We have suffered losses from hedging against our currency exchange risk.

     From time to time, we have attempted to hedge our currency exchange risk. We recorded charges of $304,000did not engage in 2000currency hedging transactions for fiscal year 2003 and $566,000 in 1999 on the write-off of option premiums purchased as a hedge against the appreciation of the Japanese yen and the decline of the Hong Kong dollar, respectively.2004. We have experienced in the past and may experience in the future losses as a result of currency hedging.

Political and economic instability in Hong Kong could harm our operations.

     Our executive and sales officeSome of our subsidiaries’ offices and several of our customers and suppliers are located in Hong Kong, formerly a British Crown Colony. Sovereignty over Hong Kong was resumed by China effective July 1, 1997. Since then, Hong Kong has become a Special Administrative Region of China, enjoying a high degree of autonomy except for foreign and defense affairs. Moreover, China’s political system and policies are not practiced in Hong Kong. Under the principle of “one country, two systems,”systems”, Hong Kong maintains a legal system that is based on the common law and is different from that of China. It is generally acknowledged as an open question whether Hong Kong’s future prosperity in its role as a hub and gateway to China after China’s recent accession to the World Trade Organization (introducing a market liberalization in China) will be diminished. The continued stability of political, economic or commercial conditions in Hong Kong remains uncertain, and any instability could materially and adversely impact our business and operating results.

The spread of severe acute respiratory syndrome or similar illnesses may have a negative impact on our business and operating results.

     In March 2003, several economies in Asia, including Hong Kong and southern China, where our operations are located, were affected by the outbreak of severe acute respiratory syndrome, or SARS. If there is a recurrence of a serious outbreak of SARS, it may adversely affect our business and operating results. For example, the future SARS outbreak could result in quarantines or closures to some of our factories if our employees are infected with SARS and ongoing concerns regarding SARS, particularly its effect on travel, could negatively impact our China-based customers and suppliers and our business and operating results.

     In addition, there has recently been an outbreak of avian influenza in humans in Asian countries, including Vietnam, South Korea and Japan, which has proven fatal in some instances. As the human death toll continues to grow, many are concerned that the virus will mutate and trigger a human pandemic. If such an outbreak were to spread to southern China, where our operation facilities are located, it may adversely affect our business operating results.

We conduct operations in a number of countries and the effect of business, legal and political risks associated with international operations could significantly harm us.

We conduct operations in number of countries. There are risks inherent in doing business in international markets, including:

•	Difficulties in staffing and managing international operations;
•	Compliance with laws and regulations, including environmental laws, which vary from country to country and over time, increasing the costs of compliance and potential risks of non-compliance;
•	Exposure to political and financial instability, leading to currency exchange losses, collection difficulties or other losses;
•	Exposure to fluctuations in the value of local currencies;
•	Changes in value-added tax or VAT reimbursement;
•	Imposition of currency exchange controls; and
•	Delays from customs brokers or government agencies.

Any of these risks could significantly harm our business, financial condition and operating results.

Risks Related to Our Industry

We are exposed to general economic conditions. The currentAny slowdown in the technology products industry has affected and we expect it to continue tomay affect our business and operating results adversely.

     As a result of recent unfavorablethe economic conditionsdownturn in the United States and internationally, and reduced capital spending, sales to OEMs in the electronics industry declined during 2002beginning in the second quarter of fiscal year 2001 and 2001.continuing through 2002. Lower consumer demand and high customer inventory levels have resulted in the delay and cancellation of orders for nearly all types of electronic products. As a result of order cancellations in 2001, we were required to make a provision forwrite down slow-moving inventory, which materially and adversely impacted our net income in 2001. Although the industry experienced a recovery in 2003 and 2004, we cannot assure that this recovery is sustainable or that the industry will not further decline. If the economic conditions in the United States or Asiathe other markets we serve worsen, generally orparticularly in the electronics and contract manufacturing businesses particularly, or if a wider or global economic slowdown occurs, this could materially and adversely impact our business and operating results.

