes or be prohibited from manufacturing certain products, which could have a material adverse effect on our operations and financial condition.

We rely upon trade secrets and other unpatented proprietary know-how to maintain our competitive position in the TFT-LCD industry and any loss of our rights to, or unauthorized disclosure of, our trade secrets or other unpatented proprietary know-how could adversely affect our business.

We rely upon trade secrets, unpatented proprietary know-how and information, as well as continuing technological innovation in our business. The information we rely upon includes price forecasts, core technology and key customer information. Our current standard employment agreement with our employees contains a confidentiality provision which generally provides that all inventions, ideas, discoveries, improvements and copyrightable material made or conceived by the individual arising out of the employment relationship and all confidential information developed or made known to the individual during the term of the relationship is our

Table of Contents

exclusive property. We cannot assure the enforceability of these types of agreements, or that they will not be breached. We also cannot be certain that we will have adequate remedies for any breach. The disclosure of our trade secrets or other know-how as a result of such a breach could adversely affect our business. Also, our competitors may come to know about or determine our trade secrets and other proprietary information through a variety of methods. Disputes may arise concerning the ownership of intellectual property or the applicability or enforceability of the relevant agreements, and there can be no assurance that any such disputes would be resolved in our favor. Furthermore, others may acquire or independently develop similar technology, or if patents are not issued with respect to products arising from research, we may not be able to maintain information pertinent to such research as proprietary technology or trade secrets and that could have an adverse effect on our competitive position within the TFT-LCD industry.

Political, Geographical and Economic Risks

Due to the location of our operations in Taiwan, the PRC, Japan and Eastern Europe, we and many of our customers and suppliers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.

Most of our existing manufacturing operations, and the operations of many of our customers and suppliers, are located in Taiwan, which is vulnerable to natural disasters. In 2009, approximately 42.8% of our net sales was derived from Taiwan-based customers. In addition, our module-assembly operations in the PRC, Japan and Eastern Europe, and the operations of many of our customers and suppliers in these areas, may also be vulnerable to natural disasters. As a result of this geographic concentration, disruption of operations at our fabs or the facilities of our customers and suppliers for any reason, including work stoppages, power outages, water supply shortages, fire, typhoons, earthquakes or other natural disasters, could cause delays in production and shipments of our products. Any delays or disruptions could result in our customers seeking to source our products from other manufacturers. Shortages or suspension of power supplies have occasionally occurred, and have disrupted our operations. The occurrence of a power outage in the future could seriously hurt our business.

Our manufacturing processes require a substantial amount of water. Although currently approximately 82% of the water used in our production process is recycled, our production operations may be seriously disrupted by water shortages. For instance, the Hsinchu area, where one of our principal manufacturing sites is located, experienced a drought in 2002. In response to the drought in 2002, the ROC authorities implemented water-rationing measures and began sourcing water from alternative sources, and therefore we did not encounter any water shortage. However, we may encounter droughts in the Hsinchu, Taoyuan or Taichung areas in the future, where most of our current or future manufacturing sites are located. If another drought were to occur and we or the authorities were unable to source water from alternative sources in sufficient quantity, we may be required to shut down temporarily or substantially reduce the operations of these fabs, which would seriously affect our operations. In addition, even if we were able to source water from alternative sources, our reliance on supplemental water supplies would increase our operating costs. Furthermore, the disruption of operations at our customers’ facilities could lead to reduced demand for our products. The occurrence of any of these events in the future could adversely affect our business.

We have made investments in, and are exploring the possibility of expanding our businesses and operations to, or making additional investments in, the PRC, which may expose us to additional political, regulatory, economic and foreign investment risks.

We have expanded our module assembly operations to the PRC and increased the registered capital of various PRC operating subsidiaries through cash injection. Depending on our business needs, we may further expand or adjust our business operations in the PRC in the future. Our businesses and operations and our future expansion or investment plans in the PRC are significantly affected by political and economic condition, regulatory control and general legal developments in the PRC and other foreign investment risks. The PRC economy differs from the economies of most developed countries in many respects, including the structure, level of government involvement, level of development, foreign exchange control and allocation of resources. The PRC economy has been transitioning from a planned economy to a more market-oriented economy and is growing rapidly. For the past two decades, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy and also adjusted its macroeconomic control policies from time to time. These policies have led and may continue to lead to changes in market conditions. For example, as a result of the

Table of Contents

global financial crisis, the PRC government announced a RMB4 trillion economic stimulus package in 2009 which included some measures favorable to our business, such as subsidies for purchases of televisions in rural areas in China. Although we believe these reforms will have a positive effect on our overall operations in the PRC, we cannot predict whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future operations in the PRC. In addition, the interpretation of PRC laws and regulations involves uncertainties. We cannot assure you that changes in such laws and regulations, or in their interpretation and enforcement, will not have a material adverse effect on our businesses and operations in the PRC.

The current restrictions imposed by the ROC government on investments in certain related businesses may limit our ability to compete with other TFT-LCD manufacturers that are permitted to establish TFT-LCD production operations in the PRC.

Many of our customers and competitors have expanded their businesses and operations to the PRC. In order to take advantage of the fast growth of China’s market, the lower production costs in China and to establish a presence in this market, we established a module-assembly facility in Suzhou, Jiangsu Province of the PRC, which began operations in July 2002. We also established a second module-assembly facility in Xiamen, Fujian Province, the PRC, which commenced operations in September 2007 and through our merger with QDI, acquired a module-assembly facility in Songjiang district, Shanghai, the PRC. Module-assembly involves connecting components to the cell panel. From time to time, we explore the possibility of investing in other businesses or operations in the PRC as and when we are legally permitted to do so. For example, in August 2009, we established BVCH Optronics (Sichuan) Corp. in the PRC, a 51% owned joint venture company with Sichuan Changhong Electric Co., Ltd. BVCH Optronics (Sichuan) Corp. is mainly engaged in the assembly of TFT-LCD modules. In March 2010, we established a wholly-owned subsidiary, AUO Energy (Suzhou) Corp., which is mainly engaged in the design, manufacturing, and sale of solar modules. In March 2010, we established a wholly-owned subsidiary, Darwin Precision (ChengDu) Corporation, which is mainly engaged in the manufacture and assembly of backlight modules and related components. In addition, in April 2010, our Board of Directors and that of TCL King Electrical Appliances (Huizhou) Co., Ltd., approved to establish a joint venture involved in TFT-LCD TV panel and module production in Huizhou city, Guangdong Province, the PRC. In April 2010, our Board of Directors and that of Haier Group approved to establish a joint venture involved in TFT-LCD TV panel module production in Qingdao city, Shandong Province, the PRC.

Currently, ROC laws and regulations permit investment in module-assembly operations in the PRC, but strict restrictions still remain in certain aspects. In February 2010, the Investment Commission of Ministry of Economic Affairs (“MOEAIC”) loosened certain restrictions, which has provided the possibility for TFT-LCD manufacturers in the ROC, including us, to expand into certain areas of the PRC. We submitted an application in March 2010 to the MOEAIC to establish a 7.5-generation TFT-LCD front-end manufacturing fab in the PRC. We cannot assure you that our application for the 7.5-generation TFT-LCD front-end manufacturing fab or any future applications to the MOEAIC to make further investments in the PRC will be successful and timely obtained. We also do not know when and whether the remaining restrictions under ROC laws and regulations governing investment in the PRC will be amended or repealed and we cannot assure you that any such amendments to those regulations will permit us to invest in operations in the PRC. Restrictions under ROC laws on our ability to make investments in the PRC may materially and adversely affect our business prospects.

We may not be able to obtain all licenses, approvals or permits necessary for our current and future operations.

Our current and future operations in the ROC, the PRC, Europe and other regions require a number of regulatory licenses, approvals and permits. We cannot assure you that we will be able to obtain licenses, approvals or permits necessary for our operations in the PRC, Europe and other regions, or that upon the expiration of our existing licenses, approvals or permits, we will be able to successfully renew them. In addition, if the relevant authorities enact new regulations, we cannot assure you that we will be able to successfully meet such requirements. If we fail to obtain or renew the necessary regulatory licenses, approvals or permits, we may have to cease construction or operation of the relevant projects, be subject to fines, or face other penalties, which could have a material adverse effect on our business, financial condition and results of operations.

Table of Contents

Disruptions in Taiwan’s political environment could seriously harm our business and the market price of our shares and ADSs.

Most of our assets and operations are located in Taiwan and approximately 42.8% of our net sales is derived from customers in Taiwan in 2009. Accordingly, our business and financial condition may be affected by changes in local governmental policies and political and social instability.

Taiwan has a unique international political status. The PRC government asserts sovereignty over mainland China and Taiwan, and does not recognize the legitimacy of the government of the ROC. The PRC government has indicated that it may use military force to gain control over Taiwan if Taiwan declares independence or Taiwan refuses to accept the PRC’s stated “One China” policy. In addition, on March 14, 2005, the National Peoples’ Congress of the PRC passed what is widely referred to as the “anti-secession” law, a law authorizing the PRC military to respond to efforts by Taiwan to seek formal independence. An increase in tensions between the ROC and the PRC and the possibility of instability and uncertainty could adversely affect the prices of our ADSs and our shares. It is unclear what effects any of the events described above may have on relations with the PRC. Relations between Taiwan and the PRC and other factors affecting Taiwan’s political environment could affect our business.

If economic conditions in Taiwan deteriorate, our current business and future growth would be materially and adversely affected.

In recent years, the currencies of many East Asian countries, including Taiwan, have experienced considerable volatility. The Central Bank of the Republic of China has from time to time intervened in the foreign exchange market to minimize the fluctuation of the U.S. dollar/NT dollar exchange rate and to prevent significant decline in the value of the NT dollar. NT dollars have depreciated against U.S. dollars from US$1.00 = NT$27.52 on January 2, 1997 to US$1.00 = NT$31.77 on May 7, 2010, based on the noon buying rates published by the Federal Reserve Bank of New York.

Our business, financial condition and results of operations may be affected by changes in ROC government policies, taxation, inflation and interest rates in Taiwan, as well as general economic conditions in Taiwan. In addition, the banking and financial sectors in Taiwan have been seriously harmed by the general economic downturn in Asia and Taiwan in recent years, in particular, the recent global financial crisis and the resulting global economic downturn, which has resulted in a volatile property market, and an increase in the number of companies filing for corporate reorganization and bankruptcy protection. As a result, financial institutions are more cautious in providing credit to businesses in Taiwan. We cannot assure you that we will continue to have access to credit at commercially reasonable rates of interest or at all.

The market value of our ADSs may fluctuate due to the volatility of the ROC securities market.

The trading price of our ADSs may be affected by the trading price of our shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange is smaller and more volatile than the securities markets in the United States and a number of stock exchanges in Europe. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of trading of securities, and there are currently limits on the range of daily price fluctuations on the Taiwan Stock Exchange. During the period from January 1, 2009 to December 31, 2009, the Taiwan Stock Exchange Index peaked at 8,188.1 on December 31, 2009, and reached a low of 4,242.6 on January 20, 2009. Over the same period, daily closing values of our shares ranged from NT$23.05 per share to NT$38.90 per share. On May 3, 2010, the Taiwan Stock Exchange Index closed at 7,952.2, and the closing value of our shares was NT$36.90 per share.

The Taiwan Stock Exchange is particularly volatile during times of political instability, including when relations between Taiwan and the PRC are strained. Several investment funds affiliated with the ROC government have also from time to time purchased securities from the Taiwan Stock Exchange to support the trading level of the Taiwan Stock Exchange. Moreover, the Taiwan Stock Exchange has experienced problems, including market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems could have an adverse effect on the market price and liquidity of our shares and ADSs.

Table of Contents

If the NT dollar or other currencies in which our sales, raw materials and components and capital expenditures are denominated fluctuate significantly against the U.S. dollar or the Japanese yen, our profitability may be seriously affected.

We have significant foreign currency exposure, and are affected by fluctuations in exchange rates among the U.S. dollar, the Japanese yen, the NT dollar and other currencies. Our sales, raw materials and components and capital expenditures are mainly denominated in U.S. dollars, Japanese yen and NT dollars in varying amounts. For example, in 2009, approximately 89.4% of our net sales was denominated in U.S. dollars. During the same period, approximately 11.3%, 27.7% and 60.1% of our raw materials and component costs were denominated in NT dollars, Japanese yen and U.S. dollars, respectively. In addition, in 2009, approximately 45.0%, 41.6% and 10.0% of our total capital expenditures (principally for the purchase of equipment) was denominated in NT dollars, Japanese yen and U.S. dollars, respectively. From time to time, we enter into forward foreign currency contracts to hedge our foreign currency exposure, but we cannot assure you that we will fully minimize the risk against exchange rate fluctuations and the impact on our results of operations.

Disruptions in the international trading environment may seriously decrease our international sales.

A majority of our net sales is derived from sales to customers located outside of Taiwan. In 2007, 2008 and 2009, sales to our overseas customers accounted for 63.7%, 56.4% and 57.2%, respectively, of our net sales. In addition, a significant portion of our sales to customers in Taiwan is made to original equipment manufacturing service provider customers that use our display panels in the products that they manufacture on a contract basis for brand companies worldwide. We expect sales to customers outside of Taiwan to continue to represent a significant portion of our net sales. As a result, our business will continue to be vulnerable to disruptions in the international trading environment, including those caused by adverse changes in foreign government regulations, political unrest, international economic downturns, terrorist attacks and continued military involvement in Iraq and Afghanistan. These disruptions in the international trading environment may affect the demand for our products and change the terms upon which we sell our products overseas, which could seriously decrease our international sales.

We face risks related to health epidemics and outbreaks of contagious diseases, including H1N1 influenza, H5N1 influenza and Severe Acute Respiratory Syndrome, or SARS.

There have been reports of outbreaks of a highly pathogenic influenza caused by the H1N1 virus, as well as an influenza caused by the H5N1 virus, in certain regions of Asia and other parts of the world. An outbreak of such contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries. Additionally, a recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected the PRC, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. Since most of our operations and customers and suppliers are based in Asia (mainly Taiwan), an outbreak of H1N1 influenza, H5N1 influenza, SARS or other contagious diseases in Asia or elsewhere, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including the ROC and the PRC, could adversely affect our business, financial condition or results of operations.

Risks Related to Our ADSs and Our Trading Market

The market value of our ADSs may fluctuate due to the volatility of the securities markets.

The securities markets in the United States and other countries have experienced significant price and volume fluctuations. Volatility in the price of our ADSs may be caused by factors beyond our control and may be unrelated to, or disproportionate to changes in, our results of operations. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Litigation of this kind could result in substantial costs and a diversion of our management’s attention and resources.

Table of Contents

Restrictions on the ability to deposit shares into our ADS facility may adversely affect the liquidity and price of our ADSs.

The ability to deposit shares into our ADS facility is restricted by ROC law. A significant number of withdrawals of shares underlying our ADSs would reduce the liquidity of our ADSs by reducing the number of ADSs outstanding. As a result, the prevailing market price of our ADSs may differ from the prevailing market price of our shares on the Taiwan Stock Exchange. Under current ROC law, no person or entity, including you and us, may deposit its shares in our ADS facility without specific approval of the ROC Financial Supervisory Commission (the “FSC”), unless:

(1) we pay stock dividends on our shares;

(2) we make a free distribution of shares;

(3) ADS holders exercise preemptive rights in the event of capital increases for cash; or

(4) investors purchase our shares, directly or through the depositary, on the Taiwan Stock Exchange, and deliver our shares to the custodian for deposit into our ADS facility, or our existing shareholders deliver our shares to the custodian for deposit into our ADS facility.

With respect to (4) above, the depositary may issue ADSs against the deposit of those shares only if the total number of ADSs outstanding following the deposit will not exceed the number of ADSs previously approved by the FSC, plus any ADSs issued pursuant to the events described in the subparagraph (1), (2) and (3) above. Issuance of additional ADSs under item (4) above will be permitted to the extent that previously ADSs have been cancelled.

In addition, in the case of a deposit of our shares requested under item (4) above, the depositary will refuse to accept deposit of our shares if such deposit is not permitted under any legal, regulatory or other restrictions notified by us to the depositary from time to time, which restrictions may specify blackout periods during which deposits may not be made, minimum and maximum amounts and frequencies of deposits.

ADS holders will not have the same rights as our shareholders, which may affect the value of the ADSs.

ADS holders’ rights as to the shares represented by such holders’ ADSs are governed by the deposit agreement. ADS holders will not be able to exercise voting rights on an individual basis. If holders representing at least 51% of our ADSs outstanding at the relevant record date instruct the depositary to vote in the same manner regarding a resolution, including the election of directors, the depositary will cause all shares represented by the ADSs to be voted in that manner. If, at the relevant record date, the depositary does not receive instructions representing at least 51% of ADSs outstanding to vote in the same manner for any resolution, including the election of directors, ADS holders will be deemed to have instructed the depositary or its nominee to authorize all the shares represented by the ADS holders’ ADSs to be voted at the discretion of our Chairman or his designee, which may not be in the ADS holders’ interest. Moreover, while shareholders who own 1% or more of our outstanding shares are entitled to submit one proposal to be considered at our annual general meetings, only holders representing at least 51% or more of our ADSs outstanding at the relevant record date are entitled to submit one proposal to be considered at our annual general meetings. Hence, only one proposal may be submitted on behalf of all ADS holders.

ADS holders’ rights to participate in our rights offerings are limited, which could cause dilution to the holdings of ADS holders.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement, the depositary will not offer ADS holders those rights unless both the distribution of the rights and the underlying securities to all our ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. Although we may be eligible to take advantage of certain exemptions under the Securities Act available to certain foreign issuers for rights offerings, we can give no assurances that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement for any of these rights. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution with respect to their holdings.

Table of Contents

Our equity holders may experience dilution if we issue stock bonuses and stock options to employees or sell additional equity or equity-linked securities.

Similar to other technology companies in Taiwan, from time to time we may issue bonuses to our employees in the form of shares. The issuance of these shares may have a dilutive effect on our ADSs. In 2007, 2008 and 2009, we issued 57.4 million shares, 243.7 million shares and 66.2 million shares to our employees, respectively, for their services performed in 2006, 2007 and 2008, respectively. These stock bonuses amounted to NT$573.5 million, NT$2,437.2 million and NT$2,009.8 million in 2007, 2008 and 2009, respectively. We assumed two employee stock option plans as a result of the QDI merger in 2006 and pursuant to which our full-time employees of our consolidated domestic and foreign subsidiaries are eligible to receive stock option grants. As of December 31, 2009, the exercise period was expired and no stock options were exercised. See “Item 6.B. Compensation.”

In addition, the sale of additional equity or equity-linked securities may result in additional dilution to our shareholders. In April 2010, our Board of Directors resolved to issue up to US$800 million in principal amount of unsecured global convertible bonds for the purpose to purchasing machinery and equipment overseas in line with the growth of our business. We cannot assure you that the issuance of unsecured global convertible bonds will be successful. The issuance of unsecured global convertible bonds could cause dilution to ADS holders.

Non-ROC holders of ADSs who withdraw our shares will be required to obtain a foreign investor investment identification and appoint a local custodian and agent and a tax guarantor in the ROC.

Under current ROC law, if you are a non-ROC person (other than a PRC person) and wish to withdraw and hold our shares from a depositary receipt facility, you will be required to obtain a foreign investor investment identification, or the Foreign Investor Investment I.D., issued in accordance with the ROC Regulations Governing Securities Investment by Overseas Chinese and Foreign Nationals (“the Investment Regulations”). You will also be required to appoint an eligible agent in the ROC to open a securities trading account and a Taiwan Depository & Clearing Corporation book-entry account and a bank account, to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as you may designate upon such withdrawal. In addition, you will be required to appoint a custodian bank to hold the securities in safekeeping, make confirmation and settle trades and report all relevant information. Without obtaining such Foreign Investor Investment I.D. under the Investment Regulations and opening such accounts, the non-ROC withdrawing holder would be unable to hold or subsequently sell our shares withdrawn from the depositary receipt facility on the Taiwan Stock Exchange or otherwise. There can be no assurance that such withdrawing holder will be able to obtain the Foreign Investor Investment I.D. and open such accounts in a timely manner.

Non-ROC holders of ADSs (other than a PRC person) withdrawing our shares represented by ADSs are also required under current ROC law and regulations to appoint an agent in the ROC for filing tax returns and making tax payments. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing holder’s ROC tax obligations. Generally, the evidence of the appointment of such agent and the approval of such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the profits. There can be no assurance that such withdrawing holder will be able to appoint and obtain approval for such agent in a timely manner.

Also, if any non-ROC person (other than a PRC person) receives more than 10% of our total issued and outstanding shares upon a single withdrawal, such non-ROC person must obtain prior approval from the MOEAIC. There can be no assurance that such withdrawing holder will be able to obtain such approval in a timely manner.

Pursuant to the Regulations Governing Securities Investment and Futures Trading in Taiwan by Mainland Area Investors (“the Mainland Investors Regulations”), only qualified domestic institutional investors (“QDIIs”) approved by the China Securities Regulatory Commission and registered with the Taiwan Stock Exchange or Taiwan Futures Exchange are permitted to withdraw and hold our shares from a depositary receipt facility. In order to hold our shares, such QDIIs are required to appoint an agent and custodian as required by the Mainland Investors Regulations. If the aggregate amount of our shares held by any QDII or shares received by any QDII upon a single withdrawal exceeds 10% of our total issued and outstanding shares, such QDII must obtain the prior approval from the MOEAIC. We cannot assure you that such approval will be granted.

Table of Contents

The protection of the interests of our public shareholders available under our articles of incorporation and the laws governing ROC corporations is different from that applies to a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by the laws governing ROC corporations. The rights and responsibilities of our shareholders and members of our board of directors under ROC law are different from those that apply to a U.S. corporation. Directors of ROC corporations are required to conduct business faithfully and act with the care of good administrators. However, the duty of care required of an ROC corporation’s directors may not be the same as the fiduciary duty of a director of a U.S. corporation. In addition, controlling shareholders of U.S. corporations owe fiduciary duties to minority shareholders, while controlling shareholders in ROC corporations do not. The ROC Company Law also requires that a shareholder continuously hold at least 3% of our issued and outstanding shares for at least a year in order to request that a member of our audit committee institute an action against a director on the company’s behalf. Therefore, our public shareholders may have more difficulty protecting their interests against actions of our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation.

Future sales or perceived sales of securities by us, our executive officers, directors or major shareholders may hurt the price of our ADSs.

The market price of our ADSs could decline as a result of sales of ADSs or shares or the perception that these sales could occur. As of April 20, 2010, we had an aggregate of 8,827,045,535 shares issued and outstanding, most of which were freely tradable. If we, our executive officers, directors or our shareholders, sell ADSs or shares, the market price for our shares or ADSs could decline. Future sales, or the perception of future sales, of ADSs or shares by us, our executive officers, directors or major shareholders could cause the market price of our ADSs to decline.

You may not be able to enforce a judgment of a foreign court in the ROC.

We are a company limited by shares and incorporated under the ROC Company Law. All of our directors and executive officers, and some of the experts named herein, are residents of the ROC. As a result, it may be difficult for holders of our shares or ADSs to enforce against us or them judgments obtained outside the ROC, including those predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in the ROC, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

ITEM 4. INFORMATION ON THE COMPANY

4.A. History and Development of the Company

We were incorporated as Acer Display Technology, Inc. (“Acer Display”) under the laws of the ROC as a company limited by shares in 1996. The shares of Acer Display were listed on the Taiwan Stock Exchange on September 8, 2000. On September 1, 2001, we completed a merger with Unipac pursuant to a merger agreement dated April 9, 2001, as amended by a supplemental agreement dated May 15, 2001. We changed our name to AU Optronics Corp. on May 22, 2001. Prior to the merger, Acer Display was primarily involved in the design, development, production and marketing of large-size TFT-LCD panels, and Unipac was primarily involved in the design, production and marketing of both small-size and large-size TFT-LCD panels.

On October 1, 2006, we completed our merger with QDI, a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels. Under the terms of the merger agreement dated April 7, 2006, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock issuing a total of 1,479,110,029 shares. As of the effective date of the merger, we became the surviving entity and assumed substantially all of the assets, liabilities and personnel of QDI. The merger received shareholder approval of our company and QDI on June 15, 2006, and FSC approval on August 15, 2006.

The purpose of the merger was to increase our competitiveness and expand our market share. With the combined production capacity of QDI, we are positioned among the largest TFT-LCD manufacturers in the world.

Through the merger, we have achieved synergies in supply chain management and research and development, which we believe have increased our overall competitiveness. We believe we can leverage our combined buying power to achieve favorable treatment in the sourcing of key components and enhance our relationships with suppliers. In addition, the combination of our research and development capabilities has expanded our panel design expertise and our intellectual property portfolio.

Table of Contents

We believe that another benefit of the merger is that the product lines of the two companies are complementary with each other. We have been strong in the LCD television product and computer product market and QDI has been more competitive in the notebook panel product market. Through the merger, we are able to offer a broader range of products and expand our market share.

Our principal executive offices are located at No. 1, Li-Hsin Road 2, Hsinchu Science Park, Hsinchu, Taiwan, ROC, and our telephone number is +886-3-500-8800. Our agent for service of process in the United States is Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, and our agent’s telephone number is 302-738-6680.

Our ADSs have been listed on the New York Stock Exchange since May 29, 2002.

4.B. Business Overview

Introduction

We mainly design, develop, manufacture, assemble and market flat panel displays and substantially all of our products are TFT-LCD panels. TFT-LCD is currently the most widely used flat panel display technology. Our panels are primarily used in computer products (such as notebook computers and desktop monitors) and consumer electronics products (such as mobile phones, digital photo frames, digital still cameras, portable navigation display, portable DVD players), LCD televisions and industrial displays. We expanded in the green energy business at the end of 2008 and formed our Solar Photovoltaic Business Unit in October 2009.

We sell our panels primarily to companies that design and assemble products based on their customers’ specifications, commonly known as original equipment manufacturing service providers, or brand customers. These original equipment manufacturing service providers, most of whose production operations are located in Taiwan or the PRC, use our panels in the products that they manufacture on a contract basis for brand companies worldwide. Our operations in Taiwan and the PRC allow us to better coordinate our production and services with our customers’ requirements, especially in respect of delivery time and design support. We also sell our products to some brand companies on a direct shipment basis.

We currently manufacture TFT-LCD at fabrication facilities commonly known as “fabs.” We were one of the first TFT-LCD manufacturers in Taiwan to commence commercial production at a fifth-generation fab, and we now operate four fifth-generation fabs. We believe we were the first TFT-LCD manufacturer in Taiwan to commence production at a sixth-generation and 7.5-generation fab. We are also the first TFT-LCD manufacturer in Taiwan to operate a 8.5-generation fab. New generations of TFT-LCD fabs are equipped to process increasingly larger sheets of substrates. For example, our 7.5-generation fabs are designed to process substrates with dimensions of up to 1,950 x 2,250 millimeters, and our 8.5-generation fabs are designed to process substrates with dimensions of up to 2,200 x 2,500 millimeters.

With production facilities utilizing 3.5-, fourth-, fifth-, sixth-, 7.5- and 8.5-generation technologies, we have the flexibility to produce a large number of panels of various sizes. We operate three fifth-generation fabs that commenced commercial production in March 2003, February 2004 and August 2005, respectively. We also acquired one fifth-generation fabs through our merger with QDI. We operate one sixth-generation fab that commenced commercial production in March 2005 and acquired a second sixth-generation fab through our merger with QDI. We operate two 7.5-generation fabs that commenced commercial production in June 2006 and April 2009, respectively. Our first 8.5-generation fab commenced commercial production in the first quarter of 2009. We also commenced the construction of our second 8.5-generation fab in the second quarter of 2009 and we expect to start equipment move-in by the end of 2010. Our existing operations are located at five principal manufacturing sites in Taiwan, one module assembly site in Europe, four module-assembly sites in the PRC and three manufacturing sites in Japan.

Table of Contents

We group our business into three marketing channels: Information Technology Displays, Consumer Products Displays and Television Displays. The Information Technology Displays Business Group covers applications such as desktop and notebook computers. The Consumer Products Displays Business Group covers applications such as audio-video displays and mobile device displays. The Television Displays Business Group covers applications such as LCD television. We believe this structure allows us to better serve the needs of customers in these three markets.

Principal Products

We design, develop, manufacture, assemble and market a wide range of TFT-LCD panels for the following principal product categories:

Computer products, which typically utilize display panels ranging from 8.9 inches to 24 inches, primarily for use in notebook computers and desktop monitors.

Consumer electronics products, which typically utilize display panels ranging from 1.2 inches to 10.4 inches or above for use in products such as mobile phones, digital photo frames, digital still cameras, portable navigation display, portable DVD players, digital camcorders, automobile display, amusement and printer displays.

LCD television, which typically utilizes display panels with panel size of 19 inches to 65 inches. We commenced the production of display panels for LCD television in the fourth quarter of 2002.

Industrial display, which typically utilizes display panels with panel size of 5.7 inches to 65 inches primarily for use in automatic teller machines, point of sale systems, kiosks, industrial PCs, marine and aviation electronics, game machines, medical equipment, factory automation systems, e-Signage and public information displays.

In order to create synergy by leveraging our wider technology platforms currently employed by our Consumer Products Display Business Group and Television Displays Business Group, beginning in April, 2009, we have reclassified the industrial display product category into the audio-video display product category under our Consumer Products Display Business Group and Television Displays Business Group based on different panel size and applications.

We design, develop and manufacture our panels to address specific needs of the end-products in which they are used, such as thinness, light weight, resolution, color quality, brightness, low power consumption, touch panel features, fast response time and wide viewing angles. For example, it is important for notebook computer displays to be lightweight and thin, and to have low power consumption, while desktop monitors require high brightness and wider viewing angles.

The following table sets forth the shipment of our products by category for the periods indicated:

	Year Ended December 31,
	2007		2008		2009
	(Panels in thousands)
Panels for Computer Products
Panels for notebook computers		27,478.9		32,881.6		35,225.9
Panels for desktop monitors		30,715.0		28,492.0		27,000.7
Total panels for computer products		58,193.9		61,373.6		62,226.6
Panels for Consumer Electronics Products		144,087.2		184,311.5		232,023.2
Panels for LCD Television		18,875.9		18,754.1		22,824.3
Panels for Industrial Display		2,813.3		3,244.0		523.2	(1)
Total		223,970.3		267,683.2		317,597.3

(1)

The significant decrease in the amount of panels for industrial display was primarily due to the reclassification of the industrial display product category into the audio-video display product category under our Consumer Products Display Business Group and Television Displays Business Group based on panel size and applications starting from April 2009.

Table of Contents

The following table sets forth our net sales by product category for the periods indicated:

	Year Ended December 31,
	2007		2008		2009
	NT$		NT$		NT$			US$
	(in millions)
Panels for Computer Products
Panels for notebook computers		89,030.3		81,100.6		60,432.0			1,891.5
Panels for desktop monitors		133,278.3		93,096.9		68,431.1			2,141.8
Total panels for computer products		222,308.6		174,197.5		128,863.1			4,033.3
Panels for Consumer Electronics Products		43,023.2		42,598.8		45,131.3			1,412.6
Panels for LCD Television		200,572.9		188,161.5		166,223.0			5,202.6
Panels for Industrial Display		11,988.4		13,664.9		1,993.1			62.4	(2)
Others(1)		2,290.5		5,305.5		17,120.8			535.8
Total		480,183.6		423,928.2		359,331.3	(3)		11,246.7

(1)	Includes revenues generated from sales of raw materials, components, other TFT-LCD panel products and solar modules and from service charges.

(2)

The significant decrease in the amount of net sales for industrial display was primarily due to the reclassification of the industrial display product category into the audio-video display product category under our Consumer Products Display Business Group and Television Displays Business Group based on panel size and applications starting from April 2009.

(3)

The amount is under ROC GAAP. Under US GAAP, the total amount of net sales was NT$358,732.8 million (US$11,227.9 million). The difference was due to a difference in accounting treatment for acquisition date of our equity investment in M. Setek under ROC GAAP versus US GAAP. See note 28 to our consolidated financial statements for information relating to the nature and effect of significant differences between ROC GAAP and US GAAP as they relate to us.

Computer Products

Panels for Notebook Computers. In 2007, 2008 and 2009, sales of panels for notebook computers accounted for 18.5%, 19.1% and 16.8%, respectively, of our net sales. The increase in sales of notebook computer panels as a percentage of our total net sales from 2007 to 2008 resulted primarily from the overall growth of the notebook computer market. The decrease in sales of notebook computer panels as a percentage of our total net sales from 2008 to 2009 resulted primarily from a change in our product mix, particularly the increase in sales of LCD TV panels.

The most commonly produced sizes for panels for notebook computers have changed in recent years, partly as a result of migration in TFT-LCD production technology. Our product mix for notebook computers primarily includes 8.9- to 17.3- inch panels. The most commonly produced panel sizes for notebook computers have been 14.1, 15.4 and 15.6 inches. We expect that 14.0-inch and 15.6-inch panels with an aspect ratio of 16:9 will become the most commonly produced sizes for notebook computers, with demand for 17.3-inch panels increasing as well. We typically seek to increase our production of notebook panels of a certain size, one to two quarters ahead of expected product migration towards that panel size.

In 2009, unit sales of our panels for notebook computers were approximately 35.2 million. In 2009, our net sales accounted for by panels for notebook computers was approximately NT$60.4 billion.

Panels for Desktop Monitors. In 2007, 2008 and 2009, sales of panels for desktop monitors accounted for 27.8%, 22.0% and 19.0%, respectively, of our net sales. Sales of panels for desktop monitors as a percentage of our net sales has decreased primarily due to a change in our product mix, particularly the increase in sales of LCD TV panels. We expect that our unit shipment of desktop monitor panels will grow in 2010, primarily due to the expected recovery of the global economy.

The most commonly produced size of desktop monitors changes as the generation of TFT-LCD manufacturing technology evolves, with manufacturers moving production to panel sizes that make the most efficient use of glass

Table of Contents

substrates processed by their fabs. In 2009, 18.5-inch, 19-inch and 21.5-inch panels were most commonly produced for desktop monitors. In 2009, unit sales of our panels for desktop monitors was approximately 27.0 million, and our net sales accounted for by panels for desktop monitors was approximately NT$68.4 billion.

Consumer Electronics Products

Our panels for consumer electronics products are used in products such as mobile phones, digital photo frames, digital still cameras, portable navigation display, portable DVD players, digital camcorders, automobile display, amusement and printer displays. In 2007, 2008 and 2009, sales of panels for consumer electronics accounted for 9.0%, 10.0% and 12.6%, respectively, of our net sales. The markets for our panels for consumer electronics products are typically more stable and less cyclical than the markets for our computer products because of the high level of our involvement in the design process and the customized nature of consumer electronics panels. Unit sales of our panels for consumer electronics products increased 25.9% to 232,023.2 thousand panels in 2009 from 184,311.5 thousand panels in 2008 primarily as a result of an increase in demand for mobile phones and digital cameras, accompanied by the reclassification of certain industrial display products into the audio-video product category under our Consumer Products Display Business Group based on panel size and applications starting from April 2009.

LCD Television

Our panels for LCD television consist of panels with a panel size of 19 inches or above. We commenced commercial production of panels for LCD television in the fourth quarter of 2002. Our current portfolio of LCD TV panels consists of 19-inch to 65-inch panels. In 2007, 2008 and 2009, sales of LCD TV panels accounted for 41.8%, 44.4% and 46.3%, respectively, of our net sales. In 2009, approximately 68.4% LCD TV panels we produced were 30 inches and above. We expect that unit shipments of LCD TV panels will grow in 2010, primarily as a result of expected demand growth for LCD televisions. Unit sales of our LCD TV panels increased to 22,824.3 thousand panels in 2009 from 18,754.1 thousand panels in 2008, primarily as a result of an increase in market demand in the second half of 2009.

Industrial Display

Our panels for industrial display are used in products such as automatic teller machines, point of sale systems, kiosks, industrial PCs, marine and aviation electronics, game machines, medical equipment, factory automation systems, e-Signage and public information displays. In 2007, 2008 and 2009, sales of panels for industrial display accounted for 2.5%, 3.2% and 0.6%, respectively, of our net sales. Unit sales of our TFT-LCD panels for industrial display substantially decreased 83.9% to 523.2 thousand panels in 2009 from 3,244.0 thousand panels in 2008, primarily due to the reclassification of the industrial display product category into the audio-video display product category under our Consumer Products Display Business Group and Television Displays Business Group based on panel size and applications starting from April 2009.

Customers, Sales and Marketing

We sell our panels to original equipment manufacturing service providers and brand companies. These original equipment manufacturing service providers, most of whose production operations are located in Taiwan and the PRC, use our panels in the products they manufacture on a contract basis for brand companies. In addition, we seek to strengthen our strategic relationship with Qisda, a TFT-LCD system integrator and a shareholder of our company, to better service the needs of brand customers and to provide them with superior solutions in capturing emerging trends of TFT-LCD applications in consumer markets. By enhancing our strategic relationship with Qisda, we hope to improve our competitiveness vis-a-vis other TFT-LCD manufacturers and secure potential business opportunities at an early stage. On April 11, 2008, we purchased an additional 90,456,800 shares of Qisda through a private offering, bringing our total equity interest in Qisda to 9.54%. As of December 31, 2009, our equity interest in Qisda remained unchanged at 9.54%.

The following table sets forth the geographic breakdown of our net sales by the location of our customers placing orders for the periods indicated:

Table of Contents

	Year Ended December 31,
	2007					2008					2009
Region	Net Sales		%			Net Sales		%			Net Sales		%
	(in NT$ millions, except percentages)
Taiwan		174,273		36.3	%		184,895		43.6	%		153,643.4		42.8	%
Japan		36,698		7.6	%		11,835		2.8	%		7,882.2		2.2	%
Asia(1)		192,878		40.2	%		160,744		37.9	%		157,605.0		43.9	%
Europe		43,372		9.0	%		36,450		8.6	%		19,221.8		5.3	%
United States		26,468		5.5	%		26,071		6.2	%		18,702.2		5.2	%
Others		6,495		1.4	%		3,933		0.9	%		2,276.7		0.6	%
Total		480,184		100.0	%		423,928		100.0	%		359,331.3		100.0	%

(1)	Excludes Japan and Taiwan.

Our sales in Taiwan and Asia, as set forth in the table above, represent a significant portion of our net sales for the past three years. A significant portion of these sales were made to original equipment manufacturing service providers who use our panels in the products they manufacture on a contract basis for brand companies worldwide.

We sell our panels for notebook computers to brand companies and original equipment manufacturing service providers with production operations in Taiwan and the PRC that design and manufacture notebook computers based on the specifications of their brand company customers. We market our panels to, and negotiate prices with, both our original equipment manufacturing service provider customers and brand customers, as display panels often constitute a significant part of the end product.

We sell our panels for desktop monitors through sales channels similar to those for notebook computers. We supply desktop monitor panels to brand companies and original equipment manufacturing service providers.

We sell most of our panels for digital still cameras and camcorders to brand companies based in Japan, Europe and the United States. We sell our panels for automobile display primarily to component manufacturers for automotive audio and video products based in the United States, Japan, the PRC and Europe. We sell our panels for portable DVD players primarily to original equipment manufacturing service providers and component manufacturers, most of which are located in Taiwan, the PRC and other Asian countries.

We sell a significant portion of our panels for mobile device products to mobile phone brand companies such as Nokia, and original equipment manufacturing service providers in the United States, Europe, Japan, Korea and the PRC.

As the end-use market continues to grow for LCD television products, we sell an increasing amount of LCD television products primarily to brand companies based in Japan, Korea, United States and the PRC. Orders placed by such brand customers have accounted for an increasing portion of our net sales in recent years. In addition, average price per panel for LCD television products is higher than notebook and desktop monitors.

A significant portion of our net sales is attributable to a small number of our customers. In 2007, 2008 and 2009, our five largest customers accounted for 32.1%, 39.4% and 37.3%, respectively, of our net sales. In addition, some customers individually accounted for more than 10% of our net sales for each of the last three years. For example, Samsung accounted for 12.7%, 14.8% and 16.9% of our net sales in 2007, 2008 and 2009, respectively.

We focus our sales activities on a number of large customers with whom we seek to build close relationships. We appoint a sales manager to serve as the main contact person with each of our major customers. Each product category has its own sales and marketing division, and is further subdivided into smaller teams dedicated to each of our major customers. Each dedicated customer team is headed by an account manager who is primarily responsible for our relationship with that specific customer.

Our customers typically provide monthly non-binding rolling forecasts of their requirements for the coming four to six months, and typically place purchase orders one month before the expected shipment date. We generally provide a limited warranty to our customers, including the provision of replacement parts and after-sale service for our products. In connection with these warranty policies, based on our historical experience, we typically set aside an amount as a reserve to cover these warranty obligations. As of December 31, 2009, our reserve for warranties totaled NT$2,313.6 million (US$72.4 million). In addition, we are required under several of our sales contracts to provide replacement parts for our products, at agreed prices, for a specified period of time.

Table of Contents

We price our products in accordance with prevailing market conditions, giving consideration to the complexity of the product, the order size, the strength and history of our relationship with the customer and our capacity utilization. Purchase prices and payment terms for sales to related parties are not significantly different from those for other customers. Our credit policy for sales to related parties and other customers typically requires payment within 30 to 60 days. The average number of collection days extended for sales to our customers for the years ended December 31, 2007, 2008 and 2009, was 51 days, 43 days and 44 days, respectively. We have experienced a significant decrease in the number of collection days extended for sales to our customers primarily due to our enhanced collection procedures and a strengthening of our receivables management system which allowed for lower fluctuations in receivables as compared to sales. In general, we extend longer credit terms to our large customers compared to customers of our other products and our smaller customers. We believe the terms for those customers and products are comparable to the terms offered by our industry peer competitors. We have not experienced any material problems relating to customer payments.

The TFT-LCD Manufacturing Process

The basic structure of a TFT-LCD panel may be thought of as two glass substrates sandwiching a layer of liquid crystal. The front glass substrate is fitted with a color filter, while the back glass substrate has transistors fabricated on it. A light source called a backlight unit is located at the back of the panel.

The manufacturing process consists of hundreds of steps, but may be divided into three primary steps. The first step is the array process, which involves fabricating transistors on the back substrate using film deposition, lithography and etching. The array process is similar to the semiconductor manufacturing process, except that transistors are fabricated on a glass substrate instead of a silicon wafer. The second step is the cell process, which joins the back array substrate and the front color filter substrate. The space between the two substrates is filled with liquid crystal. The third step is the module-assembly process, which involves connecting additional components, such as driver-integrated circuits and backlight units, to the TFT-LCD panel. We established a color filter production facility at one of our fifth-generation fabs with technical assistance from Toppan, one of our color filter suppliers, in order to meet a portion of our color filter requirements. We commenced commercial production of color filters at this facility in October 2003. We also established a color filter production facility at one of our sixth-generation fab in January 2005. In addition, we acquired a color filter production facility along with a sixth-generation fab and one module-assembly facility in October 2006 as a result of our merger with QDI. We established a color filter production facility at one of our 7.5-generation fabs in June 2006 and a color filter production facility at one of our 8.5-generation fabs in February 2009.

The array and cell processes are capital-intensive and require highly automated production equipment. TFT-LCD manufacturers typically design their own fabs and purchase production equipment from various suppliers, most of which are based in Japan. Each TFT-LCD manufacturer combines various equipment according to its manufacturing process technologies to form a TFT-LCD fab. In addition to developing our own manufacturing process technologies, we also license such technologies from other companies, such as Fujitsu Display Technologies Corporation (which was merged into Fujitsu Limited) (“FDTC”). We have automated our array and cell processes, with the exception of some steps in the cell process, such as panel inspection, panel baking and injection of liquid crystal. In contrast to the array and cell processes, the module-assembly process is highly labor-intensive, as it involves manual labor to assemble the pieces. We started to move a substantial portion of our module-assembly process to Suzhou, Jiangsu Province, the PRC in July 2002, as part of our efforts to reduce labor costs and the majority of the module-assembly work is conducted in Suzhou. In October 2006, we acquired a module-assembly facility in Songjiang, Shanghai, the PRC as a result of our merger with QDI. We commenced commercial production at our module-assembly facility in Xiamen, Fujian Province, the PRC in September 2007. We also commenced commercial production at our new module and TV set assembly facility in the Czech Republic in April 2008. We commenced the construction of a module-assembly facility in Trencin Slovak Republic in April 2010. In March 2010, our Board of Directors and that of TPV Technology Limited approved to establish a joint venture involved in TFT-LCD module production in Gorzow, Poland. In April 2010, our Board of Directors and that of TCL King Electrical Appliances (Huizhou) Co., Ltd. approved to establish a joint venture involved in TFT-LCD TV panel module production in Huizhou city, Guangdong Province, the PRC. In April 2010, our Board of Directors and that of Haier Group approved to establish a joint venture involved in TFT-LCD TV panel module production in Qingdao city, Shandong Province, the PRC.

Table of Contents

Raw Materials and Components and Suppliers

Our manufacturing operations require adequate supplies of high-quality raw materials and components on a timely basis. We purchase our raw materials and components based on forecasts from our customers, as well as our own assessments of our customers’ needs. We generally prepare forecasts one to four months in advance, depending on the raw materials and components, and update this forecast monthly. We source most of our raw materials and components, including critical materials such as glass substrates, color filters, CCFL, LED, polarizer and driver-integrated circuits, from a limited group of suppliers. In order to reduce our raw materials and component costs and our dependence on any one supplier, we generally purchase our raw materials and components from multiple sources. We typically do not enter into contracts with our suppliers. However, during periods of supply shortages, we typically enter into supply contracts with suppliers to ensure a stable supply of necessary raw materials and components.

We experienced a shortage of glass substrates in both the second half of 2007 and 2009. We have also experienced shortages of other raw materials in the past from time to time. Our operations would be adversely affected if we could not obtain raw materials and components in sufficient quantity and quality. We may also experience difficulties in sourcing adequate supplies for our operations if there is a ramp-up of production capacity by TFT-LCD manufacturers, including our company, without a corresponding increase in the supply of raw materials and components.

Raw materials and components constitute a substantial portion of our cost of goods sold. An increase in the cost of our raw materials may adversely affect our gross margins.

Set forth below are our major suppliers of key raw materials and components in alphabetical order by category:

Glass Substrates	Liquid Crystals	Color Filters	Polarizer	Backlight Units	Driver-integrated Circuits
Asahi Glass	Chisso Corporation	Cando Corporation(1)	Daxon Technology(3)	Coretronic	Nippon Electric Company
Corning Taiwan	DIC Corporation	Dai Nippon Printing	Nitto Denko	Darwin Precisions(4)	Novatek
Nippon Electric Glass	Merck	Mitsui & Co. (Taiwan), Ltd.	Sumika	Forhouse(5)	Orise
		Toppan CFI(2)		Radiant Opto-Electronics	Raydium Semiconductor(7)
				Taiwan Nano Electro-Optical(6)

(1)	Cando Corporation has been our investee since November 2003. See “Item 7.B. Related Party Transactions.”

(2)	Toppan CFI (Taiwan) Co. Ltd (“Toppan CFI”) has been our consolidated subsidiary since March 2007.

(3)	Daxon Technology is a subsidiary of one of our major shareholders, Qisda. See “Item 7.B. Related Party Transactions.”

(4)	Darwin Precisions (Xiamen) Corp. and Darwin Precisions (Suzhou) Corp. are our consolidated subsidiaries and also our backlight units suppliers.

(5)	Forhouse is our investee.

(6)	Taiwan Nano Electro-Optical is our investee.

(7)	We reduced our indirect ownership in Raydium Semiconductor Corporation to less than 50% in January 2006. As a result, Raydium Semiconductor is no longer a consolidated subsidiary.

We use a large amount of water and electricity in our manufacturing process. We obtain water from government-owned entities and recycle approximately 82% of the water that we use in production. We use electricity supplied by Taiwan Power Corporation. We maintain back-up generators that provide electricity in case of power interruptions, which we have experienced from time to time. Except for power outage, power interruptions in general have not materially affected our production processes.

Table of Contents

Equipment and Suppliers

We depend on a number of equipment manufacturers that make and sell the equipment that we use in our manufacturing processes. Our manufacturing processes depend on the quality and technological capacity of our equipment. We purchase equipment that is customized to our specific requirements for our manufacturing processes. The principal types of equipment we use to manufacture TFT-LCD panels include chemical vapor deposition equipment, sputters, steppers, developers and coaters.

We made significant purchases of equipment in 2007 and 2008. In 2009, as a result of the general economic downturn and decrease in market demand for our products, we reduced the level of equipment purchases. We expect to make significant purchases of equipment in 2010 for the construction of our second 8.5-generation fab and if market demand increases, the expansion of our second 7.5-generation fab. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.” We purchase equipment from a small number of qualified vendors to assure consistent quality and performance. We typically order equipment four to six months or longer in advance of our planned installation.

Competition

The TFT-LCD industry is highly competitive. Most of our competitors operate fabs in Korea, Taiwan, Japan and the PRC. Our principal competitors are:

LG Display Co., Ltd. (“LG Display”) and Samsung in Korea;

Chimei Innolux Corp., Chunghwa Picture Tubes, Ltd., Hannstar Display Corporation, Wintek Corporation, Giantplus Technology Co., Ltd. and Prime View International Co., Ltd. in Taiwan;

Sharp, Toshiba, IPS Alpha Technology, Ltd. and Hitachi in Japan; and

Shanghai SVA NEC Liquid Crystal Display Co., Ltd., BOE Technology Group Co., Ltd., InfoVision Optoelectronics (Kunshan) Co., Ltd., Century Corporation Co., Ltd. China, Shanghai Tianma Micro Electronics Co., Ltd., and Shenzhen Tianma Micro Electronics Co., Ltd. in the PRC.

The principal elements of competition for customers in the TFT-LCD market include:

price, based in large part on the ability to ramp-up lower cost, “next generation” production facilities before competitors;

product features and quality;

customer service, including product design support;

ability to keep production costs low by maintaining high yield and operating at full capacity;

ability to provide sufficient quantity of products to meet customer demand;

quality of the research and development team;

time-to-market;

superior logistics; and

access to capital.

Table of Contents

Quality Control

We have implemented quality inspection and testing procedures at all of our fabs and module-assembly facilities. Our quality control procedures include statistical process controls, which involves sampling measurements to monitor and control the production processes. We perform outgoing quality control based on sampling plans, ongoing reliability tests covering a wide range of application conditions, in-process quality control to prevent potential quality deviations, and other programs designed for process measurement and improvement, reduction of manufacturing costs, maintenance of on-time delivery, increasing in-process production yields and improving field reliability of our products. If a problem is detected, we take steps to contain the problem, conduct defect analyses to identify the cause of the problem and take appropriate corrective and preventive actions.

We visually inspect and test all completed panels to ensure that production standards are met. To ensure the effective and consistent application of our quality control procedures, we provide quality control training to all of our production line employees according to a certification system depending on the particular levels of skills and knowledge required.

We also perform quality control procedures for raw materials and components used in our products. These procedures include testing samples for large batches, obtaining vendor testing reports and testing to ensure compatibility with other raw materials and components, as well as vendor qualification and vendor ratings.

Our quality control programs have received accredited International Organization of Standards ISO 9001 and QC080000 certifications, as well as qualifications from our customers. We also received the ISO/TS16949 certifications for facilities that design and manufacture the panel displays. In addition, our facilities have been certified as meeting the International Organization of Standards ISO 14001 environmental protection standards and OHSAS 18001. The International Organization of Standards certification process involves subjecting our manufacturing processes and quality management systems to periodic reviews and observations. International Organization of Standards certification is required by certain European countries in connection with sales of industrial products in those countries. We believe that certification also provides independent verification to our customers regarding the quality control employed in our manufacturing and assembly processes.

Insurance

We maintain insurance policies on our production facilities, buildings, machinery and inventories covering property damage and damage due to fire, earthquakes, floods, and other natural and accidental perils. Our property insurance covers replacement costs for our assets. As of December 31, 2009, our insurance also included protection from covered losses, including property damage up to maximum coverage of NT$59.4 billion for all of our inventories and NT$531.8 billion for our equipment and facilities. In addition, as of December 31, 2009, we had insurance coverage for business interruptions in the aggregate amount of NT$28.9 billion.

We also maintain insurance policies, including director and officer liability insurance, employee group health insurance, travel and life insurance, employer liability insurance, general liability insurance, and policies that provide coverage for risks during the shipment of goods and equipment, as well as during equipment installation at our fabs.

Environmental Matters

Our manufacturing processes involve the use of hazardous materials and generate a significant amount of waste products, including wastewater, liquid waste products and hazardous gases, which are strictly monitored by local environmental protection bureaus. To meet ROC environmental standards, we employ various types of pollution control equipment for the treatment of hazardous gases, liquid waste, solid waste and the treatment of wastewater and chemicals in our fabs. We control exhaust gas and wastewater on-site. The treatment of solid and liquid wastes is subcontracted to third parties off-site in accordance with pollution control requirements.

We incurred small fines in 2009 for failure to meet certain effluent standards. We also incurred small fines in 2007 and 2008 for failure to meet certain effluent standards and air pollution control regulations. Following each of

Table of Contents

the infractions described above, we have taken the necessary steps to obtain the appropriate permit and believe that we are in compliance with the existing environmental laws and regulations in Taiwan.

4.C. Organizational Structure

The following chart sets forth our corporate structure and ownership interest in each of our principal operating subsidiaries as of April 30, 2010.

Table of Contents

The following table sets forth summary information for our subsidiaries as of April 30, 2010.

Subsidiary	Main Activities	Jurisdiction of Incorporation	Total Paid-in Capital	Percentage of Our Ownership Interest
			(in millions)
AU Optronics (L) Corp.	Holding and trading company	Malaysia	US$907.8	100%

AU Optronics Corporation America	Sales support in the United States	United States	US$1.0	100%(1)

AU Optronics Corporation Japan	Sales support in Japan	Japan	JPY40.0	100%(1)

AU Optronics Europe B.V.	Sales support in Europe	Netherlands	EUR0.05	100%(1)

AU Optronics Korea Ltd.	Sales support in South Korea	South Korea	KRW173.1	100%(1)

AU Optronics Singapore Pte. Ltd.	Sales support in South Asia	Singapore	SGD1.8	100%(1)

AU Optronics (Shanghai) Corp.	Sales support in the PRC	PRC	RMB21.8	100%(1)

AU Optronics (Xiamen) Corp.	Assembly of TFT-LCD modules in the PRC	PRC	RMB1,361.8	100%(1)

AU Optronics (Suzhou) Corp.	Assembly of TFT-LCD modules in the PRC	PRC	RMB1,967.3	100%(1)

AU Optronics (Czech) s.r.o.	Manufacturing and repair center in Czech Republic and assembly of TFT-LCD modules and TV set	Czech Republic	CZK300.0	100%(1)

AU Optronics Manufacturing (Shanghai) Corp. (previously named Tech Well (Shanghai) Display Co., Ltd.)	Assembly of TFT-LCD modules in the PRC	PRC	RMB867.0	100%(1)

AU Optronics (Slovakia) s.r.o.	Assembly of Optoelectronics LCD products in Slovakia and manufacturing and sale of related parts	Slovakia	EUR15.0	100%(1)

AUO Energy (Suzhou) Corp.	Design, manufacturing and sale of solar modules	PRC	RMB8.2	100% (11)

BriView (Xiamen) Corp. (previously named BriView Electronics Corp.)	Manufacturing and sale of liquid crystal products and related parts	PRC	RMB136.7	100%(1)

Darwin Precisions (L) Corp.	Holding and trading company	Malaysia	US$85.0	100%(2)

Darwin Precisions (Hong Kong) Limited	Holding company	Hong Kong	HK$326.7	100%(3)

Darwin Precisions (Suzhou) Corp.	Manufacturing and assembly of backlight modules and related components in the PRC	PRC	RMB120.7	100%(4)

Table of Contents

Subsidiary	Main Activities	Jurisdiction of Incorporation	Total Paid-in Capital	Percentage of Our Ownership Interest
			(in millions)

Darwin Precisions (Xiamen) Corp.	Manufacturing and assembly of backlight modules and related components in the PRC	PRC	RMB506.0	100%(4)

Darwin Precisions (ChengDu) Corporation	Manufacturing and assembly of backlight modules and related components in the PRC	PRC	RMB17.1	100%(4)

BVCH Optronics (Sichuan) Corp.	Assembly of TFT-LCD modules in the PRC	PRC	RMB100.0	51.0%(5)

BriView (Kunshan) Co., Ltd.	Manufacturing and sale of liquid crystal products and related parts	PRC	RMB34.1	100%(5)

BriView (Hefei) Co., Ltd.	Manufacturing and sale of liquid crystal products and related parts	PRC	RMB95.6	100%(5)

Konly Venture Corp.	Venture capital investment	ROC	NT$2,500.0	100%

Ronly Venture Corp. (6)	Venture capital investment	ROC	NT$2,800.0	100%

Lextar Electronics Corp.	Manufacturing and sale of LED products	ROC	NT$3,704.9	46.29%(7)

Darwin Precisions Corp.	Manufacturing and sale of backlight modules	ROC	NT$4,120.0	61.35%(8)

Toppan CFI (Taiwan) Co., Ltd.	Manufacturing and sale of color filters	ROC	NT$15,363.0	49%(9)

BriView Technology Corp.	Manufacturing and sale of liquid crystal products and related parts	ROC	NT$100.0	60%

BriView (L) Corp.	Holding and trading company	Malaysia	US$26.5	100% (1)

AUO Energy Taiwan Corp.	Technical Services	ROC	NT$100.0	100%

M. Setek Co., Ltd.	Manufacturing of single crystal silicon wafers and ignots and sale of solar modules	Japan	JPY32,762.1	90%(1)

Ichijo Seisakusyo Co., Ltd.	Manufacturing semiconductor products	Japan	JPY13.0	38.46%(10)

Tung-Tai Venture Limited	Holding company	ROC	NT$30.0	100%(12)

Lighthouse-LED (Singapore) Pte. Ltd.	Holding company	Singapore	US$9.0	100%(12)

Lextar Electronics (Suzhou) Corp.	Manufacturing and sale of LED products	PRC	RMB61.4	100%(13)

Darshin Microelectronics Inc.	IC design and sales support	ROC	NT$30.0	66.67%(14)

Table of Contents

(1)	Indirectly, through our 100% ownership of AU Optronics (L) Corp.