The current economic downturn in the electronics manufacturing services industry could continue to have a material adverse effect on our11

Our business and operating results.results are dependent on growing global outsourcing trends.

     TheOver the last two decades, the EMS industry is currently in an economic slowdown with an uncertain outlook. Someexperienced rapid change and growth as the capabilities of EMS companies continued to expand and consumer electronic product manufacturers adopted, and became increasingly reliant on, manufacturing outsourcing strategies to remain competitive. Despite the major contract manufacturers and OEMs worldwide have announced job reductions and plant closures aimed at reducing costs. Industry analysts have reduced their projections of the future growthslow down of the EMS segment. Furthermore, Wall Street analysts have reduced earningsindustry in 2001 and revenue estimates across the entire EMS sector2002 as a result of consumer electronic product manufacturers’ decreasing production requirement, growth has been renewed in 2003 and have reported2004 and we believe that the EMS industry has excess capacity. For example, the EMS industry in which we operate experienced a decrease in demand in 2001 and 2002. Softening demandpotential for our products and services caused by the ongoing economic downturn was responsible in part for a decline in our operating income in 2001,further growth as well as our provision for slow-moving inventory.

     The global economy may remain weak and market conditionsmany consumer electronic product manufacturers continue to favor outsourcing over internal manufacturing, and the market for outsourcing, as a whole, continues to flourish. However, there can be challenging inno assurance that the EMS industry. As a result, individuals and companies maytrends of adopting manufacturing outsourcing strategies by consumer electronic product manufacturers will continue delaying or reducing expenditures, including those for electronic products. Further delays or reductions in spending in our industry in particular, and economic weakness generally,to grow. If the growing outsourcing trends discontinue, this could materially and adversely affectimpact our business and operating results.

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Risks Related to Ownership of Our Common Shares

The market price of our shares will likely be subject to substantial price and volume fluctuations.

     The markets for equity securities have been volatile and the price of our common shares has been and could continue to be subject to wide fluctuations in response to variations in operating results, news announcements, trading volume, sales of common shares by our officers, directors and our principal shareholders, customers, suppliers or other publicly traded companies, general market trends both domestically and internationally, currency movements and interest rate fluctuations. Certain events, such as the issuance of common shares upon the exercise of our outstanding stock options could also materially and adversely affect the prevailing market price of our common shares.

     Further, the stock markets have recently experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many companies and that have been unrelated or disproportionate to the operating performance of such companies. These fluctuations may materially and adversely affect the market price of our common shares.

The concentration of share ownership in our senior management allows them to control or substantially influence the outcome of matters requiring shareholder approval.

     At January 31, 2003,On February 28, 2005, members of our management and boardBoard of directorsDirectors as a group beneficially owned approximately 46%42.0% of our common shares. As a result, acting together, they may be able to control and substantially influence the outcome of all matters requiring approval by our shareholders, including the election of directors and approval of significant corporate transactions. This ability may have the effect of delaying or preventing a change in control of Nam Tai, or causing a change in control of Nam Tai that may not be favored by our other shareholders.

If we do not receive an unqualified opinion on the adequacy of our internal control over financial reporting as of December 31, 2006 and future year-ends as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our shares.

     As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company’s internal control structure and procedures over financial reporting in their annual reports on Form 20-F that contains an assessment by management of the effectiveness of the company’s internal control structure and procedures over financial reporting. In addition, the public accounting firm auditing the company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal control structure and procedures over financial reporting. While we intend to conduct a rigorous review of our internal control structure and procedures over financial reporting in order to assure compliance with Section 404 requirements, if our independent auditors interpret Section 404 requirements and the related rules and regulations differently from us or if our independent auditors are not satisfied with our internal control structure and procedures over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to attest to management’s assessment or issue a qualified report. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline.

Changes to financial accounting standards may affect our reported results of operations and could result in a decrease in the value of our shares.

     The Financial Accounting Standards Board recently published amendments to Statement of Financial Accounting Standards No. 123 that would require stock-based compensation issued to employees to be treated as compensation expense using the fair value method. If we are required to record an expense for our stock-based compensation plans using the fair value method, we would incur significant compensation charges. Although we currently are not required to record any compensation expense in connection with options granted that have an exercise price equal to fair market value of our common stock at the grant date, if future laws and regulations require us to treat all stock-based compensation as a compensation expense using the fair value method, our results or operations could be adversely affected. For discussion of our employee stock option and employee stock purchase plans, see Note 2 – “Summary of Significant Accounting Policies – Stock Options” and Note 11 – “Shareholders’ Equity” to the Consolidated Financial Statements.

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Risks Related to Our Foreign Private Issuer Status

It may be difficult to serve us with legal process or enforce judgments against our management or us.

     We are a British Virgin Islands holding corporation having our principal executive officeswith subsidiaries in Hong Kong.Kong, Macao, Japan and China. We have appointed Stephen Seung, 2 Mott St.,Street, Suite 601, New York, New York 10013 as our agent upon whom process may be served in any action brought against us under the securities laws of the United States. However, outside the United States, it may be difficult for investors to enforce judgments against us obtained in the United States in any of these actions, including actions based upon civil liability provisions of the Federal securities laws. In addition, all of our officers and most of our directors reside outside the United States, and all of our assets, and the assets of those persons who reside outside of the United States, are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon those persons, or to enforce against those persons or ususe judgments obtained in United States courts grounded upon the liability provisions of the United States securities laws. There is substantial doubt as to the enforceability against us or any of our directors and officers located outside of the United States in original actions or in actions for enforcement of judgments of United States courts of liabilities based solely on the civil liability provisions of the securities laws of the United States.

     No treaty exists between Hong Kong or the British Virgin Islands and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong and the British Virgin Islands are generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Hong Kong or the British Virgin Islands for recovery of this debt. A Hong Kong or British Virgin Islands court will only accept a foreign judgment as evidence of a debt due if:

	•	the judgment is for a liquidated amount in a civil matter;
	•	the judgment is final and conclusive and has not been stayed or satisfied in full;

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•	the judgment is not, directly or indirectly, for the payment of foreign taxes, penalties, fines or charges of a like nature (in this regard, a Hong Kong or British Virgin Islands court is unlikely to accept a judgment for an amount obtained by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained by the person in whose favor the judgment was given);
	•	the judgment was not obtained by actual or constructive fraud or duress;
	•	the foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong or the British Virgin Islands;
	•	the proceedings in which the judgment was obtained were not contrary to natural justice (i.e., the concept of fair adjudication);
	•	the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of Hong Kong or the British Virgin Islands;
	•	the person against whom the judgment is given is subject to the jurisdiction of the Hong Kong or the British Virgin Islands court; and
	•	the judgment is not on a claim for contribution in respect of damages awarded by a judgment, which does not satisfy the criteria stated previously.

     Enforcement of a foreign judgment in Hong Kong or the British Virgin Islands may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium, or similar laws relating to or affecting creditors’ rights generally, and will be subject to a statutory limitation of time within which proceedings may be brought.

     No treaty exists between Macao and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Macao are generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Macao for recovery of this debt. A Macao court will only accept a foreign judgment as evidence of a debt due if:

•	there is no doubt to the authenticity of the judgment documents and the understanding of the judgment;
•	pursuant to the law of the place of judgment, the judgment is final and conclusive;
•	the judgment was not obtained by fraud or the matter in relation to the judgment is not within the exclusive jurisdiction of Macao courts;
•	the judgment will not be challenged on the ground that the relevant matter has been adjudicated by the Macao court, except matters which have first been adjudicated by courts outside Macao;
•	pursuant to the law of the place of the judgment, the defendant has been summoned and the proceedings in which the judgment was obtained were not contrary to natural justice; and
•	the enforcement of the judgment will not cause any orders that may result in apparent public disorder.

     Enforcement of a foreign judgment in Macao may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium, or similar laws relating to or affecting creditors’ rights generally, and will be subject to a statutory limitation of time within which proceedings may be brought.