(2)	24.12% held indirectly through AU Optronics (L) Corp. and 75.88% held directly by Darwin Precisions Corp.

(3)	Indirectly, through our 100% ownership of Darwin Precisions (L) Corp.

(4)	Indirectly, through our 100% ownership of Darwin Precisions (Hong Kong) Limited.

(5)	Indirectly, through our 100% ownership of BriView (L) Corp.

(6)	Formerly Quanta Display Technology Investment Ltd.

(7)	24.99% held directly by us and 4.76% and 16.54% held indirectly through Konly Venture Corp. and Ronly Venture Corp., respectively.

(8)	38.11% held directly by us, 20.56% held indirectly by Konly Venture Corp. and 2.68% held indirectly by Ronly Venture Corp., respectively.

(9)	We consolidated Toppan CFI (Taiwan) Co., Ltd. in accordance with FIN 46R starting from fiscal year 2007. See note 28 to our consolidated financial statements.

(10)	Indirectly, through our 90% ownership of M. Setek Co., Ltd.

(11)	Indirectly, through our 100% ownership of AU Optronics (Singapore) Pte. Ltd.

(12)	100% held directly by Lextar Electronics Corp., which is 46.29% held directly and indirectly through us, Konly Venture Corp. and Ronly Venture Corp.

(13)	100% held directly by Lighthouse-LED (Singapore) Pte. Ltd., which is 100% held directly by Lextar Electronics Corp.

(14)	Indirectly, though our 100% ownership of Konly Venture Corp.

In January 2009, we established our wholly-owned subsidiary, AU Optronics (Slovakia) s.r.o., in Slovakia, which is mainly engaged in the assembly of Optoelectronics LCD products and manufacture and sale of related parts.

In February 2009, we established our wholly-owned subsidiary, BriView (Xiamen) Corp. (previously named BriView Electronics Corp.), in the PRC, which is mainly engaged in the manufacture and sale of liquid crystal products and related parts.

In May 2009, we established our wholly-owned subsidiary, AUO Energy Taiwan Corp., which is mainly engaged in providing value-added services in clean energy business, including the installation of energy system fueled by solar or other renewable energies for power plants, industrial facilities, commercial buildings and households.

Between June and December 2009, we gradually increased our ownership in M. Setek to 58.10% through the subscription of new shares and convertible preferred shares and the conversion of such convertible preferred shares. In February 2010, our equity investment in M. Setek was further increased to 90% through the subscription of new shares and convertible preferred shares. M. Setek is mainly engaged in the manufacture of polysilicon and mono-crystal silicon wafer. M. Setek owns 38.46% shares of Ichijo Seisakusyo Co., Ltd, which is engaged in the assembly of semiconductor manufacturing equipment.

In August 2009, we established our wholly-owned subsidiary, BriView (L) Corp. in Malaysia, which is a holding company. In August 2009, BriView (L) Corp. established a joint venture with Sichuan Changhong Electric Co., Ltd. to establish BVCH Optronics (Sichuan) Corp. , a 51% ownership subsidiary, which is mainly engaged in the assembly of TFT-LCD modules in the PRC.

From December 2008 to October 2009, we gradually increased our ownership and eventually wholly-owned Darwin Precisions(L) Corp. through share purchases.

In November 2009, we established a 66.67%-owned subsidiary, Darshin Microelectronics Inc., which is mainly engaged in the design of integrated circuit and sales support.

In October 2009, our ownership in Lextar Electronics Corp. (“Lextar”) decreased from 76.98% to 68.43% as a result of disproportionate participation in its capital increase. In March 2010, Lextar merged with Lighthouse Technology Co., Ltd. (“Lighthouse”), a company mainly engaged in light-emitting diode. As a result of this merger,

Table of Contents

we also absorbed several subsidiaries of Lighthouse, including Tung Tai Venture Limited, Lighthouse-LED (Singapore) Pte. Ltd. and Lextar Electronics (Suzhou) Corp.

In March 2010, we established a wholly-owned subsidiary, AUO Energy (Suzhou) Corp., which is mainly engaged in the design, manufacturing, and sale of solar modules.

In March 2010, we established a wholly-owned subsidiary, Darwin Precision (ChengDu) Corporation, which is mainly engaged in the manufacture and assembly of backlight modules and related components.

4.D. Property, Plants and Equipment

As of April 30, 2010, we have five principal manufacturing sites in Taiwan, one module-assembly site in Europe, four module-assembly sites in the PRC and three manufacturing sites in Japan.

Principal Facilities

The following table sets forth certain information relating to our principal facilities as of April 30, 2010. The land in the Hsinchu Science Park, Lungke Science Park and Central Taiwan Science Park on which our facilities are located is leased from the ROC government. The land in the Songjiang Export Processing Zone, Torch Hi-tech Industrial Development Zone and Suzhou Industrial Park, on which our facilities are located, is leased from the PRC government.

Location	Building Size	Input Substrate Size / Installed Capacity	Commencement of Commercial Production	Primary Use	Owned or Leased
	(in square meters)	(in millimeters)/ (substrates processed per month) ***
No. 5, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu 30078, Taiwan, ROC	69,647	610x720/40,000(1)	December 1999	Manufacturing of TFT-LCD panels	· Building is owned · Land is leased (expires in December 2020)

No. 1, Li-Hsin Rd. 2, Hsinchu Science Park, Hsinchu 30078, Taiwan, ROC	162,895	610x720/LTPS 20,000(1)	November 2000	Manufacturing of TFT-LCD panels; business operations; research and development; sales and marketing	· Building is owned · Land is leased (expires in December 2020)

No. 23, Li-Hsin Rd. Hsinchu Science Park, Hsinchu 30078, Taiwan, ROC	105,127	600x720/60,000(1)	July 1999	Manufacturing of TFT-LCD panels	· Building is owned · Land is leased (expires in January 2017)

No. 189, Hwaya Rd. 2, Kueishan Hwaya Science Park, Kueishan 33383, Taoyuan, ROC*	162,826	620x750/a-Si 30,000(1) 1,100x1,300/70,000(2)	December 2001 October 2003	Manufacturing of TFT-LCD panels	· Building is owned · Land is owned

No. 1, Xinhe Rd. Aspire Park Lungtan 32543, Taoyuan Taiwan, ROC	535,528	680x880/60,000(3) 1,100x1,250/50,000(2) 1,100x1,300/70,000(2)	February 2001 March 2003 February 2004	Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters	· Building is owned · Land is owned

Table of Contents

Location	Building Size	Input Substrate Size / Installed Capacity	Commencement of Commercial Production	Primary Use	Owned or Leased
	(in square meters)	(in millimeters)/ (substrates processed per month) ***
No. 228, Lungke St., Lungke Science Park, Lungtan, 32542, Taoyuan, Taiwan, ROC*	867,955	1,500x1,850/120,000(4)	August 2005	Manufacturing of TFT-LCD panels; manufacturing of color filters	· Building is owned · Land is leased (expires in December 2027)

No. 1 JhongKe Rd. Central Taiwan Science Park Taichung 40763, Taiwan, ROC	1,430,750	1,500x1,850/120,000(4) 1,100x1,300/120,000(2) 1,950x2,250/75,000(5) 1,950x2,250/25,000(5) 2,200x2,500/40,000(6)	March 2005 August 2005 June 2006 April 2009 February 2009	Manufacturing of TFT-LCD panels; module and component assembly; manufacturing of color filters	· Building is owned · Land is leased (expires in December 2022)

No. 398, Suhong Zhong Road Suzhou Industrial Park, Suzhou, the PRC	413,035	N/A	July 2002	Module and component assembly	· Building is owned · Land is leased (expires in 2051)

No. 3, Lane 58, San-Zhuang Rd., Songjiang Export Processing Zone, Shanghai, the PRC*	83,508	N/A	October 2004	Module and component assembly	· Building is owned · Land is leased (expires in 2052)

No. 1689, North of XiangAn Rd., XiangAn Branch, Torch Hi-tech Industrial Development Zone, Xiamen, the PRC	289,662	N/A	September 2007	Module and component assembly	· Building is owned · Land is leased (expires in 2056)

No. 35 Mianxing East Road, Mianyang, Sichuan Province, the PRC	24,195	N/A	September 2009	Module and component assembly	· Building is leased (expires in 2014)

Turanka 856/98b, Slatina, 627 00, Brno, Czech Republic	26,710	N/A	October 2008	Module and TV set assembly; TFT-LCD related products repair service	· Building is leased (expires in December 2013) · Land is leased (expires in December 2013)

Table of Contents

Location	Building Size	Input Substrate Size / Installed Capacity	Commencement of Commercial Production	Primary Use	Owned or Leased
	(in square meters)	(in millimeters)/ (substrates processed per month) ***
Sendai 83,Shimomiyamae, Asouhara, Yamamoto-cho, Watari-gun, Miyagi-ken, Japan**	52,759	Silicon wafer 2,000 kpcs per month	October 1984	Production of silicon wafer	· Building is owned · Land is owned

Kochi Site 1: 378, Myoken-cho, Susaki-shi, Kochi-ken, Japan Kochi Site 2: 1117-1, Otani, Susaki-shi, Kochi-ken, Japan	167,007 (including Kochi Site 1 and Kochi Site 2)	Ingot 160 ton per month	Kochi Site 1: April 2004 Kochi Site 2: January 2009	Production of ingot	· Building is owned · Land is owned

Soma 2-2-21, Koyo, Soma-shi, Fukushima-ken, Japan**	1,113,359	Polysilicon 227 ton per month	October 2007	Production of polysilicon	· Building is owned · Land is owned

* Facilities acquired through our merger with QDI.

** Facilities acquired through our acquisition of M.Setek.

*** Not applicable to silicon wafer, ingot and polysilicon products.

(1)	3.5-generation fab.

(2)	Fifth-generation fab.

(3)	Fourth-generation fab.

(4)	Sixth-generation fab.

(5)	7.5-generation fab.

(6)	8.5-generation fab.

Expansion Projects

Set forth below is a description of our principal expansion projects which we expect to finance with cash on hand, long-term debt and cash flow from operations.

Second 7.5-Generation Fab. We established our second 7.5-generation fab in order to produce LCD TVs that are larger than 40 inches. Our second 7.5-generation fab is capable of processing substrates with dimensions of 1,950 x 2,250 millimeters. Our second 7.5-generation substrate size is designed to produce large-size panels with high efficiency and with capabilities of cutting, for example, eight 42-inch panels, six 46-inch panels or three 52-inch panels in wide format. We commenced commercial production at our second 7.5-generation fab in the second quarter of 2009. As of April 30, 2010, our second 7.5-generation fab had an input capacity of approximately 25,000 substrates per month. The capacity of our second 7.5-generation fab is designed with an input capacity of approximately 60,000 substrates per month. If market demand increases in the future, we may decide to expand its commercial production to its maximum.

Second 8.5-Generation Fab. We are in the process of establishing our second 8.5-generation fab in order to produce LCD TVs that are larger than 50 inches. Our second 8.5-generation fab is capable of processing substrates

Table of Contents

with dimensions of 2,200 x 2,500 millimeters. Our second 8.5-generation substrate size is designed to produce large-size panels with high efficiency and with capabilities of cutting, for example, eight 46-inch panels, six 55-inch panels, or three 65-inch panels in wide format. We commenced construction of our second 8.5-generation fab in the second quarter of 2009 and we expected to start equipment move-in by the end of 2010.

We estimate our capital expenditures to be approximately between NT$100.0 billion for 2010, primarily for the installation of our second 8.5-generation fab and the expansion of our second 7.5-generation fab to an input capacity of approximately 60,000 substrates per month if market demand increases.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A. Operating Results

Overview

The TFT-LCD industry in general has been characterized by cyclical market conditions. The industry has been subject to significant and rapid downturns as a result of imbalances between excess supply and slowdowns in demand, resulting in sharp declines in average selling prices. For example, average selling prices of our large-size panels decreased throughout 2008 by 46.6% from the fourth quarter of 2007. On a year-on-year basis, average selling prices of our large-size panels decreased 24.9% in 2009 compared to 2008 and decreased 13.6% in 2008 compared to 2007. We expect average selling prices of large-size panels will fluctuate due to unclear market conditions in the recovery of global economy and we expect the demand for large-size panels will increase in 2010.

Our revenues depend on the average selling prices and shipment volume of our panels and are affected by fluctuations in those prices. The average selling prices of our large-size panels increased by 1.2% in 2007, decreased by 13.6% in 2008 and decreased by 24.9% in 2009. Our gross margin decreased from 13.1% in 2008 to 2.0% in 2009 as a result of a 24.9% decrease in average selling prices. Our gross margin decreased from 17.9% in 2007 to 13.1% in 2008 as a result of a 13.6% decrease in average selling prices. Average selling prices of our large-size panels increased in the last three quarters of 2007 because of the low level of inventory in the market as well as increases in demand. Average selling price of our large-size panels decreased significantly in the second half of 2008 as a result of the global economic downturn which caused a significant decrease in end demand. Average selling price of our large-size panels remained stable in the first half of 2009 compared to the fourth quarter of 2008 resulting from the global economic downturn and increased slightly in the second half of 2009 compared to the first half of 2009 primarily due to an increase in demand for our products resulting from the recovery of the global economy.

To meet a potential future increase in demand, many TFT-LCD manufacturers, including our company, may expand capacities. If such expansion in capacity is not matched by a comparable increase in demand, it could lead to overcapacity and declines in the average selling prices of panels in the future. In addition, we expect that, as is typical in the TFT-LCD industry, the average selling prices for our existing product lines will gradually decrease as the cost of manufacturing TFT-LCD panels declines.

Production Capacity

We measure the capacity of a fab in terms of the number of substrates and the glass area of substrates that can be produced. For 2009, we had an annual capacity to produce approximately 20.3 million square meters of glass area of TFT-LCD panels.

Fab Construction and Ramp-Up Process

Once the design of a new fab is completed, it typically takes six to eight quarters before the fab commences commercial production, during which time we construct the building, install the machinery and equipment and conduct trial production at the fab. An additional two to four quarters are required for the fab to be in a position to

Table of Contents

produce at the installed capacity and with high-production yield, where production yield is the number of good panels produced expressed as a percentage of the total number of panels produced. This process is commonly referred to as “ramp-up.” At the beginning of the ramp-up process, fixed costs, such as depreciation and amortization, other overhead expenses, labor, general and administrative and other expenses, are relatively high on a per panel basis, primarily as a result of the low output. Variable costs, particularly raw materials and component costs, are also relatively high on a per panel basis since production yield is typically low in the early stages of the ramp-up of a fab, resulting in greater waste of raw materials and components. In general, upon the completion of the ramp-up process, a fab is capable of producing at its installed capacity, leading to lower fixed costs per panel as a result of higher output, as well as lower raw material and component costs per panel as a result of higher production yield.

We typically construct our new fabs in phases in order to allocate our aggregate capital expenditure across a greater period of time. As a result, the installed capacity in the early phases of production at a new fab is typically lower than the maximum capacity that can be installed at a fab.

Product Mix

Our product mix affects our sales and profitability, as the prices and costs of different size panels may vary significantly. The larger size panels command higher prices, but also have higher manufacturing costs. In 2009, an increase in demand for consumer electronics products using larger panels such as portable DVD players, digital photo frames, and low cost PCs caused a shift in product mix to more medium-sized panels being produced. The continuing demands for notebook computers and the continuing trends towards desktop monitors as a result of the popularity of wide screen monitors and upgrading to large size LCD panels led us to shift our product mix to include primarily 8.9- to 17.3-inch panels for notebook computers and 18.5-, 19- and 21.5-inch panels for desktop monitors. Net sales of panels for computer products represented 46.3%, 41.1% and 35.8% of our net sales in 2007, 2008 and 2009, respectively. This declining trend was due primarily to the increase in sales of LCD TV panels as a proportion of our net sales. Moreover, a strong demand for LCD TV panels contributed to increased production of LCD TV panels with sizes mainly ranging from 19- to 65-inch. We periodically review and adjust our product mix based on the demand for, and profitability of, the different panel sizes that we manufacture.

Merger with Quanta Display Inc.

Facing increasing competition in the TFT-LCD industry, such as from Samsung and LG Display, we sought to achieve a better competitive position in the industry through resource integration. On October 1, 2006, we completed our merger with QDI, a company incorporated in Taiwan that manufactures and assembles TFT-LCD panels, to strengthen our competitiveness through synergies such as the expansion of production capacity and lowering of raw material costs. Under the terms of the merger agreement dated April 7, 2006, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock and as a result issued 1,479,110,029 shares of AUO to QDI shareholders.

The common stock issued in connection with the merger had a fair value of NT$67.8 billion and was valued using the average closing price of our common stock of NT$46.89 over a range of trading days (from March 30, 2006 to April 14, 2006, inclusive of both dates) set around the public announcement of the merger on April 7, 2006.

In connection with the transaction, we recorded NT$14.3 billion of goodwill, NT$3.7 billion of intangible assets and NT$49.8 billion of net tangible assets. We also incurred merger-related expenses of NT$15.9 million, which consisted of NT$9.5 million for legal and other professional fees. The merger was qualified as a tax-free reorganization and we accounted for it using the purchase method of accounting. The results of QDI’s operations have been included in our results of operations beginning on October 1, 2006.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations contained elsewhere in this annual report are based on our audited consolidated financial statements which have been prepared in accordance with ROC GAAP. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of our financial statements. We base our assumptions and

Table of Contents

estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. On an ongoing basis, our management evaluates its estimates. Actual results may differ from those estimates as facts, circumstances and conditions change.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our financial statements. Our principal accounting policies are set forth in detail in Note 2 to our consolidated financial statements included elsewhere herein. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

Revenue is recognized when title to the products and risk of ownership are transferred to the customers, which occurs principally at the time of shipment. We continuously evaluate whether our products meet our inspection standards and can reliably estimate sales returns expected to result from customer inspections. Allowance and related provisions for sales returns are estimated based on historical experience, our management’s judgment, and any known factors that would significantly affect such allowance. Such provisions are deducted from sales in the same period the related revenue is recorded. There have been no changes in this policy for the last three years.

The movements of the allowance for sales returns and discounts are as follows:

	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)
Balance at beginning of year		833,524			1,255,033			1,145,135			35,842
Provision charged to revenue		4,165,379			2,793,933			623,728			19,522
Utilized		(3,743,870	)		(2,903,831	)		(1,650,534	)		(51,660	)
Balance at end of year		1,255,033			1,145,135			118,329			3,704

The provision made in 2009 decreased as compared with 2008 primarily due to the decreases in sales in 2009. The provision made in 2008 decreased as compared with 2007 primarily due to the decreases in sales in 2008.

Long-Lived Assets and Intangible Assets

Under ROC and US GAAP, we review our long-lived assets and identifiable intangible assets, including purchased intangible assets for impairment whenever events or changes in circumstances indicate that the assets may be impaired and the carrying amounts of these assets may not be recoverable. Furthermore, we review our assets held for sale for impairment when it is possible that the expected selling price less cost of these assets may be lower than the carrying amount. Judgments about the fair value of assets held for sale are generally based upon market assumptions about value of similar assets.

Under ROC GAAP, we measure recoverability of our long-lived assets by comparing the carrying amount of an asset to the future net discounted cash flows to be generated by the asset. Under US GAAP, we assess recoverability of our long-lived assets to be held and used by comparing the carrying amount of an asset to its future net undiscounted cash flows. If we consider our assets to be impaired, the impairment we would recognize is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Under ROC GAAP, for purposes of evaluating the recoverability of long-lived assets, assets purchased for use in the business but subsequently determined to have no future economic benefits are written down to their fair value and recorded as either idle assets or assets held for sale. In 2007, 2008 and 2009, under ROC GAAP we recognized impairment losses on long-lived assets of NT$1,358.6 million, NT$1,264.7 million and NT$1,102.1 million (US$34.5 million), respectively, classified under non-operating expenses and losses. Under US GAAP, the impairment losses on long-lived assets were not materially different from the amounts recognized under ROC GAAP. We classify impairment losses on long-lived assets and assets held for sale within operating expenses.

Table of Contents

Intangible assets are recorded at cost or at fair value on the acquisition date and are amortized over the estimated useful lives using the straight-line method. The costs of patents and licenses for the product and process technology for TFT-LCDs and other flat-panel displays are capitalized and amortized on a straight-line basis over their estimated useful lives generally for periods ranging from 3 to 15 years.

We assess the impairment of acquired intangible assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. An impairment loss would be recognized when the sum of the estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value. Our cash flow assumptions are based on historical and forecasted revenue, operating costs, and other relevant factors. If our management’s estimates of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of intangible assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our consolidated financial statements. In 2007, 2008 and 2009, we did not recognize any impairment loss for intangible assets.

Business Combinations and Goodwill

When we acquire businesses, under ROC GAAP, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. Under US GAAP, pursuant to FASB ASC Topic 805, “Business Combinations – a replacement of Statement 141” (Statement No. 141R), the identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination are required to be recognized and measured at “full fair value”. The sum of the fair value of identifiable net assets acquired less the fair value of the non-controlling interests, if any, exceeding the sum of the fair value of the consideration transferred and the fair value of the equity interests held before the business combination is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on historical experience and information obtained from the management of the acquired companies. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates.

Under ROC GAAP, effective January 1, 2006 and in accordance with the amended ROC SFAS No. 25 “Business Combinations,” goodwill is no longer amortized but is tested for impairment at least annually or more frequently if events or circumstances indicate it might be impaired. We determined that we have one cash-generating unit for purposes of testing goodwill for impairment. The recoverable amount of the cash-generating unit calculated using a cash flow projection of eight years was compared to the carrying value of the cash-generating unit. If the recoverable amount of the cash-generating unit is lower than the carrying amount of the cash-generating unit, an impairment loss is recognized. We test goodwill for impairment annually on June 30 and when a triggering event occurs between annual impairment tests.

Under US GAAP, we determined that we have one reporting unit for purposes of testing goodwill for impairment, which is the enterprise as a whole. We compare the carrying amount of our consolidated total stockholders’ equity determined on a US GAAP basis to the estimated fair value of our enterprise to determine if goodwill is potentially impaired. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit. An impairment loss will be recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB ASC Topic 805 (Statement No. 141). The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined based on our market capitalization, adjusted to include an appropriate amount of control premium, as of the assessment date.

During the fourth quarter of 2008, the global economic downturn and financial crisis negatively affected the quoted market price of our shares on the Taiwan Stock Exchange. On December 31, 2008, the quoted market price of our shares was NT$24.70 per share, resulting in our market capitalization being lower than the carrying amount

Table of Contents

of our consolidated total stockholders’ equity per share under US GAAP basis of NT$34.49 per share. We believe our stock price in the fourth quarter of 2008 was adversely impacted by general market conditions and that our market capitalization was not representative of the fair value of our enterprise as a whole at December 31, 2008. We adjusted our market capitalization to include an appropriate control premium to derive at the estimated fair value of our enterprise. We believe the control premium represents the additional amount that a buyer would be willing to pay to obtain a controlling voting interest in our company as a result of the ability to take advantage of synergies and other benefits.

The application of goodwill impairment test requires significant judgments. In determining the appropriate control premium, we referred to recent and comparable merger and acquisition transactions in our industry. We engaged an independent external service provider to assist us in performing the control premium analysis. In addition, to validate our adjusted market capitalization results and corroborate our control premium estimate, we performed a discounted cash flow analysis to also come up with an estimate of the fair value of our enterprise. The discounted cash flow analysis is based on forward-looking projections that incorporate current trends and market expectations. The results of discounted cash flow analysis provided sufficient corroborating evidence that our estimate of the fair value of our enterprise based on our adjusted market capitalization was reasonable.

On June 30, 2009, we compared the carrying amount of the total stockholders’ equity consolidated on a US GAAP basis to market value based on the quoted market price of the company’s shares on the date of assessment to determine if goodwill is potentially impaired. We did the test again for goodwill impairment on December 31, 2009. Based on our assessment, we concluded goodwill as of December 31, 2009 was not impaired under both ROC GAAP and US GAAP.

Allowance for Doubtful Accounts Receivable

We evaluate our outstanding accounts receivables on a monthly basis for collectability purposes. Our evaluation includes an analysis of the number of days outstanding for each outstanding accounts receivable account. When appropriate, we provide a provision that is based on the number of days for which the account has been outstanding. The provision provided on each aged account is based on our average historical collection experience and current trends in the credit quality of our customers. There have been no changes in this policy for the last three years.

The movements of the allowance for uncollectible accounts are as follows:

	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)
Balance at beginning of year		474,025			317,183			99,333			3,109
Provision charged to expense (reversed to income)		(71,435	)		(187,011	)		(3,335	)		(104	)
Write-off		(85,407	)		(30,839	)		–			–
Balance at end of year		317,183			99,333			95,998			3,005

The allowance we established for uncollectible accounts in 2008 decreased significantly as compared to 2007 primarily due to decreases in net sales and account receivables, which resulted in significant amount of bad debt allowance reversal in 2008. The allowance we established for uncollectible accounts in 2009 decreased as compared to 2008 primarily due to the timely payment of most accounts receivable in 2009 within permitted credit periods.

Realization of Inventory

Provisions for inventory obsolescence and devaluation are recorded when we determine that the amounts that will ultimately be realized are less than their cost basis or when we determine that inventories cannot be liquidated without price concessions, which may be affected by the number of months inventory items remain unsold and their prevailing market prices. Additionally, our analysis of the amount we expect to ultimately realize are partially based upon forecasts of demand for our products and any change to these forecasts. There have been no changes in this policy for the last three years.

Table of Contents

As of December 31, 2007, 2008 and 2009, the provision for inventory obsolescence and devaluation was NT$3,771.7 million, NT$8,413.9 million and NT$4,359.3 million (US$136.4 million), respectively, which were classified in cost of goods sold in the statements of income. The provision made in 2008 increased significantly due to substantial decrease in average selling prices in the fourth quarter of 2008. The provision made in 2009 decreased significantly primarily due to an increase in the average selling price in the fourth quarter of 2009. For the years ended December 31, 2007, 2008 and 2009, we have not made any significant changes to our policy for determining the provisions for excess and obsolete inventory.

Equity-Method Investments and Other than Temporary Impairment

When we have the ability to exercise significant influence over the operating and financial policies of investees (generally those in which we own between 20% and 50% of the investee’s voting shares and/or have significant board and management representation) those investments are accounted for using the equity method. The difference between the acquisition cost and the carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of non-current assets. Any unallocated difference is treated as investor-level goodwill. Prior to January 1, 2006, under ROC GAAP, the amount of unallocated difference is amortized over five years. Commencing January 1, 2006, as required by the amended ROC SFAS No. 5 “Long-term Investments under Equity Method,” it is no longer amortized and the carrying value of the total investment is assessed for impairment. Under US GAAP, such difference is not amortized, but the carrying value of the total investment is assessed for impairment. The allocation of excess basis in equity-method investments requires the use of judgments regarding, among other matters, the fair value and estimated useful lives of long lived assets. Changes in those judgments would affect the amount and timing of amounts charged to our statement of income.

Certain investments in which we hold less than a 20% voting interest, but are nonetheless able to exercise significant influence over the operating and financial policies of investees through board representation or other means are also accounted for using the equity method. Significant judgment is required to assess whether we have significant influence. Factors that we consider in making such judgment include, among other matters, participation in policymaking processes, material intercompany transactions, interchange of managerial personnel, or technological dependency.

In 2004, we purchased 126,600,000 shares of Qisda, and, as of December 31, 2007, held a 5.19% equity interest in Qisda. On April 11, 2008, we purchased an additional 90,456,800 shares of Qisda, bringing our total equity interest to 9.58%. As our chairman is also the chairman of Qisda and one of our directors is also an executive officer of Qisda, and we have other commercial relationships with Qisda, we are deemed to have the ability to exercise significant influence over Qisda. As such, we account for our investment in Qisda under the equity method of accounting. The difference between the acquisition cost and the net equity of the investee as of the acquisition date is amortized based on the nature of their source. If the source cannot be identified, such difference was amortized over five years using the straight-line method prior to January 1, 2006. Effective January 1, 2006, the difference is no longer amortized.

Under ROC GAAP and in accordance with ROC SFAS No. 35 “Impairment of Assets,” we consider an equity-method investment to be impaired if there is objective evidence of impairment as a result of one or more events at the balance sheet date indicating that the recoverable amount of the investment is below its carrying amount. We assess impairment at the individual security level. The recoverable amount is determined based on one of the two following approaches: (1) the discounted expected future net cash flows from the investee company; or (2) the combination of expected cash dividends from the investee company and the discounted cash flows from the ultimate disposal of the investment. The impairment loss is recorded in profit or loss. If the recoverable amount increases in the future period, the amount previously recognized as impairment loss could be reversed and recognized as a gain in profit or loss.

Under US GAAP, we consider an equity-method investment to be impaired if such impairment is other than temporary. The amount of the impairment loss is calculated by reference to the excess of the carrying value of the equity-method investment over its fair value. In determining whether a decline in value is other than temporary, we consider primarily the duration and severity of the decline in value, the financial condition of the investee, the extent of recovery in market value subsequent to the reporting date, and reports of external market analysts for the investee

Table of Contents

and/or the industry that the investee operates in. Unlike ROC GAAP, an impairment loss recognized cannot be reversed subsequently.

For the year ended December 31, 2008, we evaluated our investment in Qisda and determined that our investment had been in a continuous unrealized loss position due primarily to the significant decline in the investee’s stock price. Considering primarily the length of time and the extent of the decline, we determined that the impairment was other than temporary and therefore recognized an impairment of NT$1,928.7 million for US GAAP purposes. No impairment loss was recorded for ROC GAAP purposes because we believe the carrying amount of our investment in Qisda is supported by the expected discounted cash flows from the investment.

For the year ended December 31, 2009, we did not record any other-than-temporary impairment loss on equity-method investments because the fair value of our investments exceeded their carrying value.

Income Taxes

We are subject to the continuous examination of our income tax returns by the ROC tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

As of December 31, 2009, our valuation allowances on deferred tax assets was NT$19,661.0 million (US$615.4 million) under ROC GAAP. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating loss and investment tax credits utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net operating loss and investment tax credits, net of the existing valuation allowance as of December 31, 2009.

We used estimated future taxable income for the next five years to determine the realizability of our deferred tax assets and the resulting requirement for valuation allowance. We believe that, as of December 31, 2009, the estimated future taxable income beyond the five-year period cannot be objectively and reliably determined given the cyclical nature of the TFT-LCD industry. In addition, the five-year period is considered to be consistent with the statutory period that the tax credit and loss carryforwards can be utilized under ROC Tax Law. Effective January 21, 2009, the statutory period during which loss carryforwards can be utilized has been extended to 10 years.

The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforwards or reversal periods are reduced.

Legal Contingencies

From time to time, we are involved in disputes that arise in the ordinary course of business, and we do not expect this to change in the future. We are currently involved in legal proceedings discussed in “Item 8.A.7. Litigation.”

When the likelihood of the incurrence of loss related to our legal proceedings is probable and our management can reasonably estimate such loss, we provide for estimates of external legal fees and any probably losses through charges to our consolidated statement of operations. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based upon new information and intervening events.

Results of Operations

The following table sets forth certain of our results of operations data as a percentage of our net sales for the periods indicated:

Table of Contents

	Year Ended December 31,
	2007			2008			2009
	%			%			%
Net sales		100.0			100.0			100.0
Cost of goods sold		82.1			86.9			98.0
Gross profit		17.9			13.1			2.0
Operating expenses		4.7			5.3			6.2
Selling		2.4			2.1			2.2
General and administrative		1.1			1.9			2.3
Research and development		1.2			1.3			1.7
Operating income (loss)		13.2			7.8			(4.2	)
Net non-operating expenses and losses		(1.0	)		(1.6	)		(3.4	)
Earnings (loss) before income tax		12.2			6.2			(7.6	)
Income tax expenses		0.4			1.1			–
Net income (loss)		11.8			5.1			(7.6	)

In 2007, a strong demand in the TFT-LCD industry contributed to an increase in our unit sales, and an improvement on our product mix allowed us to lower our production cost. As a result, we were able to achieve higher profitability in 2007. Our gross, operating and net margins have decreased from 2008 to 2009, primarily as a result of global financial crisis and the resulting global economic downturn, which caused a significant decrease in end-demand.

For the Years Ended December 31, 2009 and 2008

Net Sales

Net sales decreased 15.2% to NT$359,331.3 million (US$11,246.7 million) in 2009 from NT$423,928.2 million in 2008 due to a 15.5% decrease in net sales of large-size panels and a 27.0% decrease in net sales of small-size panels.

Net sales of large-size panels decreased 15.5% to NT$314,840.5 million (US$9,854.2 million) in 2009 from NT$372,689.7 million in 2008. This decrease was primarily due to a decrease in average selling price, which was partially offset by an increase in unit sales. Large-size panels sold increased 12.5% to 89.7 million panels in 2009 from 79.7 million panels in 2008. The average selling price per panel of our large-size panels decreased 24.9% to NT$3,512.3 (US$109.9) in 2009 from NT$4,678.0 in 2008, primarily as a result of the global financial crisis and the resulting overall economic downturn. The increase in unit sales of large-size panels was primarily due to an increase in market demand in the second half of 2009.

Net sales of small- to medium-size panels decreased 27.0% to NT$34,168.5 million (US$1,069.4 million) in 2009 from NT$46,784.1 million in 2008. The decrease in net sales of small- to medium-size panels was primarily due to a decrease in average selling price which was partially offset by an increase in unit sales. Unit sales of our small- to medium-size panels increased 21.5% to 228.6 million panels in 2009 from 188.1 million panels in 2008. The average selling price per panel of our small- to medium-size panels decreased 40.0% to NT$149.4 (US$4.7) in 2009 from NT$248.8 in 2008, primarily as a result of a change in product mix and a falling trend in average selling prices of the end products utilizing aging technology. The increase in unit sales of small- to medium-size panels was primarily due to an increase in sales of panels for consumer products.

Cost of Goods Sold

Cost of goods sold decreased 4.4% to NT$352,290.5 million (US$11,026.3 million) in 2009 from NT$368,600.3 million in 2008. This decrease was primarily as a result of a decrease in cost of raw materials and component costs.

Raw material and component costs decreased 6.1% in 2009 as compared to 2008 primarily as a result of a decrease in average purchasing prices due to the changes of our product mix and a decrease in demand of our products as a result of the impact of the global financial crisis. Overhead expenses, including depreciation and

Table of Contents

amortization expenses, decreased 0.9% in 2009 as compared to 2008, primarily due to a decrease in employee bonus expenses. Direct labor costs decreased 7.0% in 2009 as compared to 2008, primarily as a result of a decrease in employee bonus expenses.

As a percentage of net sales, cost of goods sold increased to 98.0% in 2009 from 86.9% in 2008. This increase was primarily the result of the greater decrease in average selling price per panel than the decrease in cost of goods sold per panel.

Gross Profit

Gross profit was NT$7,040.9 million (US$220.4 million) in 2009 compared to NT$55,327.9 million in 2008. Gross margin, which is gross profit divided by net sales, was 2.0% in 2009 as compared to 13.1% in 2008. The decrease in our gross margin was primarily as a result of the decrease in our average selling prices in 2009.

Operating Expenses

Operating expenses increased 0.2% to NT$22,279.9 million (US$697.3 million) in 2009 from NT$22,235.6 million in 2008. As a percentage of net sales, operating expenses increased to 6.2% in 2009 from 5.3% in 2008. The increase in operating expenses was primarily as a result of an increase in research and development expenses and an increase in general and administrative expenses, which was partially offset by a decrease in selling expenses. Research and development expenses increased 15.9% to NT$6,185.5 million (US$193.6 million) in 2009 from NT$5,335.2 million in 2008, primarily due to an increase in depreciation expense and indirect materials. General and administrative expenses increased 2.4% to NT$8,094.4 million (US$253.3 million) in 2009 from NT$7,907.6 million in 2008 primarily due to an increase in depreciation expenses and professional fees, which was partially offset by a decrease in employee bonus expenses and management fees paid to the Science Based Industrial Park of ROC. General and administrative expenses as a percentage of net sales increased to 2.3% in 2009 from 1.9% in 2008. Selling expenses decreased 11.0% to NT$8,000.0 million (US$250.4 million) in 2009 from NT$8,992.8 million in 2008, primarily due to a decrease in royalties. Selling expenses as a percentage of net sales increased to 2.2% in 2009 from 2.1% in 2008.

Operating Income (Loss) and Operating Margin

As a result of the foregoing, we had operating loss of NT$15,239.1 million (US$477.0 million) in 2009 compared to operating income of NT$33,092.3 million in 2008. We had a negative operating margin of 4.2% in 2009 compared to an operating margin of 7.8% in 2008.

Under US GAAP, we had operating loss of NT$28,309.7 million (US$886.1 million) in 2009 compared to operating income of NT$20,148.1 million in 2008. We had a negative operating margin of 7.9% in 2009 compared to an operating margin of 4.8% in 2008.

Under ROC GAAP, the provision for the potential antitrust losses is usually recognized in the consolidated statement of operations as a non-operating expense. However, under US GAAP, the provision for the potential antitrust losses is recognized in the condensed consolidated statement of operations as an operating expense.

Net Non-Operating Expenses and Losses

We had net non-operating expenses and losses of NT$12,028.4 million (US$376.5 million) in 2009 compared to net non-operating expenses and losses of NT$6,821.3 million in 2008. We had higher net non-operating expenses and losses in 2009 as compared to 2008 primarily as a result of an increase in provisions for potential litigation losses and others, an increase in net interest expenses and a decrease in gain on valuation of financial instruments, which was partially offset by a decrease in net foreign currency exchange losses. We had provisions for potential litigation losses and others of NT$9,696.1 million (US$303.5 million) in 2009 compared to provisions for potential litigation losses and others of NT$2,717.8 million in 2008, primarily as a result of a higher amount of provisions relating to certain antitrust matters in 2009 as compared to the provision for potential litigation losses in 2008. We had a net interest expense of NT$3,180.6 million (US$99.5 million) in 2009 compared to a net interest expense of NT$2,358.2 million in 2008, primarily as a result of a decrease in interest income. We had gain on valuation of financial instruments of NT$813.2 million (US$25.5 million) in 2009 compared to gain on valuation of financial

Table of Contents

instruments of NT$3,902.3 million in 2008, primarily because we had more financial instruments to hedge our position corresponding to our larger sales in 2008 compared to 2009. We had a net foreign currency exchange income of NT$236.9 million (US$7.4 million) in 2009 compared to a foreign currency exchange loss of NT$4,994.2 million in 2008 primarily due to (1) the depreciation of NT dollars against US dollars in the first half of 2009, which was partially offset by the depreciation of NT dollars against JPY in the first half of 2009; and (2) the appreciation of NT dollars against US dollars in the first half of 2008 and the depreciation of NT dollars against JPY in the second half of 2008.

Under US GAAP, we had lower net non-operating expenses and losses of NT$1,352.7 million (US$42.3 million) in 2009 compared to net non-operating expenses and losses of NT$4,062.0 million in 2008. We had lower net non-operating expenses and losses in 2009 as compared to 2008 primarily as a result of a decrease in net investment income, partially offset by an increase in net interest expense and an increase in net other income. We had a net investment income of NT$48.6 million (US$1.5 million) in 2009 compared to a net investment loss of NT$505.3 million in 2008. In 2009, we had a net interest expense of NT$3,187.8 million (US$99.8 million) compare to a net interest expense of NT$2,358.2 million in 2008. In 2009, we had net other income of NT$2,186.2 million (US$68.4 million) as compared to a net other income of NT$1,385.1 million in 2008.

Income Tax Benefit (Expense)

We recognized an income tax benefit of NT$22.6 million (US$0.7 million) in 2009 compared to an income tax expense of NT$4,629.1 million in 2008. This change was primarily due to an increase of net operating loss carryforwards, which was partially offset by an increase in valuation allowance for deferred income tax assets.

The statutory income tax rate in the ROC was 25% in 2009. Effective from January 1, 2010, the statutory tax rate has been reduced to 20% in accordance with the ROC Income Tax Act. The effective tax rate was lower than 25% primarily due to investment tax credits and tax exemptions. While we used a portion of available tax credits to offset our income tax payable, the amount of tax credits available to be applied in any year, except for the final year in which such tax credit expires, is limited to 50% of the income tax payable for that year. There is no limitation on the amount of tax credits available to be applied in the final year.

Under US GAAP, we recognized an income tax benefit of NT$1,359.5 million (US$42.6 million) in 2009 compared to an income tax expense of NT$2,579.6 million in 2008. This change was primarily due to an increase from net operating loss carryforwards, which was partially offset by an increase in valuation allowance for deferred income tax assets. Under US GAAP, and in accordance with FASB ASC Topic 740, “Income Taxes” (Statement No.109), if a valuation allowance is recognized at the acquisition date for deferred tax assets for an acquired entity’s deductible temporary differences or operating loss or tax credits, the tax benefit for those items that are first recognized subsequent to the acquisition (by elimination of the valuation allowance) are to be applied (a) first reduce to zero any goodwill related to the acquisition, (b) second to reduce to zero other noncurrent intangible assets related to the acquisition, and (c) third to reduce income tax expense.

The effective tax rate decreased to 0.1% in 2009 from 17.6% in 2008 under ROC GAAP, primarily due to a decrease in tax on undistributed retained earnings and the effect of the change of the statutory tax rate in 2009. The effective tax rate decreased to 4.6% in 2009 from 16.0% in 2008 under US GAAP, primarily because there was no tax on undistributed retained earning due to our loss in 2009, coupled with the effect of the change of the statutory tax rate in 2009.

Net Income (Loss)

As a result of the foregoing, we incurred net loss of NT$27,244.8 million (US$852.7 million) in 2009 as compared to net income of NT$21,641.8 million in 2008.

Under US GAAP, we incurred net loss attributable to stockholders of AU Optronics Corp. of NT$28,670.3 million (US$897.3 million) in 2009 as compared to net income attributable to stockholders of AU Optronics Corp. of NT$13,089.7 million in 2008.

Table of Contents

For the Years Ended December 31, 2008 and 2007

Net Sales

Net sales decreased 11.7% to NT$423,928.2 million in 2008 from NT$480,183.6 million in 2007 due to a 14.9% decrease in net sales of large-size panels which was partially offset by a 17.2% increase in net sales of small- and medium-size panels.

Net sales of large-size panels decreased 14.9% to NT$372,689.7 million in 2008 from NT$437,970.3 million in 2007. This decrease was primarily due to a decrease in average selling prices and a decrease in unit sales. The average selling price per panel of our large-size panels decreased 13.6% to NT$4,678.0 in 2008 from NT$5,413.8 in 2007, primarily as a result of a falling trend in average selling prices exacerbated by adverse economic conditions. Large-size panels sold decreased 1.5% to 79.7 million panels in 2008 from 80.9 million panels in 2007, primarily due to a decrease in demand.

Net sales of small- to medium-size panels increased 17.2% to NT$46,784.1 million in 2008 from NT$39,922.9 million in 2007. The increase in net sales of small- to medium-size panels was primarily due to an increase in unit sales, partially offset by a decrease in average selling prices. Unit sales of our small- to medium-size panels increased 31.4% to 188.1 million panels in 2008 from 143.1 million panels in 2007. The average selling price per panel of our small- to medium-size panels decreased 10.9% to NT$248.8 in 2008 from NT$279.0 in 2007, primarily as a result of a falling trend in average selling prices of the end products utilizing aging technology. The increase in unit sales of small- to medium-size panels was primarily due to an increase in the sales of panels for mobile phones.

Cost of Goods Sold

Cost of goods sold decreased 6.4% to NT$368,600.3 million in 2008 from NT$394,005.4 million in 2007. This decrease was primarily a result of a decrease in the cost of raw materials and components.

Raw material and component costs decreased 7.7% in 2008 as compared to 2007 primarily as a result of a decrease in unit sales of our large-size panels. Overhead expenses, including depreciation and amortization expenses, decreased 2.7% in 2008 as compared to 2007, primarily due to the completion of depreciation of our 3.5-generation fab in 2007. Direct labor costs decreased 19.9% in 2008 as compared to 2007, primarily as a result of a decrease in overtime expenses caused by the decrease in sales.

As a percentage of net sales, cost of goods sold increased to 86.9% in 2008 from 82.1% in 2007. This increase was primarily the result of greater decrease in average selling prices per panel than the decrease in cost of goods sold per panel.

Gross Profit

Gross profit was NT$55,327.9 million in 2008 compared to NT$86,178.2 million in 2007. Gross margin, which is gross profit divided by net sales, was 13.1% in 2008 as compared to 17.9% in 2007. The decrease in our gross margin was primarily as a result of the decrease in our average selling prices during 2008.

Operating Expenses

Operating expenses decreased 2.9% to NT$22,235.6 million in 2008 from NT$22,903.5 million in 2007. The decrease in operating expenses was primarily due to a decrease in our selling expenses, which was partially offset by an increase in general and administrative expenses. As a percentage of net sales, operating expenses increased to 5.3% in 2008 from 4.7% in 2007. Selling expenses decreased 22.5% to NT$8,992.8 million in 2008 from NT$11,600.5 million in 2007, primarily due to a decrease in net sales in 2008. Selling expenses as a percentage of net sales decreased to 2.1% in 2008 from 2.4% in 2007. General and administrative expenses increased 45.6% to NT$7,907.6 million in 2008 from NT$5,432.4 million in 2007 primarily due to an increase in employee bonus expenses resulting from the ROC accounting policy change in 2008. General and administrative expenses as a percentage of net sales increased to 1.9% in 2008 from 1.1% in 2007. Research and development expenses decreased 9.1% to NT$5,335.2 million in 2008 from NT$5,870.5 million in 2007, primarily due to a one-time patent

Table of Contents

charge of NT$973.1 million in 2007. We did not incur such expense in 2008. Research and development expenses as a percentage of net sales increased to 1.3% in 2008 from 1.2% in 2007.

Under US GAAP, research and development expenses increased 12.5% to NT$6,387.8 million in 2008 from NT$5,677.7 million in 2007, primarily due to an increase in employee bonus expenses. Research and development expenses as a percentage of net sales increased to 1.5% in 2008 from 1.2% in 2007.

Operating Income and Operating Margin

As a result of the foregoing, operating income decreased 47.7% to NT$33,092.3 million in 2008 from NT$63,274.8 million in 2007, and operating margin decreased to 7.8% in 2008 from 13.2% in 2007.

Net Non-Operating Expenses and Losses

Net non-operating expenses and losses increased 44.8% to NT$6,821.3 million in 2008 from NT$4,710.9 million in 2007 primarily as a result of an increase in provisions for potential litigation losses and others and an increase of net foreign currency exchange losses, which was partially offset by a decrease in net interest expense. We had provisions for potential litigation losses and others of NT$2,717.8 million in 2008 compared to provisions for potential litigation losses and others of NT$207.3 million in 2007 primarily due to an increase in the provisions for litigation losses in 2008. We had a net foreign currency exchange loss of NT$4,994.2 million in 2008 compared to a net foreign currency exchange loss of NT$1,271.7 million in 2007 due to the appreciation of NT dollars against US dollars in the first half of 2008 and the appreciation of JPY against NT dollars in the second half of 2008. We had a net interest expense of NT$2,358.2 million in 2008 compared to a net interest expense of NT$4,457.8 million in 2007, primarily as a result of our decision to take advantage of lower interest rates by paying off certain more costly loans.

Under US GAAP, we had higher net non-operating expenses and losses of NT$4,062.0 million in 2008 compared to net non-operating expenses and losses of NT$3,416.7 million in 2007. We had higher net non-operating expenses and losses in 2008 as compared to 2007 primarily due to other-than-temporary impairment losses of NT$1,928.7 million in 2008 related to our equity-method investment in Qisda, which was partially offset by a gain of NT$1,252.2 million resulting from the change in fair value of the conversion right of our overseas convertible bonds assumed from the merger with QDI.

Income Tax Expense

Income tax expense increased to NT$4,629.1 million in 2008 from NT$2,087.9 million in 2007 primarily as a result of the increase in tax on undistributed retained earnings from 2007, which is recognized in 2008 under ROC GAAP. The statutory income tax rate in the ROC is 25%. The effective tax rate was lower than 25% primarily due to investment tax credits and tax exemptions. While we used a portion of available tax credits to offset our income tax payable, the amount of tax credits available to be applied in any year, except for the final year in which such tax credit expires, is limited to 50% of the income tax payable for that year. There is no limitation on the amount of tax credits available to be applied in the final year.

Under US GAAP, we recognized an income tax expense of NT$2,579.6 million in 2008 compared to an income tax expense of NT$3,053.1 million in 2007. Our income tax expense decreased in 2008 primarily due to lower taxable income and more investment tax credit available to be applied which were partially offset by an increase in valuation allowance for deferred tax assets. The change in effective tax rate under US GAAP from 6.3% in 2007 to 16% in 2008 was primarily due to the greater utilization of income tax credits in year 2007. In addition, valuation allowance for deferred tax assets increased significantly in 2008 due to lower projections of future taxable income which reduce the amount of investment tax credit carryforwards management believes it will be able to realize.

Net Income

As a result of the foregoing, net income decreased 61.7% to NT$21,641.8 million in 2008 from NT$56,475.9 million in 2007.

Table of Contents

Under US GAAP, we incurred net income attributable to stockholders of AU Optronics Corp. of NT$13,089.7 million in 2008 as compared to net income attributable to stockholders of AU Optronics Corp. of NT$45,355.5 million in 2007.

Inflation

We do not believe that inflation in Taiwan has had a material impact on our results of operations.

Taxation

In the past, we had been granted exemptions from income taxes in Taiwan for construction and capacity expansion of production facilities according to the Science Park Administration and the ROC Statute for Upgrading Industries. The exemption period may begin at any time within four to five years following the completion of a construction or expansion. The aggregate tax savings of such exemptions were approximately NT$6,085.4 million, NT$2,975.3 million and nil in 2007, 2008 and 2009, respectively.

In addition, we have enjoyed other tax incentives generally available to technology companies in the ROC, including tax credits ranging from 30% to 50% for research and development expenses and employee training expenses, and tax credits at 7% for the investment in automation equipment and technology and certain qualifying investments.

The ROC Statute for Upgrading Industries expired at the end of 2009 and we are no longer entitled to the tax benefits of investment tax credits and the five-year tax exemptions starting from January 1, 2010 in connection with our purchases of qualifying machinery and equipment and capital raising. However, we are still eligible to use our unexpired tax credits and exemptions which were approved by the related authority before the expiration of the ROC Statute for Upgrading Industries.

The corporate income tax rate in Taiwan applicable to us was 25% for 2007, 2008 and 2009. Effective from January 1, 2010, the statutory income tax rate has been reduced to 20% in accordance with the ROC Income Tax Act. Pursuant to the Statute of Income Basic Tax Amount (the “IBTA Statute”) announced in late 2005, an alternative minimum tax system became effective on January 1, 2006 in Taiwan. When a taxpayer’s income tax amount is less than the basic tax amount (“BTA”), a taxpayer is required to pay the regular income tax and the difference between the BTA and the regular income tax amount. For enterprises, BTA is determined using regular taxable income plus specific add-back items applied with a basic tax rate ranging from 10% to 12%. The add-back items include exempt capital gain from non-publicly traded security transactions and exempt income under tax holidays. Currently, the basic tax rate set by the tax authority is 10%. There are grandfathered treatments from the tax holidays approved by the tax authorities before IBTA Statute took effect. The IBTA Statute does not have a significant impact to our financial statements.

In 1997, the ROC Income Tax Law was amended to integrate the corporate income tax and shareholder dividend tax. Under such amendment, after-tax earnings generated from January 1, 1998 and not distributed to shareholders as dividends in the following year will be subject to a 10% retained earnings tax. According to the amendment to the ROC Income Tax Law, which came into effect on June 1, 2006, commencing from 2005, the undistributed retained earnings should be calculated in accordance with our earnings as determined under ROC GAAP and as reported in our audited financial statements rather than our tax returns submitted to the ROC taxation authority. See “Item 10.E. Taxation—ROC Tax Considerations—Retained Earnings Tax.”

5.B. Liquidity and Capital Resources

We need cash primarily for capacity expansion and working capital. Although we have historically been able to meet our working capital requirements through cash flow from operations, our ability to expand our capacity has largely depended upon, and to a certain extent will continue to depend upon, our financing capability through the issuance of equity securities, long-term borrowings and the issuance of convertible and other debt securities. If adequate funds are not available, whether on satisfactory terms or at all, we may be forced to curtail our expansion plans, including plans for newer generation fabs. Our ability to meet our working capital needs from cash flow from operations will be affected by our business conditions which in turn may be affected by several factors. Many of

Table of Contents

these factors are outside of our control, such as economic downturns and declines in the average selling prices of our products caused by oversupply in the market. The average selling prices of our existing product lines are reasonably likely to be subject to further downward pressure in the future. To the extent that we do not generate sufficient cash flow from our operations to meet our cash requirements, we may need to rely on external borrowings and securities offerings. Other than as described below in “—Off-Balance Sheet Arrangements,” we have not historically relied, and we do not plan to rely in the foreseeable future, on off-balance sheet financing arrangements to finance our operations or expansion.

As of December 31, 2009, we had current assets of NT$196,460.8 million (US$6,149.0 million) and current liabilities of NT$202,725.4 million (US$6,345.1 million). We expect to meet our working capital requirements as they become due and comply with current ratio covenants in our long-term loans and facilities through cash flow from operations, supplemented as necessary by financing activities. In addition, we can drawdown on our existing long-term credit facilities which would increase our current assets without affecting our current liabilities.

As of December 31, 2009, our primary source of liquidity was NT$85,443.3 million (US$2,674.3 million) of cash and cash equivalents. As of December 31, 2009, we had total short-term credit lines of NT$30,656.4 million (US$959.5 million), of which we had borrowed NT$1,945.2 million (US$60.9 million). All of our short-term facilities are revolving with a term of one year, which may be extended for terms of one year each with lender consent. Our repayment obligations under our short-term loans are unsecured. We believe that our existing credit lines under our short-term loans, together with cash generated from our operations, are sufficient to finance our current working capital needs.

As of December 31, 2009, we had outstanding long-term borrowings of NT$161,962.1 million (US$5,069.2 million). The interest rates in respect of most of these long-term borrowings are variable, and as of December 31, 2009 ranged between 0.63% and 5.76% per year.

In June 2004, we entered into a NT$55.0 billion and US$150.0 million seven-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$23,910.9 million (US$748.4 million) was outstanding under this credit facility. We issued NT$6.0 billion secured corporate bonds under this credit facility in June 2005.

In June 2004, we issued an aggregate of 30,000,000 ADSs representing 300,000,000 shares of our common stock. The net proceeds from the offering were approximately NT$15,967.2 million. We used the net proceeds for the construction of and purchase of equipment and machinery for our production facilities, including the ramping up of our fifth-generation fabs and the construction of our sixth-generation fab.

In July 2005, we issued an aggregate of 33,000,000 ADSs representing 330,000,000 shares of our common stock. The net proceeds from the offering were approximately NT$15,594.2 million. We used the net proceeds to repay indebtedness and for the construction of and purchase of equipment and machinery production facilities.

In July 2005, we entered into a NT$42.0 billion seven-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our first 7.5-generation fab. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$24,664.2 million (US$772.0 million) was outstanding under this credit facility. We issued NT$5.0 billion secured corporate bonds under this credit facility in March 2006.

In August 2006, we entered into an RMB2.8 billion and US$75.0 million seven-year syndicated credit facility, for which ABN AMRO Bank acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our Suzhou and Xiamen module-assembly facilities. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. As of December 31, 2009, RMB2,855.0 million (US$418.0 million) has been drawn down under this credit facility.

Table of Contents

In September 2006, we entered into a NT$55.0 billion seven-year syndicated credit facility, for which Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our second 7.5-generation fab. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$47.8 billion (US$1.5 billion) was outstanding under this credit facility. We issued NT$7.0 billion secured corporate bonds under this credit facility in August 2008.

In October 2008, we entered into a NT$58.0 billion seven-year syndicated credit facility, for which the Bank of Taiwan acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at our first 8.5-generation fab. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$15.0 billion (US$469.5 million) was outstanding under this credit facility.

In March 2009, we entered into a NT$2.0 billion five-year syndicated credit facility, for which First Commercial Bank acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment at the fab of Lextar Electronics Corp. in the ROC. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$820.0 million (US$25.7 million) was outstanding under this credit facility.

In April 2009, we entered into an RMB2.0 billion seven-year syndicated credit facility, for which the Bank of China, Xiamen Branch acted as the agent bank, for the purpose of funding the construction and purchase of machinery and equipment for our module-assembly facilities in Xiamen, Fujian Province, the PRC. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. As of December 31, 2009, we had not drawn down any amount under this credit facility.

In July 2009, we entered into a NT$27.0 billion five-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank, for the purpose of funding medium- and long- term working capital. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, we had not drawn down any amount under this credit facility.

We assumed the following outstanding bonds, credit facilities and arrangements as a result of our merger with QDI:

In April 2004, QDI issued an aggregate principal amount of NT$10.5 billion of zero-coupon convertible bonds due April 2009. The initial conversion price was NT$29.26 per share, subject to adjustment. The conversion price was adjusted to NT$70.49 per share in 2006 as a result of our merger. In addition, as a result of our merger, ROC regulators directed that bondholders be given the option to redeem their investments in the QDI bonds. Holders of an aggregate principal amount of NT$5.3 billion of the bonds opted for the early redemption. These bonds matured in April 2009 and were fully redeemed.

In November 2004, QDI issued an aggregate principal amount of US$294.5 million of zero-coupon convertible bonds due November 2009. The initial conversion price was NT$20.02 per share, subject to adjustment. The conversion price was adjusted to NT$52.54 per share in 2006 as a result of our merger. In January 2007, bondholders exercised their right to put back to us US$169.6 million aggregate principal amount of bonds, representing approximately 58% of the aggregate principal amount. These bonds matured in November 2009.