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Future issuances of preference shares could materially and adversely affect the holders of our common shares or delay or prevent a change of control.

     Our boardBoard of directorsDirectors may amend our Memorandum and Articles of Association without shareholder approval to create from time to time and issue one or more classes of preference shares (which are analogous to preferred stock of corporations organized in the United States). While currently no preference shares are issued or outstanding, we may issue preference shares in the future. Future issuance of preference shares could materially and adversely affect the rights of the holders of our common shares, or delay or prevent a change of control.

Our status as a foreign private issuer exempts us from certain of the reporting requirements under the Securities Exchange Act of 1934 and corporate governance standards of the New York Stock Exchange,NYSE, limiting the protections and information afforded to investors.

     We are a foreign private issuer within the meaning of rules promulgated under the Securities Exchange Act of 1934. As such, we are exempt from certain provisions applicable to United States public companies including:

	•	the rules under the Securities Exchange Act of 1934 requiring the filing with the CommissionSEC of quarterly reports on Form 10-Q, current reports on Form 8-K or annual reports on Form 10-K;
	•	the sections of the Securities Exchange Act of 1934 regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Securities Exchange Act;Act of 1934;
	•	the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; and
	•	the sections of the Securities Exchange Act of 1934 requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months).

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     In addition, because the Company is a foreign private issuer, certain of the corporate governance standards of the New York Stock ExchangeNYSE that are applied to domestic companies listed on that exchange may not be appliedapplicable to us.

     Because of these exemptions, investors are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States or traded on the New York Stock Exchange.NYSE.

Item 4.Information on the Company

History and Development of Nam Tai

     Nam Tai Electronics, Inc. was founded in 1975 by M.K. Koo, Nam Tai’s Chief Financial Officer and a member of the Board of Directors, as an electronic products trading company based in Hong Kong. We shifted our focus to manufacturing of electronic products in 1978. We moved ourits manufacturing facilities to the People’s Republic of China, or China in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates available and subsequently relocated to Shenzhen, China in order to capitalize on opportunities offered in Southernsouthern China. We were reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. Our principal designmanufacturing and manufacturingdesign operations are based in Shenzhen, China, approximately 30 miles from Hong Kong. Our principal executivePRC headquarters is at Macao, China. Some of our subsidiaries’ offices are located in Hong Kong and Macao, which provides us access to Hong Kong’s and Macao’s infrastructure of communication and banking and facilitates management of our China operations and transportationoperations. One of our products out of China through the port of Hong Kong.subsidiaries also has an office in Japan.

     Our corporate administrative matters are conducted in the British Virgin Islands through itsour registered agent, McW. Todman & Co., McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands. Our agent for service of process in the United States is Stephen Seung, 2 Mott Street, Suite 601, New York, New York 10013. Our principal executive offices are located in the Hong Kong Special Administrative Region, or Hong Kong, of China. Its address is 15/ F., China Merchants Tower, Shun Tak Centre, 168-200 ConnaughtBritish Virgin Islands at 116 Main Street, 3rd Floor, Road Central, Hong KongTown, Tortola, British Virgin Islands, and itsthe telephone number is (852) 2341-0273.(284) 494-7752.

     In 1978, Mr. Koo, the founder of the Company, began recruiting operating executives from the Japanese electronics industry. These executives brought years of experience in Japanese manufacturing methods, which emphasize quality, precision, and efficiency in manufacturing. Senior management currently includes Japanese professionals who provide technical expertise and work closely with both our Japanese component suppliers and customers.

     For a number of years, we specialized in manufacturing large-volume, hand-held digital consumer electronicselectronic products and established a leading position in electronic calculators and handheld organizers for OEMs such as Texas Instruments Incorporated and Sharp Corporation. Over the years, we have developed into an original equipment manufacturer and broadened our product mix to include a range of digital products for business and personal use, as well as key components and subassembliessub-assemblies for telecommunications and consumer electronic products. In August 1999, we established Nam Tai Telecom (Hong Kong) Co. Ltd.,Company Limited, which targetstargeted the expanding market for telecommunications components including liquid crystal display, or LCD modules as well as end products, including cordless phones and family radio systems. Nowadays, color and monochrome LCD modules displaying information have become one of our major products. Since December 2002, we have also produced RF modules for integration into cellular phones and other hand-held consumer electronic products, such as personal digital assistants, or PDAs, laptop computers and other products with wireless connectivity. In 2003, we further diversified our product mix by manufacturing CMOS sensor modules for integration into various image

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capturing devices such as digital cameras for cellular phones and home entertainment products, FPC sub-assemblies for integration into various LCD modules, front light panels for handheld video game devices and digital camera accessories for use with the cellular phones and home entertainment products. In 2004, we expanded our business on CMOS sensor modules and FPC sub-assemblies. We also further broadened our product line by manufacturing back light panels for handheld video game devices and Bluetooth^TM wireless headset accessory for cellular phones.

     In September 2000, we acquired for $2.0 million a 5% indirect equity interestshareholding in both TCL Mobile Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co., Ltd., or together known as TCL Mobile, through the acquisition of 25% of the outstanding shares of Mate Fair Group Limited, or Mate Fair, ana privately held investment holding company owningincorporated in the British Virgin Islands with a 20% shareholding interest in the communications companies.TCL Mobile. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in China andas well as in overseas markets. In October 2002, we began to provide TCL Mobile with mobile LCD modules used in its mobile phones. However, sales to TCL Mobile were not material for the year ended December 31, 2002. In January 2002, we acquired a 6% equity interest in TCL Corporation Ltd. (formerly known as TCL Holdings Corporation Ltd.), the parent of the TCL Group of companies, for approximately $12.0 million. In November 2002, Mate Fair Group Limited sold a portion of its equity interest in Huizhou TCL Mobile Communication Company Limited for which we received proceeds of approximately $10.4 million, reducing

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     In October 2000, we completed the acquisition of the J.I.C. Group (BVI) Limited. The J.I.C. Group (BVI) Limited and its subsidiaries, or the JIC Group. The JICJ.I.C. Group, isare principally engaged in the manufacture and marketing of transformers and LCD panels, a key component for a variety of consumer electronic products. Of the purchase price of $32.8 million, we paid $11.0 million in cash and issued 1.163.48 million of our common shares.

     In November 2002, Mate Fair sold a portion of its equity interest in Huizhou TCL Mobile Communication Co., Ltd. for which we received proceeds of approximately $10.4 million, reducing our direct equity interest (held through Mate Fair) in TCL Mobile to approximately 3%. In November 2002, we invested $5.1 million of the proceeds in TCL International Holdings Limited’s 3% convertible notes that are due in November 2005. In August 2003, we disposed of those convertible notes to independent third parties and received proceeds of approximately $5.03 million in cash. TCL International Holdings Limited is another company in the TCL Group, which consists of the TCL Corporation and its subsidiaries, and is publicly listed on The Stock Exchange of Hong Kong Limited, or the Hong Kong Stock Exchange.

     In January 2002, we acquired a 6% equity interest in TCL Corporation (formerly known as TCL Holdings Corporation Ltd.), for a consideration of approximately $12.0 million. TCL Corporation, an enterprise established in China, is the parent company of the TCL Group of companies. TCL Corporation changed from a limited liability company to a company limited by shares in April 2002. In January 2004, TCL Corporation listed its A-shares on the Shenzhen Stock Exchange at RMB 4.26 (equivalent to $0.52) per A-share. The Company’s interest in TCL Corporation has since been diluted to 3.69% and represents 95.52 million promoter’s shares of TCL Corporation after its initial public offering. Pursuant to Article 147 of the Company Law of China, the Company is restricted from transferring its promoter’s shares within three years from the establishment date. The Company is, however, entitled to receive dividends and other rights similar to holders of A-shares. As these promoter’s shares have a restriction on their sale prior to April 2005, the Company hired an independent valuer to determine the fair value of these shares as of December 31, 2004 and recognized an unrealized gain of $6.55 million, which has been recorded as a separate component of accumulated other comprehensive income, based on the Company’s cost of $11.97 million and an estimated fair value of $20.70 million.