In July 2005, QDI issued an aggregate principal amount of NT$6.0 billion of zero-coupon convertible bonds due July 2010. The initial conversion price was NT$17.12 per share, subject to adjustment. The conversion price was adjusted to NT$44.10 per share in 2006 as a result of our merger. As of December 31, 2009, the total carrying value was NT$2.7 billion (US$0.1 billion).

In March 2005, Tech Well (Shanghai) Display Co., Ltd. (renamed as AU Optronics Manufacturing (Shanghai) Corp.) entered into a RMB249 million and US$80 million five-year syndicated credit facility, for which Citi Bank

Table of Contents

acted as agent bank for the purpose of funding the construction and purchase of machinery and equipment at our Shanghai module-assembly facility. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Obligations under this credit facility are guaranteed by us.

In June 2006, QDI entered into a NT$27.0 billion seven-year syndicated credit facility, for which Mega International Commercial Bank acted as the agent bank for the purpose of funding the expansion of one of our sixth generation fabs. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$21.6 billion (US$0.7 billion) was outstanding under this credit facility.

In July 2006, QDI entered into a NT$1.0 billion four-year credit facility with the Industrial Bank of Taiwan for working capital purposes. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, NT$475.0 million (US$14.9 million) was outstanding under this credit facility.

With respect to all the syndicated credit facilities assumed by us as a result of our merger with QDI, we amended the terms of the credit facilities such that covenants made therein are the same as those made in our syndicated credit facilities, including covenants that we maintain certain financial ratios. We completed the amendments in early 2007.

We assumed the following credit facilities as a result of our acquisition of M. Setek:

In December 2005, we entered into a JPY2.0 billion five-year syndicated credit facility, for which Mizuho Corporate Bank acted as the agent bank, for the purpose of funding long-term working capital. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, JPY 500.0 million (US$5.4 million) was outstanding under this credit facility.

In March 2006, we entered into a JPY8.0 billion seven-year syndicated credit facility, for which Mizuho Corporate Bank acted as the agent bank, for the purpose of funding the construction of M. Setek’s first fab in Soma, Japan. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, JPY5,200.0 million (US$55.9 million) was outstanding under this credit facility.

In March 2006, we entered into a JPY7.0 billion seven-year syndicated credit facility, for which the Bank of Tokyo-Mitsubishi UFJ acted as the agent bank, for the purpose of funding the construction of M. Setek’s first fab in Soma, Japan. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. Our obligations under this credit facility are secured by certain of our equipment and machinery. As of December 31, 2009, JPY4,550.0 million (US$48.9 million) was outstanding under this credit facility.

In December 2009, we entered into a JPY21.0 billion five-year syndicated credit facility, for which Mizuho Corporate Bank acted as the agent bank, for the purpose of funding the construction of M. Setek’s second fab in Soma, Japan. The syndication agreement for this facility contains covenants that require us to maintain certain financial ratios. As of December 31, 2009, JPY21.0 billion (US$0.2 billion) was outstanding under this credit facility. Such borrowings have been classified into current liabilities.

Our long-term loans and facilities contain various financial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain financial ratios, such as current ratio, indebtedness ratio, interest coverage ratio, minimum equity requirements and other technical requirements. In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments and encumber or dispose of assets. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on our liquidity, as well as our financial condition and operations. As of December 31, 2009, we were in compliance with all financial and other covenants under our long-term loans and credit facilities, except our subsidiary M. Setek had breached certain financial covenants under its loan agreements. Currently, M. Setek is seeking relevant waivers from its lenders; otherwise an early repayment of borrowings in the amount of JPY6,750.0 million (US$72.5 million) may be required. We have reclassified such borrowings under the current liabilities. We do not expect this breach to have a material impact on our financial position.

Table of Contents

The carrying amount of our assets pledged as collateral to secure our obligations under our long-term borrowings and bonds, including building, machinery and equipment, land and available-for-sale financial assets-noncurrent amounted to NT$257,419.4 million (US$8,056.9 million) as of December 31, 2009.

Cash Flows

Net cash provided by operating activities amounted to NT$156,926.9 million in 2007, NT$132,057.5 million in 2008 and NT$57,041.0 million (US$1,785.3 million) in 2009. The decrease in net cash provided by operating activities in 2009 compared to 2008 was primarily due to lower cash collected from our customers as a result of decreased average selling prices resulting from global financial crisis and the resulting overall economic downturn.

Net cash used for investing activities was NT$66,123.1 million in 2007, NT$101,257.4 million in 2008 and NT$66,616.7 million (US$2,085.0 million) in 2009. Net cash used for investing activities primarily reflected capital expenditures for property, plant and equipment of NT$65,136.7 million in 2007, NT$98,355.2 million in 2008 and NT$61,046.9 million (US$1,910.7 million) in 2009. These capital expenditures were primarily funded with net cash provided by operating activities and financing activities, primarily from long-term bank borrowings.

Net cash used in financing activities was NT$44,816.6 million in 2007, reflecting primarily an increase of long-term borrowings and bonds payable of NT$36,845.2 million which was offset by repayment of long-term borrowings and bonds payable of NT$76,843.6 million and a decrease of short-term borrowings of NT$3,592.9 million. Net cash used in financing activities was NT$37,435.6 million in 2008, reflecting primarily an increase of short-term borrowings of NT$4,720.7 million and an increase of long-term borrowings and bonds payable for NT$37,299.4 million which were offset by repayment of long-term borrowings and bonds payable of NT$57,993.5 million and cash dividend payments of NT$19,670.6 million. Net cash provided in financing activities was NT$11,925.3 million (US$373.2 million) in 2009, reflecting primarily an increase in proceeds from long-term borrowings and bonds payable of NT$66,844.4 million (US$2,092.2 million), which was partially offset by repayment of long-term borrowings and bonds payable for NT$49,291.8 million (US$1,542.8 million) and a decrease in short-term borrowings for NT$4,901.7 million (US$153.4 million).

Capital Expenditures

We have made, and expect to continue to make, capital expenditures in connection with the expansion of our production capacity. Substantially all of capital expenditures are invested in facilities located in Taiwan and the PRC. The table below sets forth our principal capital expenditures, paid or committed, for the periods indicated.

	2007		2008		2009
	NT$		NT$		NT$		US$
	(in millions)
Equipment purchases		49,319.3		101,326.1		49,018.0		1,534.2
Land and building purchases		584.2		1,813.8		13,412.3		419.8

We are sometimes required to prepay our purchases of land and equipment. Prepayments for purchases of land are the result of a standard processing procedure by the ROC government related to the transfer of legal title. Prepayments for purchases of equipment result from contractual agreements involving down payments to suppliers when the equipment is ordered by us. As of December 31, 2007, 2008 and 2009, prepayments for purchases of equipment amounted to NT$7,945.8 million, NT$60,194.2 million and NT$26,583.7 million (US$832.0 million), respectively.

Our capital expenditures paid for 2009 were approximately NT$61.0 billion, primarily for the installation of our second 7.5-generation fab and the ramp-up of our first 7.5-generation fab and our first 8.5-generation fab.

Table of Contents

We estimate our capital expenditures to be approximately NT$100 billion for 2010, primarily for the installation our second 8.5-generation fab and expansion of our second 7.5-generation fab to an input capacity of approximately 60,000 substrates per month if market demand increases. As of December 31, 2009, we have commitments in an amount of approximately NT$79.2 billion primarily for the purchase of equipment and machinery and construction. We may increase or decrease our capital expenditures depending on cash flow from operations, the progress of our expansion plans, and market conditions.

We believe that our existing cash, cash equivalents, short-term investments, expected cash flow from operations and borrowings under our existing and future credit facilities should be sufficient to meet our present capital expenditure, working capital, cash obligations under our existing debt and lease arrangements and other requirements. However, we frequently need to invest in new capacity to improve our economies of scale and reduce our production costs, which may require us to raise additional capital. In April 2010, our Board of Directors resolved to issue up to US$800 million in principal amount of unsecured global convertible bonds for the purpose to purchasing machinery and equipment overseas in line with the growth of our business. We cannot assure you that we will be able to raise additional capital should it become necessary on terms acceptable to us or at all. The sale of additional equity or equity-linked securities may result in additional dilution to our shareholders.

5.C. Research and Development

We incurred research and development costs of NT$5,870.5 million, NT$5,335.2 million and NT$6,185.5 million (US$193.6 million) in 2007, 2008 and 2009, respectively, which represented 1.2%, 1.3% and 1.7%, respectively, of our net sales.

Our research and development activities are principally directed toward advancing our technologies in key components, manufacturing processes and product development, with the objective of improving the features of our products and services to bring added value to our customers in addition to design products that meet their specific requirements. We have a product development team dedicated to each of our primary product categories. Each of these teams focuses on the development of our existing and potential new products. To support our fabs, we maintain a centralized research and development team that works to improve our manufacturing processes, as well as a team of technical support personnel that focuses on computer integrated manufacturing. We also have research and development teams that are dedicated to the development of OLED. In addition, we have several research and development teams to explore new design platforms for next-generation displays. Finally, we have one research and development team that focuses on manufacturing yield and key component vendors. Monetary incentives are provided to our employees if research projects result in successful patents. As of December 31, 2009, we employed approximately 1,897 research and development engineers.

We established a dedicated flat panel research and development center, the AUO Technology Center, in 2002, which we believe is one of Taiwan’s largest optronics research and development centers. The research activities at the AUO Technology Center have initially been divided into several general areas, including advanced technology development in new liquid crystal materials, new system electronics, new backlight unit technologies, image and color processing, and LTPS. In addition to new product development and module processing, the AUO Technology Center also focuses on improving our current TFT-LCD panel product and manufacturing process technologies. In 2005, we expanded the AUO Technology Center to the Central Taiwan Science Park. In 2008, we established the AUO Technology Research Center to focus on the development of new technologies and mid- to-long term technologies.

We have focused on four major technologies in 2007. First, we successfully upgraded Advanced Multi-domain Vertical Alignment (AMVA) technology to AMVA3. We have successfully developed and deployed the AMVA technology since 2005. AMVA provides low color wash-out at an off-angle view, eliminating whitish issues. AMVA3 is capable of 20% higher optical transmittance than AMVA. Second, we implemented the optical film design for high efficiency CCFL lamp in LCD television applications, which can reduce power consumption by nearly 40% compared with mainstream models on the market. Third, we continued to develop the LED backlight technology, which is mercury-free and can achieve power savings of up to 30% compared to CCFL backlight. We were a leading manufacturer of LED LCD panels for notebook computers in 2007. Fourth, we focused on the ink jet printing technology, which is currently premature and under-developed. Ink jet printing technology can produce up to 70% and 90% material usage saving when applied in the color filter process and the spacer spraying process, respectively.

Table of Contents

In 2008, we have further released a series of innovative technologies to make our products more user friendly, power-saving, lighter and better quality. First, we released a series of in-cell multi-touch display in new sizes ranging from 4.3-inch to 15-inch, some of which can be integrated into computer applications. We have introduced 2.8-inch QVGA mobile phone panel with image and fingerprint scanning technology. Second, we have further applied green technology in our products with less weight and thickness. The weight of our “Eco Plus” 46-inch TV panel is less than 6.9 kilogram and the ultra slim 46-inch LED panel is less than 10 mm thick. We have also introduced a series of 18.5-inch to 24-inch super slim desktop display panels with 16:9 wide screens and LED backlight, and a series of 8.9-inch to 17.3-inch LED notebook panels with 16:9 wide screens, which can provide greater digital multi-media functions with slim, power-saving features. Our dimming technology can also save more energy. Third, some of our products have been featured with a slim bezel design. We have our 52-inch and 65-inch Full HD portrait panels, which with slim bezel design and high brightness, are the optimum choice for public information displays. We have developed 0.56 mm 1.9-inch mobile phone panel. Lastly, we have enhanced the quality of images by the developing AMVA3 technology with a high static contrast ratio of 5,000:1. We have also presented 24-inch 2D/3D mix mode panel.

In 2009, we developed certain innovative technologies. We developed a 65-inch QFHD 2D/3D mixed mode ultra high resolution display which can display four programs at the same time. We also developed a 65-inch OFHD Ultra Thin 7.9mm panel with LED backlight which features 3,840 x 2,160 resolution. It can offer a dynamic contrast ratio up to 2,000,000:1 and power saving of 50%. We launched a 58-inch 2.35:1 aspect ratio ultra-wide home theater display for home use. It has 2,560x1,080 ultra-wide resolution and can display 2.35:1 films without black bars. The display also features a 120Hz double frame rate, which will provide a viewing experience just like in the theater. Based on our past experience in AMVA development, we developed AMVA5 technology with a contrast ratio of 16,000:1 and 20% higher transmittance compared to AMVA3 technology. We also developed a series of Eco-products with LED backlight and light-weighted module designs to promote environmental protection and green technology. In 2009, we also released a series of electronic paper display such as 6-inch e-book panel with embedded touch panel. We were among world’s largest manufacturers for 20-inch electronic paper display module. In addition, we also developed a 14-inch OLED panel with Full HD resolution with contrast ratio of 100,000:1 and 16 million colors.

Intellectual Property

Overview

As of April 30, 2010, we held a total of 6,425 patents, including 2,358 in the PRC, 2,211 in Taiwan, 1,462 in the United States and 394 in other jurisdictions. These include patents for TFT-LCD manufacturing processes and products. These patents will expire at various dates from 2010 through 2029. We also have a total of 2,171 pending patent applications in Taiwan, 1,388 in the United States and 1,857 in other jurisdictions, including the PRC, Japan, Italy, India, United Kingdom, France, Germany and Korea as of April 30, 2010. In addition, we have registered “AU Optronics” and our corporate logo, “AUO,” as trademarks and service marks in some countries and jurisdictions where we operate, including the ROC, PRC, United States, European Union and Korea.

We require all of our employees to sign an employment agreement which prohibits the unauthorized disclosure of any of our trade secrets, confidential information and proprietary technologies subject to the terms and conditions of the employment agreement, and we also require our technical personnel to assign to us any inventions related to our business that they develop during the course of their employment.

We have licenses to use certain technology and processes from certain companies. Our royalty expenses relating to intellectual property licenses may increase in the future due to increases in unit sales as well as the potential need to enter into additional license agreements or to renew existing license agreements on different terms.

We intend to continue to file patent applications, where appropriate, to protect our proprietary technologies. We may find it necessary to enforce our patents or other intellectual property rights or defend ourselves against claimed

Table of Contents

infringement of the rights of others through litigation, which could result in substantial cost and diversion of our resources. We may suffer legal liabilities and financial and reputational damages if we are found to infringe product or process technology rights held by others. We are currently involved in litigation regarding alleged patent infringement. See “Item 8.A.7. Litigation.”

License Agreements

We have entered into patent and intellectual property license and cross license agreements that require periodic royalty payments. In the future, we may need to obtain additional patent licenses or renew existing license agreements.

We have a license agreement with FDTC (now Fujitsu Limited), effective as of March 31, 2003, which provides for the non-transferable and non-exclusive license under certain patents to manufacture TFT-LCD panels at our facilities.

In connection with the settlement of a lawsuit with Sharp, we entered into a cross-license agreement with Sharp, effective as of January 1, 2006, under which each party granted to the other non-transferable and non-exclusive licenses under certain patents to manufacture certain TFT-LCD panels and modules.

We entered into a cross-license agreement with Samsung, effective as of January 12, 2006, under which each party granted to the other non-transferable and non-exclusive licenses under certain patents to manufacture certain TFT-LCD and OLED panels and modules.

We have a cross-license agreement with Hitachi and IPS Alpha Technology, Ltd., effective as of July 1, 2009, under which each party granted to the other non-transferrable and non-exclusive licenses under certain patents to manufacture certain TFT-LCD and OLED panels and modules.

We have a license agreement with Semiconductor Energy Laboratory Co., Ltd., effective as of January 1, 2009, which provides for the non-transferable and non-exclusive license under certain patents to manufacture certain LCD and OLED products.

In addition to the above, we have also entered into license or cross license agreements with other third parties in the course of our business operations in connection with certain patents which such third parties own or control.

5.D. Trend Information

For trend information, see “Item 5. Operating and Financial Review and Prospects—5.A. Operating Results.”

5.E. Off-Balance Sheet Arrangements

We have, from time to time, entered into non-derivative financial instruments, including letters of credit, to finance or secure our purchase payment obligations. As of December 31, 2009, we had off-balance sheet outstanding letters of credit of US$56.4 million, JPY15,820.0 million and NT$38.2 million.

5.F. Tabular Disclosure of Contractual Obligations

The following tables set forth our contractual obligations and commitments with definitive payment terms which will require significant cash outlays in the future as of December 31, 2009.

	Payments due by Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	NT$		NT$		NT$		NT$		NT$
					(in millions)
Contractual Obligations
Long-term debt obligations(1)		193,877.0		51,276.3		91,136.0		44,590.8		6,873.9
Operating lease obligations(2)		5,530.9		849.7		1,525.0		1,091.9		2,064.3

Table of Contents

Payments due by Period

Total

Less than

1 year

1-3 years

3-5 years

More than

5 years

NT$

(in millions)

Purchase obligations(3)

79,205.5

−

Total

278,613.4

131,331.5

92,661.0

45,682.7

8,938.2

(1) Includes bonds payable, convertibles bonds payable and long-term borrowings and estimated relevant interest payments in any given period in the future. The interest rates are based on implied forward rates in the yield curve at the reporting date and management’s expectations for future interest rates. See notes 14, 15 and 16 to our consolidated financial statements for further information regarding interest rates and future repayment of long-term debts.

(2) Represents our obligations to make lease payments to use the land on which our fabs and module-assembly facilities are located.

(3) Includes purchase orders for the machinery and equipment at our fabs. We have placed orders primarily related to the installation of machinery and equipment at our second 7.5-generation and our second 8.5-generation fabs. As of December 31, 2009, we had made commitments of approximately NT$12.7 billion (US$0.4 billion), relating to our second 7.5-generation fab, and approximately NT$45.2 billion (US$1.4 billion), relating to our 8.5-generation fab.

In addition to the contractual obligations set forth above, we also have continuing obligations to make cash royalty payments under our technology license agreements, the amounts of which are determined based on our use of such technology and patents. Pursuant to relevant regulatory requirements, we estimate that we will contribute approximately NT$119.7 million to our pension fund maintained with the Bank of Taiwan in 2010.

We have not entered into any financial guarantees or similar commitments to guarantee the payment obligations of non-affiliated third parties. Our long-term loan and lease agreements include provisions that require early payment under certain conditions. The terms of our credit facilities for long-term borrowings also contain financial covenants, including current ratio, indebtedness ratio, interest coverage ratio, minimum equity requirements and other technical requirements. Our debt under these facilities may be accelerated if there is a default, including defaults triggered by failure to comply with these financial covenants and other technical requirements. As of December 31, 2009, we were in compliance with all financial covenants and other technical requirements under our credit facilities, except our subsidiary M. Setek had breached certain financial covenants under its loan agreements. Currently, M. Setek is seeking relevant waivers from its lenders; otherwise an early repayment of borrowings in the amount of JPY6,750.0 million (US$72.5 million) may be required. We have reclassified such borrowings under the current liabilities. We do not expect this breach to have a material impact on our financial position.

US GAAP Reconciliation

The following table sets forth a comparison of our net income (loss) attributable to stockholders of AU Optronics Corp. and equity attributable to stockholders of AU Optronics Corp. in accordance with ROC GAAP and US GAAP for the periods indicated.

	Year Ended and as of December 31,
	2007		2008		2009
	NT$		NT$		NT$			US$
	(in millions)
Net income (loss) attributable to stockholders of AU Optronics Corp. in accordance with
ROC GAAP		56,417.8		21,267.4		(26,769.3	)		(837.8	)
US GAAP		45,355.5		13,089.7		(28,670.3	)		(897.3	)
Equity attributable to stockholders of AU Optronics Corp. in accordance with
ROC GAAP		291,779.0		290,059.0		262,087.1			8,203.0
US GAAP		291,865.8		293,391.9		266,269.0			8,333.9

See note 28 to our consolidated financial statements for a complete discussion of significant differences between ROC GAAP and US GAAP.

Table of Contents

Recent ROC GAAP Accounting Pronouncements

There was no material ROC GAAP accounting pronouncement issued in 2009.

Recent US GAAP Accounting Pronouncements

In October 2009, the FASB issued Accounting Standard Update No. 2009-13, “Revenue Recognition (FASB ASC Topic 605): Multiple—Deliverable Revenue Arrangements,” which was subsequently codified. This guidance modifies the fair value requirements of FASB ASC Subtopic 605-25, “Revenue Recognition—Multiple Element Arrangements,” by allowing the use of the “best estimate of selling price” in addition to Vendor Specific Objective Evidence (“VSOE”) and third party evidence (“TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. The amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The impact of the adoption on our financial position and results of operations is dependent upon specific terms of any applicable future sales that contain multiple elements. We are currently evaluating the impact, if any, of applying these provisions on our financial position and results of operations.

In December 2009, the FASB issued ASU 2009-17, “Consolidations” (FASB ASC Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASU 2009-17, revises the test for determining the primary beneficiary of a Variable Interest Entity (“VIE”) from a primarily quantitative risks and rewards calculation based on VIE’s expected losses and expected residual returns to a primarily qualitative analysis based on identifying the party or related-party group (if any) with (a) the power to direct the activities that most significantly impact the VIE’s economic performance; and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The ASU requires kick-out rights and participating rights to be ignored in evaluating whether a variable interest holder meets the power criterion unless those rights are unilaterally exercisable by a single party or related-party group. The ASU also revises the criteria for determining whether fees paid by an entity to a decision maker or another service provider are a variable interest in the entity and revises the FASB ASC Topic 810 scope characteristic that identifies an entity as a VIE if the equity-at-risk investors as a group do not have the right to control the entity through their equity interests to address the impact of kick-out rights and participating rights on the analysis. Finally, the ASU adds a new requirement to reconsider whether an entity is a VIE if the holders of the equity investment at risk as a group lose the power, through the rights of those interests, to direct the activities that most significantly impact the VIE’s economic performance, and requires a company to reassess on an ongoing basis whether it is deemed to be the primary beneficiary of a VIE. ASU 2009-17 is effective for periods beginning after November 15, 2009 and may not be early adopted. We do not expect the adoption of US ASU 2009-17 will a material impact on our financial position and results of operations.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6.A. Directors and Senior Management

Members of our board of directors are elected by our shareholders. Our board of directors is composed of nine directors. The chairman of the board of directors is elected by the directors. The chairman of the board of directors presides at all meetings of the board of directors and also has the authority to act as our representative. The term of office for directors is three years.

Pursuant to the ROC Company Law, a person may serve as our director in his or her personal capacity or as the representative of another legal entity. A director who serves as the representative of a legal entity may be removed or replaced at any time at the discretion of that legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Of our nine current directors, two are representatives of Qisda and one is a representative of China Development Industrial Bank (“CDIB”).

Table of Contents

In addition, pursuant to the amended ROC Securities Exchange Act, a public company is required to either establish an audit committee or retain supervisors, provided that the FSC may, after considering the scale, business nature of a public company and other essential conditions, require the company to establish an audit committee in place of its supervisors. Currently, the FSC has not promulgated such compulsory rules, and all public companies may, at their discretion, retain either an audit committee or supervisors. We replaced our supervisors by establishing an audit committee on June 13, 2007. The audit committee’s duties and powers include, but are not limited to, investigation of our financial condition, inspection of corporate records, verification of statements by the board of directors, giving reports at shareholders’ meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our articles of incorporation or beyond our scope of business. Our audit committee is required to be composed of all of our independent directors, who are currently, Vivien Huey-Juan Hsieh, Chieh-Chien Chao and Tze-Kaing Yang.

The following table sets forth information regarding all of our directors as of April 30, 2010. The business address of all of our directors is the company’s principal executive office.

Name	Age	Position	Term Expires	Years with Us	Principal Business Activities Performed Outside Our Company
Kuen-Yao (K.Y.) Lee	58	Chairman	2010	14	· Chairman of Qisda and Chairman of BenQ Corporation · Director of Darfon Electronics Corp. · Director of Daxon Technology Inc. · Director of Lextar Electronics Corp.
Hsuan Bin (H.B.) Chen	59	Vice-Chairman	2010	13	· Chairman and Chief Executive Officer of Wellypower Optronics Corporation · Chairman of Lextar Electronics Corp.
Hui Hsiung	57	Director	2010	14	· President and Chief Executive Officer of Qisda · Director of Qisda
Ronald Jen-Chuan Chwang(1)	62	Director	2010	2	· Chairman and President of iD Ventures America
Ko-Yung (Eric) Yu(2)	54	Director	2010	14	· Senior Vice President of Qisda · Chairman of Daxon Technology Inc.
Ching-Shih Han(3)	46	Director	2010	3	· Director of Wellypower Optronics Corporation · Director of Cando Corporation · Director of Taiwan Nano Electro-Optical Technology Co., Ltd.
Vivien Huey-Juan Hsieh	57	Director	2010	6	· Independent Supervisor of Chief Telecom Inc. · Independent Director of Gold East Paper (Jiangsu) Co., Ltd.
Chieh-Chien Chao	66	Director	2010	6	· Adjunct Professor at National Taiwan University
Tze-Kaing Yang	56	Director	2010	3	· Supervisor of ASUSTeK Computer Inc. · Independent director of ASRock Inc. · Director of Ritek Corporation

(1)	Representing Qisda.

(2)	Representing Qisda.

(3)	Representing CDIB.

Table of Contents

Kuen-Yao (K.Y.) Lee has been the Chairman of our company since 1996 and a director of our company since 1996. Mr. Lee received his Bachelor’s degree in Electrical Engineering from the National Taiwan University in Taiwan in 1974 and his Master’s of Business Administration degree from the International Institute for Management Development in Switzerland in 1990. For a description of certain proceedings to which Mr. Lee is a party, please see “Item 8.A.7. Litigation.”

Hsuan Bin (H.B.) Chen has been our Vice-Chairman since 2007 and has been a director of our company since 1998. In addition, Mr. Chen was our President and Chief Operating Officer from 1997 to 2007 and was our Chief Executive Officer from 2007 to 2008. Mr. Chen received his Bachelor’s degree in Communications Engineering from the National Chiao Tung University in Taiwan in 1975. Mr. Chen worked for Acer Technologies Sdn. Bhd. in Malaysia from 1992 to 1997 before he joined Acer Display in 1997.

Hui Hsiung has been a director of our company since early 2002. Mr. Hsiung is also Chief Executive Officer and President of Qisda. Mr. Hsiung joined our company in 1996 as Director of the Research and Development Department, and from 1997 to 1999 served in positions in the company’s Marketing & Sales Division. Mr. Hsiung was a director of Acer Display from April 1999 to August 2001. From 2002 to 2007, Mr. Hsiung served as our Executive Vice President in charge of all our business units of our company. He received a Bachelor’s degree in Physics from the National Taiwan University in Taiwan in 1975 and a Ph.D. degree in Physics from the University of California, Berkeley in 1985.

Ronald Jen-Chuan Chwang has been a director of our company since 2008. Mr. Chwang is also Chairman of iD Ventures America. From 1998 to 2005, Mr. Chwang served as Chairman and President of Acer Technology Ventures, America. He was also President and Chief Executive Officer of Acer America Corp from 1992 to 1997. Mr. Chwang received a Bachelor’s degree in Engineering from McGill University in 1972 and his Ph.D. degree in Electrical Engineering from the University of Southern California in 1977.

Ko-Yung (Eric) Yu has been a director since 2007. Mr. Yu was a supervisor of our company from 1996 to 2007. Mr. Yu was the Controller of Acer Peripherals, Inc. from 1996 to 1999. Thereafter, Mr. Yu was the Chief Financial Officer of Acer Communications and Multimedia Inc. from November 1999 to December 2001, and has served as a Vice President of BenQ Corporation from 2002 to 2007. He received a Bachelor’s degree in Accounting from Fu Jen Catholic University in Taiwan in 1980 and a Master’s of Business Administration degree from the Strathclyde Graduate Business School in the United Kingdom in 1995.

Ching-Shih Han has been a director since 2007 and is also a vice president of the direct investment department of CDIB. Ms. Han is also a director of Cando Corporation, Taiwan Nano Electro-Optical Technology Co., Ltd. and Wellypower Optronics Corporation. Ms. Han graduated from Fu Jen Catholic University with a Bachelor’s degree in business administration in 1987 and University of Connecticut with a Master’s degree in business administration in 1989.

Vivien Huey-Juan Hsieh has been our director since April 2004. Ms. Hsieh is also an independent director of Gold East Paper (Jiangsu) Co., Ltd. and an independent supervisor of Chief Telecom Inc. Ms. Hsieh received a Ph.D. in Finance from the Graduate School of Business Administration, University of Houston, University Park, Texas.

Chieh-Chien Chao has been our director since 2007 and was our supervisor from 2004 to 2007. Mr. Chao was the Chairman of Chiao Tung Bank from 1994 to 2000, the Chairman of The Farmers Bank of China from 2000 to 2003 and the Chairman of Small and Medium Business Credit Guarantee Fund from 2003 to 2004. Mr. Chao received a Ph.D. in economics from National Taiwan University in 1974.

Tze-Kaing Yang has been our director since 2007. Dr. Yang is a director of Ritek Corporation, an independent director of ASRock Inc. and a supervisor of ASUSTeK Computer Inc. Dr. Yang graduated from National Chengchi University with a Bachelor’s degree in business administration in 1977 and National Chengchi University with a Doctorate’s degree in Business Administration in 1987.

Table of Contents

Executive Officers

The following table sets forth information regarding all of our executive officers as of April 30, 2010.

Name	Age	Position	Years with Us
Lai-Juh (L.J.) Chen	47	Chief Executive Officer and President	11
Andy Yang	42	Chief Financial Officer	8
Paul Peng	52	Executive Vice President of Global Business Unit	14
F.C. Hsiang	51	Executive Vice President of Global Operation Unit	11

Lai-Juh (L.J.) Chen has been our Chief Executive Officer since January 1, 2009. Prior to his current position, Dr. Chen was our President and Chief Operating Officer since September 2007. Dr. Chen was also our Senior Vice President and General Manager of Global Manufacturing from 2007 to 2008. Before he joined our company, Dr. Chen was Senior Manager of the Industrial Technology Research Institute. Dr. Chen graduated from Tatung Institute of Technology in Taiwan with a Bachelor’s degree in Chemical Engineering in 1986 and National Tsing-Hua University in Taiwan with a Doctorate’s degree in Chemical Engineering in 1992.

Andy Yang has been our Chief Financial Officer since March 2009. Prior to his current position, Mr. Yang was the Senior Project Manager of our Finance Division from April 2003 to February 2005, Associate Vice President of our Finance Center from March 2005 to February 2008, Finance Director of our subsidiaries in China from November 2008 to March 2009, and member of Board of Supervisor of Darwin Precisions and General Manager of Apower Optronics Corp. Prior to joining our company in 2002, Mr. Yang also held a number of positions in the banking industry, including Assistant Vice President of Corporate Banking of ABN AMRO Bank Taipei Branch in 1998 and Credit Manager of Union Bank of California Taipei Branch in 1996. He received his Bachelor’s degree from the Department of Finance of National Taiwan University in 1991 and his Master’s degree in Business Administration from George Washington University in 1996.

Paul Peng has been the Executive Vice President of our Global Business Unit since April 2008 and oversees the TV Business Group and IT Display Business Group. Mr. Peng is currently also the General Manager of the TV Business Group. Prior to his current position, Mr. Peng was General Manager of our Suzhou module plant from 2002 to 2004. Prior to joining AUO, Mr. Peng worked as Manager of material and production department at BenQ’s Malaysia branch. Mr. Peng holds a Master’s degree in Business Administration from Heriot-Watt University, U.K.

F.C. Hsiang has been the Executive Vice President of our Global Operation unit since April 2008. Prior to his current position, Mr. Hsiang was the Senior Vice President and General Manager of our Global Supply Chain Management and Global Manufacturing division from 2007 to 2008 and Assistant Vice President of our module plant from 2002 to 2006. Prior to joining AUO, Mr. Hsiang worked in various divisions at Acer Display, including Quality Assurance, Manufacturing Engineering, and Product Research and Development. Mr. Hsiang obtained his Master’s degree in Mechanical Engineering from the National Cheng Kung University in Taiwan in 1986.

6.B. Compensation

According to our articles of incorporation, we may distribute up to 1% of our annual distributed earnings in cash to our directors as compensation after the payment of all income taxes, the deduction of any past losses, and the allocation of 10% of our annual earnings as legal reserves. In the event that a director serves as a representative of a legal entity, such compensation is paid to the legal entity. See “Item 10. Additional Information—Articles of Incorporation—Dividends and Distributions.” The aggregate compensation paid in 2009 to our directors, supervisors and executive officers for their services was approximately NT$82.6 million (US$2.6 million).

We have a defined benefit pension plan covering our regular employees in the ROC. Retirement benefits are based on length of service and average salaries or wages in the last six months before retirement. We make monthly contributions, at 2% of salaries and wages, to a pension fund that is deposited in the name of, and administered by, the employees’ pension plan committee. Beginning July 1, 2005, pursuant to the newly effective ROC Labor Pension Act, we are required to make a monthly contribution for full-time employees in the ROC that elected to participate in a defined contribution plan at a rate of no less than 6% of the employee’s monthly salaries or wages to the employee’s individual pension fund accounts at the ROC Bureau of Labor Insurance. Our pension cost for the year ended December 31, 2009 was NT$645.7 million (US$20.2 million). See note 28 to our consolidated financial statements.

Table of Contents

We assumed two employee stock option plans, adopted in August 2002 and December 2003, respectively, as a result of the merger with QDI. Full-time QDI employees that have joined us as a result of the merger with QDI are eligible to keep stock options granted before the merger. At this stage, we have not determined whether to grant more stock options or to expand the employee stock option plans to enroll other employees.

We granted 33,428,000 stock options pursuant to the 2002 employee stock option plan, each exercisable for one QDI common share at an exercise price of NT$11.0. 100,000,000 stock options were authorized to be granted under the plan. Under the terms of the merger agreement with QDI, we assumed the 2002 employee stock option plan and reduced the number of stock options to 9,550,857 (on the basis of one of our shares of common stock for every 3.5 shares of QDI common stock ). Each option vests upon the second anniversary of its issuance and is exercisable for six years from the beginning of the option term. The options are generally not transferable. The exercise period expired in 2008 and no stock options were exercised.

We granted 40,541,170 stock options pursuant to the 2003 employee stock option plan, each exercisable for one QDI common share at an exercise price of NT$14.6. 100,000,000 stock options were authorized to be granted under the plan. Under the terms of the merger agreement with QDI, we assumed the 2003 employee stock option plan and reduced the number of stock options to 11,583,191 (on the basis of one of our shares of common stock for every 3.5 shares of QDI common stock ), each exercisable for one of our common shares at an adjusted exercise price of NT$44.3. Each option vests upon the second anniversary of its issuance and is exercisable for six years from the beginning of the option term. The exercise period expired in 2009 and no stock options were exercised.

6.C. Board Practices

General

For a discussion of the term of office of the board of directors, see “—Directors and Senior Management.” No benefits are payable to members of the board or the executive officers upon termination of their relationship with us.

Audit Committee

Our board of directors established an audit committee in August 2002. On June 13, 2007, we replaced our supervisors with an audit committee pursuant to the amended ROC Securities Exchange Act. The audit committee’s duties and powers include, but are not limited to, investigation of our financial condition, inspection of corporate records, verification of statements by the board of directors, giving reports at shareholders’ meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our articles of incorporation or beyond our scope of business. Our audit committee is required to be composed of all our independent directors, who are currently Vivien Huey-Juan Hsieh, Chieh-Chien Chao and Tze-Kaing Yang. Each audit committee member is an independent director who is financially literate and has accounting or related financial management expertise. The audit committee meets as often as it deems necessary to carry out its responsibilities.

6.D. Employees

Employees

The following table provides a breakdown of our employees by function as of December 31, 2007, 2008 and 2009.

	As of December 31,
Function	2007		2008		2009
Production		38,455		31,381		39,312
Technical(1)		8,285		9,279		9,218
Sales and marketing		658		582		657
Management and administration		1,712		2,025		2,191
Total		49,110		43,267		51,378

(1)	Includes research and development personnel.

Table of Contents

The following table provides a breakdown of our employees by geographic location as of December 31, 2007, 2008 and 2009.

	As of December 31,
Location	2007		2008		2009
Taiwan(1)		21,190		21,030		20,471
PRC(2)		27,833		22,077		29,994
Others(3)		87		160		913
Total		49,110		43,267		51,378

(1)	Employed by AU Optronics Corp., Toppan CFI, Lextar Electronics Corp., and Darwin Precision Corp.

(2)	Employed by AU Optronics (Suzhou) Corp., AU Optronics (Xiamen) Corp., AU Optronics Manufacturing (Shanghai) Corp., Darwin Precisions (Suzhou) Corp., and Darwin Precisions (Xiamen) Corp.

(3)	We added 660 employees as a result of our acquisition of M. Setek.

Employee salaries are reviewed and adjusted annually, while performance evaluations are conducted semi-annually. Salaries are adjusted based on inflation and individual performance. As an incentive, discretionary cash bonuses may be paid based on the performance of individuals. In addition, ROC law generally requires that our employees in Taiwan be given preemptive rights to subscribe for between 10% and 15% of any of our share offerings.

Our employees in Taiwan participate in our profit distributions under our articles of incorporation. Employees in Taiwan are entitled to receive stock bonus, cash or a combination of stock bonus and cash, based on a percentage of our annual distributed earnings. Prior to January 1, 2008, the amount allocated in shares is, subject to the resolution of our shareholders’ meeting, determined by valuing the shares at their par value, or NT$10.00 per share. Effective on January 1, 2008, the amount allocated in shares is determined by valuing the shares at the closing price on the last trading day before the stockholder’s meeting and paid to our employees in Taiwan based on individual performance and job seniority. Based on par value, we paid NT$573.5 million in stock bonus and NT$245.8 million in cash bonuses to our employees in 2007 with respect to 2006. Based on par value, we paid NT$2,437.2 million in stock bonus and NT$1,624.8 million in cash bonuses to our employees in 2008 with respect to 2007. Based on the relevant closing price, we paid NT$2,009.8 million in stock bonus, representing 66,154,312 shares and NT$861.3 million in cash bonuses to our employees in 2009 with respect to 2008.

The Hsinchu Science Park Administration offers a variety of employee-related services, including medical examinations, health insurance, career planning advice and other services for our employees in Taiwan. In addition to the services provided by the Hsinchu Science Park Administration, we have established a welfare committee, a pension fund committee, and other employee committees and a variety of employee benefit programs.

We have two employee stock option plans, which we assumed as a result of the merger with QDI. Eligible employees may participate in our employee stock option plans. See “Item 6.B. Compensation.”

We do not have any collective bargaining arrangement with our employees. We consider our relations with our employees to be good.

6.E. Share Ownership

The table below sets forth the share ownership, as of April 20, 2010, of the legal entities represented by our directors and executive officers.

Name	Number of Shares Owned			Percentage of Shares Owned
Kuen-Yao (K.Y.) Lee, Chairman		10,532,153			*
Hsuan Bin (H.B.) Chen, Vice-Chairman		6,197,633			*
Hui Hsiung, Director		2,790,877			*
Ronald Jen-Chuan Chwang, Director		663,598,620	(1)		7.52	%
Ko-Yung (Eric) Yu, Director		663,598,620	(1)		7.52	%
Lai-Juh (L.J.) Chen, Chief Executive Officer and President		2,959,118			*

Table of Contents

Ching-Shih Han, Director	44,929,277	(2)	*
Vivien Huey-Juan Hsieh, Director	—		—
Chieh-Chien Chao, Director	—		—
Tze-Kaing Yang, Director	—		—
Andy Yang, Chief Financial Officer	527,259		*
Paul Peng, Executive Vice President of Global Business	2,533,660		*
F.C. Hsiang, Executive Vice President of Global Operation Unit	4,484,330		*

*	The number of common shares held is less than 1% of our total outstanding common shares.

(1)	Represents shares held by Qisda.

(2)	Represents shares held by CDIB.

As of April 20, 2010, none of our directors or executive officers held any of our employee stock options. None of our directors or executive officers has voting rights different from those of other shareholders.

For a description of the two employee stock option plans assumed by us as a result of the merger with QDI, see “—Compensation.”

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A. Major Shareholders

Qisda Corporation (“Qisda”) is one of our major shareholders. In September 2007, BenQ Corporation completed its reorganization to separate its branded and manufacturing businesses. After the reorganization, BenQ Corporation was renamed Qisda, and its subsidiary BenQ Asia Pacific succeeded the name of BenQ Corporation.

In March 2007, Qisda sold 100,000,000 of our shares, representing 1.32% of our outstanding shares as of December 31, 2006. As of April 20, 2010, Qisda beneficially owned 7.56% of our outstanding shares. Two of our directors are representatives of Qisda.

Quanta Computer Inc. is one of our major shareholders. As of April 20, 2010, Quanta Computer beneficially owned 5.03% of our outstanding shares.

There have been no changes in our major shareholders since April 20, 2010.

The following table sets forth information known to us with respect to the beneficial ownership of our shares as of April 20, 2010 or the most recent practicable date, unless otherwise noted, by (1) each shareholder known by us to beneficially own more than 5% of our shares and (2) all directors as a group.

Name of Beneficial Owner	Number of Shares Beneficially Owned		Percentage of Shares Beneficially Owned		Percentage of Shares Beneficially Owned (Fully Diluted)
Qisda 157, Shan-Ying Road, Gueishan, Taoyuan 333, Taiwan, ROC		667,289,544		7.56%		7.56%
Quanta Computer Inc. 211, Wen Hwa 2nd Road, Kuei Shan, Taoyuan 33377, Taiwan, ROC		443,930,307		5.03%		5.03%
All directors as a group(1)		729,727,559		8.27%		8.27%

(1)

Calculated as the sum of: (a) with respect to directors who are serving in their personal capacity, the number of shares held by such director and (b) with respect to directors who are serving in the capacity as legal representatives, the number of shares owned by such institutional or corporate shareholder for which such director is a legal representative.

Table of Contents

None of our major shareholders has voting rights different from those of our other shareholders. To the best of our knowledge, we are not directly or indirectly controlled by another corporation, any foreign government, or any other natural or legal person, severally or jointly.

We are not aware of any arrangement that may at a subsequent date result in a change of control of our company.

As of April 20, 2010, approximately 8,827.0 million of our shares were issued and outstanding. Citibank, N.A. has advised us that, as of April 20, 2010, approximately 1,097 million shares in the form of ADSs were held of record by Cede & Co. and 27 other registered shareholders domiciled in and outside of the United States.

7.B. Related Party Transactions

We have not extended any loans or credit to any of our directors or executive officers, and we have not provided guarantees for borrowings by any of these persons. We have not entered into any fee-paying contract with any of these persons for such person to provide services not within such person’s capacity as a director or executive officer of the company.

We have, from time to time, purchased raw materials and components and sold our panels to our affiliated companies. We believe that these transactions with related parties have been conducted on arms’-length terms. Given the nature of our business, it is not practical for us to review many of these related party transactions on a day-to-day basis. However, at the meeting of our board of directors on April 11, 2002, we adopted an amended related party transactions policy which requires, among other things:

pre-approval by a majority vote of disinterested directors of each sale to, or purchase of raw materials and components from, a related party that is in the ordinary course of our business, which transaction involves a transaction amount in excess of 5% of our net sales or raw materials and component purchases, as the case may be, for the previous three months on an unconsolidated basis, provided that any series of similar transactions with the same related party that collectively exceeds 40% of our net sales or raw materials and component purchases, as the case may be, for the previous three months on an unconsolidated basis shall also require pre-approval;

periodic review by our board of directors of other related party transactions in the ordinary course of business;

pre-approval by a majority vote of disinterested directors of related party transactions not in the ordinary course of business and not otherwise specified in our related party transaction policy; and

recusal of any interested director from consideration of matters involving the company he or she represents or with respect to which the director might have a conflict of interest.

The following is a description of our material transactions with related parties.

Qisda

Qisda is one of our major shareholders, owning directly and indirectly a 7.56% equity interest in our company as of April 20, 2010. In addition, two of our nine directors are legal representatives of Qisda. In 2004, we purchased shares in Qisda, which as of December 31, 2008 represents 9.54% of their outstanding shares, in order to establish a long-term strategic relationship with Qisda. On April 11, 2008, we purchased an additional 90,456,800 shares of Qisda, bringing our total equity interest in Qisda to 9.58%. We received cash dividend of NT$17,021,480 and stock dividend of 13,617,184 shares from Qisda in 2008.

We sold panels for desktop monitors and LCD television to Qisda. We generated net sales to Qisda in the amount of NT$105.8 million (US$3.3 million) in 2009, and our receivables from these sales were NT$13.2 million (US$0.4 million) as of December 31, 2009.

Table of Contents

Qisda (Suzhou) Co., Ltd. (“QCSZ”)

QCSZ, an affiliate of our company, was 100% indirectly owned by Qisda as of April 30, 2010. We sold desktop monitor display panels and consumer electronics display panels to QCSZ. We generated net sales to QCSZ in the amount of NT$1,887.4 million (US$59.1 million) in 2009, and our receivables from these sales was NT$377.5 million (US$11.8 million) as of December 31, 2009.

Qisda Optronics (Suzhou) Co., Ltd. (“QCOS”)

QCOS, an affiliate of our company, was 100% indirectly owned by Qisda as of April 30, 2010. We sold desktop monitor display panels and consumer electronics display panels to QCOS. We generated net sales to QCOS in the amount of NT$596.4 million (US$18.7 million) in 2009, and our receivables from these sales were NT$121.2 million (US$3.8 million) as of December 31, 2009.

Qisda Czech S.R.O. (“QZBR”)

QZBR, an affiliate of our company, was 100% directly owned by Qisda as of April 30, 2010. We sold desktop monitor display panels and television display panels to QZBR. We generated net sales to QZBR in the amount of NT$178.4 million (US$5.6 million) in 2009, and our receivables from these sales were NT$7.5 million (US$0.2 million) as of December 31, 2009.

Daxon Technology Inc. (“Daxon”)

Daxon, an affiliate of our company, was 14.74% directly owned by Qisda as of April 30, 2010. We purchased polarizers from Daxon in the amount of NT$11,136.6 million (US$348.6 million) in 2009, and our payables from these purchases were NT$3,856.7 million (US$120.7 million) as of December 31, 2009.

Cando Corporation (“Cando”)

We directly and indirectly owned 18.20% of Cando as of April 30, 2010. We purchased color filters from Cando in the amount of NT$3,179.8 million (US$99.5 million) in 2009, and our payables from these purchases were NT$1,028.5 million (US$32.2 million) as of December 31, 2009.

Raydium Semiconductor Corporation (“Raydium”)

We indirectly owned 15.39% of Raydium as of April 30, 2010. We purchased driver-integrated circuits from Raydium in the amount of NT$7,534.2 million (US$235.8 million) in 2009, and our payables from these purchases were NT$3,507.5 million (US$109.8 million) as of December 31, 2009.

Nano Electro-Op (Kunshan) Co., Ltd (“Nano-Kunshan”)

Nano-Kunshan, an affiliate of our company, was indirectly wholly-owned by Taiwan Nano Electro-Optical Technology Co., Ltd. as of April 30, 2010. We purchased backlight units from Nano-Kunshan in the amount of NT$2,865.7 million (US$89.7 million) in 2009, and our payables from these purchases were NT$1,360.3 million (US$42.6 million) as of December 31, 2009.

BenQ Corporation (“BenQ”)

BenQ, an affiliate of our company, was 98.65% directly owned by Qisda as of April 30, 2010. We sold panels for desktop monitors, notebooks and television sets to BenQ. We generated net sales to BenQ in the amount of NT$8,945.2 million (US$280.0 million) in 2009, and our receivables from these sales were NT$1,910.1 million (US$59.8 million) as of December 31, 2009.

Sichuan Changhong Electric Co., Ltd. (“Changhong Electric”)

Changhong Electric is a joint investor of BVCH Optronics (Sichuan) Corp. We sold television display panels to Changhong Electric. We generated net sales to Changhong Electric in the amount of NT$6,827.5 million (US$213.7 million) in 2009, and our receivables from these sales were NT$2,095.3 million (US$65.6 million) as of December 31, 2009.

Table of Contents

Forhouse Corp. (“Forhouse”)

We indirectly owned 15.23% of Forhouse as of April 30, 2010. We purchased backlight units from Forhouse in the amount of NT$7,911.6 million (US$247.6 million) in 2009, and our payables from these purchases were NT$3,261.7 million (US$102.1 million) as of December 31, 2009.

Fortech International Corp. (“Fortech”)

Fortech, an affiliate of our company, was indirectly wholly-owned by Forhouse as of April 30, 2010. We purchased backlight units from Fortech in the amount of NT$6,057.1 million (US$189.6 million) in 2009, and our payables from these purchases were NT$2,585.5 million (US$80.9 million) as of December 31, 2009.

Fortress Optronics International Corporation (“Fortress”)

Fortress, an affiliate of our company, was indirectly wholly-owned by Forhouse as of April 30, 2010. We purchased backlight units from Fortress in the amount of NT$4,360.1 million (US$136.5 million) in 2009, and our payables from these purchases were NT$2,160.2 million (US$67.6 million) as of December 31, 2009.

Wellypower Optronics Corp. (“Wellypower”)

We indirectly owned 9.00% of Wellypower as of April 30, 2010. We purchased cold cathode fluorescent lamps from Wellypower in the amount of NT$2,861.9 million (US$89.6 million) in 2009 and our payables from these purchases were NT$1,241.4 million (US$38.9 million) as of December 31, 2009.

7.C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

8.A. Consolidated Statements and Other Financial Information

8.A.1. See Item 18 for our audited consolidated financial statements.

8.A.2. See Item 18 for our audited consolidated financial statements, which cover the last three financial years.

8.A.3. See page F-1 for the audit report of our independent auditors, entitled “Report of Independent Registered Public Accounting Firm.”

8.A.4. Not applicable.

8.A.5. Not applicable.

8.A.6. See “Item 4.B. Business Overview—Customers, Sales and Marketing” for the amount of our export sales.

8.A.7. Litigation

In December 2006, LG Display filed a lawsuit in the United States District Court for the District of Delaware against us, our U.S. subsidiary and other TFT-LCD manufacturers claiming patent infringement. We have retained legal counsel to handle the matter. LG Display is seeking, among other things, monetary damages for willful infringement and an injunction against future infringement. In March 2007, we filed a suit in the United States District Court for the Western District of Wisconsin against LG Display and LG Display America, claiming infringement of certain of our patents in the United States relating to the manufacturing of TFT-LCD products. We are seeking, among other things, monetary damages and enhanced damage for willful infringement and an injunction

Table of Contents

against future infringement. The claims against us and the counterclaims filed by us were consolidated in June 2007 in the United States District Court for the District of Delaware. Trial for this case was held in June 2009 and in February 2010, the United States District Court for the District of Delaware found that LG Display and LG Display America have infringed our patents asserted at trial and in April 2010, the United States District Court for the District of Delaware further found that we did not infringe any of LG Display’s patents as asserted at trial. Although the findings of the United States District Court for the District of Delaware were in favor of us, we cannot assure you that LG Display and LG Display America will not appeal this case to the superior courts. Moreover, as of April 30, 2010, the amount of damages has not been decided and the final judgment has not been rendered. Therefore, the results of this matter cannot be predicted with certainty.

In February 2007, Anvik Corporation (“Anvik”) filed a lawsuit in the United States District Court for the Southern District of New York against us and other TFT-LCD manufacturers, claiming infringement of certain of Anvik’s patents in the United States relating to the use of photo-masking equipment manufactured by Nikon Corporation in the manufacturing of TFT-LCD panels. We have retained legal counsel to handle the related matters. Anvik is seeking, among other things, unspecified monetary damages for past infringement and an injunction against future infringement. The lawsuit is in the discovery phase. While we intend to defend the suit vigorously, the ultimate outcome of the matter is uncertain, and the amount of possible loss, if any, is currently not estimable. We are reviewing the merits of this suit on an ongoing basis.

In March 2007, Honeywell International Inc. and Honeywell Intellectual Properties Inc. (collectively, “Honeywell”) filed a lawsuit in the United States District Court for the Eastern District Court of Texas against us and other TFT-LCD manufacturers, as well as certain of our customers, claiming infringement of certain of Honeywell’s patent in the United States relating to the manufacturing of TFT-LCD panels. In April 2009, we and Honeywell entered into a settlement to resolve the dispute. The settlement did not have a material impact on our business, results of operation or financial position.

In April 2008, Plasma Physics Corporation (“Plasma”) and Solar Physics Corporation (“Solar”) filed a lawsuit in the United States District Court for the Eastern District of New York against us, our U.S. subsidiary, and other TFT-LCD manufacturers, claiming infringement of certain of its patents in the United States relating to the use of machines manufactured by AKT America, Inc. in the manufacturing of TFT-LCD panels. In October 2009, we, Plasma and Solar entered into a settlement to resolve the dispute. The settlement did not have a material impact on our business, results of operation or financial position.

In September 2008, Apeldyn Corporation (“Apeldyn”) filed a lawsuit in the United States District Court for the District of Delaware against us, our U.S. subsidiary, and other TFT-LCD manufacturers, claiming infringement of certain of Apeldyn’s patents in the United States relating to the manufacturing of TFT-LCD panels. In the complaint, Apeldyn is seeking, among other things, unspecified monetary damages for past infringement and an injunction against future infringement. This litigation is still in the discovery phase. While we intend to defend the suit vigorously, the ultimate outcome of the matter is uncertain, and the amount of possible loss, if any, is currently not estimable. We are reviewing the merits of this suit on an ongoing basis.

We and certain of our subsidiaries, along with various competitors in the TFT-LCD industry, are under investigation for alleged violation of antitrust and competition laws. Specifically, since December 2006, we and certain of our overseas subsidiaries have become involved in antitrust investigations by the United States Department of Justice (the “U.S. DOJ”), the Commission of the European Communities Directorate-General for Competition (the “DG COMP”), the Canada Competition Bureau, the Taiwan Fair Trade Commission, the Korea Fair Trade Commission and the Japan Fair Trade Commission, concerning the allegations of price fixing by manufacturers of TFT-LCD panels. In January 2009, the Taiwan Fair Trade Commission visited our office in Taiwan and requested certain information from us as part of its investigations into the TFT-LCD industry. In November 2009, the Taiwan Fair Trade Commission notified us of the termination of its investigation. The Japan Fair Trade Commission and the Korea Fair Trade Commission also requested certain information from us as part of their respective investigations in 2007 and 2009, respectively. In 2009, the DG COMP issued a “Statement of Objections” to a number of LCD manufacturers, including us, alleging anti-competitive activities. We received DG COMP’s Statement of Objections in May 2009 and submitted our reply in July 2009. We and certain LCD manufacturers attended the hearing held by the DG COMP regarding its investigation in September 2009. The result

Table of Contents

of DG COMP’s investigation is still pending. We intend to continue to cooperate with these investigations as warranted as part of our ongoing defense of these matters.

We, certain of our subsidiaries, and certain of our respective current or former officers and/or employees may be indicted in the United States for possible violations of antitrust and/or competition laws. If we and certain of our subsidiaries are found to have violated antitrust and/or competition laws, we and our subsidiaries will likely have to pay a fine or penalty. It is also possible that certain of our current or former officers or employees may be held criminally liable and subject to imprisonment or fines or both. We and our subsidiaries may also agree to pay a fine or penalty as part of any plea bargain or settlement. To our knowledge, certain of our competitors that pled guilty and entered into plea bargain agreements with the U.S. DOJ have agreed to pay fines ranging from US$35 million to US$400 million. While we do not know all the facts and circumstances that led each of these competitors to enter into these pleas, we are aware of the outcome of those plea bargain agreements which may or may not be the amounts which we and our subsidiaries may agree to pay and/or which the U.S. DOJ may agree to accept as part of any plea bargain and/or settlement.

In addition, in the fourth quarter of 2009, AT&T, Motorola and Nokia, respectively filed civil lawsuits against a number of LCD manufacturers including us, claiming among other things, unspecified monetary damages and an enjoinment from the alleged antitrust conspiracy. These lawsuits are still in the early stages.

In addition to the matters described above, we are also a party to other litigations or proceedings that arise during our ordinary course of business. Except as mentioned above, we are not involved in any material litigation or proceeding which could be expected to have a material adverse effect on our business or results of operations.

The following is a description of one Qisda-related event and proceeding:

As of April 30, 2010, there are four pending lawsuits against Qisda filed by the insolvency administrator of BenQ Mobile GmbH & Co. OHG (“OHG”): (i) litigation filed on July 12, 2007 at District Court of Munich I in the amount of EUR68.96 million, which was increased by an additional EUR253.5 million on January 12, 2009; (ii) litigation filed on July 12, 2007 at District Court of Munich I in the amount of EUR14.24 million, (iii) litigation filed on August 2, 2007 at District Court of Munich I in the amount of EUR25.94 million, and (iv) litigation filed on July 30, 2009 at District Court of Munich I in the amount of approximately EUR264 million which was further increased to EUR282 million, for the damages relating to willful mismanagement of OHG by the de facto majority shareholder. Based on the information provided by Qisda, we do not expect these cases to have a material adverse impact on our financial position. We are reviewing these cases on an ongoing basis.

Table of Contents

The following is a description of one proceeding related to our management:

In May 2007, Mr. Lee, our Chairman, was indicted by the Taoyuan District Prosecutors’ Office for alleged insider trading of Qisda stock and other related charges. In August 2009, the Taoyuan court acquitted Mr. Lee of all charges. The case was appealed by the prosecutor to the superior court in September 2009. As of April 30, 2010, the case was still pending and the ultimate outcome of the case is uncertain.

8.A.8. Dividends and Dividend Policy

We distributed a cash dividend of NT$0.2 per share and a stock dividend of NT$0.2 per share on August 7, 2007 for the year 2006. We distributed a cash dividend of NT$2.5 per share and a stock dividend of NT$0.5 per share on August 22, 2008 for the year 2007. We distributed a cash dividend of NT$0.3 per share and a stock dividend of NT$0.3 per share on August 18, 2009 for the year 2008.

Our articles of incorporation provide that the cash portion of any dividend shall not be less than 10% of the annual dividend. The form, frequency and amount of future dividends will depend upon our earnings, cash flow, financial condition, reinvestment opportunities and other factors.

We are generally not permitted under the ROC Company Law to distribute dividends or to make any other distributions to shareholders for any fiscal year in which we have no earnings. Our articles of incorporation provide that we shall allocate 10% of our annual earnings as a legal reserve in each fiscal year after:

payment of all income taxes; and

deduction of any past losses.

Earnings distributions are made in the following manner:

no less than 5% of the earnings to be distributed is distributable as a bonus for employees;

no more than 1% of the earnings to be distributed is distributable as remuneration to directors; and

all or a portion of the balance is distributable as dividend and bonus to our shareholders.

In addition to permitting dividends to be paid out of accumulated earnings after deducting losses, we are permitted under the ROC Company Law to make distributions to our shareholders of additional shares by capitalizing reserves, including the legal reserve. However, the capitalized portion payable out of our legal reserve is limited to 50% of the total accumulated legal reserve, and only if and to the extent the accumulated legal reserve exceeds 50% of our paid-in capital. See “Item 10. Additional Information—Articles of Incorporation—Dividends and Distributions.” For information as to ROC taxes on dividends and distributions, see “Item 10.E. Taxation—ROC Tax Considerations—Dividends.”

The holders of ADSs will be entitled to receive dividends to the same extent as the holders of our shares, subject to the terms of the deposit agreement.

Any cash dividends will be paid to the depositary in NT dollars and, after deduction of any applicable ROC taxes and fees and expenses of the depositary and custodian, except as otherwise provided in the deposit agreement, will be converted by the depositary into U.S. dollars and paid to the holders of ADSs. Whenever the depositary receives any free distribution of shares, including stock dividends, on any ADSs that the holders of ADSs hold, the depositary may, and will if we so instruct, deliver to the holders of ADSs additional ADSs which represent the number of shares received in the free distribution, after deduction of applicable taxes and the fees and expenses of the depositary and the custodian. If additional ADSs are not so delivered, each ADS that the holders of ADSs hold shall represent its proportionate interest in the additional shares distributed.

Table of Contents

8.B. Significant Changes

Except as otherwise disclosed in this report, we have not experienced any significant changes since the date of the annual financial statements included herein.

ITEM 9. THE OFFER AND LISTING

9.A. Offering and Listing Details

Our shares have been listed on the Taiwan Stock Exchange since September 8, 2000 under the number “2409.” The ADSs have been listed on the New York Stock Exchange under the symbol “AUO” since May 23, 2002. The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Taiwan Stock Exchange for the shares and the high and low closing prices and the average daily volume of trading activity on the New York Stock Exchange for the shares represented by ADSs.

	Taiwan Stock Exchange						New York Stock Exchange(1)
	Closing Price per Share				Average Daily Trading Volume		Closing Price per ADS				Average Daily Trading Volume
	High		Low		Average Daily Trading Volume		High		Low		Average Daily Trading Volume
	(NT$)		(NT$)		(in thousands of shares)		(US$)		(US$)		(in thousand of ADSs)
2005		55.70		41.50		58,771.47		18.14		12.73		1,848.57
2006		55.20		40.00		47,043.79		17.56		12.16		2,162.58
2007		70.40		43.30		48,530.06		22.41		13.06		1,881.55
2008		62.70		18.30		70,171.86		20.66		5.02		3,343.94
First Quarter		61.30		51.10		81,208.32		19.74		15.99		3,368.69
Second Quarter		62.70		47.10		72,280.56		20.66		15.55		3,371.35
Third Quarter		48.20		31.05		69,864.02		15.74		10.20		3,247.35
Fourth Quarter		36.00		18.30		58,753.02		11.38		5.02		3,389.52
2009		38.90		23.05		62,016.60		12.12		6.66		3,999.55
First Quarter		29.90		23.05		66,737.51		9.01		6.66		3,524.08
Second Quarter		38.20		28.50		65,734.77		12.00		8.66		3,868.17
Third Quarter		38.90		30.85		55,275.68		12.12		9.48		4,442.43
Fourth Quarter		38.80		28.90		61,028.65		11.99		8.79		4,139.18
November		33.60		28.90		65,784.07		10.45		8.79		3,580.93
December		38.80		34.05		60,039.59		11.99		10.68		2,994.22
2010 (through May 7)		42.00		32.80		56,803.10		13.25		10.24		3,281.52
First Quarter		42.00		32.80		59,323.72		13.25		10.24		3,141.07
January		42.00		35.85		69,810.47		13.25		10.94		3,993.38
February		36.30		32.80		58,660.48		11.54		10.24		3,046.59
March		37.00		33.40		50,608.51		11.75		10.41		2,515.04
April		37.75		34.55		46,943.55		12.51		11.08		3,493.33
May (through May 7)		36.90		33.50		69,478.23		11.89		10.40		4,105.42

(1)	Each ADS represents the right to receive 10 common shares.

9.B. Plan of Distribution

Not applicable.

9.C. Markets

The principal trading markets for our shares are the Taiwan Stock Exchange and the New York Stock Exchange, on which our shares trade in the form of ADSs.

9.D. Selling Shareholders

Not applicable.

Table of Contents

9.E. Dilution

Not applicable.

9.F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10.A. Share Capital

Not applicable.

10.B. Articles of Incorporation

The following statements summarize the material elements of our capital structure and the more important rights and privileges of our shareholders conferred by ROC law and our Articles of Incorporation.

Objects and Purpose

The scope of our business as set forth in Article 2 of our articles of incorporation includes the research, development, production, manufacture and sale of the following products: plasma display and related systems, liquid crystal display and related systems, organic light emitting diodes and related systems, amorphous silicon photo sensor device parts and components, thin film photo diode sensor device parts and components, thin film transistor photo sensor device parts and components, touch imaging sensors, full color active-matrix flat panel displays, field emission displays, single crystal liquid crystal displays, original equipment manufacturing for amorphous silicon thin film transistor process and flat panel display modules, solar cell, modules, and related system and service, new green energy-related system and service, original design manufacturing and original equipment manufacturing business for flat panel display modules and the simultaneous operation of a trade business relating to our business.

Directors

Our board of directors is elected by our shareholders and is responsible for the management of our business. Our articles of incorporation provide that our board of directors is to have between nine to eleven members. Currently, our board of directors is composed of nine directors. The chairman of our board is elected by the directors. The chairman presides at all meetings of our board of directors, and also has the authority to represent our company. The term of office for our directors is three years.

In addition, pursuant to the amended ROC Securities Exchange Act, a public company is required to either establish an audit committee or retain supervisors, provided that the FSC may, after considering the scale, business nature of a public company and other essential conditions, require the company to establish an audit committee in place of its supervisors. Currently, the FSC has not promulgated such compulsory rules, and all public companies may, at their discretion, retain either an audit committee or supervisors. We replaced our supervisors by establishing an audit committee on June 13, 2007. The audit committee’s duties and powers include, but are not limited to, investigation of our financial condition, inspection of corporate records, verification of statements by the board of directors, giving reports at shareholders’ meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to the board of directors to cease acting in contravention of applicable law or regulations or our articles of incorporation or beyond our scope of business. Our audit committee is required to be composed of all of our independent directors, who are currently Vivien Huey-Juan Hsieh, Chieh-Chien Chao and Tze-Kaing Yang.

The election of our directors by our shareholders may be conducted by means of cumulative voting or other voting mechanics, if any, adopted in our articles of incorporation. Pursuant to the ROC Company Law, the election of our directors is currently conducted by means of cumulative voting, as our articles of incorporation do not provide

Table of Contents

for another voting mechanism. The most recent election for all of the directors was held on June 13, 2007. We have adopted a candidate nomination system for the election of directors.

Pursuant to the ROC Company Law, a person may serve as a director in his or her personal capacity or as the representative of another legal entity. A legal entity that owns our shares may be elected as a director, in which case a natural person must be designated to act as the legal entity’s representative. In the event several representatives are designated by the same legal entity, any or all of them may be elected. A natural person who serves as the representative of a legal entity as a director may be removed or replaced at any time at the discretion of such legal entity, and the replacement director may serve the remainder of the term of office of the replaced director. Currently, three of our directors are representatives of other legal entities, as shown in “Item 6.—Directors, Senior Management and Employees—Directors and Senior Management—Executive Officers.”

The present members of the board of directors took office on June 13, 2007. Our shareholders will elect new directors at the 2010 annual general shareholders meeting, which is scheduled on June 18, 2010.

As of April 30, 2010, our authorized share capital was NT$100 billion, divided into 10 billion common shares, of which 100 million shares are reserved for the issuance of shares for employee stock options, and 8,827,045,535 shares were issued.

On June 19, 2009, our shareholders approved the issuance of 321,325,901 common shares for purposes of distributing stock dividends and employee stock bonuses. The stock issuance was authorized by the government authorities. The record date for this stock issuance was August 18, 2009.

All shares presently issued, including those underlying our ADSs, are fully paid and in registered form, and existing shareholders are not obligated to contribute additional capital.

New Shares and Preemptive Rights

The issuance of new shares requires the prior approval of our board of directors. If our issuance of any new shares will result in any change in our authorized share capital, we are required under ROC law to amend our articles of incorporation, which requires approval of our shareholders in a shareholders’ meeting. We must also obtain the approval of, or submit a registration to, the FSC and the Hsinchu Science Park Administration Bureau, as applicable. Generally, when a company issues capital stock for cash, 10% to 15% of the issue must be offered to its employees. In addition, if a public company intends to offer new shares for cash, at least 10% of the issue must also be offered to the public. This percentage can be increased by a resolution passed at a shareholders’ meeting, which will reduce the number of new shares in which existing shareholders may have preemptive rights. Unless the percentage of the shares offered to the public is increased by a resolution, existing shareholders of the company have a preemptive right to acquire the remaining 75% to 80% of the issue in proportion to their existing shareholdings.

Our share registrar, Taiwan Securities Co., Ltd., maintains the register of our shareholders at its office in Taipei, Taiwan, and enters transfers of our shares in the register upon presentation of, among other documents, the certificates in respect of our shares transferred. The ROC Company Law permits us, by giving advance public notice, to set a record date and close the register of shareholders for a specified period in order to determine the shareholders or pledgees that are entitled to certain rights pertaining to our shares. Under the ROC Company Law, our register of shareholders should be closed for a period of sixty days before each ordinary meeting of shareholders, thirty days before each extraordinary meeting of shareholders and five days before each record date.

Transfer of Shares

Under the ROC Company Law, shares are transferred by endorsement and delivery of the related share certificates. In addition, transferees must have their names and addresses registered on our register in order to assert shareholders’ rights against us. Notwithstanding the foregoing, shareholders are required to file their specimen seals

Table of Contents

with our share registrar. The settlement of trading of our shares on the Taiwan Stock Exchange will be carried out on the book-entry system maintained by Taiwan Depository & Clearing Corporation.

Shareholders’ Meetings

We are required to hold an annual ordinary shareholders’ meeting once every calendar year, generally within six months after the end of each fiscal year. Any shareholder who holds 1% or more of our issued and outstanding common shares may submit one written proposal for discussion at our annual ordinary shareholders meeting. Our directors may convene an extraordinary shareholders’ meeting whenever they think fit, and they must do so if requested in writing by shareholders holding not less than 3% of our paid-in share capital who have held their shares for more than a year. In addition, any member of our audit committee may convene a shareholders’ meeting under certain circumstances. For a public company in Taiwan, such as our company, at least 15 days’ advance written notice must be given of every extraordinary shareholders’ meeting and at least 30 days’ advance written notice must be given of every annual ordinary shareholders’ meeting. Unless otherwise required by law or by our articles of incorporation, voting for an ordinary resolution requires an affirmative vote of a simple majority of those present and voting. A distribution of cash dividends would be an example of an act requiring an ordinary resolution. A special resolution may be adopted in a meeting of shareholders convened with a quorum of holders of at least two-thirds of our total outstanding shares at which the holders of at least a majority of our shares represented at the meeting vote in favor thereof. A special resolution is necessary for various matters under ROC law, including:

any amendment to our articles of incorporation;

our dissolution or amalgamation;

a merger or spin-off;

transfers of the whole or a substantial part of our business or properties;

the acquisition of the entire business of another company which would have a significant impact on our operations;

the distribution of any stock dividend; or

the removal of directors.

However, in the case of a public company such as our company, a special resolution may be adopted by holders of at least two-thirds of the shares represented at a meeting of shareholders at which holders of at least a majority of the total outstanding shares are present.

Voting Rights

According to the ROC Company Law, a holder of our shares has one vote for each share held at shareholders’ meetings. However, (i) treasury shares or (ii) our common shares held by an entity in which our company owns more than 50% of the voting shares or paid-in capital, or “Controlled Entity,” or by a third entity in which our company and a Controlled Entity jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital cannot be voted. There is cumulative voting for the election of directors. In all other matters, shareholders must cast all their votes the same way on any resolution. Voting rights attached to our common shares may be exercised by personal attendance or proxy, or at our discretion, by written or electronic ballot.

If any shareholder is represented at an ordinary or extraordinary shareholders’ meeting by proxy, a valid proxy form must be delivered to us five days before the commencement of the ordinary or extraordinary shareholders’ meeting. Voting rights attached to our shares that are exercised by our shareholders’ proxy are subject to ROC proxy regulations. Any shareholder who has a personal interest in a matter to be discussed at our shareholders’ meeting, the outcome of which may impair our interests, is not permitted to vote or exercise voting rights nor vote or exercise voting rights on behalf of another shareholder on such matter.

Table of Contents

Except for trust enterprises or share transfer agents approved by the FSC, where one person is appointed as proxy by two or more shareholders who together hold more than 3% of our shares, the votes of those shareholders in excess of 3% of our total issued shares will not be counted.

You will not be able to exercise voting rights on the shares underlying your ADSs on an individual basis.

Dividends and Distributions

We may distribute dividends in any year in which we have accumulated earnings. Before distributing a dividend to shareholders following the end of a fiscal year, we must recover any past losses, pay all outstanding taxes, and set aside in a legal reserve 10% of our remaining net earnings for that fiscal year until our legal reserve equals our paid-in capital.

At the shareholders’ annual ordinary meeting, our board of directors submits to the shareholders for approval proposals for the distribution of a dividend or the making of any other distribution to shareholders from our accumulated earnings or reserves for the preceding fiscal year. Dividends may be distributed either in cash, in the form of shares or a combination of cash and shares. Our articles of incorporation provide that the cash portion of any dividend shall not be less than 10% of the annual dividend. Dividends are paid proportionately to shareholders as listed on the register of shareholders on the relevant record date.

Our articles of incorporation provide that we shall allocate 10% of our remaining net earnings as a legal reserve in each fiscal year after:

payment of all income taxes; and

deduction of any past losses.

Earnings distributions are made in the following manner:

no less than 5% of the earnings to be distributed is distributable as a bonus for employees;

no more than 1% of the earnings to be distributed is distributable as remuneration to directors; and

all or a portion of the balance is distributable as a dividend to our shareholders.

For information on the dividends paid by us in recent years, see “Item 8. Financial Information—Dividends and Dividend Policy.” For information as to ROC taxes on dividends and distributions, see “Item 10. Additional Information—Taxation—ROC Tax Considerations—Dividends.”

Acquisition of Shares by Our Company

With limited exceptions under the ROC Company Law, we are not permitted to acquire our shares.

In addition, pursuant to the Securities and Exchange Law, we may, by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present, purchase our shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the FSC, for the following purposes:

to transfer shares to our employees;

to facilitate conversion arising from bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants (collectively, the “Convertible Securities”) issued by our company into shares; and

if necessary, to maintain our credit and our shareholders’ equity; provided that the shares so purchased shall be cancelled thereafter.

Table of Contents

Our shares purchased pursuant to the first and the second items above shall be transferred to our employees or holders of Convertible Securities, as the case maybe, within three years after the date of such purchase. Our shares purchased pursuant to item 3 above shall be cancelled within six months after the date of such purchase.

We are not allowed to purchase more than 10% of our total issued and outstanding shares. In addition, we may not spend more than the aggregate amount of our retained earnings, the premium from issuing stock and the realized portion of the capital reserve to purchase our shares.

We may not pledge or hypothecate any purchased shares. In addition, we may not exercise any shareholders’ rights attaching to such shares. In the event that we purchase our shares on the Taiwan Stock Exchange or through a tender offer, our affiliates, directors, officers and their respective spouses and minor children and/or nominees are prohibited from selling any of our shares during the period in which we purchase our shares.

According to the ROC Company Law, an entity in which our company directly or indirectly owns more than 50% of the voting shares or paid-in capital, which is referred to as a controlled entity, may not purchase our shares. Also, if our company and a controlled entity jointly own, directly or indirectly, more than 50% of the voting shares or paid-in capital of another entity, which is referred to as a third entity, the third entity may not purchase shares in either our company or a controlled entity.

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all debts, liquidation expenses, taxes and distributions to holders of preferred shares, if any, will be distributed pro rata to our shareholders in accordance with the ROC Company Law.

Rights to Bring Shareholder Suits

Under the ROC Company Law, a shareholder may bring suit against us in the following events:

Within 30 days from the date on which a shareholders’ resolution is adopted, a shareholder may file a lawsuit to annul a shareholders’ resolution if the procedure for convening a shareholders’ meeting or the method of resolution violates any law or regulation or our articles of incorporation.

If the substance of a resolution adopted at a shareholders’ meeting contradicts any applicable law or regulation or our articles of incorporation, a shareholder may bring a suit to determine the validity of such resolution.

Shareholders may bring suit against our directors under the following circumstances:

Shareholders who have continuously held 3% or more of the total number of issued and outstanding shares for a period of one year or longer may request in writing that an audit committee member institute an action against a director on our behalf. In case the audit committee member fails to institute an action within 30 days after receiving such request, the shareholders may institute an action on our behalf. In the event that shareholders institute an action, a court may, upon motion of the defendant, order such shareholders to furnish appropriate security.

In the event that any director, officer or shareholder who holds more than 10% of our issued and outstanding shares and their respective spouse and minor children and/or nominees sells shares within six months after the acquisition of such shares, or repurchases the shares within six months after the sale, we may make a claim for recovery of any profits realized from the sale and purchase. If our board of directors or our audit committee fail to make a claim for recovery, any shareholder may request that our board of directors or our audit committee exercise the right of claim within 30 days. In the event our directors or audit committee fail to exercise such right during such 30-day period, such requesting shareholder will have the right to make a claim for such recovery on our behalf. Our directors and audit committee will be jointly and severally liable for damages suffered by us as a result of their failure to exercise the right of claim.

Table of Contents

Financial Statements

For a period of at least twenty-one days before our annual shareholders’ meeting, we must make available our annual financial statements at our principal offices in Hsinchu, Taiwan and our share registrar in Taipei, for inspection by our shareholders.

Transfer Restrictions

Our directors, officers and shareholders holding more than 10% of our issued and outstanding shares and their respective spouse and minor children and/or nominees, which we refer to as insiders, are required to report any changes in their shareholding to us on a monthly basis. No insider is permitted to sell shares on the Taiwan Stock Exchange for six months from the date on which the relevant person becomes an insider. In addition, the number of shares that insiders can sell or transfer on the Taiwan Stock Exchange on a daily basis is limited by ROC law. Furthermore, insiders may sell or transfer our shares on the Taiwan Stock Exchange only after reporting to the FSC at least three days before the transfer, provided that such reporting is not required if the number of shares transferred per day does not exceed 10,000.

Other Rights of Shareholders

Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in the event of a spin-off, a merger or various other major corporate actions. Dissenting shareholders may request us to redeem their shares at a fair price to be determined by mutual agreement. If no agreement can be reached, the valuation will be determined by court order. Dissenting shareholders may exercise their appraisal rights by notifying us before the related shareholders’ meeting or by raising and registering their dissent at the shareholders’ meeting.

Transfer Agent and Registrar

The transfer agent and registrar for our shares is Taishin International Bank, Bl, No.96, Jianguo N. Rd, Sec.1, Taipei, Taiwan; telephone number: 886-2-2504-8125. The transfer agent and registrar for our ADS is Citibank, N.A., 388 Greenwich Street, 14th Floor, New York, New York, 10013, USA; telephone number: 1-877-248-4237.

10.C. Material Contracts

Certain material contracts are discussed under Item 5.C. above where relevant.

In addition, we entered into merger agreement with QDI dated April 7, 2006. Under the terms of the merger agreement, we offered one share of our common stock for every 3.5 shares of outstanding QDI common stock and we assumed substantially all of the assets, liabilities and personnel of QDI.

10.D. Exchange Controls

We have extracted from publicly available documents the information presented in this section. Please note that citizens of the PRC and entities organized in the PRC are subject to special ROC laws, rules and regulations, which are not discussed in this section.

The ROC’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the Central Bank of the Republic of China. Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, Taiwan companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million and US$5 million, respectively, each calendar year. A requirement is also imposed on all private enterprises to report all medium- and long-term foreign debt with the Central Bank of the Republic of China.

Table of Contents

In addition, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if required documentation is provided to ROC authorities. This limit applies only to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.

10.E. Taxation

ROC Tax Considerations

The following summarizes the principal ROC tax consequences of owning and disposing of ADSs and shares if you are not a resident of the ROC (a “non-ROC resident”). You will be considered a non-ROC resident for the purposes of this section if:

you are an individual and you are not physically present in the ROC for 183 days or more during any calendar year; or

you are an entity and you are organized under the laws of a jurisdiction other than the ROC and have no fixed place of business or other permanent establishment or business agent in the ROC.

You should consult your own tax advisors concerning the tax consequences of owning ADSs or shares in the ROC and any other relevant taxing jurisdiction to which you are subject.

Dividends

Dividends, whether in cash or shares, declared by us out of retained earnings and paid out to a holder that is a non-ROC resident in respect of shares represented by ADSs or shares, are subject to ROC withholding tax. The current rate of withholding for non-ROC residents is 20% of the amount of the distribution, in the case of cash dividends, or of the par value of the shares distributed, in the case of stock dividends. As discussed below in “Retained Earnings Tax,” our after-tax earnings will be subject to an undistributed retained earnings tax. To the extent dividends are paid out of retained earnings that have been subject to the retained earnings tax, the amount of such tax will be used by us to offset the withholding tax liability on such dividend. Consequently, the effective rate of withholding on dividends paid out of retained earnings previously subject to the retained earnings tax will be less than 20%. Each of our cash dividends and stock dividends declared in 2009 was subject to a withholding tax of 20% in the amount of NT$226.8 million. There is no withholding tax with respect to stock dividends declared out of our capital reserves.

Capital Gains

Gains realized on ROC securities transactions inside or outside of the ROC are currently exempt from ROC income tax. In addition, sales of ADSs by non-ROC resident holders are not regarded as sales of ROC securities and, as a result, any gains on such transactions are currently not subject to ROC income tax.

Securities Transaction Tax

The ROC government imposes a securities transaction tax that will apply to sales of shares, but not to sales of ADSs. The transaction tax is payable by the seller for the sale of shares and is equal to 0.3% of the sales proceeds.

Estate and Gift Tax

Subject to allowable exclusions, deductions and exemptions, any property within the ROC of a deceased individual is subject to a 10% estate tax, and any property within the ROC donated by any individual is subject to a 10% gift tax. Under ROC estate and gift tax laws, shares issued by ROC companies, such as our shares, are deemed located in the ROC regardless of the location of the holder. It is unclear whether or not ADSs will be deemed assets located in the ROC for the purpose of ROC gift and estate taxes.

Table of Contents

Preemptive Rights

Distributions of statutory preemptive rights for shares in compliance with the ROC Company Law are not subject to ROC tax. Proceeds derived from sales of statutory preemptive rights evidenced by securities by a non-ROC resident are exempt from income tax, but may be subject to ROC securities transaction tax, discussed above. Proceeds derived from sales of statutory preemptive rights that are not evidenced by securities are subject to income tax at the rate of:

20% of the gains realized by non-ROC entities; and

20% of the gains realized by non-ROC individuals.

We have the sole discretion to determine whether statutory preemptive rights are evidenced by securities or not.

Retained Earnings Tax

Under the ROC Income Tax Laws, we are subject to a 10% retained earnings tax on our after-tax earnings generated after January 1, 1998 that are not distributed in the following year. Any retained earnings tax so paid will further reduce the retained earnings available for future distribution. When we declare dividends out of those retained earnings, a maximum amount of up to 10% of the declared dividends will be credited against the 20% withholding tax imposed on the non-ROC resident holders of our ADS or shares.

Tax Treaty

The ROC does not have an income tax treaty with the United States. The ROC has tax treaties for the avoidance of double taxation with Indonesia, Singapore, South Africa, Australia, the Netherlands, Vietnam, New Zealand, Malaysia, Macedonia, Swaziland, Gambia, the United Kingdom, Senegal, Sweden, Belgium, Denmark and Israel which may limit the rate of ROC withholding tax on dividends paid with respect to shares. It is unclear whether, if you hold ADSs, you will be considered to hold shares for the purposes of these treaties. Accordingly, if you may otherwise be entitled to the benefits of an income tax treaty, you should consult your tax advisors concerning your eligibility for the benefits with respect to ADSs.

United States Federal Income Tax Considerations for United States Holders

The following is a discussion of the material U.S. federal income tax consequences of the ownership and disposition of our ADSs or shares to the U.S. Holders described below, but it is not a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such securities. The discussion set forth below applies only to beneficial owners of our ADSs or shares that are U.S. Holders, hold the ADSs or shares as capital assets for tax purposes and are non-ROC residents as defined under “ROC Tax Considerations.” You are a “U.S. Holder” if, for United States federal income tax purposes, you are:

a citizen or resident of the United States;

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or

an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. In addition, this summary is based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. This summary does not contain a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-U.S. tax laws (or other U.S. federal tax consequences, such as U.S. federal estate or gift tax consequences). In addition, it does not describe all of the U.S. federal income tax consequences that

Table of Contents

may be relevant in light of the U.S. Holder’s particular circumstances, including alternative minimum tax consequences and tax consequences applicable to U.S. Holders subject to special rules, such as:

dealers and traders in securities who use a mark-to-market method of accounting;

certain financial institutions;

tax-exempt entities, including “individual retirement accounts”;

entities classified as partnerships for U.S. federal income tax purposes;

persons holding ADSs or shares as part of a hedge, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the ADSs or shares;

persons that own or are deemed to own 10% or more of our voting stock;

persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

persons who acquired ADSs or shares pursuant to the exercise of any employee stock option or otherwise as compensation; or

persons holding shares in connection with a trade or business conducted outside of the United States.

If a partnership holds our ADSs or shares, the tax treatment of a partner will depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding ADSs or shares, you are urged to consult your tax advisor.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (“pre-release”), or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. holders. Accordingly, the analysis of the creditability of ROC taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions that may be taken by parties to whom the ADSs are pre-released.

For U.S. federal income tax purposes, the beneficial owner of an ADS will generally be treated as the owner of the shares underlying the ADS. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

You are urged to consult your tax advisor concerning the particular United States federal income tax consequences to you of the ownership and disposition of ADSs or shares, as well as the consequences to you arising under the laws of any other taxing jurisdiction.

This discussion assumes that we were not a passive foreign investment company for our 2009 taxable year, as discussed below.

Taxation of Dividends

Distributions you receive on your ADSs or shares, other than certain pro rata distributions of shares, including amounts withheld in respect of ROC withholding taxes, will generally be treated as dividend income to you to the extent the distributions are made from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, we expect that distributions will generally be reported to U.S. Holders as dividends. The amount of a dividend will include any amounts withheld by us or our paying agent in respect of ROC taxes (reduced by any credit against such withholding tax as a result of the 10% retained earnings tax previously paid by us). The amount will be treated as foreign source dividend income to you and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.

Table of Contents

Dividends paid in New Taiwan dollars will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your (or, in the case of ADSs, the depositary’s) receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss, which will be U.S. source, if you do not convert the amount of such dividend into U.S. dollars on the date of receipt.

Subject to limitations that may vary depending upon your circumstances and the concerns expressed by the U.S. Treasury described above, you may be entitled to a credit against your U.S. federal income taxes for the amount of ROC income taxes that are withheld from dividend distributions made to you. In determining the amounts withheld in respect of ROC taxes, any reduction of the amount withheld on account of the ROC credit in respect of the 10% retained earnings tax imposed on us is not considered a withholding tax. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing the foreign tax credit are complex. We therefore urge you to consult your own tax advisor regarding the availability of the foreign tax credit in your particular circumstances. Instead of claiming a credit, you may, at your election, deduct foreign taxes, including otherwise creditable ROC taxes, in computing your taxable income, subject to generally applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year.

Subject to applicable limitations that may vary depending upon a U.S. Holder’s individual circumstances and the concerns expressed by the U.S. Treasury described above, under current law, dividends paid to certain non-corporate U.S. Holders in taxable years beginning before January 1, 2011 will be taxable at a maximum U.S. Federal Income tax rate of 15% if the dividends constitute qualified dividend income. Dividends will constitute qualified dividend income provided that the stock or ADSs with respect to which such dividends are paid is readily tradable on an established securities market in the United States, such as the New York Stock Exchange where our ADSs are traded. U.S. Holders should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their particular circumstances.

It is possible that pro rata distributions of shares to all shareholders may be made in a manner that is not subject to U.S. federal income tax, but is subject to ROC withholding tax as discussed above under “ROC Tax Considerations—Dividends.” Such distribution will not give rise to U.S. federal income tax against which the ROC withholding tax imposed on these distributions may be credited. Holders should consult their tax advisors with respect to the creditability of any such ROC tax. The basis of any new ADSs or shares you receive as a result of a pro rata distribution of shares by us will be determined by allocating your basis in the old ADSs or shares between the old ADSs or shares and the new ADSs or shares received, based on their relative fair market values on the date of distribution.

Taxation of Capital Gains

For U.S. federal income tax purposes, when you sell or otherwise dispose of your ADSs or shares, you will recognize U.S. source capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized for the ADSs or shares and your adjusted tax basis in the ADSs or shares, determined in U.S. dollars. Any such gain or loss will be long-term capital gain or loss if you held the ADSs or shares for more than one year. Your ability to deduct capital losses is subject to limitations.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our 2009 taxable year. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, goodwill) from time to time, there can be no assurance that we will not be a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which you held ADSs or shares, certain adverse tax consequences could apply to you.

Table of Contents

If we were a PFIC for any taxable year during which you held ADSs or shares, gain recognized by you on a sale or other disposition (including certain pledges) of ADSs or shares would be allocated ratably over your holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Further, to the extent that any distribution received by you on your ADSs or shares exceeds 125% of the average of the annual distributions on ADSs or shares received by you during the preceding three years or your holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or shares. You should consult your tax advisor to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in your particular circumstances.

In addition, if we were a PFIC with respect to a particular U.S. Holder for the taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to certain non-corporate holders would not apply.

If you own ADSs or shares during any year in which the company is a PFIC, you must generally file an annual report with respect to the Company, generally with your federal income tax return for that year.

Information Reporting and Backup Withholding

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding unless (i) you are an exempt recipient or (ii) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.

The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

10.F. Dividends and Paying Agents

Not applicable.

10.G. Statement by Experts

Not applicable.

10.H. Documents on Display

It is possible to read and copy documents referred to in this annual report that have been filed with the SEC at the SEC’s public reference rooms in Washington, D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms.

10.I. Subsidiary Information

Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

Market risk is the risk of loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. We are exposed to various types of market risks, including changes in interest rates and foreign currency exchange rates, in the ordinary course of business.

Table of Contents

We use financial instruments, including variable rate debt and swap and foreign currency forward contracts, to finance our operations and to manage risks associated with our interest rate and foreign currency exposures, through a controlled program of risk management in accordance with established policies. We have used, and intend to continue to use, derivative financial instruments only for hedging purposes. These policies are reviewed and approved by our board of directors. Our treasury operations are subject to the review of our internal audit department, which review is submitted for our audit committee’s review on a quarterly basis.

As of December 31, 2009, we had U.S. dollar- and Japanese yen-denominated savings and checking accounts of US$331.4 million and JPY12,248.3 million, respectively. We also had certificates of deposit denominated in U.S. dollars and Japanese yen in the amount of US$705.3 million and JPY34,733.4 million, respectively. Since export sales are primarily conducted in U.S. dollars, we had U.S. dollar-denominated accounts receivable of US$1,681.0 million as of December 31, 2009, which represents 86.13% of the total accounts receivable balance at that date. We also had Japanese yen-denominated accounts receivable of JPY1,695.2 million attributable to our Japanese operations as of December 31, 2009, which represents 0.93% of the total accounts receivable balance at that date. In addition, we had U.S. dollar- and Japanese yen-denominated accounts payable of US$1,595.6 million and JPY68,947.4 million, respectively, relating to our overseas vendors.

Our primary market risk exposures relate to interest rate movements on borrowings and exchange rate movements on foreign currency-denominated accounts receivable and capital expenditures relating to equipment used in our manufacturing processes and purchased primarily from Japan. The fair value of forward exchange contracts has been determined by our internal evaluation model, and interest rate swaps has been determined by obtaining from our bankers the estimated amount that would be received/(paid) to terminate the contracts.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We incur debt obligations primarily to support general corporate purposes, including capital expenditures and working capital needs. We use interest rate swaps to modify our exposure to interest rate movements and reduce borrowing costs. Interest rate swaps limit the risks of fluctuating interest rates by allowing us to convert a portion of the interest on our borrowings from a variable rate to a fixed rate.

As of December 31, 2009, we had 123 outstanding interest rate swap agreements with 18 major international financial institutions, having a total notional principal amount of NT$38,888.9 million.

The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps, debt obligations and certain assets. For debt obligations, the table sets forth principal cash flows and related weighted average interest rates by expected maturity date. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under a contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date and management’s expectations for future interest rates. The information is presented in the currencies in which the instruments are denominated.

	Expected Maturity Date
	2010			2011		2012		2013		2014		Thereafter		Total			Fair Value at December 31, 2009
	(in thousands)
Assets
Certificates of Deposit:
Fixed rate (US$)		705,334			—		—		—		—		—		705,334			705,334
Average interest rate		0.326	%		—		—		—		—		—		0.326	%		0.326	%
Fixed rate (NT$)		11,311,245			—		—		—		—		—		11,311,245			11,311,245
Average interest rate		0.218	%		—		—		—		—		—		0.218	%		0.218	%
Fixed rate (JPY)		34,733,352			—		—		—		—		—		34,733,352			34,733,352
Average interest rate		0.228	%		—		—		—		—		—		0.228	%		0.228	%
Fixed rate (CNY)		1,454,120			—		—		—		—		—		1,454,120			1,454,120
Average interest rate		1.360	%		—		—		—		—		—		1.360	%		1.360	%

Table of Contents

	Expected Maturity Date
	2010			2011			2012			2013			2014			Thereafter			Total			Fair Value at December 31, 2009
	(in thousands)
Fixed rate (CZK)		30,000			—			—			—			—			—			30,000			30,000
Average interest rate		0.800	%		—			—			—			—			—			0.800	%		0.800	%
Fixed rate (EUR)		31,300			—			—			—			—			—			31,300			31,300
Average interest rate		0.388	%		—			—			—			—			—			0.388	%		0.388	%
Liabilities Bonds:
Secured (NT$)		5,500,000			6,000,000			3,500,000			—			—			—			15,000,000			15,389,103
Fixed rate		2.403	%		2.649	%		2.900	%		—			—			—			2.549	%		—
Unsecured (NT$)		115,508			98,268			56,892			—			—			—			270,668			270,668
Fixed rate		0.987	%		0.980	%		0.983	%		—			—			—			0.984	%		—
Secured Long-term Loans:
Fixed rate (NT$)		676,363			203,432			113,784			16,550			—			—			1,010,129			1,013,046
Average interest rate		2.471	%		2.197	%		2.023	%		1.730	%		—			—			1.930	%		—
Variable rate (NT$)		37,861,563			42,228,264			32,204,864			25,043,559			16,978,872			6,634,827			160,951,949			—
Average interest rate(1)		2.512	%		3.020	%		3.274	%		3.488	%		3.618	%		3.603	%		2.974	%		—
Interest Rate Swaps (2)
Variable to fixed (NT$)		1,000,000			15,555,556			10,333,333			—			12,000,000			—			38,888,889			(511,884	)
Pay rate		2.040	%		2.046	%		2.484	%		—			1.385	%		—			1.958	%		—

(1) The weighted average interest rate of the NT$-denominated loan.

(2) 90 days Taipei Money Market Secondary middle rate settled quarterly (0.5% on December 31, 2009).

Foreign Currency Risk

The primary foreign currencies to which we are exposed are the Japanese yen and the U.S. dollar. We enter into short-term forward exchange contracts to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities, and firm commitments for the purchase of raw materials and components and capital expenditures denominated in U.S. dollars and Japanese Yen. The purpose of entering into these hedges is to minimize the impact of foreign currency fluctuations on the results of operations. Gains and losses on foreign currency contracts and foreign currency denominated assets and liabilities are accrued in the period of the exchange rate changes on a monthly basis. The contracts have maturity dates that do not exceed three months.

The table below sets forth our outstanding foreign currency forward contracts as of December 31, 2009:

	(in thousands)

Contracts to sell US$/Buy NT$:
Aggregate contract amount	US$342,000
Average contractual exchange rate	NT$32.25 per US$
Contracts to sell EUR/Buy NT$:
Aggregate contract amount	EUR177,000
Average contractual exchange rate	NT$47.52 per EUR$
Contracts to sell NT$/Buy JPY:
Aggregate contract amount	NT$3,439,837
Average contractual exchange rate	JPY2.83 per NT$
Contracts to sell US$/Buy JPY:
Aggregate contract amount	US$646,500
Average contractual exchange rate	JPY89.48 per US$
Contracts to sell US$/Buy CNY:
Aggregate contract amount	US$11,000
Average contractual exchange rate	CNY6.83 per US$
Contracts to sell CNY/Buy US$:
Aggregate contract amount	CNY150,200
Average contractual exchange rate	US$0.15 per CNY

Contracts to sell JPY/Buy US$:
Aggregate contract amount	JPY1,243,225
Average contractual exchange rate	US$0.01 per JPY
Fair value of all forward contracts(1)	NT$(555,037)

(1)	Fair value represents the amount of the receivable from or payable to the counter-parties if the contracts were terminated on the balance sheet date.

Table of Contents

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

12.A. Debt Securities.

Not applicable.

12.B. Warrants and Rights.

Not applicable

12.C. Other Securities.

Not applicable

12.D. American Depositary Shares.

Depositary Fees and Charges

Under the terms of the deposit agreement dated May 29, 2002 among Citibank, N.A., as depositary, holders and beneficial owners of ADSs and us, which was filed as an exhibit to our annual report on Form 20-F on June 30, 2003 and its amendment dated February 15, 2006, which was filed as an exhibit to our annual report on Form 20-F on June 29, 2007 (collectively, the “Deposit Agreement”) for our ADSs, an ADS holder may have to pay the following service fees to the depositary bank:

Service		Fees
(1) Issuance of ADSs		Up to US$5 per 100 ADSs (or fraction thereof) issued
(2) Cancellation of ADSs		Up to US$5 per 100 ADSs (or fraction thereof) surrendered
(3) Distribution of (a) cash dividends or (b) ADSs pursuant to stock dividends (or other free distribution of stock)		No fee, so long as prohibited by the exchange upon which the ADSs are listed. If the charging of such fee is not prohibited, the fees specified in (1) above shall be payable in respect of a distribution of ADSs pursuant to stock dividends (or other free distribution of stock) and the fees specified in (4) below shall be payable in respect of distributions of cash.
(4) Distribution of cash proceeds (i.e., upon sale of rights and other entitlements)		Up to US$2 per 100 ADSs (or fraction thereof) held
(5) Distribution of ADSs pursuant to exercise of rights to purchase additional ADSs		Up to US$5 per 100 ADSs (or fraction thereof) issued

An ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:

taxes (including applicable interest and penalties) and other governmental charges;

Table of Contents

such registration fees as may from time to time be in effect for the registration of ADSs on the share register and applicable to transfers of ADSs to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;

such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing ADSs or holders and beneficial owners of ADSs;

the expenses and charges incurred by the depositary in the conversion of foreign currency;

such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to ADSs; and

the fees and expenses incurred by the depositary in connection with the delivery of ADSs.

Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly-issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these transaction fees to their clients.

Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividends, rights offerings), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or un-certificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts via the central clearing and settlement system, The Depository Trust Company (“DTC”), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.

In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set-off the amount of the depositary fees from any distribution to be made to the ADS holder.

Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary bank. You will receive prior notice of such changes.

Payment received by us

In 2009, we received the following payments from Citibank, N.A, the Depositary Bank for our ADR program:

Reimbursement of proxy process expenses:	US$	94,566.8
Reimbursement of ADS holders identification expenses:	US$	28,457.7
Contributions towards our investor relations efforts (i.e., non-deal road shows/investor conferences and investor relationship agency fees):	US$	1,536,610.1
Total payment received by us:	US$	1,659,634.6

Table of Contents

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report, have concluded that based on the evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with ROC GAAP and US GAAP.

Our internal control over financial reporting includes those policies and procedures that:

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with ROC GAAP and US GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, our management believes that our internal control over financial reporting was effective as of December 31, 2009.

Table of Contents

We acquired M. Setek on September 1, 2009. Our management excluded from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009 M. Setek’s internal control over financial reporting associated with total assets of NT$42,528 million as of December 31, 2009 and total revenues of NT$2,143 million from the acquired date to December 31, 2009.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by KPMG, an independent registered public accounting firm, as stated in their report which is included below.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AU Optronics Corp.:

We have audited AU Optronics Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AU Optronics Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, AU Optronics Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

AU Optronics Corp. acquired M. Setek during 2009, and management excluded from its assessment of the effectiveness of AU Optronics Corp.’s internal control over financial reporting as of December 31, 2009, M. Setek’s internal control over financial reporting associated with total assets of NT$42,528 million as of December 31, 2009, and total revenues of NT$2,143 million from the acquired date to December 31, 2009. Our audit of internal control over financial reporting of AU Optronics Corp. also excluded an evaluation of the internal control over financial reporting of M. Setek.

Table of Contents

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AU Optronics Corp. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated April 30, 2010 expressed an unqualified opinion on those consolidated financial statements.

KPMG

Hsinchu, Taiwan (Republic of China)

April 30, 2010

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Vivien Huey-Juan Hsieh is an audit committee financial expert and is independent within the meaning of this Item 16A.

ITEM 16B. CODE OF ETHICS

Our employee handbook, which applies to all officers and employees, contains provisions covering conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets and encouraging the reporting of any illegal or unethical behavior. Although, we have not adopted a written code of ethics specifically for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, the provisions in our employee handbook cover these individuals and there have not been any waivers of the provisions of the employee handbook for any officers or employees. Ethical oversight and actual or apparent conflicts of interest have historically been handled informally by senior management and the board of directors. We will continue to address violations of the code of business conduct and ethics contained in our employee handbook and will continue to consider a separate code of ethics with the board of directors should the need arise. We will provide a copy of our employee handbook without charge upon written request to:

AU Optronics Corp.

Finance Department

1 Li-Hsin Road 2

Hsinchu Science Park

Hsinchu, Taiwan

Republic of China

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Policy on Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

Our audit committee is responsible for the oversight of KPMG’s work. The policy of our audit committee is to pre-approve all audit and non-audit services provided by KPMG, including audit services, audit-related services, tax services and other services, as described below. The audit committee sets forth its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and setting forth a specific budget for such services. In urgent circumstances, the audit committee’s chairman may issue such a pre-approval. Additional services may be pre-approved on an individual basis. KPMG and our management then report to the audit

Table of Contents

committee on a quarterly basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees for the services performed.

Auditor Fees

The following are fees for professional services to KPMG for the years ended December 31, 2008 and 2009.

	Year ended December 31,
Services	2008		2009
	NT$		NT$
	(in thousands)
Audit Fees(1)		50,300		58,950
Tax Fees(2)		—		—
Other Fees (3)		—		7,800
Total		50,300		66,750

(1)

Audit Fees. This category includes the audit of our financial statements, review of quarterly financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years, and service related to the audit of the effectiveness of our internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of quarterly financial statements and statutory audits required by non-US jurisdictions, including statutory audits required by the Tax Bureau of the ROC, Customs Bureau of the ROC and Financial Supervisory Commission of the ROC. This category also includes assistance with and review of documents filed with the SEC.

(2)	Tax Fees. This category consists of professional services for tax compliance.

(3)	Other Fees. This category consists of professional services for IFRS adoption.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

Neither we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Our corporate governance practices are governed by applicable ROC law and our articles of incorporation. Also, because our shares are registered with the SEC and are listed on the New York Stock Exchange (“NYSE”), we are subject to corporate governance requirements applicable to NYSE-listed foreign private issuers.

Under Section 303A of the NYSE Listed Company Manual, NYSE-listed non-US companies may, in general, follow their home country corporate governance practices in lieu of most of the new NYSE corporate governance requirements. However, all NYSE-listed foreign private issuers must comply with NYSE Sections 303A.06, 303A.11, 303A.12(b) and 303A.12(c).

Item 16G as well as NYSE Section 303A.11 requires that foreign private issuers disclose any significant ways in which their corporate governance practices differ from US companies under NYSE listing standards. A NYSE-listed foreign private issuer is required to provide to its US investors, a brief, general summary of the significant differences, either: (a) on the company website in English, or (b) in its annual report distributed to its US investors. To comply with NYSE Section 303A.11, we have prepared the comparison in the table below.

Table of Contents

The most relevant differences between our corporate governance practices and NYSE standards for listed companies are as follows:

NYSE Standards for US Listed Companies under Listed Company Manual Section 303A	Our Corporate Governance Practices
NYSE Section 303A.01 requires a NYSE-listed company to have a majority of independent directors on its board of directors.	ROC law does not require a public company to have a majority of independent directors on its board of directors. ROC law requires public companies meeting certain criteria to have two independent directors but no less than one-fifth of the total number of our directors. We have three independent directors on our nine-member board of directors.
NYSE Section 303A.02 establishes general standards to evaluate directors’ independence (no director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship with the listed company either directly or as a partner, shareholder or officer of an organization that has a relationship with the listed company).	Our standards for determining director independence, which comply with ROC requirements for directors independence, may differ from the standards imposed by the NYSE. The independence standards of our directors are disclosed in our ROC annual report. Our board of directors have affirmatively determined that our three independent directors have no material relationship with us.
NYSE Section 303A.03 requires non-management directors to meet at regularly scheduled executive meetings that are not attended by management.	ROC law does not contain such a requirement, and our non-management directors do not meet at regularly scheduled executive sessions without management.
NYSE Section 303A.04 requires listed companies to have a nominating/corporate governance committee comprised entirely of independent directors which committee shall have a written charter establishing certain minimum responsibilities as set forth in NYSE Section 303A.04(b)(i) and providing for an annual evaluation of the committee’s performance.	ROC law does not contain such a requirement, and we do not have a nominating/corporate governance committee.
NYSE Section 303A.05 requires listed companies to have a compensation committee comprised entirely of independent directors, which committee shall have a written charter to establish certain minimum responsibilities as set forth in NYSE Section 303A.05(b)(i) and to provide for an annual evaluation of the committee’s performance.	We are not required by ROC regulations to have a compensation committee and we do not have a compensation committee. However, the ROC Company Law requires that the measures by which director compensation are determined either be set forth in the company's articles of incorporation or be approved at a shareholders’ meeting.
NYSE Section 303A.06 requires listed companies to have an audit committee that satisfies the	We have an audit committee that substantially conforms with the requirements of Rule 10A-3

100

Table of Contents

NYSE Standards for US Listed Companies under Listed Company Manual Section 303A	Our Corporate Governance Practices
requirements of Rule 10A-3 under the Exchange Act.	under the Exchange Act.
NYSE Section 303A.07(a) requires an audit committee to consist of at least three board members, all of whom must be independent under NYSE Section 303A.02 and be financially literate or must acquire such financial knowledge within a reasonable period.	Our audit committee is composed of our three independent directors, each of whom complies with the independence requirements of NYSE Section 303A.02 and each member of our Audit Committee meets all applicable financial literacy requirements.
NYSE Section 303A.07(b) requires an audit committee to have a written charter establishing the duties and responsibilities of its members, including the duties and responsibilities required, at a minimum, by Section 10A-3(b)(1) of the Exchange Act.	Our audit committee has a written charter that is substantially similar to the requirements of NYSE Section 303A.07(b).
NYSE Section 303A.07(c) requires each company to have an internal audit function that provides to the management and to the audit committee regular assessments on the company’s risk management processes and internal control system.	Our internal audit function complies with the requirements of NYSE Section 303A.07(c).
NYSE Section 303A.08 requires each company to give to shareholders the opportunity to vote on all equity based compensation plans and material revisions thereto with certain exceptions.	Under ROC law, shareholders approval is required for the distribution of employee bonuses, while the board of directors has authority to approve employee stock option plans and to grant options to employees pursuant to such plans, subject to the approval of the FSC, Executive Yuan, ROC, and to approve share buy-back programs and the transfer of shares to employees under such programs.
NYSE Section 303A.09 requires public companies to adopt and disclose corporate governance guidelines, including several issues for which such reporting is mandatory, and to include such information on the company’s website (which website should also include the charters of the audit committee, the nominating committee, and the compensation committee.)	We currently comply with ROC non-binding corporate governance principles promulgated by the Taiwan Stock Exchange, and we provide an explanation of differences between our practice and the principles, if any, in our ROC annual report.
NYSE Section 303A.10 provides for the adoption of a code of business conduct and ethics and sets out the topics that such code must contain.	ROC law does not contain such a requirement. But our employee handbook, which applies to all officers and employees, contains provisions covering conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets and encouraging the reporting of any illegal or unethical behavior. Although, we have not adopted a written

101

Table of Contents

NYSE Standards for US Listed Companies under Listed Company Manual Section 303A	Our Corporate Governance Practices
	code of ethics specifically for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, we believe that the provisions in our employee handbook cover these individuals and there have not been any waivers of the provisions of the employee handbook for any officers or employees. Ethical oversight and actual or apparent conflicts of interest have historically been handled informally by senior management, the board of directors and supervisors. We will continue to address violations of the code of business conduct and ethics contained in our employee handbook and will continue to consider a separate code of ethics with the board of directors should the need arise.
NYSE Section 303A.12(a) requires the CEO, on a yearly basis, to certify to the NYSE that he or she knows of no violation by the company of NYSE rules relating to corporate governance.	ROC law does not contain such a requirement. But, in order to comply with relevant SEC regulations, our CEO is required to certify in our 20-F annual report that, to his or her knowledge the information contained therein fairly represents in all material respects the financial condition and results of our operation.
NYSE Section 303A.12(b) requires the CEO to notify the NYSE in writing whenever any executive officer of the company becomes aware of any substantial non-fulfillment of any applicable provision under NYSE Section 303A.	ROC law does not contain such requirement. But, in order to be consistent with the corporate governance principles established under the Sarbanes-Oxley Act of 2002, our CEO complies with the notice provision as set forth under NYSE Section 303A.12(b).
NYSE Section 303A.12(c) requires each listed company to submit an executed Written Affirmation annually to the NYSE and Interim Written Affirmation each time a change occurs in the board or any of the committees subject to Section 303A.	ROC law does not contain such requirement. But, in order to comply with the corporate governance principles established under the Sarbanes-Oxley Act of 2002, we will comply with NYSE Section 303A.12(c).

102

Table of Contents

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide financial statements for fiscal year 2009 and the related information pursuant to Item 18.

ITEM 18. FINANCIAL STATEMENTS

Our consolidated financial statements and the report thereon by our independent registered public accounting firm listed below are included herein as follows:

(a)

Report of Independent Registered Public Accounting Firm.

(b)

Consolidated Balance Sheets of AU Optronics Corp. and subsidiaries as of December 31, 2008 and 2009.

(c)

Consolidated Statements of Operations of AU Optronics Corp. and subsidiaries for the years ended December 31, 2007, 2008 and 2009.

(d)

Consolidated Statements of Stockholders’ Equity of AU Optronics Corp. and subsidiaries for the years ended December 31, 2007, 2008 and 2009.

(e)

Consolidated Statements of Cash Flows of AU Optronics Corp. and subsidiaries for the years ended December 31, 2007, 2008 and 2009.

(f)

Notes to Consolidated Financial Statements of AU Optronics Corp. and subsidiaries.

ITEM 19. EXHIBITS

1.1	Articles of Incorporation (English translation).

2.1	Deposit Agreement, dated May 29, 2002, among AU Optronics Corp., Citibank, N.A. as depositary, and Holders and Beneficial Owners of American depositary shares evidenced by American depositary receipts issued thereunder, including the form of American depositary receipt (incorporated herein by reference to Exhibit 2(A) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

2.2	Amendment No. 1 to the Deposit Agreement, dated February 15, 2006, among AU Optronics Corp., Citibank, N.A. as depositary, and Holders and Beneficial Owners of American depositary shares evidenced by American depositary receipts issued thereunder, including the amended form of American depositary receipt (incorporated herein by reference to Exhibit 2.2 to our annual report on Form 20-F as filed with the Commission on June 29, 2007).

4.1	Patent and Technology License Agreement by and between FDTC and AU Optronics Corp., for TFT-LCD technologies, dated March 31, 2003 (incorporated herein by reference to Exhibit 4(g) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.2	Stock Purchase Agreement by and among FDTC, Fujitsu and AU Optronics Corp., for purchase certain amount of stocks of FDTC, dated March 25, 2003 (incorporated herein by reference to Exhibit 4(i) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.3	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, No. 76-6 Small Section, Hsinchu, Taiwan, Republic of China, with respect to part of the site of our previous L1 fab (incorporated herein by reference to Exhibit 4(j) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.4	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, No. 77 Small Section, Hsinchu, Taiwan, Republic of China, with respect to part of the site of L1 fab (incorporated herein by reference to Exhibit 4(k) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.5	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Nos. 255-46 Gin-Shan Section, Hsinchu, Taiwan, Republic of China, the site of one of our 3.5-generation fabs (incorporated herein by reference to Exhibit 4(l) to ours annual report on Form 20-F as filed with the Commission on June 30, 2003).

103

Table of Contents

4.6	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Nos. 114-4 Gin-Shan Section, Hsin-Chu, Taiwan, Republic of China, the site of one of our 3.5-generation fabs (incorporated herein by reference to Exhibit 4(m) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.7	Lease Agreement with Hsinchu Science Park Administration in relation to government-owned land located at Hsinchu Science Park, Nos. 472 etc., Gin-Shan Section, Hsinchu, Taiwan, Republic of China, the site of one of our 3.5-generation fabs (incorporated herein by reference to Exhibit 4(n) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.8	Lease Agreement by and between Acer Display Technology, Inc. and Min-Tour Inc. for No. 1 Xinhe Road Aspire Park, 325 Lungtan, Taoyuan, Taiwan, Republic of China, the site of our fourth-generation fab and module-assembly plant (in Chinese, with English summary translation) (incorporated herein by reference to Exhibit 10.12 to our Registration Statement on Form F-1 (Registration No. 333-87418) as filed with Commission on May 1, 2002).

4.9	Lease Agreement by and between AU Optronics Corp. and UMC for No. 1, Gin-Shan Section 7 of Hsinchu Science Park, Hsinchu, Taiwan, Republic of China, the site of one of our fourth-generation fab module-assembly plant (in Chinese, with English summary translation) (incorporated herein by reference to Exhibit 10.13 to our Registration Statement on Form F-1 (Registration No. 333-87418) as filed with the Commission on May 1, 2002).

4.10	Lease Agreement by and between AU Optronics (Suzhou) Corp. and Chinese-Singapore Suzhou Industrial Park Development Co., Ltd. for No. 398, Suhong Zhong Road, Suzhou Industrial Park, Suzhou, The People’s Republic of China, the site of two of our module-assembly plants (incorporated herein by reference to Exhibit 4(q) to our annual report on Form 20-F as filed with the Commission on June 30, 2003).

4.11	Merger Agreement, dated April 7, 2006, between AU Optronics Corp. and Quanta Display Inc. (incorporated herein by reference to Item 1 of our Form 6-K as filed with the Commission on May 12, 2006).

4.12	Quanta Display Inc. 2002 Employee Stock Option Plan (English translation) (incorporated herein by reference to Exhibit 4.13 to our annual report on Form 20-F as filed with the Commission on June 29, 2007).

4.13	Quanta Display Inc. 2003 Employee Stock Option Plan (English translation) (incorporated herein by reference to Exhibit 4.14 to our annual report on Form 20-F as filed with the Commission on June 29, 2007).

8.1	List of Subsidiaries.

12.1	Certification of Lai-Juh (L.J.) Chen, Chief Executive Officer of AU Optronics Corp., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included on the signature page hereto).

12.2	Certification of Andy Yang, Chief Financial Officer of AU Optronics Corp., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included on the signature page hereto).

13.1	Certification of Lai-Juh (L.J.) Chen, Chief Executive Officer of AU Optronics Corp., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2	Certification of Andy Yang, Chief Financial Officer of AU Optronics Corp., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

104

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

AU OPTRONICS CORP.


By:	/s/ LAI-JUH (L.J.) CHEN
	Name:	Lai-Juh (L.J.) Chen
	Title:	Chief Executive Officer

Date: May 11, 2010

105

Table of Contents

Certification

I, Lai-Juh (L.J.) Chen, the Chief Executive Officer of AU Optronics Corp., or the registrant, certify that:

1.	I have reviewed this annual report on Form 20-F of AU Optronics Corp.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.	The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: May 11, 2010

By:	/s/ LAI-JUH (L.J.) CHEN
	Name:	Lai-Juh (L.J.) Chen
	Title:	Chief Executive Officer

106

Table of Contents

Certification

I, Andy Yang, the Chief Financial Officer of AU Optronics Corp., or the registrant, certify that:

1.	I have reviewed this annual report on Form 20-F of AU Optronics Corp.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: May 11, 2010

By:	/s/ ANDY YANG
	Name:	Andy Yang
	Title:	Chief Financial Officer

107

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements of AU Optronics Corp. and Subsidiaries
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets	F-2
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-9
Notes to Consolidated Financial Statements	F-11

Table of Contents

AU OPTRONICS CORP.

AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2007, 2008 and 2009

(With Report of Independent Registered Public Accounting Firm)

Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

AU Optronics Corp.:

We have audited the accompanying consolidated balance sheets of AU Optronics Corp. and subsidiaries (the “Company”) as of December 31, 2008 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AU Optronics Corp. and subsidiaries as of December 31, 2008 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the Republic of China.

As further described in note 2(zc) to the consolidated financial statements, the Company adopted, effective January 1, 2008, Republic of China Statement of Financial Accounting Standards (“ROC SFAS”) No. 10, “Inventories,” as amended, ROC SFAS No. 39, “Share-based Payment,” and Accounting Research and Development Foundation Interpretation No. 2007-052 on the accounting for employee bonuses and remuneration to directors and supervisors.

The consolidated financial statements as of and for the year ended December 31, 2009, have been translated into United States dollars solely for the convenience of the readers. We have audited the translation, and in our opinion, the consolidated financial statements expressed in New Taiwan dollars have been translated into United States dollars on the basis set forth in note 2(za) to the consolidated financial statements.

Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 28 to the consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AU Optronics Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 30, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG

Hsinchu, Taiwan (Republic of China)

April 30, 2010

F-1

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2008 and 2009

(Expressed in thousands of New Taiwan dollars and US dollars)

	2008			2009
	NT$			NT$			US$
Assets
Current assets:
Cash and cash equivalents (note 3)		83,434,697			85,443,311			2,674,282
Notes receivable and accounts receivable, net (note 7)		22,225,324			57,025,944			1,784,850
Receivables from related parties, net (note 23)		1,673,753			5,319,556			166,496
Other current financial assets (note 7)		3,082,294			1,867,294			58,444
Inventories, net (notes 8 and 24)		23,610,687			39,229,916			1,227,853
Prepayments and other current assets (notes 9 and 25)		5,348,063			1,280,206			40,069
Equity investments held-for-sale (note 9)		-			707,175			22,134
Deferred tax assets (note 20)		5,380,440			5,199,265			162,731
Financial assets measured at fair value—current (note 6)		1,067,531			388,129			12,148
Available-for-sale financial assets—current (note 4)		470,301			-			-
Total current assets		146,293,090			196,460,796			6,149,007
Long-term investments:
Equity-method investments (note 10)		6,651,601			9,706,574			303,805
Available-for-sale financial assets—noncurrent (notes 4 and 24)		595,750			2,012,265			62,982
Hedging derivative financial assets—noncurrent (note 6)		5,398			3,829			120
Financial assets carried at cost (note 5)		583,197			484,009			15,149
Total long-term investments		7,835,946			12,206,677			382,056
Property, plant and equipment (notes 11, 23 and 24):
Land		6,273,615			7,780,680			243,527
Buildings		73,598,148			90,379,997			2,828,795
Machinery and equipment		513,629,547			621,880,340			19,464,173
Other equipment		25,143,816			29,729,246			930,493
		618,645,126			749,770,263			23,466,988
Less: accumulated depreciation		(301,831,632	)		(395,405,471	)		(12,375,758	)
Construction in progress		12,312,856			9,773,502			305,900
Prepayments for purchases of land and equipment		60,221,909			26,611,776			832,919
Net property, plant and equipment		389,348,259			390,750,070			12,230,049
Intangible assets:
Goodwill (note 12)		11,280,595			11,464,947			358,840
Deferred pension cost (note 17)		9,509			-			-
Core technologies (note 12)		918,925			-			-
Technology-related fees (notes 12 and 25)		3,339,120			2,828,307			88,523
Total intangible assets		15,548,149			14,293,254			447,363
Other assets:
Idle assets, net (note 11)		2,612,320			1,797,158			56,249
Deferred charges		2,815,010			2,765,980			86,572
Deferred tax assets (note 20)		2,005,382			3,053,319			95,566
Others (notes 17 and 24)		477,482			1,285,504			40,235
Total other assets		7,910,194			8,901,961			278,622
Total Assets		566,935,638			622,612,758			19,487,097

See accompanying notes to consolidated financial statements.

F-2

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

December 31, 2008 and 2009

(Expressed in thousands of New Taiwan dollars and US dollars, except for par value)

	2008			2009
	NT$			NT$		US$
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings (note 13)		4,857,260			1,945,227		60,883
Notes payable and accounts payable		45,929,222			69,779,706		2,184,028
Payables to related parties (note 23)		12,249,003			22,750,778		712,074
Accrued expenses and other current liabilities (note 18)		24,471,869			36,528,777		1,143,311
Financial liabilities measured at fair value—current (note 6)		28,831			1,087,827		34,048
Equipment and construction in progress payable		21,363,213			23,788,714		744,561
Current installments of long-term borrowings (notes 16 and 24)		30,491,872			38,537,926		1,206,195
Current installments of bonds payable (notes 14, 15 and 24)		13,093,382			8,306,408		259,981
Total current liabilities		152,484,652			202,725,363		6,345,081
Long-term liabilities:
Financial liabilities measured at fair value—noncurrent (note 6)		40,711			10,450		327
Bonds payable, excluding current installments (notes 14 and 24)		15,000,000			9,655,160		302,196
Convertible bonds payable, excluding current installments (note 15)		2,690,900			-		-
Long-term borrowings, excluding current installments (notes 16 and 24)		96,650,642			123,424,152		3,863,041
Hedging derivative financial liabilities—noncurrent (note 6)		788,678			505,372		15,818
Long-term payables and capital lease liabilities—excluding current installments (notes 18 and 23)		-			1,611,653		50,443
Unearned revenue (note 25)		-			9,622,370		301,170
Total long-term liabilities		115,170,931			144,829,157		4,532,995
Other liabilities (note 17)		21,319			139,246		4,358
Total liabilities		267,676,902			347,693,766		10,882,434
Stockholders’ equity (notes 4, 10 and 19):
Capital stock:
Common stock, NT$10 par value		85,057,196			88,270,455		2,762,768
Capital surplus		113,651,334			114,972,148		3,598,502
Retained earnings:
Legal reserve		13,079,368			15,206,106		475,934
Unappropriated retained earnings		76,912,630			40,863,051		1,278,969
		89,991,998			56,069,157		1,754,903
Others: Cumulative translation adjustments		2,330,858			1,685,733		52,762
Minimum pension liability		(40,252	)		-		-
Unrealized gains (losses) on financial instruments		(932,163	)		1,089,644		34,105
		1,358,443			2,775,377		86,867
		290,058,971			262,087,137		8,203,040
Minority interests		9,199,765			12,831,855		401,623
Total stockholders’ equity		299,258,736			274,918,992		8,604,663
Commitments and contingent liabilities (note 25)
Total Liabilities and Stockholders’ Equity		566,935,638			622,612,758		19,487,097

See accompanying notes to consolidated financial statements.

F-3

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars and US dollars, except for per share data)

	2007			2008			2009
	NT$			NT$			NT$			US$

Net sales (note 23)		480,183,626			423,928,193			359,331,345			11,246,677
Cost of goods sold (note 23)		394,005,401			368,600,330			352,290,469			11,026,306
Gross profit		86,178,225			55,327,863			7,040,876			220,371
Operating expenses (note 23):
Selling		11,600,525			8,992,831			8,000,028			250,392
General and administrative		5,432,426			7,907,578			8,094,414			253,346
Research and development		5,870,518			5,335,196			6,185,485			193,599
		22,903,469			22,235,605			22,279,927			697,337
Operating income (loss)		63,274,756			33,092,258			(15,239,051	)		(476,966	)
Non-operating income and gains:
Interest income		1,693,005			1,845,712			265,975			8,325
Investment gains recognized by equity method, net		201,155			-			139,635			4,370
Foreign currency exchange gains, net		-			-			236,909			7,415
Gains on valuation of financial instruments (note 6)		1,396,372			3,902,317			813,152			25,451
Other income (note 23)		987,020			1,709,071			1,953,635			61,147
		4,277,552			7,457,100			3,409,306			106,708
Non-operating expenses and losses:
Interest expenses		6,150,817			4,203,946			3,446,588			107,874
Investment losses recognized by equity method, net		-			313,621			-			-
Foreign currency exchange losses, net		1,271,735			4,994,189			-			-
Depreciation of idle assets		811,355			654,639			1,102,132			34,496
Asset impairment losses (notes 4, 5, 9 and 11)		547,240			1,394,297			1,192,807			37,334
Provisions for potential litigation losses and others (notes 23 and 25)		207,317			2,717,755			9,696,129			303,478
		8,988,464			14,278,447			15,437,656			483,182
Earnings (loss) before income taxes		58,563,844			26,270,911			(27,267,401	)		(853,440	)
Income tax (expense) benefit (note 20)		(2,087,910	)		(4,629,066	)		22,587			707
Net income (loss)		56,475,934			21,641,845			(27,244,814	)		(852,733	)
Attributable to:
Equity holders of the parent company		56,417,766			21,267,386			(26,769,335	)		(837,851	)
Minority interest		58,168			374,459			(475,479	)		(14,882	)
Net income (loss)		56,475,934			21,641,845			(27,244,814	)		(852,733	)

See accompanying notes to consolidated financial statements.

F-4

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Operations (continued)

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars and US dollars, except for per share data)

	2007		2008		2009
	NT$		NT$		NT$			US$

Earnings (loss) per share—Basic (note 21):
Basic (L)EPS—net income (loss)		7.22		2.50		(3.04	)		(0.10	)
Basic EPS—retroactively adjusted		6.49		2.43

Earnings (loss) per share—Diluted (note 21):
Diluted (L)EPS—net income (loss)		6.86		2.41		(3.04	)		(0.10	)
Diluted EPS—retroactively adjusted		6.16		2.34

See accompanying notes to consolidated financial statements.

F-5

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars, US dollars and shares)

	Capital stock								Retained earnings								Others
	Number of shares		Amount		Capital in advance		Capital surplus		Legal reserve		Special reserve			Unappropriated retained earnings			Cumulative translation adjustments		Unrealized gains (losses) on financial instruments			Minority interests		Total

Balance at January 1, 2007		7,573,403		75,734,028		-		110,675,618		6,527,244		201,809			37,262,566			305,857		27,182			342,014		231,076,318
Appropriation for legal reserve		-		-		-		-		910,347		-			(910,347	)		-		-			-		-
Capitalization of employee stock bonus		57,352		573,519		-		-		-		-			(573,519	)		-		-			-		-
Employees’ profit sharing—cash		-		-		-		-		-		-			(245,793	)		-		-			-		(245,793	)
Remuneration to directors and supervisors		-		-		-		-		-		-			(30,500	)		-		-			-		(30,500	)
Cash dividends		-		-		-		-		-		-			(1,514,793	)		-		-			-		(1,514,793	)
Stock dividends to shareholders		151,479		1,514,793		-		-		-		-			(1,514,793	)		-		-			-		-
Reversal of special reserve		-		-		-		-		-		(201,809	)		201,809			-		-			-		-
Issuance of stock for conversion of bonds		34,104		341,037		460,668		2,901,626		-		-			-			-		-			-		3,703,331
Deferred compensation cost for employee stock options		-		-		-		3,890		-		-			-			-		-			-		3,890
Issuance of stock for employee stock option exercised		1,368		13,678		14,283		98,530		-		-			-			-		-			-		126,491
Adjustments to capital surplus and unrealized gains (losses) on financial instruments for changes in investees’ equity		-		-		-		128,503		-		-			-			-		(11,291	)		-		117,212
Net income		-		-		-		-		-		-			56,417,766			-		-			-		56,417,766
Minority interests in net income of subsidiaries		-		-		-		-		-		-			-			-		-			58,168		58,168
Unrealized gains on available-for-sale financial assets, net		-		-		-		-		-		-			-			-		1,326,391			-		1,326,391
Unrealized gains on cash flow hedges, net		-		-		-		-		-		-			-			-		396,472			-		396,472
Foreign currency translation adjustments		-		-		-		-		-		-			-			744,194		-			-		744,194
Adjustments for changes in minority interests		-		-		-		-		-		-			-			-		-			8,640,718		8,640,718
Balance at December 31, 2007		7,817,706		78,177,055		474,951		113,808,167		7,437,591		-			89,092,396			1,050,051		1,738,754			9,040,900		300,819,865

See accompanying notes to consolidated financial statements.

F-6

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (continued)

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars, US dollars and shares)

	Capital stock										Retained earnings					Others
	Number of shares		Amount		Capital in advance			Capital surplus			Legal reserve		Unappropriated retained earnings			Cumulative translation adjustments		Minimum pension liability			Unrealized gains (losses) on financial instruments			Minority interests			Total

Balance at January 1, 2008		7,817,706		78,177,055		474,951			113,808,167			7,437,591		89,092,396			1,050,051		-			1,738,754			9,040,900			300,819,865
Appropriation for legal reserve		-		-		-			-			5,641,777		(5,641,777	)		-		-			-			-			-
Capitalization of employee stock bonus		243,725		2,437,247		-			-			-		(2,437,247	)		-		-			-			-			-
Employees’ profit sharing—cash		-		-		-			-			-		(1,624,832	)		-		-			-			-			(1,624,832	)
Remuneration to directors and supervisors		-		-		-			-			-		(138,604	)		-		-			-			-			(138,604	)
Cash dividends		-		-		-			-			-		(19,670,577	)		-		-			-			-			(19,670,577	)
Stock dividends to shareholders		393,411		3,934,115		-			-			-		(3,934,115	)		-		-			-			-			-
Issuance of stock for conversion of bonds		48,829		488,289		(460,668	)		100,418			-		-			-		-			-			-			128,039
Issuance of stock for employee stock option exercised		2,049		20,490		(14,283	)		20,402			-		-			-		-			-			-			26,609
Adjustments to capital surplus and unrealized losses on financial instruments for changes in investees’ equity		-		-		-			(277,653	)		-		-			-		-			(202,187	)		-			(479,840	)
Net income		-		-		-			-			-		21,267,386			-		-			-			-			21,267,386
Minority interests in net income of subsidiaries		-		-		-			-			-		-			-		-			-			374,459			374,459
Unrealized losses on available-for-sale financial assets, net		-		-		-			-			-		-			-		-			(1,763,605	)		-			(1,763,605	)
Unrealized losses on cash flow hedges, net		-		-		-			-			-		-			-		-			(705,125	)		-			(705,125	)
Foreign currency translation adjustments		-		-		-			-			-		-			1,280,807		-			-			-			1,280,807
Minimum pension liability		-		-		-			-			-		-			-		(40,252	)		-			-			(40,252	)
Adjustments for changes in minority interests		-		-		-			-			-		-			-		-			-			(215,594	)		(215,594	)
Balance at December 31, 2008		8,505,720		85,057,196		-			113,651,334			13,079,368		76,912,630			2,330,858		(40,252	)		(932,163	)		9,199,765			299,258,736

See accompanying notes to consolidated financial statements.

F-7

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (continued)

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars, US dollars and shares)

	Capital stock				Retained earnings			Others
	Number of shares	Amount	Capital surplus		Legal reserve	Unappropriated retained earnings		Cumulative translation adjustments		Minimum pension liability		Unrealized gains (losses) on financial instruments		Minority interests		Total

Balance at January 1, 2009	8,505,720	85,057,196	113,651,334		13,079,368	76,912,630		2,330,858		(40,252	)	(932,163	)	9,199,765		299,258,736
Appropriation for legal reserve	-	-	-		2,126,738	(2,126,738	)	-		-		-		-		-
Cash dividends	-	-	-		-	(2,551,716	)	-		-		-		-		(2,551,716	)
Stock dividends to shareholders	255,172	2,551,716			-	(2,551,716	)	-		-		-		-		-
Capitalization of employee stock bonus	66,154	661,543	1,348,225		-	-		-		-		-		-		2,009,768
Adjustments to capital surplus, retained earnings and unrealized gains (losses) on financial instruments for changes in investees’ equity	-	-	(27,411	)	-	(2,050,074	)	-		-		190,312		-		(1,887,173	)
Net loss	-	-	-		-	(26,769,335	)	-		-		-		-		(26,769,335	)
Minority interests in net loss of subsidiaries	-	-	-		-	-		-		-		-		(475,479	)	(475,479	)
Unrealized gains on available-for-sale financial assets, net	-	-	-		-	-		-		-		1,637,350		-		1,637,350
Unrealized losses on cash flow hedges, net	-	-	-		-	-		-		-		194,145		-		194,145
Foreign currency translation adjustments	-	-	-		-	-		(645,125	)	-		-		-		(645,125	)
Reversal of minimum pension liability	-	-	-		-	-		-		40,252		-		-		40,252
Adjustments for changes in minority interests	-	-	-		-	-		-		-		-		4,107,569		4,107,569
Balance at December 31, 2009	8,827,046	88,270,455	114,972,148		15,206,106	40,863,051		1,685,733		-		1,089,644		12,831,855		274,918,992
Balance at December 31, 2009 (in US$)		2,762,768	3,598,502		475,934	1,278,969		52,762		-		34,105		401,623		8,604,663

See accompanying notes to consolidated financial statements.

F-8

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars and US dollars)

	2007			2008			2009
	NT$			NT$			NT$			US$
Cash flows from operating activities:
Net income (loss)		56,475,934			21,641,845			(27,244,814	)		(852,733	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		77,546,880			78,411,867			87,512,945			2,739,059
Amortization of intangible assets and deferred charges		4,158,688			2,776,565			2,594,666			81,210
Unrealized foreign currency exchange losses (gains), net		880,974			2,298,557			(2,192,835	)		(68,633	)
Asset impairment losses		547,240			1,394,297			1,192,807			37,334
Losses (gains) on valuation of financial instruments		(381,052	)		(1,075,326	)		1,336,469			41,830
Investment losses (gains) recognized by equity method, net		(201,155	)		313,621			(139,635	)		(4,370	)
Proceeds from cash dividends		84,342			142,368			142,096			4,447
Losses (gains) on disposal of investment securities		(25,014	)		142,267			(384,186	)		(12,025	)
Amortization of premium for convertible bonds and commercial paper		(375,095	)		(3,732	)		30,588			957
Losses (gains) from disposal and write-off of property, plant and equipment, and others		52,687			33,631			(7,340	)		(230	)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (including related parties)		(14,211,494	)		51,485,303			(39,564,516	)		(1,238,326	)
Decrease (increase) in inventories, net		7,404,509			11,831,747			(12,708,862	)		(397,773	)
Decrease (increase) in deferred tax assets, net		(2,435,780	)		2,411,066			(716,548	)		(22,427	)
Decrease (increase) in prepayments (including long-term prepayments for materials) and other current assets		(1,854,495	)		1,625,308			4,535,738			141,964
Increase (decrease) in accounts payable (including related parties)		17,881,742			(39,799,729	)		32,455,076			1,015,808
Increase (decrease) in accrued expenses and other current liabilities		11,474,524			(1,453,395	)		10,297,563			322,302
Increase in prepaid pension assets		(96,521	)		(118,750	)		(98,193	)		(3,073	)
Net cash provided by operating activities		156,926,914			132,057,510			57,041,019			1,785,321
Cash flows from investing activities:
Acquisition of property, plant and equipment		(65,136,668	)		(98,355,181	)		(61,046,891	)		(1,910,701	)
Proceeds from disposals of property, plant and equipment, noncurrent assets held-for-sale, and idle assets		138,003			1,344,356			235,562			7,373
Purchase of convertible bonds		-			-			(500,002	)		(15,650	)
Proceeds from disposal of available-for-sale financial assets-current		205,564			270,250			854,849			26,756
Purchase of long-term investments		(1,209,033	)		(2,889,016	)		(5,804,295	)		(181,668	)
Proceeds from disposal of long-term investments		76,166			378			299,203			9,365
Decrease (increase) in restricted cash in bank		9,700			7,999			(425,799	)		(13,327	)
Increase in intangible assets and deferred charges		(2,029,574	)		(1,502,092	)		(1,121,028	)		(35,087	)
Decrease (increase) in refundable deposits		219,069			(134,105	)		52,404			1,640
Cash increase resulting from change in consolidated entity		1,603,665			-			839,336			26,270
Net cash used in investing activities		(66,123,108	)		(101,257,411	)		(66,616,661	)		(2,085,029	)

See accompanying notes to consolidated financial statements.

F-9

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)

Years ended December 31, 2007, 2008 and 2009

(Expressed in thousands of New Taiwan dollars and US dollars)

	2007			2008			2009
	NT$			NT$			NT$			US$
Cash flows from financing activities:
Increase (decrease) in short-term borrowings		(3,592,871	)		4,720,666			(4,901,690	)		(153,418	)
Increase (decrease) in guarantee deposits		3,054			2,912			(5,758	)		(180	)
Repayment of long-term borrowings and bonds payable		(76,843,555	)		(57,993,509	)		(49,291,812	)		(1,542,780	)
Proceeds from long-term borrowings and bonds payable		36,845,178			37,299,393			66,844,430			2,092,158
Proceeds from issuance of stock for employee stock options exercised		126,491			26,609			-			-
Cash dividends		(1,514,793	)		(19,670,577	)		(2,551,716	)		(79,866	)
Remuneration to directors and supervisors, and employees’ profit sharing		(276,293	)		(1,763,436	)		-			-
Proceeds from issuance of subsidiary shares to minority interests		396,228			40,000			2,445,262			76,534
Cash dividends to minority interests and others		39,994			(97,667	)		(613,376	)		(19,198	)
Net cash provided by (used in) financing activities		(44,816,567	)		(37,435,609	)		11,925,340			373,250
Effect of exchange rate change on cash		(23,172	)		180,600			(341,084	)		(10,675	)
Net increase (decrease) in cash and cash equivalents		45,964,067			(6,454,910	)		2,008,614			62,867
Cash and cash equivalents at beginning of year		43,925,540			89,889,607			83,434,697			2,611,415
Cash and cash equivalents at end of year		89,889,607			83,434,697			85,443,311			2,674,282
Supplemental disclosures of cash flow information:
Cash paid for interest expense (excluding interest capitalized)		6,263,952			4,112,907			3,459,032			108,264
Cash paid for income taxes		930,586			5,179,223			2,127,321			66,583
Additions to property, plant and equipment:
Increase in property, plant and equipment		49,903,453			103,289,880			62,430,334			1,954,001
Decrease (increase) in equipment and construction-in-progress payables		15,233,215			(4,934,699	)		(1,383,443	)		(43,300	)
		65,136,668			98,355,181			61,046,891			1,910,701
Supplementary disclosure of non-cash investing and financing activities:
Current installments of long-term liabilities		35,585,178			43,585,254			46,844,334			1,466,176
Issuance of common stock for bond conversion rights exercised		3,703,331			128,039			-			-
Conversion of convertible bonds into equity method investments		-			-			618,065			19,345
Impact of change in consolidated entities:
Cash		1,603,665			-			839,336			26,270
Non-cash assets		15,562,075			-			34,416,206			1,077,190
Liabilities		(1,584,927	)		-			(30,541,846	)		(955,926	)
Minority interests		(8,204,496	)		-			(482,658	)		(15,107	)
		7,376,317			-			4,231,038			132,427

See accompanying notes to consolidated financial statements.

F-10

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of and for the years ended

December 31, 2007, 2008 and 2009

1.	Organization

AU Optronics Corp. (“AUO”) was founded in the Hsinchu Science Park of the Republic of China on August 12, 1996. AUO’s main activities are the research, development, production and sale of thin film transistor liquid crystal displays (“TFT-LCDs”) and other flat panel displays used in a wide variety of applications, including notebooks, desktop monitors, televisions, personal digital assistants, car televisions, digital cameras and camcorders, car navigation systems and mobile phones. AUO’s common shares were publicly listed on the Taiwan Stock Exchange in September 2000 and its American Depositary Shares (“ADSs”) were listed on the New York Stock Exchange in May 2002.

On September 1, 2001, Unipac Optoelectronics Corp. (“Unipac”) was merged with and into AUO in a transaction accounted for in accordance with the pooling-of-interests method of accounting. Unipac was principally engaged in the research, development, manufacture and sale of TFT-LCD and LCD modules.

On October 1, 2006, Quanta Display Inc. (“QDI”) was merged with and into AUO in a transaction accounted for in accordance with the purchase method of accounting. QDI was principally engaged in the research, development, manufacture and sale of TFT-LCD and LCD modules.

The consolidated entities were as follows:

			Percentage of Ownership(%)
Name of Investor	Subsidiary	Main Activities	December 31, 2008	December 31, 2009
AUO	AU Optronics (L) Corp. (AULB)	Holding and trading company	100.00	100.00
AUO	Konly Venture Corp. (Konly)	Venture capital investment	100.00	100.00
AUO	Ronly Venture Corp. (Ronly)	Venture capital investment	100.00	100.00
AUO	Toppan CFI (Taiwan) Co., Ltd. (Toppan CFI)	Manufacturing and sale of color filters	49.00	49.00
AUO, Konly and Ronly	Lextar Electronics Corp. (Lextar)	Manufacturing and sale of LED products.	100.00	68.43
AUO, Konly and Ronly	Darwin Precisions Corp. (DPTW)	Manufacturing and sale of backlight modules.	100.00	62.08
AUO	BriView Technology Corp. (BVTW)	Manufacturing and sale of liquid crystal products and related parts	60.00	60.00
AUO	AUO Energy Taiwan Corp. (AETW)	Technical services	-	100.00

(Continued)

F-11

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			Percentage of Ownership(%)
Name of Investor	Subsidiary	Main Activities	December 31, 2008	December 31, 2009
Konly	Darshin Microelectronics Inc. (DSTW)	IC design and sales support	-	66.67
AULB	AU Optronics Corporation America (AUUS)	Sales support in the United States	100.00	100.00
AULB	AU Optronics Corporation Japan (AUJP)	Sales support in Japan	100.00	100.00
AULB	AU Optronics Europe B.V. (AUNL)	Sales support in Europe	100.00	100.00
AULB	AU Optronics Korea Ltd. (AUKR)	Sales support in South Korea	100.00	100.00
AULB	AU Optronics Singapore Pte. Ltd. (AUSG)	Sales support in South Asia	100.00	100.00
AULB	AU Optronics (Czech) s.r.o. (AUCZ)	Manufacturing and repair center in Czech Republic and assembly of TFT-LCD modules and TV set	100.00	100.00
AULB	AU Optronics (Shanghai) Corp. (AUSH)	Sales support in the PRC	100.00	100.00
AULB	AU Optronics (Xiamen) Corp. (AUXM)	Assembly of TFT-LCD modules in the PRC	100.00	100.00
AULB	AU Optronics (Suzhou) Corp. (AUSZ)	Assembly of TFT-LCD modules in the PRC	100.00	100.00
AULB	AU Optronics Manufacturing (Shanghai) Corp. (AUSJ)	Assembly of TFT-LCD modules in the PRC	100.00	100.00
AULB	AU Oprtonics (Slovakia) s.r.o. (AUSK)	Assembly of Optoelectronics LCD products in Slovakia and manufacturing and sale of related parts	-	100.00
AULB	BriView Electronics Corp. (BVXM)	Manufacturing and sale of liquid crystal products and related parts	-	100.00
AULB and DPTW	Darwin Precisions (L) Corp. (DPLB)	Holding and trading company	73.53	100.00
AULB	BriView (L) Corp. (BVLB)	Holding and trading company	-	100.00

(Continued)

F-12

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			Percentage of Ownership(%)
Name of Investor	Subsidiary	Main Activities	December 31, 2008	December 31, 2009
AULB	M. Setek Co., Ltd. (M. Setek)	Manufactures of single crystal silicon wafers and ingots and sales of solar modules	-	58.10
DPLB	Darwin Precisions (Hong Kong) Limited (DPHK)	Holding company	100.00	100.00
DPHK	Darwin Precisions (Suzhou) Corp. (DPSZ)	Manufacturing and assembly of backlight modules and related components in PRC	100.00	100.00
DPHK	Darwin Precisions (Xiamen) Corp. (DPXM)	Manufacturing and assembly of backlight modules and related components in PRC	100.00	100.00
BVLB	BVCH Optronics (Sichuan) Corp. (BVCH)	Assembly of TFT-LCD modules in the PRC	-	51.00
M. Setek	Ichijo Seisakusyo Co., Ltd. (Ichijo)	Manufacturing semiconductor products.	-	38.46

AULB was incorporated in September 2000. AULB is a holding company investing in foreign subsidiaries, AUUS, AUSZ, AUNL, AUKR, AUJP, AUSH, AUXM, AUSG, AUCZ, AUSK, AUSJ, BVLB, BVXM, DPLB, and M. Setek. AUSZ, AUXM and AUSJ are engaged in the assembly of TFT-LCD module products in Mainland China. AUUS, AUJP, AUNL, AUKR and AUSG are mainly engaged in the after-sale service of TFT-LCDs. AUSH is engaged in the sale of TFT-LCD module products in Mainland China. AUCZ is engaged in the repair of TFT-LCD related products and the assembly of TFT-LCD module products in Czech Republic. AUSK is mainly engaged in the manufacture and assembly of Optoelectronics LCD products and related parts manufacture and sale in Slovak Republic. DPLB is a holding company investing in the wholly owned foreign subsidiaries, DPHK, DPSZ and DPXM. DPSZ and DPXM are wholly owned subsidiaries of DPHK. DPSZ and DPXM are engaged in the manufacture and assembly of backlight modules in Mainland China. BVTW, BVLB, BVXM and BVCH are mainly engaged in the manufacture and sale of Optoelectronics LCD products and related parts in the Republic of China and Mainland China.

Konly was incorporated in August 2002 and is an investment holding company for investments in other domestic technology companies.

Ronly is a wholly owned subsidiary which AUO assumed from business combination with QDI and is an investment holding company in domestic marketable securities.

(Continued)

F-13

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In August 2006, AUO acquired a 39.7% ownership interest in Toppan CFI, which is mainly engaged in the manufacture and sale of color filters. In October 2006, AUO made additional investment and increased its ownership interest to 49%, and entered into a shareholders agreement with Toppan Printing Co., Ltd. (“Toppan Printing”). On March 15, 2007, AUO and Toppan Printing amended the shareholders agreement. Pursuant to the amended shareholders agreement, AUO was able to exercise control over the operating, financial and personnel policies of Toppan CFI. As a result, effective from the date of amendment to the shareholders agreement, Toppan CFI is included in the Company’s consolidated financial statements.

In April and August 2008, AUO established wholly owned subsidiaries, Lextar and DPTW, respectively. Lextar is mainly engaged in the manufacture and sale of Light Emitting Diode (“LED”) products. DPTW is mainly engaged in the manufacture and sale of backlight modules.

In October 2008, AUO established a 60%-owned subsidiary, BVTW. BVTW is mainly engaged in the manufacture and sale of liquid crystal products and related parts.

In May 2009, AUO established a wholly owned subsidiary, AETW. AETW is mainly engaged in providing extensive value-added services in clean energy business, including installation of energy system fueled by solar or other renewable energies for power plants, industrial facilities, commercial buildings and households.

In June 2009, AUO made an initial equity investment totaling US$16,000 thousand for common stock of M. Setek and US$33,000 thousand for M. Setek convertible preferred stock series B through AULB. M. Setek is mainly engaged in the production of polysilicon, manufactures of single crystal silicon wafers and ingots and sales of solar modules. From July to September 2009, AULB additionally subscribed to and purchased newly issued shares, including common shares and convertible preferred shares, from M. Setek totaling US$141,000 thousand. By taking into consideration the amount of common shares that the preferred shares could be converted into along with the common shares held by AULB, management concluded that it had a controlling interest in M. Setek as of August 31, 2009, and therefore began to include M. Setek in AUO’s consolidated financial statements as of that time. As of December 31, 2009, M. Setek is a 58.10%-owned subsidiary of AUO.

Ichijo is engaged in the assembly of semiconductor manufacturing equipment, which is a 38.46%-owned subsidiary of M. Setek. Ichijo was included into consolidated financial statements of AUO because M. Setek has the unilateral power to control Ichijo’s financial, operating and personnel policies.

In August 2009, AULB established a wholly owned subsidiary, BVLB, and joined venture with Changhong Electrics (Sichuan) Co., Ltd. to establish BVCH. BVCH is a 51%-owned subsidiary of AULB.

In November 2009, AUO established a 66.67%-owned subsidiary, DSTW, through Konly. DSTW is mainly engaged in the manufacture and sale of Driver IC.

(Continued)

F-14

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As a result of disproportionate participation in Lextar’s capital increase in 2009, the Company’s ownership interest in Lextar decreased to 68.43% at the end of 2009.

As a result of disproportionate participation in DPTW’s capital increase and partial disposal of its investment in November 2009, the Company’s ownership interest in DPTW decreased to 62.08% at the end of 2009.

In December 2008, AULB made additional investment and increased its ownership interest in DPLB from 50% to 73.53%. In October 2009, due to the organizational restructuring, DPTW acquired 49.41% voting shares of DPLB from AULB. Together with additional shares purchased, DPTW’s ownership interest in DPLB increased to 75.88% at the end of 2009. Together with the shareholdings of AULB and DPTW, the Company held 100% ownership interest in DPLB as of December 31, 2009.

As of December 31, 2008 and 2009, AUO and its consolidated subsidiaries had 43,267 and 51,378 employees, respectively.

2.	Summary of Significant Accounting Policies

(a)

Accounting principles and consolidation policy

The consolidated financial statements are prepared in accordance with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers and accounting principles generally accepted in the Republic of China (“ROC GAAP”). These consolidated financial statements are not intended to present the financial position and the related results of operations and cash flows of the Company based on accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China.

The consolidated financial statements include the accounts of AUO and the aforementioned subsidiaries, hereinafter referred to individually or collectively as “the Company.” The Company includes in its consolidated financial statements the results of operations of all entities in which it has control over the financial and operating policies, irrespective of whether or not it has a majority shareholding in such entities. All significant inter-company balances and transactions are eliminated in the consolidated financial statements.

(b)

Revenue recognition

Revenue is recognized when title to the products, and the risks and rewards of ownership are transferred to customers which occurs principally at the time of shipment. Allowance and related provisions for sales returns and discounts are estimated based on historical experience. Such provisions are deducted from sales in the year the products are sold.

(Continued)

F-15

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The preparation of the accompanying consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenues and expenses during the reporting periods. Economic conditions and events could cause actual results to differ significantly from such estimates.

(d)

Foreign currency transactions and translation

The Company’s reporting currency is New Taiwan dollar. AUO and its subsidiaries record transactions in their respective functional currency, which generally is the local currency of the primary economic environment in which these entities operate. The translation from the applicable foreign currency assets and liabilities to New Taiwan dollars is performed using exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated using average exchange rates during the year. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of stockholders’ equity. Foreign currency transactions are recorded at the exchange rates prevailing at the transaction dates. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are re-measured into the functional currency using the exchange rates prevailing on that date. The resulting translation gains or losses are recorded in the consolidated statements of operations.

(e)

Classification of current and noncurrent assets and liabilities

Cash or cash equivalents, trading securities, and assets that are expected to be realized into cash within twelve months are classified as current assets; assets that are not current are classified as non-current assets. For liabilities arising from trading or being expected to be liquidated within twelve months are classified as current liabilities; liabilities that are not current are classified as non-current liabilities.

(f)

Asset impairment

Management reviews the Company’s assets (an individual asset or cash-generating unit (“CGU”) associated with the asset, other than goodwill) for impairment at each balance sheet date. If there is any indication of impairment, management estimates the recoverable amount of the asset. Any excess of the carrying amount of the asset over its recoverable amount is recognized as an impairment loss. If there is evidence that the accumulated impairment losses of an asset other than goodwill in prior years no longer exist or have decreased, the amount previously recognized as impairment loss is reversed and the carrying amount of the asset is increased to the recoverable amount. The increase in the carrying amount shall not exceed the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years.

(Continued)

F-16

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The CGU to which goodwill is allocated for purposes of impairment testing is reviewed for impairment annually. If the recoverable amount of the CGU is lower than the carrying amount of the CGU, an impairment loss is recognized.

(g)

Cash equivalents and restricted cash in bank

The Company considers all highly liquid investments, such as investments in government bonds with repurchase agreements with original maturity of three months or less, to be cash equivalents. Time deposits which are provided as collateral are classified as restricted cash in bank presented under current assets or noncurrent assets depending on the term of the obligation secured by such collateral.

(h)

Financial instruments

The Company uses transaction-date accounting for financial instrument transactions. At initial recognition, financial instruments are evaluated at fair value. Except for financial assets and liabilities measured at fair value through profit or loss, acquisition cost or issuance cost is added to the originally recognized amount.

Financial instruments are classified into the following categories in accordance with the purpose of holding or issuing of such financial instruments:

(1)

Financial assets and liabilities measured at fair value through profit or loss: Financial instruments are classified into this category if the purpose of acquisition is principally for selling or repurchasing in the near term. Except for effective hedging derivative financial instruments, all financial derivatives are included in this category. Changes in fair values are charged to current operations.

(2)

Available-for-sale financial assets: These are measured at fair value, and any changes, excluding impairment loss and unrealized foreign currency exchange gain or loss, are reported as a separate component of stockholders’ equity until realized. Realized gain or loss on financial instruments is charged to current operations. If there is objective evidence of impairment, an impairment loss is recognized in profit or loss. If, in a subsequent period, events or changes in circumstances indicate that the amount of impairment loss decreases, the previously recognized impairment loss for equity securities is reversed to the extent of the decrease and recorded as an adjustment to equity, while for debt securities, the reversal is allowed through profit or loss provided that the decrease is clearly attributable to an event which occurs after the impairment loss is recognized.

(3)

Financial assets carried at cost: Financial assets that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are carried at their original cost. If there is objective evidence which indicates that a financial asset is impaired, a loss is recognized. A subsequent reversal of such impairment loss is prohibited.

(Continued)

F-17

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(4)

Investments in debt security with no active market: Debt investments are measured at amortized cost using the effective interest method. If there is objective evidence which indicates the financial asset is impaired, a loss is recognized. If, in a subsequent period, the amount of the impairment loss decreases and the decrease is clearly attributable to an event which occurred after the impairment loss was recognized, the previously recognized impairment loss is reversed to the extent of the decrease. The reversal may not result in a carrying amount of the financial asset that exceeds the amortized cost that would have been determined if no impairment loss had been recognized.

(5)

Financial liabilities measured at amortized cost: Financial liabilities not measured at fair value through profit or loss and not designated as hedges are reported at amortized cost.

(6)

Hedging-purpose derivative financial instruments: These are derivative instruments entered into to hedge exposure to interest rate risks and effective as hedges.

(i)

Derivative financial instruments and hedging activities

The Company uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with the Company’s treasury policy, the Company holds or issues derivative financial instruments for hedging purposes. When a derivative financial instrument is no longer effective as a hedge, the Company discontinues hedge accounting prospectively and accounts for it as a financial instrument held for trading purposes.

Hedge accounting recognizes the offsetting effects on profit or loss of changes in the fair value of the hedging instrument and the hedged item. If the hedging relationship of a cash flow hedge meets the criteria for hedge accounting, it is accounted for as follows:

Changes in the fair value of the hedging instrument designated as a cash flow hedge are recognized directly in equity. If a hedge of a forecasted transaction subsequently results in the recognition of an asset or a liability, then the amount recognized in equity is reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. For hedges other than those covered by the preceding statements, the associated cumulative gain or loss is removed from equity and recognized in profit or loss in the same period or periods during which the hedged forecasted transaction affects profit or loss.

(j)

Allowance for doubtful accounts

The allowance for doubtful accounts is based on the age, credit quality, and results of management’s evaluation of collectability of the outstanding balance of accounts receivable.

(Continued)

F-18

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(k)

Inventories

Inventories are recorded at cost, and cost is determined using the weighted-average method. The allocation of fixed production overheads is based on the capacity of the production facilities. If the actual level of production is different from the capacity of production facilities, the difference, if any, is adjusted proportionately to inventories and cost of sales. At each period-end, inventories are measured at the lower of cost or fair value. The fair value of raw materials is determined on the basis of replacement cost. The fair value of finished goods and work-in-progress is determined on the basis of net realizable value.

Effective January 1, 2008, unallocated fixed production overheads as a consequence of abnormally low production are charged to the cost of sales in the period in which they are incurred; at each year-end, inventories are measured at the lower of cost or net realizable value; see note 2(zc) for a discussion of the impact of adoption of the amended ROC SFAS No. 10, “Inventories.”

(l)

Equity-method investments

When the Company is able to exercise significant influence over the operating and financial policies of the investee (generally those in which the Company owns between 20% and 50% of the investee’s voting shares), the Company’s equity investment thereon is accounted for using the equity method.

Effective January 1, 2006, under the amended ROC SFAS No. 5, “Long-term Investments under Equity Method,” and ROC SFAS No. 25, “Business Combinations,” the difference between acquisition cost and carrying amount of net equity of the investee as of the acquisition date is allocated based upon the pro rata excess of fair value over the carrying value of noncurrent assets on the investee’s books. Allocated amounts are amortized based on the method used for the related assets. Any unallocated difference is treated as investor-level goodwill. If the allocation reduces noncurrent assets to zero value, the remaining excess over acquisition cost is recognized as an extraordinary gain.

Prior to January 1, 2006, investor-level goodwill was amortized over five years on a straight-line basis. Commencing January 1, 2006, as required by the amended ROC SFAS No. 5, investor-level goodwill is no longer amortized but tested for impairment.

Upon the sale of equity-method investment, the difference between the selling price and carrying amount of the investment at the date of sale is recognized as an investment gain or loss. In proportion to the percentage disposed of, capital surplus and other equity adjustment items from the long-term investment resulting from the Company’s proportionate share in the net equity of the investee are recognized in profit or loss.

(Continued)

F-19

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

If an investee company issues new shares and the Company does not acquire new shares in proportion to its original ownership percentage, the Company’s equity in the investee’s net assets will be changed. The change in the equity interest shall be used to adjust the capital surplus and long-term investment accounts. If the Company’s capital surplus is insufficient to offset the adjustment to long-term investment, the difference is charged as a reduction to retained earnings.

Unrealized inter-company profits or losses resulting from transactions between the Company and an investee accounted for under the equity method are deferred to the extent of the Company’s ownership. Profits or losses resulting from depreciable or amortizable assets are recognized over the estimated economic lives of such assets. Profits or losses from other assets are recognized when realized.

For long-term investment in a limited partnership, the distribution of profits is based on the percentage of capital contributed by each partner. The Company adjusts the carrying amount of its investment at each fiscal year-end to recognize its share of the profit or loss. Distributed earnings and any return of capital in the limited partnership are recorded as a reduction of the carrying amount of the long-term investment.

The Company’s share of the difference resulting from translation of the financial statements of a foreign investee accounted for under the equity method into New Taiwan dollars, net of the related tax effect, are recorded as cumulative translation adjustments in stockholders’ equity.

(m)

Property, plant and equipment

Property, plant and equipment are stated at acquisition cost. Significant renewals and improvements are treated as capital expenditures and are depreciated accordingly. Interest costs related to the construction of property, plant and equipment are capitalized and included in the cost of the related asset. Maintenance and repairs are charged to expense as incurred.

Excluding land, depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets using the straight-line method less any salvage value. The range of the estimated useful lives is as follows: buildings—20 to 50 years, machinery and equipment—3 to 10 years, leasehold improvement—the shorter of 5 years or the lease term, and other equipment—3 to 5 years.

Property, plant and equipment not in use are classified as idle assets and are stated at the lower of carrying amount or net realizable value.

(n)

Leased Assets

Leased assets are recorded at the lower of fair value of the asset at the reception of the lease, or present value of all required payment (excluding executive costs paid by the lesser) and bargain purchase option or guaranteed residual value. Leased assets are depreciated over estimated useful life by using straight-line method.

(Continued)

F-20

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(o)

Deferred charges

Deferred charges consist of the cost of the software systems, electrical facility installation charges, expense associated with syndicated loans, bond issuance costs, and land use rights. The cost of the software systems, electrical facility installation charges, and expense associated with syndicated loans are amortized over the estimated useful lives of three to seven years on a straight-line basis. Bond issuance costs are amortized using the straight-line method over the period from the issuance date to the maturity date (five years). The amortization of issuance costs associated with loans and bonds under the straight-line method is not materially different from the amount determined using the effective interest method. In the case of early redemption of bonds, the unamortized bond issuance cost is charged to current operations. The cost of land use rights is amortized using the straight-line method over the lease term of 50 years.

(p)

Goodwill and other intangible assets

Effective January 1, 2007, the Company adopted ROC SFAS No. 37, “Intangible Assets.” In accordance with ROC SFAS No. 37, other than intangible assets acquired by way of government grant, which are measured at the fair value, intangible assets are initially measured at cost. Subsequent to initial recognition, intangible assets are measured at cost plus a revaluation increment (in accordance with ROC laws and regulations), less any subsequent accumulated amortization and accumulated impairment losses. The depreciable amount of an intangible asset is the cost less its residual value. An intangible asset with a finite useful life is amortized over the estimated useful life using the straight-line method from the date that the asset is made available for use. The residual value, the amortization period, and the amortization method are reviewed at least annually at each fiscal year-end, and any changes thereof are accounted for as changes in accounting estimates. An intangible asset with an indefinite useful life is not amortized, but its useful life is reviewed annually at each fiscal year-end to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. The change from an indefinite useful life to a finite useful life is accounted for as a change in accounting estimate. The adoption of ROC SFAS No. 37 had no impact on the Company’s consolidated financial statements.

Expenditure on research, other than goodwill and intangible assets acquired in a business combination, is charged to expense as incurred. Expenditure arising from development is capitalized as an intangible asset when the Company demonstrates all of the following: (1) the technical feasibility of completing the intangible asset so that it will be available for use or sale; (2) its intention to complete the intangible asset and use or sell it; (3) its ability to use or sell the intangible asset; (4) the probability that the intangible asset will generate future economic benefits; (5) the availability of adequate technical, financial and other resources to complete the development project; and (6) its ability to measure reliably the expenditure attributable to the intangible asset during its development. Other development expenditure is charged to expense as incurred.

(Continued)

F-21

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Goodwill is recognized when the purchase price exceeds the fair value of identifiable net assets acquired in a business combination. Effective January 1, 2006, in accordance with the amended ROC SFAS No. 25, goodwill is no longer amortized but is tested for impairment in accordance with ROC SFAS No. 35, “Impairment of Assets,” at least annually or more frequently if events or circumstances indicate it might be impaired.

Core technologies, primarily technologies in the design, manufacture and assembly of TFT-LCD products acquired in connection with the merger with QDI on October 1, 2006, are amortized using the straight-line method over the estimated useful lives of three years.

Technology-related fees, including purchased patents and licenses pursuant to patent licensing agreements, are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from three to fifteen years.

(q)

Noncurrent assets held-for-sale

Effective January 1, 2007, the Company adopted ROC SFAS No. 38, “Accounting for Noncurrent Assets Held for Sale and Discontinued Operations.” A noncurrent asset is classified as held-for-sale when it is available for immediate sale in its present condition subject only to terms that are usual and customary for sale, and the sale is highly probable within one year. Noncurrent assets classified as held-for-sale are measured at the lower of carrying amount or fair value less costs to sell, and cease to be depreciated or amortized. Noncurrent assets classified as held-for-sale are presented separately on the balance sheet.

An impairment loss, measured as the amount by which the carrying amount of a noncurrent asset held-for-sale exceeds its fair value, is charged to current operations. A gain from any subsequent increase in fair value less costs to sell is recognized to the extent that it is not in excess of the cumulative impairment loss that was recognized previously in accordance with ROC SFAS No. 35.

(r)

Convertible bonds assumed in a business combination

Convertible bonds assumed from business combination with QDI on October 1, 2006 were recorded at fair value at the date of acquisition. The difference between the recorded amount and the par value of the convertible bonds is amortized and charged to current operations as interest expense using the interest method over the respective remaining redemption periods.

When bondholders exercise the right to convert bonds into common stock, the number of shares to be issued is calculated based on the principal amount of the bond and conversion price applicable at the date of conversion. The par value of the shares is credited to common stock. The difference between the carrying value of the bonds and the par value of common stock, unamortized premium or discount upon the conversion of the bonds, and related issuance cost are recorded as capital surplus.

(Continued)

F-22

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(s)

Retirement plans

Pursuant to government regulations and the ROC Labor Standards Law (the “old system”), AUO and its subsidiaries located in the Republic of China establish employee noncontributory and defined benefit retirement plans covering full-time employees in the Republic of China. Under the defined benefit plans, employees are eligible for retirement, or are required to retire, after fulfilling certain age or service requirements. Payments of retirement benefits are based on years of service and the average salary for the six-month period before the employee’s retirement. Each employee earns two months of salary for the first fifteen years of service, and one month of salary for each year of service thereafter. The maximum retirement benefit is 45 months of salary. The defined benefit plans are funded by contributions made by the Company, plus earnings thereon. On a monthly basis, the Company contributes two percent of wages and salaries to a pension fund maintained with Bank of Taiwan (formerly with the Central Trust of China before it merged with and into Bank of Taiwan on July 1, 2007). Retirement benefits are paid to eligible participants on a lump-sum basis upon retirement. For the defined benefit plans, the Company adopted ROC SFAS No. 18, “Accounting for Pensions,” which requires the Company to perform an actuarial calculation on its pension obligation as of each fiscal year-end. Based on the actuarial calculation, the Company recognizes a minimum pension liability and net periodic pension costs covering the service lives of participants. A deferred pension cost is recognized and classified under intangible assets when the additional minimum liability does not exceed the sum of unrecognized net transition obligation. The excess, which represents a net loss not yet recognized as net periodic pension cost, is reported as a reduction of equity. The unrecognized net transition obligation, and unrecognized pension gain or loss, are amortized on a straight-line basis.

Commencing July 1, 2005, pursuant to the ROC Labor Pension Act (hereinafter referred to as the “new system”), employees who elected to participate in the new system or joined the Company after July 1, 2005, are subject to a defined contribution plan under the new system. For the defined contribution plan, the Company is required to make a monthly contribution at a rate no less than six percent of an employee’s monthly salary or wages to the employee’s individual pension fund account at the ROC Bureau of Labor Insurance. Cash contributions are charged to current operations as pension cost.

M. Setek established its retirement plans covering all full-time employees in 2005. In accordance with the plans, the pension benefits paid out to the employees are based on years of service, the current rate of pay and compensation. The relative rate of pay has been regulated in the retirement plans. For these defined benefit plans, M. Setek performs actuarial calculation on its accumulated benefit obligation at each balance sheet date. The excess of accumulated benefit obligation over the fair value of the plan assets is recognized as minimum pension liability on the balance sheet. A net pension cost comprising service cost, transition assets, and amortization of prior service cost is also recognized. The pension fund is maintained with Asahi Mutual Life Insurance.

The Company’s subsidiaries have set up their retirement plans, if necessary, based on their respective local government regulations.

(Continued)

F-23

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(t)

Employee bonuses and remuneration to directors

Effective January 1, 2008, employee bonuses and remuneration to directors are estimated and charged to expense in accordance with Accounting Research and Development Foundation (“ARDF”) Interpretation No. 2007-052, and included in the cost of goods sold and operating expense, as appropriate. The difference, if any, between the amount approved by stockholders in the subsequent year and the amount estimated in the current-year financial statements is accounted for as a change in accounting estimate, and charged to profit or loss in the period during which stockholders’ approval is obtained. No subsequent adjustment to compensation expense is made if the employee stock bonuses were to be settled through the issuance of stock.

(u)

Share-based payment transactions

The Company adopted ROC SFAS No. 39, “Share-based Payment,” for share-based payment arrangements with grant date on or after January 1, 2008.

An equity-settled share-based payment transaction is measured based on the fair value of the award at the grant date, and recognized as expenses over the vesting period with a corresponding increase in equity. The vesting period is estimated based on the vesting conditions under the share-based payment arrangement. Vesting conditions include service conditions and performance conditions (including market conditions). In estimating the fair value of an equity-settled share-based award, only the effect of market conditions is taken into consideration. A cash-settled share-based payment transaction is measured at the balance sheet date and settlement date based on the fair value of the award as of those dates and is recorded as a liability incurred for the goods and services received. Changes in fair values are charged to current operations. The fair value of share-based award is estimated using the Black-Scholes option-pricing model, taking into account the exercise price, current market price of the underlying shares and management’s best estimate of the expected term, expected volatility, expected dividends, and risk-free interest rate.

(v)

Employee stock options assumed in a business combination

AUO assumed the employee stock options of QDI in connection with the merger with QDI on October 1, 2006. Pursuant to the provisions of ROC SFAS No. 25, fair value of the vested employee stock options is measured on the consummation date and included in the purchase price. Fair value of unvested options is allocated to compensation cost and is amortized over the post-combination requisite service period.

(w)

Government grants

Income from government grants for research and development is recognized as non-operating income when qualifying expenditures are made and income is realizable.

(Continued)

F-24

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(x)

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred income taxes are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects resulting from taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, net operating loss carryforwards, and income tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the deferred tax assets will not be realized, a valuation allowance is recognized accordingly.

When a change in the tax laws is enacted, the deferred tax assets or liability (including items that are directly debited or credited to stockholders’ equity) should be recalculated accordingly in the period of change. The effect of changes in the deferred tax assets or liability is reported as an adjustment to current income tax benefit or expense.

If a valuation allowance is recognized at the acquisition date for deferred tax assets acquired through business combination accounted for using the purchase method of accounting, the income tax benefit recognized as a result of the elimination of valuation allowance subsequent to the acquisition is to be applied first to reduce goodwill related to the acquisition. The remaining tax benefit, if any, is applied to reduce income tax expense attributable to continuing operations.

Classification of the deferred income tax assets or liabilities as current or noncurrent is based on the classification of the related asset or liability. If the deferred income tax asset or liability is not directly related to a specific asset or liability, then the classification is based on the expected realization date of such deferred income tax asset or liability.

According to the ROC Income Tax Act, undistributed income, if any, earned after December 31, 1997, is subject to an additional 10 percent retained earnings tax. The surtax is charged to income tax expense after the appropriation of earnings is approved by the stockholders in the following year.

Income taxes of the Company are calculated based on tax laws of the various countries and jurisdictions where the respective subsidiary companies were incorporated. Income tax returns are filed by each entity separately and not on a combined basis. Income tax expense of the Company is the sum of income tax expenses of AUO and consolidated subsidiary companies.

(y)

Investment tax credits

Investment tax credits arising from the purchase of equipment and machinery, research and development expenditures, and employee training expenditures are recognized using the flow-through method.

(Continued)

F-25

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(z)

Earnings (losses) per common share (“(L)EPS”)

Basic (L)EPS are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. The Company’s convertible bonds, employee stock options, and employee stock bonuses to be issued after January 1, 2009 are potential common stocks. In computing diluted EPS, net income and the weighted-average number of common shares outstanding during the year are adjusted for the effects of dilutive potential common stock, assuming dilutive shares equivalents had been issued. The weighted-average outstanding shares are retroactively adjusted for the effects of stock dividends transferred from retained earnings and capital surplus to common stock, and employee stock bonuses issued prior to January 1, 2009. Effective January 1, 2009, EPS are not retroactively adjusted for employee stock bonuses.

(za)

Convenience translation into U.S. dollars

The consolidated financial statements are stated in New Taiwan dollars. Translation of the 2009 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the reader using the noon buying rate of the Federal Reserve Bank in New York on December 31, 2009, of NT$31.95 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this rate or any other rate of exchange.

(zb)

Reclassifications

Certain reclassifications have been made to the prior years’ financial statements to conform to the current year’s presentation.

(zc)

Accounting changes

Effective January 1, 2007, the Company adopted ROC SFAS No. 37. Upon initial adoption of ROC SFAS No. 37, management reviewed the appropriateness of the amortization periods and amortization method related to its intangible assets with finite useful lives, and concluded that no changes should be made. The initial adoption of ROC SFAS No. 37 had no impact on the Company’s consolidated financial statements.

Effective January 1, 2007, the Company adopted ROC SFAS No. 38 and reclassified certain noncurrent assets as held-for-sale (refer to note 9 for further details). The impact on net income and basic EPS for the year ended December 31, 2007, resulting from the adoption of ROC SFAS No. 38 was immaterial.

(Continued)

F-26

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Effective January 1, 2008, the Company adopted ROC SFAS No. 39 and ARDF Interpretation No. 2007-052 to classify, measure, recognize, and disclose the Company’s share-based payment transactions, employee bonuses and remuneration to directors. The adoption of ROC SFAS No. 39 decreased the Company’s net income and retroactively adjusted basic EPS for the year ended December 31, 2008, by NT$2,838,788 thousand and NT$0.33, respectively. In addition, pursuant to ARDF Interpretation No. 2008-169, the computation of basic and diluted EPS is no longer required to retroactively adjust for the effects of employee stock bonuses approved at the stockholders’ meeting held in and after year 2009.

Effective January 1, 2008, the Company adopted the amended ROC SFAS No. 10. The adoption of ROC SFAS No. 10, as amended, decreased the Company’s net income and retroactively adjusted basic EPS by NT$2,433,241 thousand and NT$0.28, respectively, for the year ended December 31, 2008.

3.	Cash and Cash Equivalents

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)

Cash and bank deposits		63,880,848		73,560,405		2,302,360
Government bonds		19,553,849		11,882,906		371,922
		83,434,697		85,443,311		2,674,282

The Company purchases ROC government bonds under agreements to sell substantially the same securities within 30 days of the repurchase agreements. These bonds bear interest rates ranging from 0.3% to 1.2% and 0.11% to 1.88% in 2008 and 2009, respectively.

4.	Available-for-sale Financial Assets

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)
Current:
Publicly listed stocks		470,301		-		-
Noncurrent:
Publicly listed stocks		595,750		2,012,265		62,982

Gains (losses) on valuation of available-for-sale financial assets resulting from the change in fair value, based on publicly quoted market prices, were NT$1,326,391 thousand, NT$(1,763,605) thousand and NT$1,637,350 (US$51,247) thousand for the years ended December 31, 2007, 2008 and 2009, respectively, as a separate component of stockholders’ equity.

(Continued)

F-27

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company determined its investment in certain publicly listed stocks was impaired due to a significant and other-than-temporary decline in fair value. As a result, the Company recognized impairment losses of NT$386,810 thousand for the year ended December 31, 2008.

Certain available-for-sale financial assets were pledged as collateral; see note 24.

5.	Financial Assets Carried at Cost—noncurrent

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)

Non-publicly listed stocks		583,197		484,009		15,149

The Company determined its investment in certain non-publicly listed stocks was impaired due to a significant and other-than-temporary decline in value. As a result, the Company recognized impairment loss of NT$397,364 thousand and NT$135,595 (US$4,244) thousand for the years ended December 31, 2008 and 2009, respectively.

6.	Derivative Financial Instruments and Hedging Policy

(a)

Derivative financial instruments

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)
Derivative financial assets:
Foreign currency forward contracts		1,067,531		378,252		11,839
Interest rate swap contracts		5,398		3,963		124
Options contracts		-		9,743		305
Derivative financial liabilities:
Foreign currency forward contracts		28,831		933,289		29,211
Interest rate swap contracts		829,389		515,847		16,145
Options contracts		-		154,513		4,837

The aforementioned derivative financial instruments were classified in the consolidated balance sheets under the current and noncurrent portion of financial assets and liabilities measured at fair value, except for derivative financial instruments designated as hedges, which were classified under hedging derivative financial assets and liabilities—noncurrent.

(Continued)

F-28

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2009, outstanding options contracts were as follows:

December 31, 2009
Contract item	Notional amount	Exercise rate/ Price range	Exercise period
	(in thousands)

Interest rate options	YEN1,800,000	1.00%	Mar. 2010 – Sep. 2011
Foreign currency call options	USD12,050	YEN95.53 – 109.75	Jan. 2010 – Nov. 2013
Foreign currency put options	USD24,100	YEN95.53 – 109.75	Jan. 2010 – Nov. 2013

As of December 31, 2008 and 2009, outstanding foreign currency forward contracts were as follows:

December 31, 2008
Contract item	Maturity date	Contract amount
		(in thousands)

Sell USD / Buy YEN	Jan. 2009 – Feb. 2009	USD33,500 / YEN3,252,780
Sell NTD / Buy YEN	Jan. 2009 – Mar. 2009	NTD14,983,792 / YEN43,739,100
Sell NTD / Buy USD	Jan. 2009	NTD1,001,650 / USD30,000
Sell USD / Buy EUR	Jan. 2009	USD21,033 / EUR15,000
Sell USD / Buy CNY	Jan. 2009 – May 2009	USD15,000 / CNY102,847
Sell CNY / Buy USD	Jan. 2009	CNY48,272 / USD7,000

December 31, 2009
Contract item	Maturity date	Contract amount
		(in thousands)

Sell USD / Buy YEN	Jan. 2010 – Mar. 2010	USD646,500 / YEN57,850,177
Sell NTD / Buy YEN	Jan. 2010 – May 2010	NTD3,439,837 / YEN9,741,408
Sell USD / Buy NTD	Jan. 2010 – Feb. 2010	USD342,000 / NTD11,030,347
Sell USD / Buy CNY	Jan. 2010	USD11,000 / CNY75,082
Sell EUR / Buy NTD	Jan. 2010 – Apr. 2010	EUR177,000 / NTD8,411,451
Sell CNY / Buy USD	Jan. 2010 – Feb. 2010	CNY150,200 / USD22,000
Sell YEN / Buy USD	Jan. 2010 – Dec. 2013	YEN1,243,225 / USD11,500

The Company entered into foreign exchange forward contracts and options contracts with several banks to manage foreign currency exchange risk resulting from business operations and investment activities. Net gain arising from foreign exchange forward contract for the years ended December 31, 2007, 2008 and 2009 were NT$1,371,945 thousand (including valuation gain of NT$356,625 thousand and realized settlement gain of NT$1,015,320 thousand), NT$ 4,015,043 thousand (including valuation gain of NT$1,188,052 thousand and realized settlement gain of NT$2,826,991 thousand) and NT$640,250 (US$20,039) thousand (including valuation loss of NT$(1,395,121) (US$(43,666)) thousand and realized settlement gain of NT$2,035,371 (US$63,705) thousand, respectively.

(Continued)

F-29

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The Company entered into interest rate swap contracts with several banks to manage interest risk exposure arising from the Company’s financing activities. As of December 31, 2008 and 2009, AUO’s total notional amount of outstanding interest rate swap contracts amounted to NT$45,111,111 thousand and NT$38,888,889 (US$1,217,180) thousand, respectively. Of the total notional amounts as of December 31, 2008 and 2009, NT$39,611,111 thousand and NT$37,888,889 (US$1,185,881) thousand, respectively, were related to effective hedges. Additionally, as of December 31, 2009, AUSJ’s total notional amount of outstanding interest rate swap contracts amounted to USD$42,000 thousand, and all of which were related to effective hedges. As of December 31, 2009, M. Setek’s total notional amount of outstanding interest rate swap contracts amounted to YEN960,000 (US$10,360) thousand. Of the total notional amounts as of December 31, 2009, YEN225,000 (US$2,428) thousand was related to effective hedges.

For the years ended December 31, 2007, 2008 and 2009, the Company’s unrealized gains (losses) resulting from change in fair value of derivative contracts recognized in earnings amounted to NT$24,427 thousand, NT$(112,726) thousand and NT$58,652 (US$1,836) thousand, respectively.

DPTW held convertible bond which was a hybrid instrument consisting of a host contract and an embedded derivative instrument, as a result, DPTW recognized financial assets measured at fair value – conversion feature for the embedded derivative instrument. For the year ended December 31, 2009, the unrealized gains resulting from changes in fair value of conversion feature of convertible bond amounted to NT$114,250 (US$3,576) thousand.

(b)

Hedge accounting

The Company entered into plain vanilla type interest rate swap contracts as the primary hedging instrument. The Company paid interest based on fixed rate and receives market floating-rate from the counterparty. The aforementioned hedging contracts are intended to protect the Company from the risk of future cash flow fluctuation of floating interest rate debt. These contracts are designated as cash flow hedge and met the criteria for hedge accounting.

(Continued)

F-30

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2008 and 2009, details of hedged items designated as cash flow hedges and their respective hedging derivative financial instruments were as follows:

December 31, 2008
Hedged item	Hedging instrument	Fair value of hedging instrument	Expected period of cash flows	Expected period of recognition in earnings
		NT$
		(in thousands)

Bonds payable with variable interest rate	Interest rate swap contracts	5,398	Jan. 2009–Apr. 2009	Jan. 2009–Apr. 2009
Long-term borrowings with variable interest rate	Interest rate swap contracts	(788,678)	Jan. 2009–Dec. 2012	Jan. 2009–Dec. 2012

December 31, 2009
Hedged item	Hedging instrument	Fair value of hedging instrument	Expected period of cash flows	Expected period of recognition in earnings
		NT$
		(in thousands)

Long-term borrowings with variable interest rate	Interest rate swap contracts	(501,543)	Jan. 2010–Sep. 2014	Jan. 2010–Sep. 2014

Unrealized gains (losses) on derivative financial instruments effective as cash flow hedges were NT$396,472 thousand, NT$(705,125) thousand and NT$194,145 (US$6,077) thousand as of December 31, 2007, 2008 and 2009, respectively, which were recognized as a separate component of stockholders’ equity.

7.	Notes receivable and accounts receivable, net

	December 31,
	2008			2009
	NT$			NT$			US$
	(in thousands)

Notes receivable		-			3,512			110
Accounts receivable		23,359,219			57,220,600			1,790,942
Less: allowance for doubtful accounts		(97,608	)		(91,294	)		(2,857	)
allowance for sales returns and discounts		(1,036,287	)		(106,874	)		(3,345	)
		22,225,324			57,025,944			1,784,850

(Continued)

F-31

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

During 2008 and 2009, the Company entered into financing facilities with banks to sell certain of its accounts receivable, details of which were as follows:

For the year ended December 31, 2008
Underwriting bank	Factoring limit	Amount advanced	Amount sold	Amount excluded	Principle terms	Promissory note as collateral
	(in thousands)
Mizuho Corporate Bank	USD95,000	-	USD123,831	USD123,831	See below	None
Standard Chartered Bank	USD36,000	USD12,000	USD330,795	USD330,795	See below	None
Bank of China	USD40,000	USD25,948	USD 63,517	USD 63,517	See below	None

For the year ended December 31, 2009
Underwriting bank	Factoring limit	Amount advanced	Amount sold	Amount excluded	Principle terms	Promissory note as collateral
	(in thousands)
Taipei Fubon Bank	USD15,000	-	USD21,583	USD21,583	See below	None
China trust Commercial Bank	USD30,000	-	USD93,733	USD93,733	See below	None
Standard Chartered Bank	USD36,000	-	USD55,425	USD55,425	See below	None
Bank of China	-	-	USD74,540	USD74,540	See below	None
Standard Chartered Bank	USD165,000	USD154,606	USD266,883	USD266,883	See below	None

Note (a):

Under these facilities, the Company, irrevocably and without recourse, transferred accounts receivable to the respective underwriting banks.

Note (b):

To the extent of the amount sold to the underwriting banks, risks of non-collection or default by customers in the event of financial difficulties are borne by respective banks. The Company is not responsible for the collection of receivables subject to these facilities, or for any legal proceedings and costs thereof in recovering these receivables.

Note (c):

The Company had informed its customers subject to the facilities to make payment directly to the respective underwriting banks.

Note (d):

As of December 31, 2008 and 2009, total outstanding receivables resulting from the above transactions, net of fees charged by underwriting banks, of NT$2,493,779 thousand and NT$1,436,061 (US$44,947) thousand, respectively, were classified under other current financial assets.

(Continued)

F-32

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8.	Inventories, net

	December 31,
	2008		2009
	NT$		NT$		US$
			(in thousands)

Finished goods		12,569,057		13,958,910		436,899
Work-in-progress		8,104,339		17,109,430		535,506
Raw materials and spare parts		2,937,291		8,161,576		255,448
		23,610,687		39,229,916		1,227,853

9.	Equity investments held-for-sale

	December 31, 2009
	NT$		US$
	(in thousands)

Joint venture investment- Ningjin Songgong		493,415		15,443
Joint venture investment - Langfang Songgong		213,760		6,691
		707,175		22,134

M. Setek has two joint venture investments in Hebei, China namely Ningjin Songgong Semiconductor Co., Ltd. (“Ningjin Songgong”) and Langfang Songgong Semiconductor Co., Ltd. (“Langfang Songgong”). Although M. Setek holds a majority of the voting interests in each of these two joint ventures, it does not have the power to unilaterally control them. Therefore, these two joint ventures were accounted for under equity method. In December 2009, the board of directors of M. Setek resolved to dispose of these two investments and therefore, the aforementioned investments were transferred to equity investments held-for-sale and impairment loss of NT$1,183,873 (US$37,054) thousand was recognized. The Company expected to complete the disposal plan within one year.

(Continued)

F-33

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

10.	Equity-Method Investments

	December 31,
	2008				2009
	Ownership interest		Amount		Ownership interest		Amount
	%		NT$		%		NT$		US$
	(in thousands)
Qisda Corporation (“Qisda”)		10		2,713,352		10		2,837,687		88,817
Forhouse Corporation (“Forhouse”)		15		457,230		25		1,709,468		53,504
Cando Corporation Ltd. (“Cando”)		18		1,138,212		18		1,059,564		33,163
Sipix Technology Inc. (“STI”)		-		-		32		909,706		28,473
Taiwan Nano Electro-Optical Technology (“Nano”)		16		682,472		16		642,269		20,102
Light House Technology Co., Ltd. (“LHTC”)		17		165,226		45		604,182		18,910
Wellypower Optronics Corporation Ltd. (“Wellypower”)		9		437,848		9		465,871		14,581
Raydium Semiconductor Corp. (“Raydium”)		16		268,685		15		429,561		13,445
Entire Technology Co., Ltd. (“Entire”)		12		270,944		10		341,425		10,686
Daxin Materials Corp. (“Daxin”)		35		190,070		33		268,126		8,392
Asia Pacific Genesis Venture Capital Fund L.P. (“Asia Pacific VC”)		11		271,451		11		245,297		7,678
Abakus Solar AG (“Abakus”)		-		-		45		125,686		3,934
Dazzo Technology Corporation (“Dazzo”)		26		19,948		25		34,502		1,080
Apower Optronics Corporation (“Apower”)		5		34,840		5		33,230		1,040
Verticil Electronic Corp. (“Verticil”)		30		1,323		-		-		-
Patentop Ltd. (“Patentop”)		41		-		41		-		-
				6,651,601				9,706,574		303,805

For the Company’s investment in Qisda, the Company determined that it is able to exercise significant influence over the operating and financial policies of Qisda, and therefore, the Company accounts for its investment in Qisda under the equity method of accounting. On April 11, 2008, AUO made additional investment in Qisda by purchasing 90,456,800 shares of common stock issued by Qisda in a private placement offering at NT$22.11 per share, totaling NT$2,000,000 thousand. The Company cannot dispose of its investment in these private placement shares within three years of issuance unless certain conditions provided under Article 43-8 of the ROC Securities and Exchange Act are met.

(Continued)

F-34

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2008 and 2009, market values of the Company’s equity-method investments in publicly listed companies, determined based on quoted market price at year-end, were as follows:

	December 31,
	2008		2009
	NT$		NT$		US$
			(in thousands)

Qisda		1,194,908		3,685,831		115,363
Nano		269,966		821,701		25,718
Forhouse		293,500		4,685,415		146,648
Wellypower		227,288		610,170		19,098
Entire		-		1,898,530		59,422
		1,985,662		11,701,647		366,249

In 2008 and 2009, details of the difference between acquisition cost and fair value of net assets acquired were as follows:

	For the year ended December, 31, 2008
	Beginning balance			Current- period change			Amortization or realization		Ending balance
	NT$			NT$			NT$		NT$
	(in thousands)

Amortizable assets		(31,852	)		(508,138	)		14,452		(525,538	)
Goodwill		658,954			-			-		658,954
Other assets		261,602			(103,796	)		4,859		162,665
		888,704			(611,934	)		19,311		296,081

	For the year ended December 31, 2009
	Beginning balance			Current- period change			Amortization or realization			Ending balance
	NT$			NT$			NT$			NT$			US$
	(in thousands)

Amortizable assets		(525,538	)		179,784			66,654			(279,100	)		(8,736	)
Goodwill		658,954			468,705			-			1,127,659			35,295
Other assets		162,665			(3,836	)		(4,500	)		154,329			4,830
		296,081			644,653			62,154			1,002,888			31,389

(Continued)

F-35

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

11. Property, Plant and Equipment, and Idle Assets

Interest capitalized and included in property, plant and equipment for the years ended December 31, 2007, 2008 and 2009, consisted of the following:

	For the years ended December 31,
	2007		2008		2009
	NT$		NT$		NT$		US$
	(in thousands)

Buildings		230,051		351,979		185,281		5,799
Machinery and equipment		441,593		1,010,719		1,021,530		31,973
		671,644		1,362,698		1,206,811		37,772

The interest rates applied for the capitalization ranged from 1.92% to 7.74%, 3.28% to 7.74%, and 0.49% to 7.24% in 2007, 2008 and 2009, respectively.

Certain property, plant and equipment were pledged as collateral; see note 24.

Idle assets as of December 31, 2008 and 2009, consisted of the following:

	December 31,
	2008			2009
	NT$			NT$			US$
				(in thousands)
Cost:
Land		478,214			478,214			14,967
Buildings		544,421			544,421			17,040
Machinery and other equipment		8,845,770			9,826,244			307,551
		9,868,405			10,848,879			339,558
Less: accumulated depreciation		(6,377,846	)		(8,327,043	)		(260,627	)
		3,490,559			2,521,836			78,931
Less: allowance for devaluation of idle assets		(878,239	)		(724,678	)		(22,682	)
		2,612,320			1,797,158			56,249

(Continued)

F-36

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12. Intangible Assets

Intangible assets as of December 31, 2008 and 2009 consisted of the following:

	For the year ended December 31, 2008
	Beginning balance		Additions		Adjustments			Amortization			Ending balance
	NT$		NT$		NT$			NT$			NT$
	(in thousands)

Goodwill		14,020,962		-		(2,740,367	)		-			11,280,595
Core technologies		2,144,158		-		-			(1,225,233	)		918,925
Technology-related fees		3,389,326		765,896		-			(816,102	)		3,339,120
		19,554,446		765,896		(2,740,367	)		(2,041,335	)		15,538,640

	For the year ended December 31, 2009
	Beginning balance		Additions		Adjustments			Amortization
	NT$		NT$		NT$			NT$		US$
	(in thousands)

Goodwill		11,280,595		184,352		-			11,464,947		358,840
Core technologies		918,925		-		(918,925	)		-		-
Technology-related fees		3,339,120		268,131		(778,944	)		2,828,307		88,523
		15,538,640		452,483		(1,697,869	)		14,293,254		447,363

Pursuant to ROC SFAS No. 22, “Income Taxes,” if a valuation allowance is recognized at the acquisition date for deferred tax assets acquired, the income tax benefits recognized as a result the elimination of valuation allowance subsequent to the acquisition is to be applied first to reduce goodwill related to the acquisition. As of January 1, 2008, the goodwill related to merger with QDI amounted to NT$14,020,962 thousand which was reduced correspondingly with a downward adjustment of valuation allowance on deferred tax assets recognized in connection with the merger of NT$2,740,367 thousand in 2008.

13. Short-term Borrowings

Short-term borrowings as of December 31, 2008 and 2009 consisted of the following:

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)

Short-term borrowings		4,857,260		1,945,227		60,883
Unused available balance		38,760,054		28,711,185		898,629

(Continued)

F-37

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Interest rates on short-term borrowings outstanding as of December 31, 2008 and 2009, ranged from 1.80%-6.40% and 0.90%-4.37%, respectively.

14.	Bonds Payable

Bonds payable as of December 31, 2008 and 2009, consisted of the following:

	December 31,
	2008			2009
	NT$			NT$			US$
				(in thousands)
Secured bonds payable:
Secured Bond 1		2,500,000			-			-
Secured Bond 2		6,000,000			3,000,000			93,897
Secured Bond 3		5,000,000			5,000,000			156,495
Secured Bond 4		7,000,000			7,000,000			219,092
Unsecured bonds payable:
Unsecured Bond 1		-			17,240			539
Unsecured Bond 2		-			129,300			4,047
Unsecured Bond 3		-			124,128			3,885
		20,500,000			15,270,668			477,955
Less: current portion		(5,500,000	)		(5,615,508	)		(175,759	)
		15,000,000			9,655,160			302,196
Interest payable		224,051			184,805			5,784
Unused available balance		-			-			-

As of December 31, 2009, future principal repayments were as follows:

	NT$		US$
	(in thousands)

2010		5,615,508		175,759
2011		6,098,268		190,869
2012		3,556,892		111,327
		15,270,668		477,955

(Continued)

F-38

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The significant terms of secured bonds payable are summarized as follows:

	Secured Bond 1	Secured Bond 2	Secured Bond 3	Secured Bond 4

Issuer	AUO	AUO	AUO	AUO
Par value	NT$6,000,000 thousand	NT$6,000,000 thousand	NT$5,000,000 thousand	NT$7,000,000 thousand
Issue date	Apr. 23 – 24, 2004	Jun. 6 – 13, 2005	Mar. 21, 2006	Aug. 22, 2008
Issue price	At par value	At par value	At par value	At par value
Coupon rate	As stated below	Bond I: 2.00% Bond II: 1.9901%	Fixed rate 1.948%	Fixed rate 2.90%
Duration	As stated below	Jun. 6, 2005 – Jun. 13, 2010	Mar. 21, 2006 – Mar. 21, 2011	Aug. 22, 2008 – Aug. 22, 2012
Bank that provided guarantee	Mega International Commercial Bank and eleven other banks	Bank of Taiwan and eight other banks	Mizuho Corporate Bank and six other banks	Mizuho Corporate Bank and three other banks
Redemption	As stated below	As stated below	As stated below	As stated below

Secured Bond 1 is divided into five types, namely, I, II, III, IV and V, based upon their respective issuance structures. Type I has a fixed coupon rate of 1.43%, and the remaining have floating rates. However, AUO has entered into separate interest rate swap contracts that have the effect of converting the floating rates into fixed rates. Whereas Type I has a three-year term, the rest have a term of five years. AUO is obligated to repay the principal amount of each tranche under Type I in full at maturity; the principal amount of tranches A-F under Type II, tranches A, B, E, and F under Type III, and tranches A and B under Type IV will be repaid in 3 installments in the proportion of 10/60, 25/60 and 25/60 at the end of year 3, 4 and 5, respectively, from their respective issuance date; tranches G and H under Type II, tranches C and D under Type III, tranches C and D under Type IV, and tranches A-D under Type V will be repaid in two equal installments at the end of year 4 and 5 from their respective issuance date.

Secured Bond 2 is divided into two types, namely I and II, based upon their respective coupon rates and interest calculation structure. While AUO is obligated to make annual interest payments for both types of bonds, Type I is calculated based on simple interest and Type II is calculated semi-annually based on compound interest. Based upon their respective issuance date, the bonds can be further divided into six tranches, namely A, B, C, D, E and F, payable in two equal installments at the end of year 4 and 5 from their respective issuance date.

Secured Bond 3 is calculated based on simple interest. AUO is obligated to make annual interest payments for the bond. The bond is payable in two equal installments at the end of year 4 and 5 from its issuance date.

(Continued)

F-39

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Secured Bond 4 is calculated based on simple interest. AUO is obligated to make annual interest payments for the bond. The bond is payable in two equal installments at the end of year 3 and 4 from its issuance date.

The significant terms of unsecured bonds payable are summarized as follows:

	Unsecured Bond 1	Unsecured Bond 2	Unsecured Bond 3
Issuer	M. Setek	M. Setek	M. Setek
Par value	YEN500,000 thousand	YEN900,000 thousand	YEN900,000 thousand
Issue date	Jan. 31, 2005	Apr. 28, 2005	Sep. 30, 2005
Issue price	At par value	At par value	At par value
Coupon rate	Fixed rate 1.10%	Fixed rate 0.30%	Fixed rate 1.01%
Duration	Jan. 31, 2005 – Jan. 29, 2010	Apr. 28, 2005 – Apr. 25, 2012	Sep. 30, 2005 – Sep. 28, 2012
Bank that provided guarantee	None	Mizuho Corporate Bank	Mizuho Corporate Bank
Redemption	As stated below	As stated below	As stated below

Unsecured Bond 1 is calculated based on simple interest and M. Setek is obligated to make interest payment semi-annually from the date of issuance. The bond is payable in ten installments which started from July, 2005.

Unsecured Bond 2 is calculated based on floating interest and M. Setek is obligated to make interest payment semi-annually from the date of issuance. The bond is payable in twelve installments which started from October, 2005.

Unsecured Bond 3 is calculated based on floating interest and M. Setek is obligated to make interest payment semi-annually from the date of issuance. The bond is payable in fourteen installments started from March, 2006. Each payment of installment is YEN67,500 thousand and the remaining balance is payable at final installment.

All of the aforementioned secured bonds are secured by bank guarantees through an arrangement of a syndicated bank guarantee facility. Based on financial covenants under the syndicate agreement for the bond guarantee, AUO is obligated to maintain its current ratio (defined as current assets divided by current liabilities excluding current portion of long-term debts), debt ratio, interest coverage ratio, and tangible net worth, as defined, at a certain level. AUO complied with the aforementioned financial covenants in 2008 and 2009.

Certain of the Company’s assets are pledged to secure the bonds payable; see note 24.

(Continued)

F-40

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

15.	Convertible Bonds Payable

AUO assumed the convertible bonds of QDI in connection with the merger with QDI on October 1, 2006, and recorded the outstanding convertible bonds payable at fair value on the date of acquisition.

AUO assumed two unsecured domestic convertible corporate bonds (hereinafter referred to as “TCB 1” and “TCB 2”) and two unsecured overseas convertible corporate bonds (hereinafter referred to as “ECB 2” and “ECB 3”) from the merger with QDI. In 2007, AUO redeemed the total principal amount outstanding of ECB 2 in whole, amounting to US$1,950 thousand. Details of these convertible bonds are discussed in detail in the following paragraphs.

As of December 31, 2008 and 2009, outstanding convertible bonds payable consisted of the following:

	December 31, 2008
	TCB 1			TCB 2		ECB 3			Total
	NT$			NT$		NT$			NT$
	(in thousands)

Convertible bonds payable		5,194,300			2,690,900		2,427,861			10,313,061
Unamortized discount		(28,779	)		-		-			(28,779	)
		5,165,521			2,690,900		2,427,861			10,284,282
Less: current portion		(5,165,521	)		-		(2,427,861	)		(7,593,382	)
		-			2,690,900		-			2,690,900

	December 31, 2009
	TCB 2
	NT$		US$
	(in thousands)
Convertible bonds payable- current portion		2,690,900		84,222

Significant terms of the aforementioned convertible bonds payable are summarized as follows:

(a) Domestic convertible bond 1 (“TCB 1”)

Par value	NT$10,500,000 thousand

Original issue date	April 22, 2004

Original issue price	102.5% of par value

Coupon rate	0%

Maturity date	April 21, 2009

Collateral	None

Conversion method	Bondholders may convert bonds into AUO’s common shares at any time between May 22, 2004, and April 11, 2009.

(Continued)

F-41

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements


Conversion price	NT$70.49, as adjusted, effective October 1, 2006, as a result of merger with QDI. The conversion price was adjusted to NT$68.61 and NT$62.55 as a result of earnings distributions on August 10, 2007 and July 31, 2008, respectively.

Put right	No

Redemption terms	(a) Unless previously redeemed, purchased and cancelled, or converted, bonds will be redeemed on maturity at par. (b) Effective from the first anniversary of issuance to 40 days before maturity, AUO may redeem the outstanding bonds at par if the closing price of its common shares on the Taiwan Stock Exchange is at least 150% of the conversion price for 30 consecutive trading days. (c) Effective from the first anniversary of issuance to 40 days before maturity, AUO may redeem the outstanding bonds at par if the total amount of outstanding bonds is less than NT$1,050,000 thousand.

There was no conversion during 2008 and 2009.

(b) Domestic convertible bond 2 (“TCB 2”)

Par value	NT$6,000,000 thousand

Original issue date	July 18, 2005

Original issue price	At par value

Coupon rate	0%

Maturity date	July 18, 2010

Collateral	None

Conversion method	Bondholders may convert bonds into AUO’s common shares at any time between August 18, 2005, and July 8, 2010.

Conversion price	NT$44.10, as adjusted, effective October 1, 2006, as a result of merger with QDI. The conversion price was adjusted to NT$42.92, NT$38.21 and NT$36.82 as a result of earnings distributions on August 10, 2007, July 31, 2008, and August 18, 2009, respectively.

Put right	Bondholders have the right to request AUO to repurchase bonds on July 18, 2008, at par.

(Continued)

F-42

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Redemption terms

(a) Unless previously redeemed, purchased and cancelled, or converted, bonds will be redeemed on maturity at par.

(b) Effective from the first anniversary of issuance to 40 days before maturity, AUO may redeem the outstanding bonds at par if the closing price of its common shares on the Taiwan Stock Exchange is at least 150% of the conversion price for 30 consecutive trading days.

(c) Effective from the first anniversary of issuance to 40 days before maturity, AUO may redeem the outstanding bonds at par if the total amount of outstanding bonds is less than NT$600,000 thousand.

During 2008, certain bondholders exercised their rights to convert bonds with total principal amount of NT$58,400 thousand into common shares. There was no conversion during 2009.

Par value	US$294,500 thousand

Original issue date	November 26, 2004

Original issue price	At par value

Coupon rate	0%

Maturity date	November 26, 2009

Collateral	None

Conversion method	Bondholders may, at any time from 41 days after issuance to the 10 days before maturity, convert bonds into AUO’s common shares or certificates exchangeable for common stock.

Conversion price	NT$52.54, as adjusted, effective October 1, 2006, as a result of merger with QDI. The conversion price was adjusted to NT$51.13, NT$47.30 and NT$45.58 as a result of earnings distributions on August 10, 2007, July 31, 2008, and August 18, 2009, respectively. For purposes of determining the number of converted shares, a fixed exchange rate of US$1=NT$32.57 is used.

Put right	Bondholders have the right to request AUO to repurchase bonds on January 26, 2007, at par.

(Continued)

F-43

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Redemption terms

(a) Unless previously redeemed, purchased and cancelled, or converted, bonds will be redeemed on maturity at par.

(b) Effective from the 26th month of issuance, AUO may, at any time after January 26, 2007, redeem the bonds at par, in whole or in part, if the closing price (translated into U.S. dollars at the prevailing rate) of its common shares on the Taiwan Stock Exchange is at least 125% of the conversion price (translated into U.S. dollars at the rate of NT$32.57 = US$1) for 30 consecutive trading days.

(c) AUO may redeem the total amount of outstanding bonds in whole at par in the event that 95% of the bonds have been previously redeemed, converted, or purchased and cancelled.

During 2008, certain bondholders exercised their rights to convert bonds with total principal amount of US$2,200 thousand into common shares. There was no conversion during 2009.

During 2008, AUO purchased outstanding bonds of US$40,000 thousand, and recognized a gain of NT$142,055 thousand for the year ended December 31, 2008. In 2009, AUO redeemed the entire principal amount outstanding.

16.	Long-term Borrowings

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

Bank of Taiwan	As stated below, see note (a)	From Dec. 18, 2004, to Dec. 18, 2011, NT$49,000 million and US$150 million, repayable in 9 semi-annual installments starting from Dec. 2007.	35,949,387	23,910,912	748,385
Bank of Taiwan	As stated below, see note (a)	From Dec. 29, 2005, to Dec. 29, 2012, NT$37,000 million, repayable in 9 semi-annual installments starting from Dec. 2008.	32,885,600	24,664,200	771,962
Mega International Commercial Bank (see note (a) below)	As stated below, see note (a)	From Jul. 14, 2006, to Jul. 14, 2013, NT$27,000 million, repayable in 10 semi-annual installments starting from Jan. 2009.	27,000,000	21,600,000	676,056

(Continued)

F-44

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

Bank of Taiwan	As stated below, see note (a)	From Sep. 13, 2006, to Sep. 13, 2014, NT$48,000 million, repayable in 9 semi-annual installments starting from Sep. 2010.	10,000,000	47,750,000	1,494,523
Industrial Bank of Taiwan (see note (a) below)	As stated below, see note (b)	From Aug. 29, 2006, to Aug. 29, 2010, NT$1,000 million, repayable in 5 semi-annual installments starting from Aug. 2008.	825,000	475,000	14,867
Industrial Bank of Taiwan (see note (a) below)	As stated below, see note (b)	From Nov. 17, 2005, to Nov. 17, 2009, NT$500 million, repayable in 6 semi-annual installments starting from May 2007.	200,000	-	-
Bank of Taiwan	As stated below, see note (a)	From Dec. 29, 2009, to Dec. 29, 2016, NT$58,000 million, repayable in 9 semi-annual installments starting from Oct. 2012.	-	15,000,000	469,484
ABN-AMRO Bank, Shanghai branch (Phase A)	As stated below, see note (a)	From Aug. 2, 2006, to Aug. 2, 2013, RMB$1,400 million, repayable in 8 semi-annual installments starting from Feb. 2010.	3,507,358	5,705,738	178,583
ABN-AMRO Bank, Shanghai branch (Phase B)	As stated below, see note (a)	From Aug. 2, 2006, to Aug. 2, 2013, RMB$600 million. In May 2009, paid off RMB$200 million, the rest is repayable in 6 semi-annual installments starting from February 2011, the first repayable installments is RMB$40 million, RMB$60 million for the other 4 installments, with remaining balance payable at final installment.	2,862,073	1,876,960	58,747

(Continued)

F-45

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

ABN-AMRO Bank, Shanghai branch	As stated below, see note (a)	From Aug. 2, 2006, to Aug. 2, 2013, US$75 million, repayable in 9 semi-annual installments starting from Aug. 2009.	2,398,190	2,079,993	65,102
ABN-AMRO Bank, Shanghai branch	As stated below, see note (a)	From Aug. 2, 2006, to Aug. 2, 2013, RMB$800 million, repayable in 9 semi-annual installments starting from Aug. 2009.	3,734,765	999,053	31,269
Citibank, Shanghai branch (Syndicated loan II)	As stated below, see note (a)	From Nov. 30, 2004, to Nov. 30, 2009, RMB$830 million, repayable in 4 semi-annual installments starting from May 2008. Early repayment in full was made in Mar. 2009.	664,819	-	-
Citibank, Shanghai branch (Syndicated loan II)	As stated below, see note (a)	From Dec. 2, 2004, to Dec. 2, 2009, US$54 million, repayable in 6 semi-annual installments starting from Jun. 2007. Early repayment in full was made in Oct. 2009.	591,075	-	-
Standard Chartered Bank (China) Limited, Shanghai branch	As stated below, see note (a)	From Nov. 27, 2007, to Nov. 27, 2012, US$42 million, repayable in 5 semi-annual installments starting from Nov. 2010.	1,379,176	1,345,707	42,119
Agriculture Bank of China, Shanghai Songjiang branch	As stated below, see note (a)	From Dec. 29, 2006, to Oct. 16, 2009, RMB$771 million, repayable starting from Jan. 2009, each drawdown repayable in two years. Early repayment in full was made in Oct. 2009.	1,316,967	-	-
Agriculture Bank of China, Shanghai Songjiang branch	As stated below, see note (a)	From Sep. 11, 2008, to Sep. 10, 2009, RMB$771 million, repayable starting from Nov. 2010, each drawdown repayable in two years. Early repayment in full was made in Dec. 2009.	816,782	-	-

(Continued)

F-46

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

Agriculture Bank of China, Shanghai Songjiang branch	As stated below, see note (a)	From Dec. 3, 2008, to Oct. 16, 2009, RMB$235 million, repayable starting from Dec. 2010, each drawdown repayable in two years.	-	1,102,714	34,514
Citibank, Shanghai branch	As stated below, see note (a)	From Mar. 30, 2005, to Mar. 30, 2010, US$80 million, repayable in 7 semi-annual installments starting from Mar. 2007. Early repayment in full was made in May 2009.	401,087	-	-
Citibank, Shanghai branch	As stated below, see note (a)	From Mar. 30, 2005, to Mar. 30, 2010, RMB$249 million, repayable in 7 semi-annual installments starting from Mar. 2007. Early repayment in full was made in Mar. 2009.	256,360	-	-
Standard Chartered Bank, Shanghai branch	As stated below, see note (a)	From Nov. 27, 2007, to Nov. 27, 2012, RMB$135 million, repayable in 5 semi-annual installments starting from Nov. 2010.	-	281,544	8,812
Agricultural Bank of China, Xiamen branch	As stated below, see note (a)	From Apr. 3, 2006, to Apr. 3, 2012, US$20 million, 25% repayable in Apr. 2010, 50% in Apr. 2011, and the remaining principal due in Apr. 2012.	600,575	422,316	13,218
Bank of China, Xiamen branch	As stated below, see note (a)	From Apr. 28, 2007, to Apr. 28, 2012, RMB$80 million, 25% repayable in Dec. 2010, 25% in Dec. 2011 and 50% in Apr. 2012.	384,368	375,392	11,749

(Continued)

F-47

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

Bank of Communications, Xiamen branch	As stated below, see note (a)	From Dec. 20, 2006, to Dec. 20, 2009, RMB$50 million, 30% payable in Mar. 2010 and 10% payable in Apr. 2010, with the remaining principal payable in full in December 2010. Early repayment in full was made in Sep. 2009.	240,230	-	-
Bank of Communications, Xiamen branch	As stated below, see note (a)	From Aug. 18, 2008, to Aug. 18, 2012, RMB$100 million, repayable in 6 semi-annual installments starting from Feb. 2010, repayable in semi-annual installments of RMB15 million for the first 5 installments, with the remaining balance payable at final installment. Early repayment in full was made in Oct. 2009.	144,138	-	-
Agricultural Bank of China, Xiamen branch	As stated below, see note (a)	From Feb. 22, 2008, to Feb. 21, 2011, US$5 million, 3-year term, one-time repayment upon maturity. Early repayment in full was made in Nov. 2009.	144,138	-	-
Bank of China (Suzhou)	As stated below, see note (a)	From Feb. 12, 2007, to Feb. 12, 2012, RMB$80 million, 25% repayable in Feb. 2010, 25% in Feb. 2011 and 50% in Feb. 2012. Early repayment in full was made in Aug. 2009.	384,368	-	-
China Construction Bank (Suzhou)	As stated below, see note (a)	From Aug. 10, 2006, to Aug. 9, 2011, RMB$71 million, 5-year term, one-time repayment upon maturity. Early repayment in full was made in Feb. 2009.	341,127	-	-

(Continued)

F-48

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

China Construction Bank (Suzhou)	As stated below, see note (a)	From Aug. 28, 2007, to Aug. 23, 2010, US$1.5 million, 3-year term, one-time repayment upon maturity. Early repayment in full was made in Sep. 2009.	49,256	-	-
China Construction Bank (Suzhou)	As stated below, see note (a)	From Aug. 10, 2006, to Aug. 9, 2011, US$1 million, 5-year term, one-time repayment upon maturity. Early repayment in full was made in Sep. 2009.	32,838	-	-
China Construction Bank (Suzhou)	As stated below, see note (a)	From Jul. 24, 2007, to Jul. 23, 2010, US$1 million, 3-year term, one-time repayment upon maturity. Early repayment in full was made in Sep. 2009	32,837	-	-
First Commercial Bank	As stated below, see note (a)	From Aug. 25, 2009, to Aug. 25, 2011, NT$2,000 million, repayable in 5 semi-annual installments starting from Aug. 2012, 12.5% payable at each of the first 4 installments, with the remaining balance payable at final installment.	-	820,000	25,665
China Construction Bank, Xiamen branch	As stated below, see note (a)	From Nov. 24, 2009, to Nov. 23, 2016, RMB$200 million, 20% principal repayable in Nov. 2013, 2014 and 2015, and 40% in Nov. 2016.	-	126,695	3,965
Agriculture Bank of China, Xiamen branch	As stated below, see note (a)	From Dec. 24, 2009, to Dec. 23, 2014, US$20 million, repayable in 6 semi-annual installments starting from Dec. 2011, the first three installments of US$2.5 million payable until Dec. 2012, following two installments of US$2.5 million until Dec. 2013, and the remaining principal due in Dec. 2014.	-	46,924	1,469

(Continued)

F-49

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

Mizuho Corporate Bank	As stated below, see note (a)	From Dec. 26, 2005, to Dec. 25, 2010, YEN2,000 million, repayable in 16 quarterly installments starting from Mar. 2007.	-	172,400	5,396
Mizuho Corporate Bank	As stated below, see note (a)	From Mar. 27, 2006, to Feb. 28, 2013, YEN8,000 million, repayable in 20 quarterly installments starting from May 2008.	-	1,792,960	56,118
Bank of Tokyo – Mitsubishi UFJ	As stated below, see note (a)	From Mar. 27, 2006, to Feb. 28, 2013, YEN7,000 million, repayable in 20 quarterly installments starting from May 2008.	-	1,568,840	49,103
Shoko Chukin Bank	As stated below, see note (b)	From Apr. 2, 2007, to Jan. 31, 2012, YEN1,000 million, repayable in 18 quarterly installments starting from Oct. 2007.	-	174,124	5,450
Shoko Chukin Bank	As stated below, see note (b)	From Sep. 28, 2007, to Aug. 28, 2012, YEN330 million, repayable in 55 monthly installments starting from Feb. 2008.	-	68,270	2,137
Resona Bank	As stated below, see note (b)	From Mar. 8, 2007, to Feb. 28, 2012, YEN500 million, repayable in 20 quarterly installments starting from May 2007.	-	77,580	2,428
Development Bank of Japan	As stated below, see note (a)	From Feb. 28, 2006, to Feb. 28, 2013, YEN650 million, repayable in 25 quarterly installments starting from Feb. 2007.	-	116,542	3,648

(Continued)

F-50

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank or

December 31,

agent bank

Purpose

Line of credit and key terms

2008

2009

NT$

US$

(in thousands)

Development Bank of Japan	As stated below, see note (a)	From Feb. 28, 2006, to Feb. 28, 2013, YEN550 million, repayable in 25 quarterly installments starting from Feb. 2007.	-		98,613		3,086
Bank SinoPac	As stated below, see note (a)	From Dec. 1, 2009, to Dec. 9, 2014, YEN3,000 million, repayable in 16 quarterly installments starting from Mar. 2010.	-		1,034,400		32,376
Taipei Fubon Bank	As stated below, see note (a)	From Dec. 10, 2009, to Jan. 30, 2014, YEN3,000 million, repayable in 16 quarterly installments starting from Mar. 2010.	-		1,034,400		32,376
Mizuho Corporate Bank	As stated below, see note (a)	From Dec. 25, 2009, to Dec. 25, 2014, YEN21, 000 million, repayable in 16 quarterly installments starting from Mar. 2010.	-		7,240,801		226,629
			127,142,514		161,962,078		5,069,236
Less: current portion			(30,491,872	)	(38,537,926	)	(1,206,195	)
			96,650,642		123,424,152		3,863,041
Unused available balance			103,818,007		85,213,004		2,667,074
Interest rate range			1.45%-7.74%		0.63%-5.76%

Note (a):

The loan is intended to fund the purchase of machinery, equipment and building.

Note (b):

The loan is intended for operational use.

(Continued)

F-51

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2009, future principal repayments were as follows:

	NT$		US$
	(in thousands)

2010		38,537,926		1,206,195
2011		42,431,696		1,328,066
2012		32,318,648		1,011,538
2013		25,060,109		784,354
Thereafter		23,613,699		739,083
Total		161,962,078		5,069,236

The Company entered into the aforementioned long-term loan arrangements with banks and financial institutions to support capital expenditures on construction projects and the purchase of machinery and equipment. A commitment fee is charged per annum and payable quarterly based on the committed-to-withdraw but unused balance, if any. No commitment fees were paid for the years ended December 31, 2007, 2008 and 2009. These credit facilities contain covenants that require the Company to maintain certain financial ratios such as current ratio (defined as current assets divided by current liabilities excluding (a) current portion of long-term debt or (b) current portion of long-term debt and accounts payable which are related to the equipment payment), debt-equity ratio, interest coverage ratio, tangible net worth and others as specified in the loan agreements. The Company complied with the aforementioned financial covenants in 2008 and 2009, except for the matter described below.

M. Setek had breached one financial covenant under its loan agreements, which may require an early repayment of a borrowing of YEN6,750,000 (US$72,845) thousand. Currently, M. Setek is seeking waiver from its lenders. Such borrowing which breached the financial covenant and matured over one year has been reclassified into current liabilities.

Refer to note 24 for assets pledged as collateral to secure the aforementioned long-term borrowings.

(Continued)

F-52

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

17.	Retirement Plans

The following table sets forth the defined benefit obligation and the amounts recognized related to AUO’s and Toppan CFI’s retirement plans.

	December 31,
	2008			2009
	NT$			NT$			US$
	(in thousands)
Benefit obligation:
Vested benefit obligation		-			(7,749	)		(242	)
Non-vested benefit obligation		(490,196	)		(580,847	)		(18,180	)
Accumulated benefit obligation		(490,196	)		(588,596	)		(18,422	)
Additional benefits based on future salary increase		(567,180	)		(676,886	)		(21,186	)
Projected benefit obligation		(1,057,376	)		(1,265,482	)		(39,608	)
Fair value of plan assets		1,111,106			1,254,680			39,270
Funded status		53,730			(10,802	)		(338	)
Unrecognized net transition obligation		8,506			7,547			236
Unrecognized pension loss		223,637			393,088			12,303
Minimum pension liability		(49,761	)		-			-
Prepaid pension assets		236,112			389,833			12,201

The following table sets forth the defined benefit obligation and the amounts recognized related to M. Setek’s retirement plans.

	December 31,
	2009
	NT$			US$
	(in thousands)
Benefit obligation:
Vested benefit obligation		(131,959	)		(4,130	)
Non-vested benefit obligation		(13,122	)		(411	)
Accumulated benefit obligation		(145,081	)		(4,541	)
Additional benefits based on future salary increase		(19,584	)		(613	)
Projected benefit obligation		(164,665	)		(5,154	)
Fair value of plan assets		31,871			998
Funded status		(132,794	)		(4,156	)
Unrecognized net transition obligation		9,109			285
Pension liabilities		(123,685	)		(3,871	)

(Continued)

F-53

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The components of AUO’s, Toppan CFI’s and M. Setek’s net periodic pension costs consisted of the following:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)
Defined benefit pension plan:
Service cost		8,949			8,116			(958	)		(30	)
Interest cost		26,445			29,547			23,793			745
Expected return on plan assets		(21,760	)		(28,561	)		(27,669	)		(866	)
Amortization		13,184			6,907			9,406			294
Gain on curtailment		-			(1,630	)		-			-
Net periodic pension cost		26,818			14,379			4,572			143

Significant weighted-average actuarial assumptions used for the pension plans of AUO and Toppan CFI were as follows:

	December 31,
	2007			2008			2009

Discount rate		3.00	%		2.50	%		2.25	%
Rate of increase in future compensation levels		3.50	%		2.50% – 3.00	%		3.00	%
Expected long-term rate of return on plan assets		3.00	%		2.50	%		2.00% – 2.25	%

Significant weighted-average actuarial assumptions used for the pension plan of M. Setek were as follows:

	December 31,
	2009

Discount rate		2.00	%
Rate of increase in future compensation levels		1.20	%
Expected long-term rate of return on plan assets		0.75	%

AUO, Toppan CFI, Konly, Lextar, DPTW and DSTW have set up defined contribution plans in accordance with the ROC Labor Pension Act, and for the years ended December 31, 2007, 2008 and 2009, the Company recognized total benefit costs of NT$584,311 thousand, NT$667,327 thousand and NT$641,120 (US$20,066) thousand, respectively, related to these defined contribution plans. In addition to the aforementioned companies, total benefit costs recognized by other subsidiary companies related to defined contribution plans in accordance with local regulations amounted to NT$414,769 thousand, NT$490,427 thousand and NT$359,358 (US$11,248) thousand for the years ended December 31, 2007, 2008 and 2009, respectively.

(Continued)

F-54

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

18.	Capital Lease Liability

The Company entered into several machinery and equipment capital lease agreements. These leases cover periods starting from April 2005 to September 2014, and are payable on a monthly basis. As of December 31, 2009, details of lease liability were as follows:

	December 31,
	2009
	NT$			US$
	(in thousands)

Capital lease liability		789,274			24,703
Less: current portion		(194,685	)		(6,093	)
		594,589			18,610

As of December 31, 2009, the Company’s future lease payments based on the lease agreements were as follows:

	NT$		US$
	(in thousands)

2010		194,685		6,093
2011		175,273		5,486
2012		181,293		5,674
2013		185,058		5,792
Thereafter		52,965		1,658
Total		789,274		24,703

19.	Stockholders’ Equity

(a) Common stock

Based on a stockholder resolution on June 13, 2007, AUO increased its common stock by NT$2,088,312 thousand, at par value of NT$10 per share, through the capitalization of retained earnings and employee bonuses of NT$1,514,793 thousand and NT$573,519 thousand, respectively. The issuance of 208,831 thousand shares of common stock was authorized by and registered with the government authorities.

Based on a stockholder resolution on June 19, 2008, AUO increased its common stock by NT$6,371,362 thousand, at par value of NT$10 per share, through the capitalization of retained earnings and employee bonuses of NT$3,934,115 thousand and NT$2,437,247 thousand, respectively. The issuance of 637,136 thousand shares of common stock was authorized by and registered with the government authorities.

(Continued)

F-55

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Based on a stockholder resolution on June 19, 2009, AUO increased its common stock by NT$4,561,484 thousand, with 321,326 thousand shares through the capitalization of retained earnings and employee bonuses of NT$2,551,716 thousand and NT$2,009,768 thousand, respectively. The issuance of the aforementioned shares of common stock was authorized by and registered with the government authorities. The employee bonuses of NT$2,009,768 thousand was securitized into 66,154 thousand common shares based on the closing price of NT$30.38 on the day before the stockholder resolution.

AUO’s authorized common stock, with par value of NT$10 per share, amounted to NT$90,000,000 thousand and NT$100,000,000 thousand as of December 31, 2008 and 2009, respectively. AUO’s issued common stock, with par value of NT$10 per share, amounted to NT$85,057,196 thousand and NT$88,270,455 thousand as of December 31, 2008 and 2009, respectively.

AUO’s ADSs were listed on the New York Stock Exchange. Each ADS represents the right to receive 10 shares of common stock. As of December 31, 2009, AUO had issued 105,929 thousand ADSs, which represented 1,059,285 thousand shares of its common stock.

(b) Capital surplus

According to the Republic of China Company Act, capital surplus, including premium from stock issuing and donations received, shall be applied to offset accumulated deficits before it can be used to increase common stock. Pursuant to the Republic of China Securities and Exchange Act, the total sum of capital surplus capitalized per annum shall not exceed 10 percent of the issued common stock. Capital surplus arising from premium from issuing stock shall only be applied to increase common stock one year after it has been approved by and registered with the relevant governmental authorities.

According to the Republic of China Company Act, 10 percent of the annual earnings after payment of income taxes due and offsetting accumulated deficits, if any, shall be allocated as legal reserve until the accumulated legal reserve equals the issued common stock. Legal reserve can only be used to offset accumulated deficits and increase common stock. The distribution of additional shares to shareholders through capitalizing legal reserve is limited to 50 percent of the accumulated legal reserve and is effected only when the accumulated legal reserve exceeds 50 percent of the issued common stock.

(Continued)

F-56

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(d) Distribution of earnings and dividend policy

According to AUO’s articles of incorporation, 10 percent of the annual earnings, after payment of income taxes due and offsetting accumulated deficits, if any, shall be set aside as a legal reserve. In addition, a special reserve in accordance with applicable laws and regulations shall also be set aside. The remaining earnings may be distributed as follows:

(1) at least 5 percent as employee bonuses;

(2) at most 1 percent as remuneration to directors; and

(3) the remaining portion, in whole or in part, as dividends to common stockholders.

Pursuant to regulations promulgated by the Financial Supervisory Commission, and effective from the distribution of earnings for fiscal year 1999 onwards, a special reserve equivalent to the total amount of items that are accounted for as deductions to the stockholders’ equity shall be set aside from current earnings, and not distributed. The special reserve shall be available for appropriation to the extent of reversal of deductions to stockholders’ equity in subsequent periods.

The appropriation of AUO’s net earnings may be distributed by way of cash dividend, stock dividend, or a combination of cash and stock dividends. The policy for dividend distribution considers factors such as the current and future investment environment, fund requirements, domestic and international competition, capital budgets, the benefits to stockholders, equalization of dividends, and long-term financial planning. Earnings distribution is proposed by the board of directors and approved at the stockholders’ meeting. Pursuant to the articles of incorporation, the cash dividend shall not be less than 10 percent of the total dividends.

Information on the distributions of earnings as employee bonuses and remuneration to directors for 2007 and 2008, as approved by stockholders on June 19, 2008, and June 19, 2009, respectively, is as follows:

	2007		2008
	NT$
	(in thousands, except for per share data)

Employee bonuses－stock		2,437,247		2,009,768
Employee bonuses－cash		1,624,832		861,329
Remuneration to directors		138,604		57,422
		4,200,683		2,928,519

(Continued)

F-57

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The aforementioned distributions of earnings for 2007 and 2008 were consistent with the resolutions in the board of directors’ meetings.

Employee bonuses and remuneration to directors for 2009 were not accrued due to AUO’s net loss for the year ended December 31, 2009.

Effective June 13, 2007, AUO elect to replace the duties of supervisors with an audit committee.

(e) Employee stock option plans

AUO assumed Employee Stock Option (“ESO”) Plans from the merger with QDI. The ESO Plans entitle option holders to subscribe one share of common stock per unit thereof. Options are granted to eligible employees of QDI and its subsidiaries, both domestic and overseas, in which QDI held directly and indirectly more than 50% ownership interest and had a controlling interest. Options granted expire six years after the date of grant, and holders may exercise options vested, effective from two years after date of grant, in accordance with the vesting schedule. Options were granted at an exercise price equal to the closing price of the common stock of QDI on the Taiwan Stock Exchange on the grant date. On the date of acquisition, the exercise price and units issued were adjusted in accordance with the share conversion ratio between QDI and AUO share.

Details of the ESO Plans were as follows:

Plan	Issuing date	Units issued		Term of grant	Option exercising term

2002 ESO Plan	Aug. 8, 2002		1,861	Aug. 8, 2002 – Aug. 7, 2008	Aug. 8, 2004 – Aug. 7, 2008

2003 ESO Plan	Dec. 31, 2003		5,631	Dec. 31, 2003 – Dec. 30, 2009	Dec. 31, 2005 – Dec. 30, 2009

(Continued)

F-58

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A summary of the ESO Plans, and changes during the years ended December 31, 2007, 2008 and 2009, were as follows:

	Unit			Weighted-average exercise price
	(in thousands)			NT$

Balance at January 1, 2007		7,146			48.30
Units exercised		(2,796	)		45.30
Units increased due to issuance of stock dividends		142			47.90
Units cancelled		(798	)		50.60
Balance at December 31, 2007		3,694			48.10
Units exercised		(621	)		42.90
Units increased due to issuance of stock dividends		250			45.20
Units cancelled		(526	)		42.50
Balance at December 31, 2008		2,797			46.00
Units exercised		-			-
Units increased due to issuance of stock dividends		102			44.30
Units cancelled		(2,899	)		45.90
Balance at December 31, 2009		-			-

Assumptions used to estimate the fair value of the aforementioned ESO were as follows:

	2002 ESO Plan		2003 ESO Plan

Dividend yield		2.4%		2.4%
Expected volatility		40.6%		43.7%
Risk-free interest rate		1.7%		1.7%
Expected continuing period	0.9 year		1.9 years

20.	Income Taxes

(a)

Pursuant to the Act for Establishment and Administration of Science Parks and the Statute for Upgrading Industries, AUO (including the extinguished Unipac and QDI), Toppan CFI, and Lextar are entitled to elect appropriate tax incentives, such as tax exemption and investment tax credits for shareholders, based on initial investments and subsequent capital increases for the purpose of purchasing qualified TFT-LCD, color filter and LED production equipment and machinery.

(Continued)

F-59

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

AUO, Toppan CFI and Lextar were entitled to the following tax exemptions:

Year of investment	Tax incentive chosen	Tax exemption period

AUO:
1999	Exemption from corporate income taxes for four years	Jan. 1, 2005 – Dec. 31, 2008
1999, 2000, 2001	Exemption from corporate income taxes for five years	Jan. 1, 2005 – Dec. 31, 2009
2001, 2002, 2003	Exemption from corporate income taxes for five years	Jan. 1, 2006 – Dec. 31, 2010
2002	Exemption from corporate income taxes for five years	Jan. 1, 2007 – Dec. 31, 2011
2003	Exemption from corporate income taxes for five years	Jan. 1, 2008 – Dec. 31, 2012
2004	Exemption from corporate income taxes for five years	Jun. 25, 2007 – Jun. 24, 2012
2004	Exemption from corporate income taxes for five years	Sep. 29, 2007 – Sep. 28, 2012
2004	Exemption from corporate income taxes for five years	Nov. 3, 2007 – Nov. 2, 2012
2005, 2006, 2007, 2008	Exemption from corporate income taxes for five years	Pending designation
Toppan CFI:
2001	Exemption from corporate income taxes for five years	Jan. 1, 2004 – Dec. 31, 2008
2002	Exemption from corporate income taxes for five years	Jul. 31, 2004 – Jul. 30, 2009
2004	Exemption from corporate income taxes for five years	Jun. 30, 2005 – Jun. 29, 2010
Lextar:
2008	Exemption from corporate income taxes for five years	Pending designation

(Continued)

F-60

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(b)

The components of income tax expense (benefit) were as follows:

	For the year ended December 31,
	2007			2008		2009
	NT$			NT$		NT$			US$
	(in thousands)
Current income tax expense		4,475,124			2,205,215		684,697			21,430
Deferred income tax expense (benefit)		(2,387,214	)		2,423,851		(707,284	)		(22,137	)
		2,087,910			4,629,066		(22,587	)		(707	)

The statutory income tax rate applicable to AUO and its subsidiaries located in the Republic of China is 25%. Effective January 1, 2006, an alternative minimum tax (“AMT”) in accordance with the Income Basic Tax Act (“IBTA”) is calculated. Other foreign subsidiary companies calculated income tax in accordance with local tax law and regulations.

In May 2009, the Republic of China government promulgated an amendment of the Income Tax Law. According to the amendment, the income tax rate of Taiwan profit-seeking enterprises will be reduced from 25% to 20%, effective in 2010. AUO and its domestic subsidiaries had recalculated their deferred tax assets and liabilities in accordance with the amended Law and adjusted the resulting difference as income tax benefit or expense.

The income tax expense (benefit) calculated based on the Republic of China statutory income tax rate of 25% was reconciled with income tax expense (benefit) as reported in the consolidated statements of operations for the years ended December 31, 2007, 2008 and 2009, as follows:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)
Expected income tax expense (benefit)		14,640,961			6,567,728			(6,816,850	)		(213,360	)
Tax exemption		(6,085,443	)		(2,975,267	)		-			-
Decrease (increase) in investment tax credits, net of expired portion		(1,654,487	)		(5,162,128	)		3,387,963			106,040
Tax on undistributed retained earnings		431,373			2,297,061			1,404,104			43,947
Increase (decrease) in valuation allowance		(5,082,677	)		3,374,806			1,007,152			31,523
Effect of changes in statutory income tax rate		-			-			1,872,338			58,602
Permanent differences		(459,923	)		327,415			(380,862	)		(11,921	)
Others		298,106			199,451			(496,432	)		(15,538	)
Income tax expense (benefit)		2,087,910			4,629,066			(22,587	)		(707	)

(Continued)

F-61

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(c)

The components of deferred income tax assets (liabilities) were as follows:

	December 31,
	2008			2009
	NT$			NT$			US$
	(in thousands)
Current:
Investment tax credits		9,527,886			5,545,151			173,557
Timing differences of revenue recognition between accounting and taxable income		538,820			443,136			13,870
Inventories devaluation		2,078,665			1,057,786			33,107
Product warranty		471,338			458,117			14,339
Unrealized losses and expenses		1,154,627			2,658,964			83,223
Others		282,110			298,108			9,330
		14,053,446			10,461,262			327,426
Valuation allowance		(8,673,006	)		(5,261,997	)		(164,695	)
Net deferred tax assets—current		5,380,440			5,199,265			162,731
Noncurrent:
Investment tax credits		13,015,255			12,212,776			382,247
Net operating loss carryforwards		256,900			6,685,747			209,257
Foreign investment gain under the equity method		(1,035,489	)		(1,864,459	)		(58,356	)
Goodwill		(765,906	)		(824,776	)		(25,815	)
Others		(339,953	)		1,242,995			38,904
		11,130,807			17,452,283			546,237
Valuation allowance		(9,125,425	)		(14,398,964	)		(450,671	)
Net deferred tax assets—noncurrent		2,005,382			3,053,319			95,566

Total gross deferred tax assets		28,098,244			31,062,821			972,232
Total gross deferred tax liabilities		(2,913,991	)		(3,149,276	)		(98,569	)
Total valuation allowance		(17,798,431	)		(19,660,961	)		(615,366	)
		7,385,822			8,252,584			258,297

(d)

Investment tax credits

Pursuant to the Statute for Upgrading Industries, tax credits may be applied over a period of five years to offset income tax payable. The amount of tax credits available to be applied in any year is limited to 50% of the income tax payable for that year, except for the final year in which such tax credit expires.

Pursuant to the Business Mergers and Acquisition Act, AUO is entitled to investment tax credits accumulated by QDI prior to the date of acquisition. As of December 31, 2009, unused investment tax credits available to AUO amounted to NT$640,750 (US$20,055) thousand, and a valuation allowance of NT$640,750 (US$20,055) thousand was recognized thereon.

(Continued)

F-62

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2009, unused tax credits of AUO (including the extinguished QDI), Toppan CFI, Lextar, Konly and Ronly, and their respective years of expiration were as follows:

Year of assessment	Unused tax credits				Expiration year
	NT$		US$
	(in thousands)

2006		5,545,151		173,557	2010
2007		2,331,811		72,983	2011
2008		7,521,167		235,405	2012
2009(estimated)		2,359,798		73,859	2013
		17,757,927		555,804

(e)

Net operating loss carryforwards

Pursuant to the Taiwan Income Tax Act, as amended on January 21, 2009, the period within which unused net operating loss (“NOL”) assessed by the tax authorities can be carried forward to offset future taxable income has been extended from five years to ten years. Certain foreign subsidiaries are also entitled to enjoy NOL in accordance with respective local tax law and regulations.

As of December 31, 2009, unused NOL sustained by AUO, Toppan CFI, and foreign subsidiaries were as follows:

Year of assessment	Unused NOL				Expiration year
	NT$		US$
	(in thousands)

2006		783,130		24,511	2016
2007		193,740		6,064	2017
2008		64,150		2,008	2018
2009 (estimated) - Domestic subsidiaries		29,037,247		908,834	2019
2009 (estimated) - Foreign subsidiaries		1,665,244		52,120	2013
		31,743,511		993,537

(f)

Assessments by the tax authorities

As of December 31, 2009, the tax authorities had completed the examination of income tax returns of AUO through 2006.

(Continued)

F-63

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The tax authorities have completed the examination of income tax returns of Toppan CFI through 2006 but its 2004 income tax return was assessed by the tax authorities with additional liability of NT$17,751 thousand due to a dispute on the calculation of tax exemption and investment tax credits pursuant to the Statute for Upgrading Industries. Toppan CFI disagreed with the assessment and subsequently filed a tax appeal. Management does not expect that the final outcome of this matter will have a material impact on the Company’s consolidated financial statements.

The tax authorities have completed the examination of income tax returns of Konly and Ronly through 2007.

(g)

The Enterprise Income Tax Law of the People’s Republic of China (the “EITL”), as approved by related government authorities on March 16, 2007, is effective from January 1, 2008. Prior to 2008 and the promulgation of the EITL, income tax rates applicable to the Company’s subsidiary companies located in Mainland China ranged from 0% to 33%. Beginning on January 1, 2008, income tax rates range from 0% to 25%. The Company remeasured deferred tax assets and liabilities as of December 31, 2007, in accordance with the EITL, and concluded that the adoption of the EITL did not have a material impact on the Company’s consolidated financial statements.

(h)

The integrated income tax system

Information related to the imputation credit account (“ICA”) was summarized below:

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)
Unappropriated earnings:
Earned in 1998 and thereafter		76,912,630		40,863,051		1,278,969
ICA balance		4,487,600		5,369,104		168,047

	For the year ended December 31,
	2008		2009
	(actual)		(estimated)
Creditable ratio for earnings distribution to Republic of China resident stockholders		7.71%		13.13%

The imputation credit to be allocated to stockholders is computed based on the ICA balance at the date of earnings distribution. The estimated creditable ratio may differ from the actual distribution.

(Continued)

F-64

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

21.	Earnings (loss) per Share (“(L)EPS”)

Basic (L)EPS for the years ended December 31, 2007, 2008 and 2009 were computed as follows:

	For the year ended December 31,
	2007				2008				2009
	Pre-tax		After tax		Pre-tax		After tax		Pre-tax			After tax
	NT$		NT$		NT$		NT$		NT$			NT$
	(in thousands, except for per share data)
Net income (loss) attributable to equity holders of the parent company:
Net income (loss)		58,443,002		56,417,766		25,903,996		21,267,386		(26,668,094	)		(26,769,335	)
Weighted-average number of shares outstanding during the year:
Shares of common stock at beginning of year		7,573,403		7,573,403		7,865,201		7,865,201		8,505,720			8,505,720
Employee stock options		1,138		1,138		419		419		-			-
Convertible bonds		26,126		26,126		2,398		2,398		-			-
Issuance of shareholders’ stock dividends and employee stock bonus		208,831		208,831		637,136		637,136		291,005			291,005
		7,809,498		7,809,498		8,505,154		8,505,154		8,796,725			8,796,725
Basic (L)EPS (NT$):
Basic (L)EPS—net income (loss)		7.48		7.22		3.05		2.50		(3.03	)		(3.04	)
Weighted-average number of shares outstanding during the year—retroactively adjusted		8,695,122		8,695,122		8,760,309		8,760,309
Basic EPS—retroactively adjusted (NT$):
Basic EPS—net income—retroactively adjusted		6.72		6.49		2.96		2.43

(Continued)

F-65

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Diluted EPS for years 2007, 2008 and 2009 were computed as follows:

	For the year ended December 31,
	2007						2008				2009
	Pre-tax			After tax			Pre-tax		After tax		Pre-tax	After tax
	NT$			NT$			NT$		NT$		NT$	NT$
	(in thousands, except for per share data)
Net income attributable to equity holders of the parent company (including the effect of dilutive potential common stock)
Net income attributable to equity holders of the parent company		58,443,002			56,417,766			25,903,996		21,267,386
Effects of potential common stock:
Convertible bonds payable		(300,056	)		(225,042	)		53,055		39,792
		58,142,946			56,192,724			25,957,051		21,307,178
Weighted-average number of shares outstanding during the year (including the effect of dilutive potential common stock):
Weighted-average number of shares outstanding during the year		7,809,498			7,809,498			8,505,154		8,505,154
Effects of potential common stock:
Convertible bonds payable		377,304			377,304			204,708		204,708
Employee bonuses		-			-			135,795		135,795
Employee stock options		547			547			104		104
		8,187,349			8,187,349			8,845,761		8,845,761
Diluted EPS (NT$)		7.10			6.86			2.93		2.41
Weighted-average number of shares outstanding—retroactively adjusted (including the effect of dilutive potential common stock)		9,115,822			9,115,822			9,111,134		9,111,134
Diluted EPS—retroactively adjusted (NT$):
Diluted EPS—net income—retroactively adjusted		6.38			6.16			2.85		2.34

22.	Additional Disclosure on Financial Instruments

(a)

Fair value information

As of December 31, 2008 and 2009, the fair values of the Company’s financial assets and liabilities were as follows:

	December 31, 2008
	Carrying amount		Fair value
	NT$		NT$
	(in thousands)
Financial assets:
Cash and cash equivalents		83,434,697		83,434,697
Accounts receivable (including related parties)		23,899,077		23,899,077
Other financial assets—current		3,082,294		3,082,294
Foreign currency forward contracts		1,067,531		1,067,531
Available-for-sale financial assets—current		470,301		470,301
Available-for-sale financial assets—noncurrent		595,750		595,750
Financial assets carried at cost—noncurrent		583,197	See (b) (3)
Interest rate swap contracts		5,398		5,398
Refundable deposits		215,869		215,869
Restricted cash in bank		25,501		25,501

(Continued)

F-66

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31, 2008
	Carrying amount		Fair value
	NT$		NT$
	(in thousands)
Financial liabilities:
Short-term borrowings		4,857,260		4,857,260
Accounts payable (including related parties)		58,178,225		58,178,225
Foreign currency forward contracts		28,831		28,831
Equipment and construction-in-progress payables		21,363,213		21,363,213
Long-term borrowings (including current portion)		127,142,514		127,152,178
Convertible bonds payable (including current portion)		10,284,282		9,971,668
Bonds payable (including current portion)		20,500,000		20,808,217
Interest rate swap contracts		829,389		829,389

	December 31, 2009
	Carrying amount				Fair value
	NT$		US$		NT$		US$
	(in thousands)
Financial assets:
Cash and cash equivalents		85,443,311		2,674,282		85,443,311		2,674,282
Receivable (including related parties)		62,345,500		1,951,346		62,345,500		1,951,346
Other financial assets—current		1,867,294		58,444		1,867,294		58,444
Foreign currency forward contracts		378,252		11,839		378,252		11,839
Available-for-sale financial assets—noncurrent		2,012,265		62,982		2,012,265		62,982
Financial assets carried at cost—noncurrent		484,009		15,149	See (b) (3)			-
Interest rate swap contracts		3,963		124		3,963		124
Option contracts		9,743		305		9,743		305
Refundable deposits		204,231		6,392		204,231		6,392
Restricted cash in bank		608,572		19,048		608,572		19,048

Financial liabilities:
Short-term borrowings		1,945,227		60,883		1,945,227		60,883
Payable (including related parties)		92,530,484		2,896,102		92,530,484		2,896,102
Foreign currency forward contracts		933,289		29,211		933,289		29,211
Equipment and construction-in-progress payables		23,788,714		744,561		23,788,714		744,561
Long-term borrowings (including current portion)		161,962,078		5,069,236		161,964,995		5,069,327

(Continued)

F-67

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31, 2009
	Carrying amount				Fair value
	NT$		US$		NT$		US$
	(in thousands)

Convertible bonds payable (including current portion)		2,690,900		84,222		2,663,542		83,366
Bonds payable (including current portion)		15,270,668		477,955		15,659,771		490,134
Interest rate swap contracts		515,847		16,145		515,847		16,145
Option contracts		154,513		4,836		154,513		4,836

(b)

The following methods and assumptions are used to estimate the fair values of the Company’s financial assets and liabilities:

(1)

The carrying amount of cash and cash equivalents, notes receivable, accounts receivable/payable (including related parties), other current financial assets, restricted cash in bank, equipment and construction-in-progress payables, and short-term borrowings approximates their fair value due to their short-term maturity periods.

(2)

The fair value of financial instruments other than financial assets carried at cost is based on quoted market prices, if available, in active markets. If market price is unavailable, fair value is determined using a valuation technique, with estimates and assumptions consistent with those used by market participants.

The fair value of foreign currency forward contracts is computed based on the spot rate and swap points provided by Reuters quotes system. The fair value of interest rate swap is estimated based on market price provided by financial institutions. Financial institutions use the evaluation models and assumptions to estimate the market price of the individual contract.

(3)

It is not practicable to estimate the fair value of investments in debt securities with no active market and financial assets carried at cost, as these financial instruments are not traded in an active public market.

(4)

The fair value of refundable deposits with no fixed maturity is based on carrying amount.

(5)

The fair value of floating-rate long-term borrowings is calculated based on the prevailing market rate adjusted by the Company’s credit spread. Management believes the carrying value of floating-rate long-term borrowings approximates the fair value.

(6)

The fair value of fixed-rate long-term borrowings is estimated based on the present value of future discounted cash flows based on prevailing market interest rates for similar debt instruments of comparable maturities and credit standing of the borrower.

(Continued)

F-68

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The discount rate adopted by the Company is the rate of return of a similar financial instrument in the market; the factors include the debtors’ credit rating and the remaining period for principal repayment, etc. The Company uses a discount rate of 0.6% to 1.9%. The fair value of convertible bonds payable is estimated based on Monte Carlo Simulation.

(7)

If the fair value of aforementioned financial instruments is denominated in foreign currency, the Company estimates the fair value based on the spot exchange rate provided by Reuters quotes system. The spot exchange rate is based on the buying rate and adopted consistently, except for the US dollar, which is based on the close price.

(c)

The fair values of the Company’s financial assets and liabilities determined by publicly quoted market price, if available, or determined using a valuation technique were as follows:

	December 31, 2008
	Publicly quoted market prices		Fair value based on valuation technique
	NT$		NT$
	(in thousands)
Financial assets:
Cash and cash equivalents		83,434,697		-
Receivable (including related parties)		-		23,899,077
Other financial assets—current		-		3,082,294
Foreign currency forward contracts		-		1,067,531
Available-for-sale financial assets—current		470,301		-
Available-for-sale financial assets—noncurrent		595,750		-
Interest rate swap contracts		-		5,398
Refundable deposits		-		215,869
Restricted cash in bank		25,501		-

Financial liabilities:
Short-term borrowings		-		4,857,260
Payable (including related parties)		-		58,178,225
Foreign currency forward contracts		-		28,831
Equipment and construction-in-progress payables		-		21,363,213
Long-term borrowings (including current portion)		-		127,152,178
Convertible bonds payable (including current portion)		-		9,971,668
Bonds payable (including current portion)		-		20,808,217
Interest rate swap contracts		-		829,389

(Continued)

F-69

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31, 2009
	Publicly quoted market prices				Fair value based on valuation technique
	NT$		US$		NT$		US$
	(in thousands)
Financial assets:
Cash and cash equivalents		85,443,311		2,674,282		-		-
Receivable (including related parties)		-		-		62,345,500		1,951,346
Other current financial assets		-		-		1,867,294		58,444
Foreign currency forward contracts		-		-		378,252		11,839
Available-for-sale financial assets—noncurrent		2,012,265		62,982		-		-
Interest rate swap contracts		-		-		3,963		124
Option contracts		-		-		9,743		305
Refundable deposits		-		-		204,231		6,392
Restricted cash in bank		608,572		19,048		-		-
Financial liabilities:
Short-term borrowings		-		-		1,945,227		60,883
Payable (including related parties)		-		-		92,530,484		2,896,102
Foreign currency forward contracts						933,289		29,211
Equipment and construction-in-progress payables		-		-		23,788,714		744,561
Long-term borrowings (including current portion)		-		-		161,964,995		5,069,327
Convertible bonds payable (including current portion)		-		-		2,663,542		83,366
Bonds payable (including current portion)		-		-		15,659,771		490,134
Interest rate swap contracts		-		-		515,847		16,145
Option contracts		-		-		154,513		4,836

(d)

As of December 31, 2008 and 2009, the Company pledged certain of its financial assets to secure long-term borrowings; see note 24.

(e)

Gains on valuation of financial instruments resulting from the change in fair value, determined using valuation techniques, were NT$1,396,372 thousand, NT$3,902,317 thousand and NT$813,152 (US$25,451) thousand for the years ended December 31, 2007, 2008 and 2009, respectively.

(f)

Financial liabilities exposed to cash flow risk resulting from change in interest rates were NT$85,688,663 thousand and NT$123,198,156 (US$3,855,967) thousand as of December 31, 2008 and 2009, respectively.

(Continued)

F-70

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(g)

Financial risks relating to financial instruments

(1)

Market risk

The Company holds equity securities which are classified as available-for-sale financial assets. Equity securities are valued at fair value and are exposed to the risk of price changes in the securities market.

The foreign currency forward contracts entered into by the Company are, in economic substance, for hedging purposes. Gains or losses from these financial instruments are expected to substantially offset gain or loss from hedged items. Therefore, management believes that there is no significant market risk from the fluctuations of foreign currency.

(2)

Credit risk

The Company’s potential credit risk is derived primarily from cash in bank, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalent investments with various reputable financial institutions of high credit quality. The majority of these financial institutions are located in the ROC. Management performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution. Management believes that there is a limited concentration of credit risk in cash and cash equivalent investments.

The majority of the Company’s customers are in the computer, consumer electronics and LCD TV industries. Management continuously evaluates the credit quality and financial strength of its customers. If necessary, the Company will request collateral from its customers. In 2007, 2008 and 2009, the Company’s five largest customers accounted for 32.1%, 39.4% and 37.3%, respectively, of the consolidated net sales.

(3)

Liquidity risk

The Company had negative working capital at December 31, 2009 of NT$6,264,567 (US$196,074) thousand. However, the Company has positive cash flows generated from operations and unused borrowing capacity under long-term loan arrangements. Management believes that the Company’s existing liquidity sources, including cash flows generated from operations and unused available borrowing capacity under long-term loan arrangements, are sufficient to fulfill its contractual payment obligations over the next twelve months. Therefore, management believes that there is no significant liquidity risk.

(Continued)

F-71

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(4)

Cash flow risk resulting from change in interest rates

The Company’s short-term and long-term borrowings are primarily borrowings bearing floating-interest-rate. As a result, the Company is exposed to fluctuation in interest rates that affect cash flows for interest payments on these borrowings. At December 31, 2009, if the market interest rates on the Company’s floating-interest-rate borrowings had been 25 basis points higher with all other variables held constant, the future annual interest expense would have been NT$307,995 (US$9,640) thousand higher.

23.	Related-party Transactions

Except as disclosed in the consolidated financial statements and other footnotes, the significant related party transactions were as follows:

(a) Names and relationships of related parties

Name of related party		Relationship with the Company

Cando Corporation, Ltd. (“Cando”)		Investee of AUO and Konly
Raydium Semiconductor Corporation (“Raydium”)		Investee of Konly
Wellypower Optronics Co., Ltd. (‘Wellypower’)		Investee of Konly
Qisda Corporation (“Qisda”)		Shareholder represented on AUO’s board of directors; investee of AUO and Konly
BenQ Corporation (“BenQ”)		Subsidiary of Qisda
Qisda Czech s.r.o. (“QZBR”)		Subsidiary of Qisda
Daxon Technology Inc. (“Daxon”)		Subsidiary of Qisda
Qisda Co., Ltd. Suzhou (“QCSZ”)		Subsidiary of Qisda
Qisda Optronics (Suzhou) Co., Ltd. (“QCOS”)		Subsidiary of Qisda
Darfon Electronics Corp. (“Darfon”)		Subsidiary of Qisda
Taiwan Nano Electro-Optical Technology (“Nano”)		Investee of Konly and Ronly
Nano Electro-Op (Kunshan) Co., Ltd. (“Nano-Kunshan“)		Subsidiary of Nano
Forhouse Corporation (“FH”)		Investee of DPTW; see note (i) below
Fortech International Corp. (“Fortech”)		Subsidiary of Forhouse; see note (i) below
Fortress Optronics International Corporation (“Fortress”)		Subsidiary of Forhouse; see note (i) below
Fortech Optronics (Xiamen) Co., Ltd. (“FHSSXM”)		Subsidiary of Forhouse; see note (i) below
Changhong Electrics (Sichuan) Co., Ltd. (“Changhong Electrics”)		Joint investor of BVCH; see note (ii) below
Matsumiya Semiconductor Laboratory Co., Ltd. (“Matsumiya Semiconductor”)		Chairman of Matsumiya Semiconductor and chairman of M. Setek are first-degree direct blood relative.

(Continued)

F-72

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Name of related party		Relationship with the Company

Others		Directors, supervisors, president, vice-presidents of the Company, and entities that the Company has significant influence but with which the Company had no material transactions.

Note (i):

The Company invested in Forhouse through DPTW in 2008 and accounted for its investment in Forhouse under the equity method of accounting. Forhouse is considered a related party of the Company, and related-party transactions were disclosed starting from September 3, 2008.

Note (ii):

In August 27, 2009, the Company jointly invested in BVCH with Changhong Electrics (Sichuan) Co., Ltd. through BVLB. Accordingly, Changhong Electrics (Sichuan) Co., Ltd. is considered as a related party of the Company, and related-party transactions were disclosed starting from August 27, 2009.

(b) Significant transactions with related parties

(1)

Sales

Net sales to related parties were as follows:

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$		US$
	(in thousands)

BenQ		-		360,951		8,945,171		279,974
Changhong Electrics		-		-		6,827,504		213,693
QCSZ		23,732,707		14,250,810		1,887,418		59,074
QCOS		814,471		1,350,840		596,375		18,666
QZBR		858,118		2,427,621		178,368		5,583
Qisda		2,441,050		638,016		105,815		3,312
Others		1,786,566		494,476		2,344,953		73,395
		29,632,912		19,522,714		20,885,604		653,697

(Continued)

F-73

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The collection terms for sales to related parties were month-end 30 to 45 days, and average collection days for the years ended December 31, 2007, 2008 and 2009, were 92 days, 61 days, and 60 days, respectively. The collection terms for sales to unrelated customers were month-end 30 to 60 days, and average collection days for the years ended December 31, 2007, 2008 and 2009, were 48 days, 42 days and 48 days, respectively. The pricing and other terms for sales to related parties were not materially different from those with unrelated customers.

As of December 31, 2008 and 2009, receivables resulting from the above transactions were as follows:

	December 31,
	2008			2009
	NT$			NT$			US$
				(in thousands)

Changhong Electrics		-			2,095,277			65,580
BenQ		196,908			1,910,070			59,783
FHSSXM		118,284			391,234			12,245
QCSZ		505,725			377,538			11,817
QCOS		341,779			121,158			3,792
Qisda		186,254			13,220			414
QZBR		352,534			7,474			234
Others		47,890			372,575			11,661
Less: allowance for doubtful accounts		(1,725	)		(4,703	)		(147	)
Less: allowance for sales returns and discounts		(108,848	)		(11,455	)		(359	)
		1,638,801			5,272,388			165,020

(2)

Disposal of property, plant and equipment, operating leases, and others

The Company leased portion of its facilities to related parties. Total rental income for the years ended December 31, 2007, 2008 and 2009, amounted to NT$39,500 thousand, NT$90,439 thousand and NT$83,862 (US$2,625) thousand, respectively. The payment term was quarter-end 15 days, and the pricing was not materially different from that with unrelated parties.

In 2007, 2008 and 2009, the Company sold property, plant and equipment to related parties for NT$30,300 thousand, NT$1,950 thousand, and NT$128,252 (US$4,014) thousand, respectively. Gains (losses) on disposals for the years ended December 31, 2007, 2008 and 2009, amounted to NT$28,314 thousand, NT$0 thousand and NT$(4,469) (US$(140)) thousand, respectively. The payment term was month-end 30 to 45 days and the pricing for sales to related parties was not materially different from that with unrelated parties.

(Continued)

F-74

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2008 and 2009, rental and other receivables from the disposal of property, plant and equipment resulting from the aforementioned transactions amounted to NT$10,866 thousand and NT$6,733 (US$211) thousand, respectively.

In 2008 and 2009, the Company received compensation income of NT$98,489 thousand and NT$17,886 (US$560) thousand from related parties due to product quality issues.

In 2007, 2008 and 2009, the Company received other income of NT$16,527 thousand, NT$6,531 thousand and NT$1,543 (US$48) thousand, respectively, from related parties. As of December 31, 2008 and 2009, receivables from such transactions amounted to NT$24,086 thousand and NT$40,435 (US$1,266) thousand, respectively.

The Company received commission of NT$38,340 thousand from Darfon in 2007. In 2008 and 2009, the Company received total cash dividends of NT$140,568 thousand and NT$142,096 (US$4,447) thousand, respectively, from its investees.

(3)

Purchases

Net purchases from related parties were as follows:

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$		US$
	(in thousands)

Daxon		8,775,448		8,903,819		11,136,574		348,562
Forhouse		-		1,375,021		7,911,643		247,626
Raydium		4,137,943		6,331,750		7,534,212		235,812
Fortech		-		1,248,284		6,057,071		189,580
Fortress		-		848,435		4,360,141		136,468
Cando		4,042,390		3,414,922		3,179,766		99,523
Nano-Kunshan		-		3,286,114		2,865,743		89,695
Wellypower		13,891		880,226		2,861,898		89,574
Others		4,282,508		5,649,956		10,414,681		325,968
		21,252,180		31,938,527		56,321,729		1,762,808

The pricing and payment terms with related parties were not materially different from those with unrelated vendors. The payment terms were 30 to 120 days for the years ended 2007, 2008 and 2009.

(Continued)

F-75

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of December 31, 2008 and 2009, payables resulting from the above purchases were as follows:

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)

Daxon		1,583,567		3,856,696		120,710
Raydium		1,624,681		3,507,516		109,781
Forhouse		1,522,802		3,261,661		102,087
Fortech		1,509,808		2,585,496		80,923
Fortress		1,063,740		2,160,210		67,612
Nano-Kunshan		1,069,640		1,360,294		42,576
Wellypower		311,094		1,241,353		38,853
Others		3,501,209		4,710,935		147,447
		12,186,541		22,684,161		709,989

(4)

Acquisition of property, plant and equipment, operating leases, and others

During 2007, 2008 and 2009, the Company acquired property, plant, and equipment from related parties for a total consideration of NT$4,571 thousand, NT$63,364 thousand and NT$59,326 (US$1,857) thousand, respectively.

In 2007, 2008 and 2009, the Company paid commission and other expenses of NT$64,769 thousand, NT$114,264 thousand and NT$386,237 (US$12,089) thousand, respectively, to related parties.

As of December 31, 2008 and 2009, amounts due to related parties as a result of the aforementioned transactions amounted to NT$62,462 thousand and NT$66,617 (US$2,085) thousand, respectively.

(5)

In August 2007, M. Setek provided guarantees of YEN2,440,000 thousand for Matsumiya Semiconductor’s borrowings from Bank of Tokyo – Mitsubishi UFJ. In 2009, Matsumiya Semiconductor defaulted on the aforementioned loan as a result of its poor operating results. M. Setek, as guarantor of the loan, believes it is probable it will need to repay the loan on behalf of Matsumiya Semiconductor. As of December 31, 2009, the Company accrued a guarantee obligation of YEN2,074,000 (US$22,382) thousand and recorded it under other current liabilities and long-term payables in accordance with the schedule of payments.

(Continued)

F-76

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(6)

Compensation to executive officers

In 2008 and 2009, compensation paid to the Company’s executive officers including directors, supervisors, president and vice-presidents was as follows:

	For the year ended December 31,
	2008		2009
	NT$		NT$		US$
			(in thousands)

Salaries		149,267		144,612		4,526
Compensation		28,127		25,698		804
Service charges		765		3,317		104
Employee bonuses		143,690		-		-

For the 2008 compensation included in the accruals for remuneration to directors and employee bonuses; refer to section “stockholders’ equity” for further details.

24.	Pledged Assets

		December 31,
Pledged assets	Pledged to secure	2008		2009
		NT$		NT$		US$
				(in thousands)
Restricted cash in banks	Oil purchases, customs duties, and guarantees for foreign workers		25,501		608,572		19,048

Inventory	Guarantees for unearned revenue		-		665,033		20,815

Building	Long-term borrowings		33,779,934		59,092,917		1,849,543

Machinery and equipment	Long-term borrowings and bonds payable		150,759,321		196,783,810		6,159,118

Available-for-sale financial assets－noncurrent	Long-term borrowings		-		2,404		75

Land	Long-term borrowings		-		1,540,247		48,208
			184,564,756		258,692,983		8,096,807

(Continued)

F-77

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

25.	Commitments and Contingencies

The significant commitments and contingencies of the Company as of December 31, 2009, in addition to those disclosed in the aforementioned notes to the financial statements, were as follows:

(a) Outstanding letters of credit

As of December 31, 2008 and 2009, the Company had the following outstanding letters of credit:

	December 31,
Currency	2008		2009
	(in thousands)

USD		5,336		56,413
YEN		7,540,907		15,820,027
EUR		2,527		-
NTD		-		38,220

The outstanding letters of credit facilitate the Company’s purchase of machinery and equipment and materials from foreign suppliers. The letters of credit are irrevocable and will expire upon the Company’s payment of the related obligations.

(b) Technology licensing agreements

In 1998, AUO has entered into technical collaboration, patent licensing, and/or patent cross licensing agreements with Fujitsu Limited, Toppan Printing Co., Ltd. (“Toppan Printing”), Semiconductor Energy Laboratory Co., Ltd. (“SEL”), Hitachi Displays Ltd. and IPS Alpha Technology, Ltd., Guardian Industries Corp., Sharp Corporation, Honeywell International Inc., Honeywell Intellectual Properties Inc., Fergason Patent Properties LLC, Samsung Electronics Co., Ltd. and others. The Company believes that it is in compliance with the terms and conditions of the aforementioned agreements.

On September 30, 2007, AUO signed a long-term materials supply agreement with Corning Display Technologies Taiwan Co. Ltd.. AUO and Corning Taiwan agreed on the supply of certain TFT-LCD and color filters glass substrates at negotiated quantity and pricing.

As of December 31, 2008 and 2009, significant outstanding purchase commitments for property, plant and equipment totaled NT$57,122,485 thousand and NT$79,205,499 (US$2,479,045) thousand, respectively.

(Continued)

F-78

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On April 11, 2008, Toppan CFI and Allied Material Technology Corporation (“AMTC”) entered into an agreement for purchase and sale of real property located in the Kaohsiung Lujhu Science Park for a total consideration of NT$1,500,000 thousand. As of December 31, 2009, Toppan CFI had paid the first installment of NT$30,000 thousand to AMTC. However, the property is currently under the registration of provisional seizure initiated by AMTC’s creditors. AMTC is seeking the withdrawal of the foregoing registration of provisional seizure through negotiation with its creditors or the court’s approval of its reorganization plan, so that the transfer can be processed. In addition, Toppan CFI and AMTC entered into a lease agreement with the right to use the aforementioned property for a term of five years. Both parties agreed that, upon the court’s termination of the reorganization, Toppan CFI may, at any time by providing written notice to AMTC, invalidate the foregoing lease agreement. In accordance with the lease agreement, the down payment paid by Toppan CFI for the purchase of the property shall be treated as rental payments.

Since 2006, M. Setek entered into long-term sales agreements with five customers. The agreements provide that, from 2006 to 2016, M. Setek will sell certain silicon materials or wafers to these customers at certain quantities and prices, with the proportionate installment prepayments made to M. Setek. These customers may request M. Setek to terminate the agreements and to reimburse the remaining prepayments, if delivery schedule is not met. As of December 31, 2009, the remaining unearned revenue amounted to US$251,162 thousand.

(d)

Operating lease agreements

AUO entered into various operating lease agreements for operating facilities and land with the Science Park Administration Bureaus for periods from March 1, 1994, to December 31, 2027. In addition, the Company’s subsidiary companies, including Toppan CFI, AUCZ, and M. Setek, also entered into operating lease agreements for operating facilities and land for periods from May 22, 2007, to July 31, 2028. Future minimum lease commitments as of December 31, 2009, under existing non-cancelable agreements were as follows:

Year	Minimum lease commitments
	NT$		US$
	(in thousands)

2010		849,672		26,594
2011		780,826		24,439
2012		744,134		23,291
2013		674,825		21,121
2014		417,120		13,055
Thereafter		2,064,253		64,609

Rental expense for operating leases amounted to NT$557,202 thousand, NT$421,341 thousand, and NT$526,232 (US$16,470) thousand in 2007, 2008 and 2009, respectively.

(Continued)

F-79

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(e)

Litigation

(1)

Alleged patent infringements

In December 2006, LG Display Co., Ltd. (“LGD”) filed a lawsuit in the United States District Court for the District of Delaware against AUO, AUO’s U.S. subsidiary and other TFT-LCD manufacturers claiming patent infringement. AUO has retained legal counsel to handle the matter. LGD is seeking, among other things, monetary damages in the amount of approximately USD 691 million for past infringement through trial, enhanced damages (up to treble damages) for willful infringement and an injunction against future infringement. In March 2007, AUO filed a suit in the United States District Court for the Western District of Wisconsin against LGD and LG Display America, claiming infringement of certain of AUO’s patents in the United States relating to the manufacturing of TFT-LCD products. AUO is seeking, among other things, monetary damages for past infringement, enhanced damages (up to treble damages) for willful infringement and an injunction against future infringement. The claims against the Company and the counterclaims filed by AUO were consolidated in June 2007, and the consolidated case is pending before the United States District Court for the District of Delaware. Trial for this case was held in June 2009. In February 2010, the United States District Court for the District of Delaware (“Court”) found that LGD and LG Display America have infringed AUO patents asserted at trial. In April 2010, the Court further found that AUO have not infringed LG Display’s patents asserted at trial. Although the findings of the United States District Court for the District of Delaware were in favor of AUO, the Company cannot assure that LG Display and LG Display America will not appeal this case to the superior courts. Moreover, as of April 30, 2010, the amount of damages has not been decided and the final judgment has not been rendered. Therefore, the results of this matter cannot be predicted with certainty. Management is reviewing the merits of this suit on an ongoing basis.

In February 2007, Anvik Corporation (“Anvik”) filed a lawsuit in the United States District Court for the Southern District of New York against AUO and other TFT-LCD manufacturers, claiming infringement of certain of Anvik’s patents in the United States relating to the use of photo-masking equipment manufactured by Nikon Corporation in the manufacturing of TFT-LCD panels. AUO has retained legal counsel to handle the related matters. Anvik is seeking, among other things, unspecified monetary damages for past infringement and an injunction against future infringement. The case is in the discovery phase. While management intends to defend the suit vigorously, the ultimate outcome of the matter is uncertain, and the amount of possible loss, if any, is currently not estimable. Management is reviewing the merits of this suit on an on-going basis.

(Continued)

F-80

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In September 2008, Apeldyn Corporation (“Apeldyn”) filed a lawsuit in the United States District Court for the District of Delaware against AUO, AUUS, and other TFT-LCD manufacturers, claiming infringement of certain of Apeldyn’s patents in the United States relating to the manufacturing of TFT-LCD panels. In the complaint, Apeldyn is seeking, among other things, unspecified monetary damages for past infringement and an injunction against future infringement. The case is in the discovery phase. While management intends to defend the suit vigorously, the ultimate outcome of the matter is uncertain, and the amount of possible loss, if any, is currently not estimable. Management is reviewing the merits of this suit on an on-going basis.

(2)

Investigation for alleged violation of antitrust and competition laws

AUO and certain of its subsidiaries, along with various competitors in the TFT-LCD industry, are under investigation for alleged violation of antitrust and competition laws. Specifically, since December 2006, AUO and certain of its overseas subsidiaries have become involved in antitrust investigations by the United States Department of Justice (“US DOJ”), the Commission of the European Communities Directorate-General for Competition (“Commission”), the Canadian Competition Bureau, the Taiwanese Fair Trade Commission, the Korean Fair Trade Commission and the Japan Fair Trade Commission concerning allegations of price fixing by manufacturers of TFT-LCD panels. In January 2009, the Taiwan Fair Commission visited AUO’s office in Taiwan and requested certain information from AUO as part of their respective investigations into the TFT-LCD industry. In November 2009, the Taiwan Fair Trade Commission has notified AUO that is has terminated its investigation. In 2009, the Commission issued a “Statement of Objections” to a number of LCD manufacturers alleging that the LCD competitors are involved in anti-competitive acts. AUO received such document in May 2009, reviewed the relevant documents and submitted its reply in July 2009. AUO and other LCD competitors attended the hearing held by the Commission regarding this case in September 2009. The Company intends to continue to cooperate with these investigations as warranted as part of our ongoing defense of these matters.

(Continued)

F-81

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

AUO, certain of its subsidiaries and certain of its and/or its subsidiaries’ current and/or former officers and/or employees may be indicted in the United States for possible violation of the antitrust and/or competition laws. If AUO and its subsidiaries are found to have violated antitrust and/or competition laws in the applicable jurisdictions, AUO and its subsidiaries will likely have to pay a fine or penalty, subject to any appeal AUO and its subsidiaries may file. It is also possible that certain of AUO’s executive officers, senior management and/or other employees, current and/or former, may be held criminally liable and subject to imprisonment and/or fines. AUO and its subsidiaries, if warranted, may also agree to pay a fine or penalty as part of any plea bargain and/or settlement. To AUO management’s knowledge, other competitors that pled guilty and entered into plea bargain agreements with the US DOJ have agreed to pay fines from US$35 million to US$400 million. While AUO management does not know all the facts and circumstances that led each of the competitors to enter into these pleas, management is aware of the outcome of those plea bargain agreements, which may or may not be the amounts which AUO and its subsidiaries may agree to pay and/or which the US DOJ may agree to accept as part of any plea bargain and/or settlement, if any, with the US DOJ.

AUO has made certain provisions for certain antitrust matters in certain jurisdictions as the management deems appropriate with the understanding that the provisions may ultimately be proven to be under or over-estimated. With respect to the ongoing investigation in Europe, any potential penalty against the company will be heavily dependent on which year the EC uses to calculate its fine. Depending on the year chosen, the range, which is dependent on numerous factors, may be from 70 million Euros to 443 million Euros. It is not possible to determine precisely which year will be chosen, so AUO has made a provision for a fine assessed based on the year 2005. AUO will revisit the issue of adjusting the said provisions or making new provisions from time to time as the Company deems appropriate. The ultimate outcome of the pending antitrust investigations cannot be predicted with certainty. Any penalties, fines or settlements made in connection with these investigations and/or lawsuits may have a material adverse effect on our business, results of operation and future prospects.

(3)

Antitrust civil actions lawsuits in the United States and Canada

There are also over 100 civil lawsuits filed against AUO and/or its subsidiaries in the United States and several civil lawsuits in Canada alleging, among other things, antitrust violations. The putative antitrust class actions filed in the United States have been consolidated for discovery in the United States District Court for the Northern District of California. In the amended consolidated complaints, the plaintiffs are seeking, among other things, unspecified monetary damages and an enjoinment from the alleged antitrust conspiracy. The Court has recently issued an order certifying 2 types of classes that may proceed against AUO and other TFT-LCD companies: direct purchasers and indirect purchasers.

(Continued)

F-82

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In the fourth quarter of 2009, AT&T, Motorola and Nokia respectively filed civil lawsuits against a number of LCD manufacturers including AUO claiming, among other things, unspecified monetary damages and an enjoinment from the alleged antitrust conspiracy. AUO has retained counsel to handle the related matters. The class actions are in the discovery phase, and the claims made by Motorola, AT&T and Nokia are in the early stages. AUO intends to defend these lawsuits vigorously, and at this stage, the final outcome of these matters is uncertain, and the amount of possible loss, if any, is currently not estimable. Management is reviewing the merits of these civil lawsuits on an on-going basis.

The Company has made certain accruals for certain potential losses relating to the above-mentioned litigation, except when management concluded and disclosed herein that it is not probable that a liability had been incurred and/or the amount of loss cannot be reasonably estimated. Given the unpredictable nature of the above-mentioned litigation, any estimate or accruals for possible loss made by management of the Company may be materially different from the actual loss. Amount paid upon the ultimate resolution of the litigation may be materially different from previous estimates and could require adjustments to the estimated reserves to be recognized in the period such ultimate resolution becomes known.

In addition to the matters described above, the Company is also a party to other litigation that arises during the normal course of operations. In management’s opinion, the aggregate liability, if any, with respect to these other litigation is not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

(f)

Other

On January 21, 2010, the Taiwan Supreme Administrative Court dismissed an appeal by the Environmental Protection Administration of the Executive Yuan of Taiwan relating to the development of Central Taiwan Science Park located in Seven Star Farm. As a result of the dismissal, the Central Taiwan Science Park Development Office may be required to make supplement or submission for environmental assessment for the construction of Seven Star Farm of the Central Taiwan Science Park. The Seven Star Farm is the location where the Company is building its new 8.5 generation manufactory plants. As of December 31, 2009, the Company’s accumulated costs spent for the construction at the above-mentioned site is approximately NT$9 billion. At the present, the Company does not expect this event to have a material adverse effect on the Company’s operations under the preliminary presumption of administrative trust-protection principle between the government and people since the Company has obtained the development approval issued by the governmental authorities in due course.

26.	Subsequent Events

In January 2010, AUO converted M. Setek’s convertible preferred stock and increased its ownership interest in M. Setek from 58.10% as of December 31, 2009 to 71.67%. In February 2010, AUO made an additional investment in M.Setek and made its ownership interest increase from 71.67% to 90%.

(Continued)

F-83

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Regarding the patent infringement, on April 30, 2010, the United States District Court for the District of Delaware (“Court”) further found that AUO have not infringed LG Display’s patents asserted at trial. Please refer to Note 25(e)(1) for more details.

(Continued)

F-84

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

27.	Segment Information

(a)

Industrial information

The Company’s reportable operating segment is its TFT-LCD production and sales operations, which represents more than 90% of the Company’s consolidated revenue, profit or loss and identifiable assets.

(b)

Geographic information

A geographical breakdown of sales for the years ended December 31, 2007, 2008 and 2009, is as follows:

	For the year ended December 31,
		2007		2008		2009
		NT$		NT$		NT$		US$
				(in thousands)

Taiwan			174,272,661		184,895,032		153,643,468		4,808,872
The People’s Republic of China			115,309,356		82,626,965		98,430,471		3,080,766
Other (individually less than 10% of total net sales)			190,601,609		156,406,196		107,257,406		3,357,039
			480,183,626		423,928,193		359,331,345		11,246,677

Sales are attributed to countries based upon the location of customers placing orders.

The Company’s TFT-LCD manufacturing process can be divided into three primary steps: the array process, cell process, and module-assembly process. The array and cell processes are capital-intensive and thus require highly automated production equipment. The module-assembly process is highly labor-intensive, and therefore the Company has moved a majority of the module-assembly operations to Mainland China beginning in 2002. A geographical breakdown of long-lived assets (which primarily consist of property, plant and equipment, goodwill, and other intangible assets) as of December 31, 2007, 2008 and 2009, is as follows:

	December 31,
		2007		2008		2009
		NT$		NT$		NT$		US$
				(in thousands)

Taiwan			352,858,986		371,526,051		346,342,660		10,840,146
The People’s Republic of China			31,799,442		35,798,587		31,328,059		980,534
Other			6,625		184,090		29,169,763		912,981
			384,665,053		407,508,728		406,840,482		12,733,661

(Continued)

F-85

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(c)

Major customer information

For the years ended December 31, 2007, 2008 and 2009, sales to individual customers representing greater than 10 percent of consolidated net sales were as follows:

	For the year ended December 31,
	2007				2008				2009
	Amount		%		Amount		%		Amount				%
	NT$				NT$				NT$		US$
	(in thousands)

Samsung		61,141,835		13		62,865,559		15		60,553,035		1,895,244		17

28.	Summary of Significant Differences between Accounting Principles Generally Accepted in the Republic of China and Accounting Principles Generally Accepted in the United States of America

The accompanying consolidated financial statements have been prepared in conformity with ROC GAAP, which differ in certain significant respects from accounting principles generally accepted in the United States of America (“US GAAP”). A discussion of the significant differences between US GAAP and ROC GAAP as they apply to the Company is as follows:

(a)

Business combinations

(1)

Merger with Unipac

AUO completed the merger with Unipac on September 1, 2001. Under the applicable ROC GAAP, the merger was accounted for using the pooling-of-interests method, and accordingly, the assets and liabilities of Unipac were recorded based on the carrying value at the date of the merger. Under US GAAP, the merger was accounted for as the acquisition of Unipac by AUO using the purchase method of accounting. Under purchase accounting, the aggregate purchase price of NT$39,636,901 thousand was calculated based on the market value of the shares issued, and such amount was allocated to the assets acquired and liabilities assumed based on their respective fair values. The difference between the purchase price and the fair value of the assets acquired, including identifiable intangible assets, and liabilities assumed of Unipac was recorded as goodwill.

In 2008, the Company partially disposed of its investments in certain available-for-sale securities that were originally acquired in connection with the merger with Unipac. The adjustment of NT$14,030 thousand to net income determined in accordance with US GAAP represented the difference between Unipac’s original cost basis and the fair value of such available-for-sale securities at the date of acquisition.

(Continued)

F-86

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In 2008, the reconciliation of net income determined in accordance with ROC GAAP and US GAAP for the year ended December 31, 2008, included a reversal of the impairment loss of NT$274,961 thousand recognized under ROC GAAP related to an available-for-sale security (see note 4) originally acquired in connection with the merger with Unipac. The adjustment represented the excess of Unipac’s original cost basis over the fair value of the available-for-sale security at the date of acquisition.

In addition, under US GAAP, the Company recorded an impairment loss of NT$457,427 thousand related to another available-for-sale security acquired in connection with the merger with Unipac. The US GAAP cost basis of this investment, which was based on its fair value at the date of the Unipac acquisition, was significantly higher than the ROC GAAP cost basis based on Unipac’s original cost of the investment. This cost basis difference contributed to management’s conclusion that there was an other-than-temporary impairment of this security for US GAAP purposes, but not for ROC GAAP purposes.

In 2009, the Company disposed of all of its investments in available-for-sale securities that were originally acquired in connection with the merger with Unipac. The adjustment of NT$136,731 (US$4,280) thousand to net income determined in accordance with US GAAP represented the difference between Unipac’s original cost basis and the fair value of such available-for-sale securities at the date of acquisition.

(2)

Merger with QDI

AUO completed the merger with QDI on October 1, 2006. Under ROC GAAP, the merger was accounted for in accordance with ROC SFAS No. 25 using the purchase method of accounting. Under US GAAP, the merger was accounted for in accordance with FASB Accounting Standards Codification (“ASC”) Topic 805, “Business combinations” (Statement No. 141) using the purchase method of accounting. Under purchase accounting, the aggregate purchase price of NT$67,837,855 thousand was determined based on the market value of shares issued, direct transaction costs incurred, and the fair value of outstanding vested QDI employee stock options assumed as of the acquisition date. The aggregate purchase price was allocated to QDI’s net tangible and intangible assets and liabilities based upon their estimated fair value as of October 1, 2006. The excess purchase price over the value of the net identifiable tangible and intangible assets was recorded as goodwill. There were no material differences identified in the accounting for the merger with QDI.

(Continued)

F-87

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(3)

Acquisition of M. Setek

In June 2009, the Company made an initial equity investment in M. Setek, which was established in February 1978 and is a major polysilicon and solar wafer manufacturer in Japan. M. Setek is principally engaged in the research, development, manufacture and sale of solar wafer. This will mark a major step forward for AUO’s endeavor in energy business. By taking an equity investment in M. Setek, AUO expects to be able to secure key materials in the solar industry and strengthen its strategic position in energy business.

Initially, the Company purchased 31,241 shares of (representing a 15.07% interest in the) common stock of M. Setek for US$16,000 (equivalent to NT$526,072) thousand and 64,435 shares of M. Setek convertible preferred stock series B for US$33,000 (equivalent to NT$1,085,031) thousand. From July to September 2009, the Company additionally purchased 60,530 shares of M. Setek convertible preferred stock series B for US$31,000 (equivalent to NT$1,020,515) thousand, 87,866 shares of M. Setek convertible preferred stock series C for US$45,000 (equivalent to NT$1,477,790) thousand and 201,138 shares of M. Setek convertible preferred stock series D for US$65,000 (equivalent to NT$2,128,617) thousand. On October 1, 2009, the Company converted all convertible preferred stock series B and C into 212,831 shares of common stock, and combined with its previously held common shares in M. Setek, had attained a 58.10% ownership interest in M. Setek. Consequently, effective from October 1, 2009, management determined that the Company had a controlling financial interest in M. Setek, and therefore M. Setek is included in the Company’s consolidated financial statements from October 1, 2009 for US GAAP purposes. The acquisition of the controlling financial interest in M. Setek was accounted for in accordance with FASB ASC Topic 805 (Statement No. 141R), “Business Combinations—a replacement of Statement 141,” using the acquisition method of accounting. Prior to October 1, 2009, the Company accounted for its 15.07% ownership interest in the common stock of M. Setek using the equity method of accounting for US GAAP purposes and its investment in the series B and series C convertible preferred shares as financial assets measured at cost under US GAAP and ROC GAAP.

(Continued)

F-88

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Under ROC GAAP, and in accordance with ROC SFAS No. 7, “Consolidated Financial Statements,” paragraph 17, the effect of potential voting rights is considered in assessing whether a company can control an investee. On August 31, 2009, taking into account the potential voting rights related to the convertible preferred stock B and C, management determined that combined M. Setek’s actual and potential voting rights (including the shares held by others), the Company would result in a majority voting interest (51.00%) in M. Setek. Consequently, the Company was required to consolidate M. Setek in the Company’s consolidated financial statements from August 31, 2009 for ROC GAAP purposes. The difference in the date of consolidation of M. Setek had no effect on the consolidated net loss attributable to the equity holders of AUO in 2009 under both ROC GAAP and US GAAP. However, the primary difference resulted in one more month of operating results and cash flow activity for M. Setek in the Company’s ROC GAAP financial statements. The most significant impact was revenue reported under ROC GAAP which was higher by NT$598,542 (US$18,733) thousand compared to revenue reported under US GAAP.

Pursuant to FASB ASC Topic 805 (Statement No. 141R), the identifiable assets acquired, the liabilities assumed, and noncontrolling interests in M. Setek, were recognized and measured at acquisition-date fair values.

The following table summarizes the consideration paid for M. Setek and the amounts of estimated fair value of the assets acquired and liabilities assumed recognized at the acquisition date (October 1, 2009), as well as the fair value at the acquisition date of the noncontrolling interests in M. Setek:

	NT$
	(in millions)

Consideration
Fair value of the Series B and Series C preferred stock converted by the Company into common shares of M. Setek		2,424
Fair value of the Company’s equity interest in Series D convertible preferred stock held before the business combination		1,944
Fair value of the Company’s equity interest in the common shares of M. Setek held before the business combination		218
		4,586

Acquisition-related costs (including in operating expenses in the condensed consolidated statement of operations for the year ended December 31, 2009)		5

(Continued)

F-89

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	NT$
	(in millions)

Recognized amounts of identifiable assets acquired and liabilities assumed:
Current assets		4,769
Property and equipment		30,905
Other non-current assets		1,037
Current liabilities		(11,870	)
Long-term debt		(18,320	)
Total identifiable net assets		6,521
Noncontrolling interests in M. Setek		(1,763	)
Effect of foreign exchange		(9	)
Gain on bargain purchase of 58.1% interest		(163	)
		4,586

The sum of the fair value of identifiable net assets acquired less the fair value of the noncontrolling interests exceeded the sum of the fair value of the consideration transferred and the fair value of the Company’s equity interests held in M. Setek before the business combination. Consequently, management reassessed whether it had correctly identified all of the assets acquired and all of the liabilities assumed. Further, management reviewed the procedures used to measure the fair values of the identifiable assets acquired and liabilities assumed, the noncontrolling interests in M. Setek, the Company’s previously held equity interests in M. Setek and the consideration transferred. Management concluded that all acquired assets and all liabilities assumed were properly identified and that the valuation procedures and resulting fair value measures were appropriate. As a result, the Company recognized a bargain purchase gain of NT$163 (US$5) million at the acquisition date for US GAAP purposes. Under ROC GAAP, the Company’s acquisition of M. Setek through acquiring newly issued shares was recognized as equity transactions. Further, ROC GAAP does not permit the re-measurement of previously held interests or fair value measurement either on August 31, 2009 or October 1, 2009.

The estimated fair values of common shares and the Series B and C preferred shares of M. Setek at October 1, 2009 were determined using an income approach and validated internally by a market approach. As M. Setek is a private company, a discount for lack of marketability (DLOM) was taken into consideration when estimating the fair values of M. Setek’s common and preferred shares. The fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in the FASB ASC Topic 820, “Fair value measurements and disclosures” (Statement No. 157). The fair value estimates are based on (a) a discount rate 16%, (b) long-term sustainable growth rate 1%, (c) financial multiples of companies in the same industry as M. Setek, (d) DLOM of 30%, and (e) a control premium of 24%. The control premium was only applied to the fair value determination of the Series B and C preferred shares, as it was the conversion of these preferred shares into common shares that resulted in the Company obtaining a controlling financial interest in M. Setek.

(Continued)

F-90

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The AICPA Enterprise Value Allocation Model (the “EVA Model”), a compensation option model for privately-held-company equity securities, was adopted to value preferred stock A, which is considered as part of the total non-controlling interests, and preferred stock D. The fair value is based on risk free rate of 0.73% and volatility rate of 72.11%.

The fair value of the current assets acquired includes trade receivables with a fair value of NT$449 (US$14) million. The gross amount due is NT$453 (US$14) million, of which NT$4 million is expected to be uncollected.

The other assets acquired included certain investments accounted for using the equity method, the fair value of which was less than the carrying amount at October 1, 2009. Pursuant to FASB ASC Topic 805 (Statement No. 141R), the investments were measured at its acquisition-date fair value. Due to the Company’s ownership interest in M. Setek at the different fair-value-measurement date under ROC GAAP and US GAAP is 15.07% and 58.10%, respectively, the difference under US GAAP between the carrying amount and the fair value of the above-mentioned equity-method investments, which is attributable to the parent company, is NT$653,609 (US$20,457) thousand greater than that under ROC GAAP. As a result, while the difference was realized in December, 2009, the Company reversed the amount of NT$653,609 (US$20,457) thousand under US GAAP.

There were no intangible assets identified by management in the purchase price allocation process.

Under the acquisition method of accounting, as the acquisition was achieved in stages, the Company re-measured the fair value of its equity interests in M. Setek held before the business combination. This included the Series B and Series C convertible preferred stocks (whose fair values were determined as previously described above), as well as the Series D convertible preferred stock and the 15.07% equity interest in the common stock of M. Setek. As a result of this re-measurement, the Company recognized a net re-measurement loss of NT$ 1,445,660 (US$45,248) thousand in non-operating expenses in the condensed consolidated statement of operations under US GAAP in 2009. The re-measurement is not permitted under ROC GAAP, and therefore no such re-measurement loss has been recognized in the Company’s ROC GAAP consolidated financial statements.

(Continued)

F-91

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amounts of revenue and losses of M. Setek included in the Company’s condensed consolidated statements of operations for US GAAP purposes from the acquisition date to the period ending December 31, 2009 were as follows:

	NT$			US$
	(in thousands)

Revenue		1,510,710			47,284
Loss attributable to equity holders of AU Optronics Corp.		(708,571	)		(22,177	)

The following unaudited pro forma financial information summarizes the combined results of operations as though the business combination with M. Setek had taken place on January 1, 2008 or January 1, 2009. This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations had the acquisition been effected on January 1, 2008 or January 1, 2009.

	For the year ended December 31,
	2008		2009
	NT$		NT$			US$
	(in thousands)

Revenue		437,966,255		366,661,919			11,476,116
Income (loss) attributable to equity holders of AU Optronics Corp.		13,479,629		(31,380,060	)		(982,162	)

(b)

Noncontrolling interests

On January 1, 2009, the Company adopted FASB ASC Subtopic 810-10 (Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,”) which requires certain changes to the presentation of the financial statements. This amendment requires noncontrolling interests (previously referred to as “minority interest”) to be classified in the consolidated statements of operations as part of consolidated net earnings and to include the accumulated amount of noncontrolling interests in the consolidated balance sheets as part of shareholders' equity. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary will be accounted for as equity transactions in the consolidated financial statements. However, if a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings.

Under ROC GAAP, upon the sale of equity-method investment, the difference between the selling price and carrying amount of the investment at the date of sale is recognized as an investment gain or loss.

(Continued)

F-92

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In November 2009, the Company disposed of 6.79% of its investments in DPTW and recognized a disposal loss of NT$28,323 (US$886) thousand under ROC GAAP. The decrease in equity interests did not result in a loss of control or deconsolidation as of December 31, 2009. As a result, and pursuant to FASB ASC Subtopic 810-10 (Statement No. 160), the disposal was accounted for as an equity transaction and the loss was reversed under US GAAP.

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$			US$
	(in thousands)
Net income (loss) attributable to AU Optronics Corp.		45,355,480		13,089,654		(28,670,321	)		(897,350	)
Transfer (to) from noncontrolling interest
Decrease in AUO’s paid-in capital due to purchase of common shares of DPTW and Lextar		-		-		(8,445	)		(264	)
Increase in disproportionate participation in Lextar’s capital increase		-		-		76,039			2,380
Decrease in AUO’s paid-in capital for sale of DPTW’s common shares		-		-		(28,323	)		(886	)
Decrease in disproportionate participation in DPTW’s capital increase		-		-		(8,039	)		(252	)
Net transfer (to) from noncontrolling interest		-		-		31,232			978
Change from net income (loss) attributable to AU Optronics Corp. and transfers (to) from noncontrolling interest		45,355,480		13,089,654		(28,639,089	)		(896,372	)

(c)

Compensation

(1)

Remuneration to directors and supervisors

Under ROC GAAP, prior to January 1, 2008, remuneration to directors and supervisors was charged directly to retained earnings in the period stockholders approved such payments and was presented under financing activities in the consolidated statement of cash flows. Under US GAAP, such cash payments are recorded, based on management’s best estimate of the amounts to be paid upon stockholders’ approval, as compensation expense in the period when the related services are rendered, and presented under operating activities in the consolidated statement of cash flows.

(Continued)

F-93

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Effective January 1, 2008, the Company is also required to account for such remuneration under ROC GAAP based on the period when the related services are rendered; see note 2(t). The change in accounting principle is accounted for prospectively in accordance with ARDF Interpretation No. 2007-052. Accordingly, there is no difference between the accounting under ROC GAAP and US GAAP in the remuneration to directors starting from fiscal year 2008. The reconciling item of NT$13,397 thousand for the year ended December 31, 2008, represented the reversal of the prior-year difference.

(2)

Employee bonuses

Under ROC GAAP, prior to January 1, 2008, employee bonuses were appropriated from retained earnings in the period stockholders’ approval was obtained. If such employee bonuses were settled through the issuance of stock, the amount charged against retained earnings was based on the par value of the common shares issued. Under US GAAP, employee bonuses are charged to expense in the year when the related services are provided. The total amount of these bonuses is initially accrued based on the minimum cash value to be paid, with an adjustment in the subsequent year after stockholders’ approval. Any difference between the amount initially accrued and fair value of bonuses settled by the issuance of stock is recognized at the grant date.

Under ROC GAAP, effective January 1, 2008, employee bonuses are estimated and charged to expense in the period when the related services are provided; see note 2(t). Accordingly, the difference related to retained earnings appropriation and expensing through profit or loss has been eliminated prospectively. However, a difference continues to exist related to the “true-up” adjustment in the subsequent year upon stockholders’ approval.

(Continued)

F-94

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(d)

Equity-method investments and other-than-temporary impairment

If an investee company issues new shares and an investor company does not acquire new shares in proportion to its original ownership percentage, the investor company’s equity in the investee company’s net assets will be changed. Under ROC GAAP, the change in the equity interest is adjusted to capital surplus and long-term investment. If the investor company’s capital surplus is insufficient to offset the adjustment to long-term investment, the difference is charged to retained earnings. Under US GAAP, subsequent investment is treated as a step acquisition, and additional consideration is allocated to the incremental pro rata share of the fair value of assets and liabilities acquired. When the investor company does not acquire new shares in proportion to its original ownership percentage, any gain or loss resulting from the change in the investee company’s equity is recognized directly in equity as a equity transaction in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 51, “Accounting for Sales of Stock by a Subsidiary.” This policy has been consistently applied before December 31, 2008 and continued to be applied for the equity investment in non-subsidiary afterward. Starting 2009, as FASB ASC Subtopic 810-10 (Statement No. 160) to be in effect, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. Therefore, no gain or loss is recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest is adjusted to reflect the change in its ownership interest in the subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is recognized in equity attributable to the parent.

Under ROC GAAP, in accordance with ROC SFAS No. 35, an equity-method investment is considered to be impaired if there is objective evidence of impairment as a result of one or more events that had occurred as of the balance sheet date indicating that the recoverable amount is below the carrying amount of the investment. Impairment is assessed at the individual security level. The recoverable amount is determined based on one of the two following approaches: (1) the discounted expected future net cash flows from the investee company; or (2) the combination of expected cash dividends from the investee company and the discounted cash flows from the ultimate disposal of the investment. The impairment loss is recorded in profit or loss. If the recoverable amount increases in the future period, the amount previously recognized as impairment loss could be reversed and recognized as a gain in profit or loss.

Under US GAAP, impairment of an equity-method investment is recognized if such impairment is other-than-temporary. The amount of the impairment loss is calculated by reference to the excess of the carrying value of the equity-method investment over its fair value. For equity-method investments in publicly traded equity securities, fair value is determined by reference to the quoted market price at the measurement date. In addition, an impairment loss that is recognized cannot be reversed subsequently.

(Continued)

F-95

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In 2008, the Company’s investment in Qisda experienced significant declines in market value. Considering primarily the length of time and the extent to which the market value was less than the carrying amount of the investment, management concluded there was an other-than-temporary impairment at December 31, 2008, for US GAAP purposes. As a result, the Company recognized an impairment loss of NT$1,928,709 thousand related to its investment in Qisda for the year ended December 31, 2008. No impairment loss is recorded for ROC GAAP purposes for the investment in Qisda because management believes that the carrying amount is supported by the expected discounted cash flows from the investment.

(e)

Convertible bonds

Under ROC GAAP, each of the convertible bonds assumed from the merger with QDI in 2006 was recorded in its entirety as a liability at fair value at the date of acquisition. The difference between fair value and redemption value at the date of acquisition is recorded as a discount or premium, and amortized over the redemption period using the effective interest rate method. When the bond is converted into common stock, the par value of the shares is credited to common stock, and the difference between the carrying value of the bond and the par value of common stock is recorded in capital surplus.

Under US GAAP, in accordance with FASB ASC Topic 815 (Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”) and its related interpretations, management concluded that the conversion features for the two overseas convertible bonds assumed from the merger with QDI at October 1, 2006, namely ECB 2 and ECB 3, qualified as embedded derivative instruments under Statement No. 133, as these bonds are denominated in a currency that is different from AUO’s functional currency, and therefore were required to be bifurcated from the debt hosts. Management further concluded that the put and call options embedded in the convertible bonds did not meet the definition of embedded derivative instrument under Statement No. 133, as they were considered to be clearly and closely related to the debt hosts. As a result, under US GAAP, ECB 2 and ECB 3 were recorded at the fair value at the date of acquisition without taking into account the embedded conversion options. The recorded carrying amounts are accreted to their respective maturity and/or redemption amounts over the remaining terms of the bonds using the effective interest method.

In 2007, the differences in the amortization of discount (premium) for ECB 2 and ECB 3 between ROC GAAP and US GAAP were fully amortized. Further, as discussed in note 15, ECB 2 was fully redeemed by AUO and ECB 3 was partially redeemed in cash upon the exercise of the redemption right by certain bondholders in 2007. For US GAAP purposes, the carrying amounts of the convertible bonds redeemed, including any unamortized premiums or discounts, and the fair value of the related embedded derivative instrument liabilities at the date of redemption exceeded the cash paid to redeem the bonds, resulting in a gain of NT$864,034 thousand for the year ended December 31, 2007.

(Continued)

F-96

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The reconciliation of net income determined in accordance with ROC GAAP and US GAAP for the year ended December 31, 2008, included the impact of changes in the fair value of the embedded derivative instrument liability of NT$1,252,181 thousand, which is recognized only for US GAAP purposes.

In 2009, and as discussed in note 15, ECB 3 was fully redeemed.

(f)

Shareholders’ stock dividends

Under ROC GAAP, shareholders’ stock dividends paid are recorded at par value, with a charge to retained earnings. Under US GAAP, generally, if the ratio of distribution is less than 25% of the same class of shares outstanding, the fair value of the shares issued should be charged to retained earnings. The stock dividends issued in 2007, 2008 and 2009 decreased retained earnings and increased capital surplus by NT$6,862,012 thousand, NT$16,129,873 thousand and NT$5,486,189 (US$171,712) thousand, respectively.

(g)

Defined pension benefits

Effective January 1, 1998, the Company adopted ROC SFAS No. 18, which is not materially different from FASB ASC Topic 715, “Compensation–Retirement Benefits,” (Statement No. 87, “Employers’ Accounting for Pensions,” and Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”) with the exception of the accounting upon adoption. Pension expense under ROC GAAP differs with US GAAP primarily as a result of unrecognized prior service cost.

In 2006, the Company adopted FASB ASC Topic 715, “Compensation–Retirement Benefits” (Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”). FASB ASC Topic 715 requires the recognition of the funded status of a defined benefit plan on the balance sheet and the recognition of changes in funded status in the year in which the changes occur through comprehensive income. The adoption of FASB ASC Topic 715 had no effect on the statements of operations for the periods presented.

(h)

Depreciation of buildings

Under ROC GAAP, the Company depreciates buildings over 20 to 50 years in accordance with the relevant provisions of the ROC Internal Revenue Code. Under US GAAP, buildings are depreciated over their estimated useful lives of 20 years.

(Continued)

F-97

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(i)

Hedging derivative financial instruments

Upon the adoption of ROC SFAS No. 34 on January 1, 2006, there was no material difference between the accounting under ROC GAAP and US GAAP for hedging derivative financial instruments executed on or after January 1, 2006, except that ROC SFAS No. 34 permits the designation of derivatives entered into before the date of initial adoption on January 1, 2006, as effective hedge. In 2009, derivative financial instruments executed before January 1, 2006 and designated by the Company as cash flow hedges upon the adoption of ROC SFAS No. 34 were fully closed and settled in the current year.

(j)

Compensated absences

Under ROC GAAP, the Company is not required to accrue for earned but unused vacation at the end of each year. Under US GAAP, earned but unused vacation that can be carried over to subsequent periods is accrued at each balance sheet date.

(k)

Research and development expense

Under ROC GAAP, the amortization of patent and licensing fees for product and process technology is included in the research and development expense. Under US GAAP, the amortization expense is included in the cost of goods sold.

(l)

Operating leases

The Company entered into certain non-cancelable lease agreements with rental payments subject to escalation adjustments of 5% each year. Under ROC GAAP, fixed escalation of rental payment is recognized as it becomes payable. Under US GAAP, fixed escalation of rental payments is recognized on a straight-line basis over the lease term.

(m)

Income taxes

The statutory income tax rate in the Republic of China is 25%. In May 2009, the ROC Income Tax Act was revised to reduce the statutory tax rate to 20% effective from 2010. In addition, an additional 10% corporation income tax is imposed but only to the extent that earnings is not distributed before the end of the subsequent year. The additional income tax, or the undistributed earnings surtax, is determined in the subsequent year when the distribution plan relating to earnings attributable to the preceding year is approved by the Company’s stockholders. The actual payment of the undistributed earnings surtax will then become due and payable in the year following the finalization of the distribution plan.

Once the 10% tax is determined, the Company will not be entitled to any additional credit or refund, even if the current year’s undistributed earnings on which such tax was based are distributed in future years, in which case the shareholders, but not the Company, can claim an income tax credit.

(Continued)

F-98

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Under ROC GAAP, the undistributed earnings surtax is recorded as tax expense in the period during which the stockholders approve the amount of the earnings distribution. For US GAAP purposes, the 10% tax on unappropriated earnings is accrued during the period the earnings arise and adjusted to the extent that distributions are approved by the shareholders in the following years. For US GAAP purpose, the tax rate used by the Company to measure its income tax expenses by using effective rate was 31.8% for the years from 2006 to 2008, and 27.2% for the years from and after 2009.

Effective January 1, 2007, the Company adopted FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” included in FASB ASC Subtopic 740-10. FASB ASC Subtopic 740-10 (FIN 48) addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a threshold of more-likely-than-not for recognition and derecognition of tax positions taken or expected to be taken in a tax return. FASB ASC Subtopic 740-10 (FIN 48) also provides related guidance on measurement, classification, interest and penalties, and disclosure. The adoption and implementation of FASB ASC Subtopic 740-10 (FIN 48) did not have a material impact on the Company’s consolidated financial statements. ROC GAAP does not provide any explicit guidance on the accounting for uncertainty in income taxes. There is no significant difference in the Company’s accounting policy for income tax uncertainties between ROC GAAP and US GAAP.

(n)

Earnings per common share

Under ROC GAAP, basic EPS are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Diluted EPS are computed by taking into account the basic EPS and additional common shares that would have been outstanding if the potential dilutive share equivalents had been issued. The net income (loss) is also adjusted for the interest and other income or expense derived from any underlying dilutive share equivalents. The weighted-average outstanding shares are retroactively adjusted for the effects of stock dividends transferred from retained earnings and capital surplus to common stock, and employee stock bonuses issued prior to January 1, 2009. Effective January 1, 2009, and under ROC GAAP, EPS are not restated for employee stock bonuses.

Under ROC GAAP, effective January 1, 2008, pursuant to the provisions of ARDF Interpretation No. 2008-169, the weighted-averaged number of common shares outstanding during the year in computing diluted EPS is adjusted to include the effects of dilutive potential common stock related to employee bonuses, assuming the employee bonuses were to be distributed entirely by way of stock bonuses. Under US GAAP, the employee bonuses are estimated based on the minimum cash value to be paid, as management is unable to estimate the fair value of the stock award, if any, if the arrangement requires the payment in shares. Due to the contingent nature of employee stock bonuses, they are not included in the diluted EPS calculation.

(Continued)

F-99

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(o)

Principles of consolidation

As described in note 1, AUO purchased a 49% ownership interest in Toppan CFI and has an agreement in place. Under ROC GAAP, the Company consolidated Toppan CFI in accordance with ROC SFAS No. 7. Under US GAAP, AUO determined that Toppan CFI is a variable interest entity (“VIE”) under FASB ASC Subtopic 810-10, “Consolidation—Overall” (FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities”), and AUO is considered the primary beneficiary. Therefore, the Company consolidated Toppan CFI in accordance with FASB ASC Subtopic 810-10 starting from fiscal year 2007. Under FASB ASC Subtopic 810-10, the assets and liabilities of the VIE are recorded at fair value (including the portion attributable to noncontrolling interests). Under ROC GAAP, when the acquirer’s interest in the acquiree is less than 100 percent, assets and liabilities are adjusted to reflect fair value only to the extent of the acquirer’s interest in the acquiree.

(p)

Goodwill

Under ROC GAAP, the Company determined that it is a single CGU for purposes of testing goodwill for impairment. The recoverable amount of the CGU is calculated using a cash flow projection of eight years and is compared to the carrying value of CGU. If the recoverable amount of the CGU is lower than the carrying amount of the CGU, an impairment loss is recognized.

Under US GAAP, pursuant to FASB ASC Topic 350, “Intangibles—Goodwill and Other” (Statement No. 142, “Goodwill and Other Intangible Assets”), goodwill arising from a purchase business combination is tested for impairment annually or more frequently if events or circumstances indicate it might be impaired. The Company has determined that it is a single reporting unit for purposes of testing goodwill for impairment. The goodwill impairment test is a two-step test. Under the first step, the Company compares the carrying amount of its total stockholders’ equity determined on a US GAAP basis to its market value based on the quoted value of its common stock on the impairment evaluation date to determine if goodwill is potentially impaired. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit, and the Company proceeds to perform step two of the impairment test (i.e., measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement No. 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a control premium analysis. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. The Company performs its annual impairment review of goodwill at June 30 and when a triggering event occurs between annual impairment tests.

(Continued)

F-100

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

During the fourth quarter of 2008, the global financial crisis had a significant adverse effect on the Company’s quoted market price. At December 31, 2008, the market capitalization of the Company dropped below the book value of stockholders’ equity, which necessitated an additional test for goodwill impairment at the 2008 year-end. Consequently, the Company performed an analysis at the 2008 year-end to evaluate the potential impairment of the Company’s goodwill based on the Company’s adjusted market capitalization at December 31, 2008. Specifically, the Company’s market capitalization was adjusted by an appropriate control premium to derive at the estimated fair value of the Company. Management believes the control premium represents the additional amount that a buyer would be willing to pay to obtain a controlling voting interest in the Company as a result of the ability to take advantage of synergies and other benefits. To determine an appropriate control premium, references were made to recent and comparable merger and acquisition transactions in the industry that the Company operates. Furthermore, the results of the control premium analysis were corroborated with the results of an income approach of measuring the fair value of the Company. Based on management’s assessment, the Company’s fair value exceeded the book value of the Company’s stockholders’ equity at December 31, 2008. Therefore, management concluded that goodwill was not impaired, and step two of the goodwill impairment test under FASB ASC Topic 350 was not necessary.

Under US GAAP, management determined that the Group in essence currently only has one reporting unit for purposes of testing goodwill for impairment, which is the enterprise as a whole. On June 30, 2009, management compared the carrying amount of total stockholders’ equity consolidated on a US GAAP basis to market value based on the quoted market price of the company’s shares on the date of assessment to determine if goodwill is potentially impaired. Management did the test again for goodwill impairment on December 31, 2009. Based on the assessments mentioned above, management concluded that goodwill was not impaired under both ROC GAAP and US GAAP.

(q)

Potential antitrust loss

Under ROC GAAP, the provision for potential antitrust losses is usually recognized in the consolidated statement of operations as a non-operating expense.

Under US GAAP, the provision for potential antitrust losses is recognized in the condensed consolidated statement of operations as an operating expense.

(Continued)

F-101

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(r)

US GAAP reconciliations

(1)

Reconciliation of consolidated net income (loss) attributable to the stockholders of AU Optronics Corp.

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands, except for per share data)
Net income (loss) attributable to stockholders of AU Optronics Corp., ROC GAAP		56,417,766			21,267,386			(26,769,335	)		(837,851	)
US GAAP adjustments:
a) Purchase method of accounting for acquisition of Unipac
-Amortization of intangible assets		(1,049,496	)		(1,049,496	)		-			-
-Depreciation		(16,868	)		(22,266	)		(79,663	)		(2,493	)
-Disposals of available-for-sale securities		-			14,030			136,731			4,280
-Impairment of available-for-sale securities		-			(182,466	)		-			-
Acquisition method of accounting for acquisition of M. Setek
-Impairment loss		-			-			653,609			20,457
-Remeasurement loss		-			-			(1,445,660	)		(45,248	)
-Gain on bargain purchase		-			-			162,682			5,092
Acquisition method of accounting for other		-			-			41,099			1,286
b) Noncontrolling interests
-Decrease in ownership not resulting in loss of control		-			-			28,323			886
c) Compensation
-Remuneration to directors and supervisors		(158,500	)		13,397			-			-
-Employee bonuses
-Current-year provision		(4,573,000	)		-			-			-
-Adjustment to fair value		(2,584,194	)		(6,520,538	)		(216,324	)		(6,771	)
d) Long-term equity investments
-Investment losses		(72,354	)		(192,840	)		(36,241	)		(1,134	)
-Impairment loss		-			(1,928,709	)		-			-
e) Convertible bonds		(132,599	)		1,252,181			-			-
g) Pension expense		2,550			2,307			1,979			62
h) Depreciation of buildings		(1,675,418	)		(1,728,045	)		(2,209,816	)		(69,165	)

(Continued)

F-102

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands, except for per share data)
i) Hedging derivative financial instruments		167,019			32,625			(32,625	)		(1,021	)
j) Compensated absences expense		(11,014	)		80,470			(230,102	)		(7,202	)
l) Escalation adjustment of rent expense		6,802			2,129			2,129			67
m) Tax effect of the above US GAAP adjustments		832,523			430,476			1,031,220			32,276
m) Valuation allowance for deferred tax assets related to the above US GAAP adjustments		(17,489	)		(80,789	)		(96,163	)		(3,010	)
m) 10% surtax on undistributed retained earnings and others		(1,780,248	)		1,699,802			387,836			12,139
Net income (loss) attributable to stockholders of AU Optronics Corp., US GAAP		45,355,480			13,089,654			(28,670,321	)		(897,350	)
Earnings (loss) per share:
Basic		5.39			1.52			(3.26	)		(0.10	)
Diluted		5.17			1.49			(3.26	)		(0.10	)
Weighted-average number of shares outstanding (in thousands):
Basic		8,409,607			8,606,669			8,785,178
Diluted		8,818,252			8,817,625			8,785,178

(Continued)

F-103

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)

Reconciliation of consolidated equity attributable to the stockholders of AU Optronics Corp.:

	December 31,
	2008			2009
	NT$			NT$			US$
	(in thousands)

Equity attributable to stockholders of AU Optronics Corp., ROC GAAP		290,058,971			262,087,137			8,203,040
a) Purchase method of accounting for acquisition of Unipac
- Goodwill		10,946,732			10,946,732			342,621
- Other assets		(27,227	)		(106,890	)		(3,345	)
Acquisition method of accounting for acquisition of M. Setek
- Impairment loss		-			653,609			20,457
- Remeasurement loss		-			(1,445,660	)		(45,248	)
- Gain on bargain purchase		-			162,682			5,092
Acquisition method of accounting for other		-			41,099			1,286
d) Subsidiaries and long-term equity investments		(2,004,853	)		756,923			23,691
d) Cumulative translation adjustments		(11,086	)		38,603			1,208
g) Defined benefit plan
- Accrued pension cost		17,587			(20,698	)		(648	)
- Recognition of funded status under FASB ASC Subtopic 715-60 (Statement No. 158)		(207,207	)		(375,411	)		(11,750	)
h) Accumulated depreciation of buildings		(6,279,693	)		(8,489,509	)		(265,712	)
j) Accrued compensated absences		(161,706	)		(391,808	)		(12,263	)
l) Accrued rental expense and adjustment to land cost		(98,668	)		(96,539	)		(3,022	)
m) Deferred income tax assets and liabilities		1,159,018			2,508,712			78,520
Equity attributable to stockholders of AU Optronics Corp., US GAAP		293,391,868			266,268,982			8,333,927

(Continued)

F-104

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(s)

US GAAP condensed consolidated financial statements

(1)

Condensed consolidated balance sheets

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)
Assets
Current assets		145,522,348		195,902,913		6,131,547
Long-term investments		6,469,741		12,505,585		391,411
Property, plant and equipment, net		383,958,143		385,571,559		12,067,967
Goodwill and intangible assets		26,399,359		25,036,528		783,616
Other assets		6,636,001		7,125,197		223,011
Total Assets		568,985,592		626,141,782		19,597,552

Liabilities and Equity
Current liabilities		152,647,199		203,120,887		6,357,461
Long-term liabilities		115,209,312		145,004,401		4,538,479
Equity attributable to stockholders of AU Optronics Corp.		293,391,868		266,268,982		8,333,927
Noncontrolling interests		7,737,213		11,747,512		367,685
Total Liabilities and Equity		568,985,592		626,141,782		19,597,552

(Continued)

F-105

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)

Condensed consolidated statements of operations

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)

Net sales		480,184,256			423,928,193			358,732,803			11,227,944
Cost of goods sold		407,004,913			380,968,342			357,966,412			11,203,957
Gross profit		73,179,343			42,959,851			766,391			23,987
Operating expenses		21,328,332			22,811,722			29,076,075			910,049
Operating income (loss)		51,851,011			20,148,129			(28,309,684	)		(886,062	)
Non-operating expenses, net		(3,416,728	)		(4,061,975	)		(1,352,661	)		(42,337	)
Income (loss) before income taxes		48,434,283			16,086,154			(29,662,345	)		(928,399	)
Income tax expense (benefit)		3,053,124			2,579,576			(1,359,533	)		(42,552	)
Net income (loss)		45,381,159			13,506,578			(28,302,812	)		(885,847	)
Less net income attributable to noncontrolling interests		25,679			416,924			367,509			11,503
Net income (loss) attributable to stockholders of AU Optronics Corp.		45,355,480			13,089,654			(28,670,321	)		(897,350	)

(Continued)

F-106

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(3)

Condensed consolidated statements of comprehensive income (loss) under US GAAP

	For the year ended December 31,
	2007		2008			2009
	NT$		NT$			NT$			US$
	(in thousands)
Net income (loss) attributable to stockholders of AU Optronics Corp.		45,355,480		13,089,654			(28,670,321	)		(897,350	)
Other comprehensive income (loss), net of tax:
Derivative and hedging activities		290,193		(727,376	)		226,874			7,101
Unrealized gains (losses) on securities		1,436,558		(1,693,174	)		1,680,476			52,597
Cumulative translation adjustments		646,134		1,277,232			(611,237	)		(19,131	)
Defined benefit plan		110,991		(18,548	)		(120,856	)		(3,783	)
Other comprehensive income (loss), net of tax		2,483,876		(1,161,866	)		1,175,257			36,784
Comprehensive income (loss) attributable to stockholders of AU Optronics Corp.		47,839,356		11,927,788			(27,495,064	)		(860,566	)

	For the year ended December 31,
	2007	2008		2009
	NT$	NT$		NT$		US$
	(in thousands)
Net income attributable to noncontrolling interests	25,679	416,924		367,509		11,503
Other comprehensive income (loss), net of tax:
Derivative and hedging activities	-	-		-		-
Unrealized gains (losses) on securities	-	-		-		-
Cumulative translation adjustments	39,995	32,727		(73,534	)	(2,302	)
Defined benefit plan	2,964	(1,432	)	(2,269	)	(71	)
Other comprehensive income (loss), net of tax	42,959	31,295		(75,803	)	(2,373	)
Comprehensive income attributable to noncontrolling interests	68,638	448,219		291,706		9,130

(Continued)

F-107

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(4)

Changes in equity attributable to AU Optronics Corp., noncontrolling interests and total equity under US GAAP

	Years ended December 31, 2007, 2008 and 2009
	Equity attributable to AU Optronics Corp.			Noncontrolling interests		Total equity
	(in thousands)

Balance at January 1, 2007		238,618,131			342,014		238,960,145
Employees’ profit sharing—cash		(245,793	)		-		(245,793	)
Capitalization of employee stock bonus		3,321,574			-		3,321,574
Cash dividends		(1,514,793	)		-		(1,514,793	)
Issuance of stock for conversion of bonds		3,783,171			-		3,783,171
Deferred compensation cost for employee stock options		3,890			-		3,890
Issuance of stock from exercise of employee stock option		126,491			-		126,491
Effect of inclusion of newly consolidated subsidiaries		-			8,035,132		8,035,132
Proceeds from subsidiaries capital increase		-			396,228		396,228
Other changes in equity		(66,205	)		-		(66,205	)
Comprehensive income:
Net income		45,355,480			25,679		45,381,159
Other comprehensive income, net of tax:
Derivative and hedging activities		290,193			-		290,193
Unrealized gains on securities		1,436,558			-		1,436,558
Cumulative translation adjustments		646,134			39,995		686,129
Defined benefit plan		110,991			2,964		113,955
Comprehensive income		47,839,356			68,638		47,907,994

Balance at December 31, 2007		291,865,822			8,842,012		300,707,834

(Continued)

F-108

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	Years ended December 31, 2007, 2008 and 2009
	Equity attributable to AU Optronics Corp.			Noncontrolling interests			Total equity
	(in thousands)

Employees’ profit sharing—cash		(1,624,832	)		(19,571	)		(1,644,403	)
Capitalization of employee stock bonus		11,093,538			-			11,093,538
Cash dividends		(19,670,577	)		(110,823	)		(19,781,400	)
Issuance of stock for conversion of bonds		151,793			-			151,793
Issuance of stock from exercise of employee stock option		26,609			-			26,609
Proceeds from subsidiaries capital increase		-			40,000			40,000
Other changes in equity		(378,273	)		(1,462,624	)		(1,840,897	)
Comprehensive income:
Net income		13,089,654			416,924			13,506,578
Other comprehensive income, net of tax:
Derivative and hedging activities		(727,376	)		-			(727,376	)
Unrealized losses on securities		(1,693,174	)		-			(1,693,174	)
Cumulative translation adjustments		1,277,232			32,727			1,309,959
Defined benefit plan		(18,548	)		(1,432	)		(19,980	)
Comprehensive income		11,927,788			448,219			12,376,007
Balance at December 31, 2008		293,391,868			7,737,213			301,129,081
Employees’ profit sharing—cash		2,226,093			-			2,226,093
Cash dividends		(2,551,716	)		-			(2,551,716	)
Net transfer from noncontrolling interest		31,232			(31,232	)		-
Proceeds from subsidiaries capital increase		-			2,445,262			2,445,262
Effect of inclusion of newly consolidated subsidiaries		-			1,762,956			1,762,956
Other changes in equity		666,569			(458,393	)		208,176
Comprehensive income (loss):
Net income (loss)		(28,670,321	)		367,509			(28,302,812	)
Other comprehensive income, net of tax:
Derivative and hedging activities		226,874			-			226,874
Unrealized gains on securities		1,680,476			-			1,680,476
Cumulative translation adjustments		(611,237	)		(73,534	)		(684,771	)
Defined benefit plan		(120,856	)		(2,269	)		(123,125	)
Comprehensive income (loss)		(27,495,064	)		291,706			(27,203,358	)
Balance at December 31, 2009		266,268,982			11,747,512			278,016,494
Balance at December 31, 2009 (in US$)		8,333,927			367,685			8,701,612

(Continued)

F-109

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(5)

Condensed consolidated statements of cash flows

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)
Net cash provided by (used in):
Operating activities		156,942,207			132,044,194			58,566,108			1,833,055
Investing activities		(66,313,691	)		(101,242,355	)		(68,550,309	)		(2,145,550	)
Financing activities		(44,816,566	)		(37,473,199	)		11,467,617			358,924
Effect of exchange rate change on cash and cash equivalents		152,392			216,450			525,198			16,438
Net change in cash and cash equivalents		45,964,342			(6,454,910	)		2,008,614			62,867
Cash and cash equivalents at beginning of year		43,925,265			89,889,607			83,434,697			2,611,415
Cash and cash equivalents at end of year		89,889,607			83,434,697			85,443,311			2,674,282

(t)

Additional US GAAP disclosure

(1)

Available-for-sale securities

The Company holds marketable securities that are classified as available-for-sale securities. Information on available-for-sale securities held at each balance sheet date is as follows:

					Total unrealized		Total unrealized
	Cost*		Fair value		gains		losses
	NT$		NT$		NT$		NT$
			(in thousands)
Current assets:
As of December 31, 2008		504,823		470,301		-		34,522
As of December 31, 2009		-		-		-		-
Long-term investments:
As of December 31, 2008		592,697		595,750		137,343		134,290
As of December 31, 2009		539,292		2,012,265		1,473,354		381

Cost basis as of December 31, 2008, reflects the impact of the other-than-temporary impairment losses of NT$514,163 thousand, which resulted in a new cost basis of the related available-for-sale securities.

(Continued)

F-110

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Gross unrealized losses on available-for-sale securities for which other-than-temporary impairment has not been recognized at December 31, 2008 and 2009, relate to investments that had been in a continuous unrealized loss position for less than 12 months.

Information on the sale of available-for-sale securities for the years ended December 31, 2007, 2008 and 2009, is summarized as follows. The costs of the securities sold were determined on a weighted-average basis.

	Proceeds		Gross realized		Gross realized
	from sales		gains		losses
	NT$		NT$		NT$
	(in thousands)

For the year ended December 31, 2007		29,956		15,714		-
For the year ended December 31, 2008		270,250		40,475		58
For the year ended December 31, 2009		939,158		374,372		-

(2)

Allowance for doubtful accounts, and sales returns and discounts (including related parties)

A roll-forward of the allowance for doubtful accounts, and sales returns and discounts is as follows:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)
Allowance for doubtful accounts, and sales returns and discounts:
Balance at beginning of year		1,307,549			1,572,215			1,244,468			38,950
Provisions charged to earnings		4,093,943			2,606,923			620,393			19,418
Write-offs		(3,829,277	)		(2,934,670	)		(1,650,534	)		(51,660	)
Balance at end of year		1,572,215			1,244,468			214,327			6,708

(3)

Pension-related benefits

(i) Defined benefit pension plans in Taiwan

AUO and Toppan CFI have established defined benefit pension plans covering their full-time employees in the Republic of China who joined the Company before July 1, 2005, and elected to participate in the plans.

(Continued)

F-111

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

One of the principal assumptions used to calculate net periodic benefit cost is the expected long-term rate of return on plan assets. The expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets is designed to approximate the actual long-term returns.

The discount rate assumptions used to account for pension plans reflect the rates available on high-quality, fixed-income debt instruments on December 31 of each year. The rate of increase in compensation levels is another significant assumption used for pension accounting and is determined by AUO and Toppan CFI based upon annual review.

Net periodic benefit cost for AUO’s and Toppan CFI’s defined benefit pension plans amounted to NT$24,397 thousand, NT$15,661 thousand and NT$14,409 (US$451) thousand for the years ended December 31, 2007, 2008 and 2009, respectively.

AUO and Toppan CFI use a measurement date of December 31 for their plans.

The following table sets forth the change in benefit obligations for the pension plans:

	December 31,
	2008			2009
	NT$			NT$		US$
	(in thousands)

Projected benefit obligation at beginning of year		984,913			1,057,377		33,095
Service cost		8,116			8,077		253
Interest cost		29,548			26,435		827
Actuarial loss		36,303			173,594		5,433
Curtailment		(1,503	)		-		-
Projected benefit obligation at end of year		1,057,377			1,265,483		39,608

The accumulated benefit obligation for the pension plans was NT$490,196 thousand and NT$588,596 (US$18,422) thousand at December 31, 2008 and 2009, respectively.

(Continued)

F-112

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table sets forth the change in the fair value of plan assets for the pension plans:

	December 31,
	2008		2009
	NT$		NT$		US$
	(in thousands)

Fair value of plan assets at beginning of year		947,714		1,111,106		34,776
Actual return on plan assets		30,264		23,213		727
Actual contributions		133,128		120,361		3,767
Fair value of plan assets at end of year		1,111,106		1,254,680		39,270

Plan assets only contain a pension fund (the “Fund”), as mandated by the ROC Labor Standards Law. The government is responsible for the administration of the fund and determination of the investment strategies and policies. AUO and Toppan CFI contribute an amount equal to 2% of salaries paid every month to the Fund as required by the law. The Fund is administered by a pension fund monitoring committee (the “Committee”) and is deposited in the Committee’s name with Bank of Taiwan (formerly with the Central Trust of China before it merged with and into Bank of Taiwan on July 1, 2007). Additional contributions may be required in the future in order to provide for unfunded obligations.

The Company’s pension fund is managed by a government-established institution with minimum return guaranteed by government and the fund asset is treated as cash category.

The following table sets forth the amounts recognized related to AUO’s and Toppan CFI’s pension plans in the condensed consolidated balance sheets for US GAAP purposes:

	December 31,
	2008		2009
	NT$		NT$			US$
	(in thousands)
Funded status - plan assets more (less) than benefit obligations		53,730		(10,803	)		(338	)
Prepaid pension cost (accrued liability)		53,730		(10,803	)		(338	)

(Continued)

F-113

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31,
	2008			2009
	NT$			NT$			US$
	(in thousands)

Prepaid pension cost (accrued liability) at beginning of year		(37,198	)		53,730			1,682
Net periodic benefit cost		(15,661	)		(14,409	)		(451	)
Actual contributions		133,128			120,361			3,767
Pension liability adjustments under FASB Topic 715-60 (Statement No. 158)		(26,539	)		(170,485	)		(5,336	)
Prepaid pension cost (accrued liability) at end of year		53,730			(10,803	)		(338	)

Net periodic benefit cost for the defined benefit pension plans consisted of the following:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)

Service cost		9,264			8,116			8,077			253
Interest cost		26,679			29,547			26,435			827
Expected return on plan assets		(22,031	)		(28,408	)		(27,881	)		(872	)
Amortization of net transition cost		323			288			323			10
Recognized net actuarial loss		10,162			6,118			7,455			233
Net periodic benefit cost		24,397			15,661			14,409			451

The weighted-average assumptions used in computing the benefit obligations were as follows:

	December 31,
	2007			2008			2009

Discount rate		3.00	%		2.50	%		2.25	%
Rate of increase in compensation levels		2.00% – 3.50	%		2.50% – 3.00	%		3.00	%

(Continued)

F-114

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The weighted-average assumptions used in computing net periodic benefit cost were as follows:

	For the year ended December 31,
	2007			2008			2009

Discount rate		2.50% – 2.75	%		3.00	%		2.50	%
Rate of increase in compensation levels		2.00% – 3.50	%		2.00% – 3.50	%		2.50% – 3.00	%
Expected long-term rate of return on plan assets		2.50% – 3.00	%		2.50	%		2.25% – 2.50	%

According to applicable regulations in the Republic of China, the minimum return on the plan assets should not be lower than the market interest rate on two-year time deposits. The government is responsible for any shortfall in the event that the rate of return is less than the required rate of return.

AUO and Toppan CFI contributed NT$120,361(US$3,767) thousand to the pension plans in 2009, and anticipate contributing NT$119,717 thousand to the plans in 2010.

The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are summarized as follows:

Year	Retirement benefit payments
	NT$		US$
	(in thousands)

2010		10,979		344
2011		19,994		626
2012		11,307		354
2013		16,554		518
2014		61,961		1,939
2015-2019		340,048		10,643

The expected benefits are estimated based on the same assumptions used to measure the Company’s benefit obligation at December 31, 2009 and include estimated future employee service.

(Continued)

F-115

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(ii) Defined benefit pension plans in Japan

The following table sets forth the change in benefit obligations for the pension plans:

	December 31, 2009
	NT$			US$
	(in thousands)

Projected benefit obligation at October 1, 2009		157,667			4,935
Service cost		5,936			186
Interest cost		788			25
Actuarial loss		(532	)		(17	)
Benefit		(17	)		(1	)
Projected benefit obligation at end of year		163,842			5,128

The accumulated benefit obligation for the pension plans was NT$143,406 (US$4,488) thousand at December 31, 2009.

The following table sets forth the change in the fair value of plan assets for the pension plans:

	December 31, 2009
	NT$			US$
	(in thousands)

Fair value of plan assets at October 1, 2009		31,870			998
Actual return on plan assets		(403	)		(13	)
Actual contributions		1,185			37
Benefit		(17	)		(1	)
Fair value of plan assets at end of year		32,635			1,021

The following table sets forth the amounts recognized related to M. Setek’s pension plans in the condensed consolidated balance sheets for US GAAP purposes:

	December 31, 2009
	NT$			US$
	(in thousands)

Funded status—plan assets less than benefit obligations		(131,207	)		(4,107	)
Accrued liability		(131,207	)		(4,107	)

(Continued)

F-116

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	December 31, 2009
	NT$			US$
	(in thousands)

Accrued liability at October 1, 2009		(125,796	)		(3,937	)
Net periodic benefit cost		(6,665	)		(209	)
Actual contributions		1,185			37
Pension liability adjustments under FASB Topic 715-60 (Statement No. 158)		69			2
Accrued liability at end of year		(131,207	)		(4,107	)

Net periodic benefit cost for the defined benefit pension plans consisted of the following:

	For the period from October 1 to December 31, 2009
	NT$			US$
	(in thousands)

Service cost		5,936			186
Interest cost		788			25
Expected return on plan assets		(59	)		(2	)
Net periodic benefit cost		6,665			209

The weighted-average assumptions used in computing the benefit obligations were as follows:

	December 31, 2009

Discount rate		2.0	%
Rate of increase in compensation levels		1.2% – 5.55	%

The weighted-average assumptions used in computing net periodic benefit cost were as follows:

	For the period from October 1 to December 31, 2009

Discount rate		2.0	%
Rate of increase in compensation levels		1.2% – 5.55	%
Expected long-term rate of return on plan assets		0.75	%

(Continued)

F-117

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

M. Setek contributed NT$1,185 (US$37) thousand to the pension plans during October 1 to December 31, 2009, and anticipates contributing NT$4,738 thousand to the plans in 2010.

The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter are summarized as follows:

Year	Retirement benefit payments
	NT$		US$
	(in thousands)

2010		1,724		54
2011		1,939		61
2012		5,373		168
2013		8,370		262
2014		3,967		124
2015-2018		42,904		1,343

The expected benefits are estimated based on the same assumptions used to measure M. Setek’s benefit obligation at December 31, 2009 and include estimated future employee service.

(4)

Income taxes

(i)

The sources of income (loss) before taxes are summarized as follows:

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$			US$
	(in thousands)

Domestic operations		47,220,132		13,629,712		(34,957,294	)		(1,094,125	)
Foreign operations		1,214,151		2,456,442		5,294,949			165,726
		48,434,283		16,086,154		(29,662,345	)		(928,399	)

(Continued)

F-118

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The components of the provision for income tax expense (benefit) are summarized as follows:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)

Current income tax expense (benefit):
Domestic		4,310,720			2,060,713			(13,453	)		(421	)
Foreign		182,505			144,502			698,484			21,862
Deferred income tax expense (benefit):
Domestic		(1,404,671	)		538,317			(1,816,893	)		(56,867	)
Foreign		(35,430	)		(163,956	)		(227,671	)		(7,126	)
Income tax expense (benefit)		3,053,124			2,579,576			(1,359,533	)		(42,552	)

(Continued)

F-119

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

A reconciliation of the expected income tax expense (benefit) to the actual income tax expense (benefit) as reported under US GAAP for 2007, 2008 and 2009 was as follows:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)

Expected income tax expense (benefit)		12,108,571			4,021,538			(7,415,586	)		(232,100	)
Decrease (increase) in investment tax credits, net of expired portion		(2,685,794	)		(8,506,844	)		2,664,946			83,410
Increase (decrease) in valuation allowance		(7,645,980	)		4,937,090			2,259,473			70,719
Tax exemption		(6,085,443	)		(2,975,267	)		-			-
Employee bonuses		1,789,298			1,630,135			-			-
Tax on undistributed retained earnings		5,641,777			2,126,739			667			21
Effect of changes in statutory income tax rate		-			-			2,321,716			72,667
Effect of different subsidiary income tax rate		(59,303	)		(99,477	)		(491,379	)		(15,380	)
Impairment loss on domestic marketable securities and domestic equity-method investee		-			723,837			-			-
Non-deductible expense and others		(10,002	)		721,825			(699,370	)		(21,889	)
Income tax expense (benefit)		3,053,124			2,579,576			(1,359,533	)		(42,552	)

(Continued)

F-120

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(ii)

The components of deferred income tax assets and liabilities were as follows:

	December 31,
	2008			2009
	NT$			NT$			US$
	(in thousands)
Deferred tax assets:
Inventories		2,078,665			1,061,836			33,234
Unrealized loss and expenses		1,882,249			3,809,103			119,221
Other current liabilities		876,378			601,826			18,836
Investment tax credits		20,416,402			17,757,976			555,805
Net operating loss carryforwards		256,900			6,685,747			209,257
Convertible bonds		32,943			28,178			882
Property, plant and equipment		2,088,558			2,628,148			82,258
Others		564,672			1,137,926			35,616
Gross deferred tax assets		28,196,767			33,710,740			1,055,109
Valuation allowance		(16,624,849	)		(19,855,487	)		(621,455	)
Net deferred tax assets		11,571,918			13,855,253			433,654

Deferred tax liabilities:
Long-term investment—equity method		(1,035,489	)		(1,672,344	)		(52,343	)
Goodwill		(765,906	)		(839,121	)		(26,263	)
Property, plant and equipment		-			(1,453,849	)		(45,504	)
Cumulative translation adjustments		(773,427	)		(381,087	)		(11,928	)
Others		(452,256	)		(283,602	)		(8,876	)
Total deferred tax liabilities		(3,027,078	)		(4,630,003	)		(144,914	)
Net deferred tax assets		8,544,840			9,225,250			288,740

In assessing the realizability of deferred tax assets in accordance with US GAAP, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible and net operating losses and investment tax credits are utilized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences and carryforwards, net of the existing valuation allowance at December 31, 2009. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward or reversal periods are reduced.

(Continued)

F-121

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The valuation allowance at December 31, 2009, represented the amount of tax benefits related to investment tax credit carryforwards which management determined are not more likely than not to be realized due, in part, to projections of future taxable income. As of December 31, 2007, 2008 and 2009, the increase (decrease) in valuation allowance amounted to NT$(7,297,685) thousand, NT$3,108,708 thousand and NT$3,230,638 (US$101,115) thousand, respectively.

Pursuant to the Business Mergers and Acquisition Act, the Company is entitled to net operating loss carryforwards of NT$1,014,035 thousand and investment tax credits of NT$9,410,776 thousand sustained by QDI prior to the date of acquisition. As of October 1, 2006, the Company recognized a valuation allowance of NT$9,410,776 thousand on the unused investment tax credits because management believes that it is more likely than not that the Company will not realize the benefits of those deferred tax assets based on expected future earnings. As of December 31, 2009 NT$6,029,659 (US$188,722) thousand of such investment tax credits have expired unutilized. Any further subsequent recognition of tax benefit related to valuation allowance for deferred tax assets will be recorded in the consolidated statements of operations under FASB ASC Topic 805 (Statement No. 141R).

Similar to ROC GAAP, deferred tax assets and liabilities under US GAAP would be classified as current or noncurrent based on the classification of the related asset or liability, and the valuation allowance is allocated on a pro rata basis between current and noncurrent deferred tax assets for the relevant jurisdiction. As of December 31, 2008 and 2009, deferred tax assets and liabilities under US GAAP were as follows:

	December 31,
	2008			2009
	NT$			NT$			US$
				(in thousands)

Deferred tax assets—current		4,877,051			5,365,909			167,947
Deferred tax assets—noncurrent		6,556,452			8,294,282			259,601
Deferred tax liabilities—current		(267,355	)		(22,182	)		(694	)
Deferred tax liabilities—noncurrent		(2,621,308	)		(4,412,759	)		(138,114	)
		8,544,840			9,225,250			288,740

(Continued)

F-122

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(iii)

Summary of total income taxes (benefit):

In 2007, 2008 and 2009, the total income taxes (benefit) were allocated as follows:

	For the year ended December 31,
	2007			2008			2009
	NT$			NT$			NT$			US$
	(in thousands)

Income tax expense (benefit) from continuing operations		3,053,124			2,579,576			(1,359,533	)		(42,552	)
Other comprehensive income		331,665			183,268			(179,004	)		(5,603	)
Tax benefit allocated to reduce goodwill		(1,215,980	)		(1,524,387	)		-			-
Total income tax (benefit)		2,168,809			1,238,457			(1,538,537	)		(48,155	)

(iv)

Accounting for uncertainty in income taxes:

A reconciliation of the beginning and ending amounts of unrecognized tax benefits was as follows:

	For the year ended December 31,
	2007		2008			2009
	NT$		NT$			NT$		US$
	(in thousands)

Balance at beginning of year		-		709,134			-		-
Increase related to prior-year tax positions		709,134		-			3,368		105
Decrease related to prior-year tax positions		-		(309,327	)		-		-
Settlements		-		(399,807	)		-		-
Balance at end of year		709,134		-			3,368		105

In 2009, the income tax authorities in Taiwan completed the examination of AUO’s income tax returns for 2007. As a result of the examination, the Company increased the accrued liability for unrecognized tax benefits related to prior-year tax positions for an amount of NT$3,368 (US$105) thousand. As of December 31, 2009, the Company did not have any unrecognized tax benefits and does not expect any significant change in the unrecognized tax benefits within the next 12 months.

(Continued)

F-123

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(5)

Property, plant and equipment

As of December 31, 2008 and 2009, the components of property, plant and equipment were as follows:

	December 31, 2008
	Cost		Accumulated depreciation			Carrying amount
	NT$		NT$			NT$
			(in thousands)

Land		6,187,337		-			6,187,337
Buildings		72,120,009		(16,159,543	)		55,960,466
Machinery and equipment		509,371,848		(268,798,291	)		240,573,557
Other equipment and general assets		37,233,663		(28,481,052	)		8,752,611
Construction in progress		12,299,311		-			12,299,311
Prepayments for purchases of land and equipment		60,184,861		-			60,184,861
		697,397,029		(313,438,886	)		383,958,143

	December 31, 2009
	Cost		Accumulated depreciation			Carrying amount
	NT$		NT$			NT$
			(in thousands)

Land		7,805,694		-			7,805,694
Buildings		89,175,146		(21,493,284	)		67,681,862
Machinery and equipment		620,736,569		(354,761,499	)		265,975,070
Other equipment and general assets		43,179,551		(35,406,845	)		7,772,706
Construction in progress		9,773,502		-			9,773,502
Prepayments for purchases of land and equipment		26,562,725		-			26,562,725
		797,233,187		(411,661,628	)		385,571,559

(Continued)

F-124

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(6)

The changes in the components of accumulated other comprehensive income (loss) were as follows:

	Derivative and hedging activities			Unrealized gains (losses) on securities			Cumulative translation adjustments			Defined benefit plan			Accumulated other comprehensive income (loss)
	NT$			NT$			NT$			NT$			NT$
	(in thousands)

Balance at December 31, 2006		(104,907	)		145,607			399,931			(234,510	)		206,121
Net current-period change		290,193			1,436,558			646,134			110,991			2,483,876
Balance at December 31, 2007		185,286			1,582,165			1,046,065			(123,519	)		2,689,997
Net current-period change		(727,376	)		(1,693,174	)		1,277,232			(18,548	)		(1,161,866	)
Balance at December 31, 2008		(542,090	)		(111,009	)		2,323,297			(142,067	)		1,528,131
Net current-period change		226,874			1,680,476			(611,237	)		(120,856	)		1,175,257
Balance at December 31, 2009		(315,216	)		1,569,467			1,712,060			(262,923	)		2,703,388

The related income tax effects allocated to each component of other comprehensive income (loss) were as follows:

	For the year ended December 31, 2007
	Before tax amount			Tax (expense) benefit			Net-of-tax amount
	NT$			NT$			NT$

Derivative and hedging activities		357,891			(67,698	)		290,193
Unrealized gains on securities		1,452,272			-			1,452,272
Less: reclassification adjustment for gains realized in income		(15,714	)		-			(15,714	)
Cumulative translation adjustments		893,121			(246,987	)		646,134
Defined benefit plan		127,971			(16,980	)		110,991
Net current-period changes		2,815,541			(331,665	)		2,483,876

	For the year ended December 31, 2008
	Before tax amount			Tax (expense) benefit			Net-of-tax amount
	NT$			NT$			NT$

Derivative and hedging activities		(961,446	)		234,070			(727,376	)
Unrealized losses on securities		(1,652,757	)		-			(1,652,757	)
Less: reclassification adjustment for gains realized in income		(40,417	)		-			(40,417	)
Cumulative translation adjustments		1,702,116			(424,884	)		1,277,232
Defined benefit plan		(26,094	)		7,546			(18,548	)
Net current-period changes		(978,598	)		(183,268	)		(1,161,866	)

(Continued)

F-125

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31, 2009
	Before tax amount			Tax (expense) benefit			Net-of-tax amount
	NT$			NT$			NT$

Derivative and hedging activities		299,014			(72,140	)		226,874
Unrealized gains on securities		2,054,848			-			2,054,848
Less: reclassification adjustment for gains realized in income		(374,372	)		-			(374,372	)
Cumulative translation adjustments		(809,581	)		198,344			(611,237	)
Defined benefit plan		(173,656	)		52,800			(120,856	)
Net current-period changes		996,253			179,004			1,175,257

There are no tax effects from realized or unrealized gains (losses) on available-for-sale securities since capital gains (losses) on Republic of China securities are not taxable (deductible) in Taiwan.

(7)

Product revenue information

The Company’s Chief Executive Officer is the Chief Operating Decision Maker (“CODM”). The CODM evaluates consolidated results of revenue by product and manufacturing operations when making decisions about allocating resources and assessing performance of the Company. Consequently, the Company has determined that it has one reportable operating segment as that term is defined by FASB ASC Topic 280, “Segment Reporting— Overall.” (Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information”)

The revenue for principal products comprised the following:

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$		US$
	(in millions)
Panels for computer products:
Panels for notebook computers		89,031		81,100		60,432		1,891
Panels for desktop monitors		133,278		93,097		68,431		2,142
Total panels for computer products		222,309		174,197		128,863		4,033
Panels for LCD televisions		200,573		188,162		166,223		5,203
Panels for consumer electronics products		43,023		42,599		45,131		1,413
Panels for industrial products		11,988		13,665		1,993		62
Other(1)		2,291		5,305		16,523		517
Total		480,184		423,928		358,733		11,228

(1)

Includes revenues generated from sales of raw materials, components, other TFT-LCD panel products, solar module and from service charges.

(Continued)

F-126

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8)

Basic and diluted (L) EPS

Basic (L) EPS for years 2007, 2008 and 2009 were computed as follows:

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$
	(in thousands, except for per share data)

Net income (loss) attributable to stockholders of AU Optronics Corp.		45,355,480		13,089,654		(28,670,321	)

Weighted-average number of shares outstanding during the year—retroactively adjusted:
Shares of common stock at beginning of year		7,573,403		7,865,201		8,505,720
Employee stock options		1,138		419		-
Issuance of common stock for conversion of bonds		26,126		2,398		-
Issuance of shareholders’ stock dividends and employee stock bonus		175,206		487,971		279,458
Retroactive adjustment for capitalization of retained earnings		633,734		250,680		-
		8,409,607		8,606,669		8,785,178
Basic (L) EPS:
Net income (loss)		5.39		1.52		(3.26	)

Diluted (L) EPS for years 2007, 2008 and 2009 were computed as follows:

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$
	(in thousands, except for per share data)

Net income (loss) attributable to stockholders of AU Optronics Corp. for computing diluted EPS:
Net income (loss)		45,355,480		13,089,654		(28,670,321	)
Effect of dilutive potential common stock related to convertible bonds		208,622		39,792		-
		45,564,102		13,129,446		(28,670,321	)

(Continued)

F-127

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	For the year ended December 31,
	2007		2008		2009
	NT$		NT$		NT$
	(in thousands, except for per share data)

Weighted-average number of shares outstanding during the year—retroactively adjusted (including the effect of dilutive potential common stock):
Shares of common stock at beginning of year		7,573,403		7,865,201		8,505,720
Employee stock options		1,138		419		-
Issuance of common stock for conversion of bonds		26,126		2,398		-
Issuance of shareholders’ stock dividends and employee stock bonus		175,205		487,971		279,458
Effect of dilutive potential common stock related to stock options		547		104		-
Effect of dilutive potential common stock related convertible bonds		377,304		204,708		-
Retroactive adjustment of capitalization of retained earnings		664,529		256,824		-
		8,818,252		8,817,625		8,785,178

Diluted (L)EPS:
Net income (loss)		5.17		1.49		(3.26	)

As of December 31, 2009, the zero coupon convertible bond with a principal amount of NT$2,690,900 (US$84,222) thousand which can be converted to 73,083 thousand shares, was not included in the computation of diluted earnings per share due to its anti-dilutive effect.

(Continued)

F-128

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(9)

Goodwill and other intangible assets

(i)

Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2009, were as follows:

	For the year ended December 31,
	2008			2009
	NT$			NT$		US$
	(in thousands)

Balance at beginning of year		23,751,714			22,227,327		695,691
Tax benefit allocated to reduce goodwill		(1,524,387	)		-		-
Balance at end of year		22,227,327			22,227,327		695,691

(ii)

Other intangible assets

Details of the other intangible assets were as follows:

	December 31, 2008
	Cost		Accumulated amortization		Carrying amount
	NT$		NT$		NT$
	(in thousands)
Amortizable intangible assets:
Patents and licensing fees		22,842,711		19,589,604		3,253,107
Core technologies		3,675,700		2,756,775		918,925
		26,518,411		22,346,379		4,172,032

	December 31, 2009
	Cost		Accumulated amortization		Carrying amount
	NT$		NT$		NT$		US$
	(in thousands)
Amortizable intangible assets:
Patents and licensing fees		23,110,842		20,301,641		2,809,201		87,925
Core technologies		3,675,700		3,675,700		-		-
		26,786,542		23,977,341		2,809,201		87,925

Patents and licensing fees have a weighted-average amortization period of approximately eight years. Core technologies have a weighted-average useful life of three years.

(Continued)

F-129

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Amortization expense on intangible assets amounted to NT$4,042,617 thousand, NT$2,981,572 thousand and NT$1,630,962 (US$51,047) thousand for the years ended December 31, 2007, 2008 and 2009, respectively.

As of December 31, 2009, the Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

Year	December 31
	NT$		US$
	(in thousands)

2010		637,474		19,952
2011		384,577		12,037
2012		371,941		11,641
2013		343,282		10,745
2014		242,256		7,582
Thereafter		829,671		25,968
Total		2,809,201		87,925

(10)

Fair value measurements

The Company adopted FASB ASC Topic 820 (Statement No. 157) on January 1, 2008 for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, the Company adopted the provisions of FASB ASC Topic 820 (Statement No. 157) for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FASB ASC Topic 820 (Statement No. 157) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (i.e., Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (i.e., Level 3 measurements). The three levels of the fair value hierarchy are as follows:

(i)

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Assets utilizing Level 1 inputs include available-for-sale securities that are actively traded.

(ii)

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include interest rate swap contracts, foreign currency forward contracts and embedded derivative financial instruments.

(iii)

Level 3 inputs are unobservable inputs for the asset or liability.

(Continued)

F-130

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair value is a market-based measure considered from the perspective of a market participant who holds the assets or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are the same as those that market participants would use in pricing the asset or liability at the measurement date. The Company uses inputs that are current as of the measurement date, including during periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurement can be volatile based on various factors that may or may not be within the Company’s control.

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2008 and 2009.

			Fair value measurements at reporting date using
	December 31, 2008		Quoted prices in active market for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)*
	NT$		NT$		NT$		NT$
	(in thousands)
Assets:
Available-for-sale financial assets - current		470,301		470,301		-		-
Foreign currency forward contracts		1,067,531		-		1,067,531		-
Interest rate swap contracts		5,398		-		5,398		-
Available-for-sale financial assets - noncurrent		595,750		595,750		-		-

Liabilities:								-
Foreign currency forward contracts		28,831		-		28,831		-
Interest rate swap contracts		829,389		-		829,389		-
Embedded derivative instrument liabilities		-		-		-		-

(Continued)

F-131

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			Fair value measurements at reporting date using
	December 31, 2009		Quoted prices in active market for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)*
	NT$		NT$		NT$		NT$
	(in thousands)
Assets:
Foreign currency forward contracts		378,252		-		378,252		-
Interest rate swap contracts		3,963		-		3,963		-
Options contracts		9,743		-		9,743		-
Available-for-sale financial assets - noncurrent		2,012,265		2,012,265		-		-

Liabilities:								-
Foreign currency forward contracts		933,289		-		933,289		-
Interest rate swap contracts		515,847		-		515,847		-
Options contracts		154,513		-		154,513		-
Embedded derivative instrument liabilities		-		-		-		-

There were no financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in FASB ASC Topic 820 (Statement No. 157) for the years ended December 31, 2008 and 2009.

The consolidated financial statements as of and for the years ended December 31, 2008 and 2009 do not include any nonrecurring fair value measurements relating to assets or liabilities.

(Continued)

F-132

Table of Contents

AU OPTRONICS CORP. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(11)

Summarized US GAAP financial information about equity-method investees:

	As of and for the years ended December 31,
	2007		2008
	NT$		NT$
	(in millions)

Current assets		79,801		92,391
Noncurrent assets		70,662		80,219
Current liabilities		67,516		85,029
Long-term liabilities		34,579		30,836
Noncontrolling interests		3,806		7,737
Stockholders’ equity		44,562		49,008
Net sales		190,185		210,901
Gross profit		19,615		16,667
Net income (loss)		5,597		(7,524	)

In 2009, none of the Company’s equity-method investees, either individually or in the aggregate, was material in relation to the financial position and results of operations of the Company.

F-133