     In January 2002, we entered into a transaction which resulted in the listing of a company holding JICJ.I.C. Group’s business on the Hong Kong Stock Exchange. To effect the transaction, we entered a restructuringinto an agreement with the liquidators of Albatronics, (Far East) Company Limited, a company whose shares had been listed on the Hong Kong Stock Exchange and which was placed into voluntary liquidation in August 1999. Under the restructuring agreement, we agreed to transfer JICthe J.I.C. Group into J.I.C. Technology Company Limited, a new company, for a controlling interest in J.I.C. Technology Company Limited. Albatronics’ listing status on the Hong Kong Stock Exchange was withdrawn and J.I.C. Technology Company Limited was listed on the Hong Kong Stock Exchange free from the liabilities of Albatronics. This arrangement was more cost effective than using an initial public offering. For our contribution to J.I.C. Technology Company Limited, we received a combination of ordinary and preference shares, which are analogous to common stock and convertible preferred stock, respectively, of companies organized under U.S.United States law and which upon their full conversion, could result in us, the creditors and the Hong Kong public owning approximately 92.9%, 5.8% and 1.3%, respectively, of the outstanding ordinary shares of J.I.C. Technology Company Limited. On June 4, 2002, the reverse merger was completed and all the shares of Albatronics were transferred to the liquidators for a nominal consideration. The preference shares are non-redeemable, non-voting shares that rankpari passu with ordinary shares of the new companyJ.I.C. Technology Company Limited on the payment of dividends or other distribution other than on a winding-up. No holder of preference shares (including Nam Tai) may convert them if such conversion would result in the minimum public float of 25% that is required(required under the Hong Kong Stock Exchange Listing RulesRules) not being met. On June 4,In August 2002, the restructuring was completed and all thewe acquired an additional 7,984,000 ordinary shares of Albatronics were transferred to the liquidatorsJ.I.C. Technology Company Limited for a nominal consideration.cash consideration of $437,000. During the period from June to November 2003, we disposed of a total of 42,600,000 ordinary shares for cash consideration of $4.0 million. In November 2003, we converted 175,100,000 preference shares into 170,000,000 ordinary shares of J.I.C. Technology Company Limited.

     During the period from November to December 2004, we further disposed of a total of 128,000,000 ordinary shares of J.I.C. Technology Company Limited for cash consideration of $12.95 million. The disposal resulted in a net gain on partial disposal of a subsidiary of $6.25 million and the release of unamortized goodwill of $3.52 million. During the same period, we converted all 423,320,000 preference shares into 410,990,290 ordinary shares. As of December 31, 2004, we held 546,890,978 ordinary shares of J.I.C. Technology Company Limited, equivalent to 71.63% of issued ordinary shares.

     In January 2003, we invested $10.0 million for a 25% equity interest in Alpha Star Investments Ltd., the ultimate parentholding company of Hong Kong based JCT Wireless Technology Company Limited, or JCT. JCT is engaged in the design, development and marketing of wireless communication terminals and wireless application software and is using us to manufacture wireless communication terminals and their related radio frequency,modules. As of December 31, 2004, we recognized net sales of $34.2 million to JCT for the year. However, in September 2004, we made an impairment to write down our $10.0 million investment in Alpha Star to a fair value of approximately $3.0 million. As of December 31, 2004, another analysis had been conducted by an independent valuer, who determined that no further impairment to value was required.

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     In January 2003, we disposed of 20% of our equity interest in Namtek Software Development Company Limited to a company that is owned by the management of Namtek Software Development Company Limited for a cash consideration of $160,000. As of the date of disposal, Namtek Software Development Company Limited was fair valued at $3.3 million.

     On January 23, 2003, the listing of our shares was transferred to the NYSE from the NASDAQ National Market with symbol of “NTE”. On June 30, 2003, we implemented a three-for-one stock split with both the stock size and market price to be divided by three. As of December 31, 2004, there were 42,664,536 common shares outstanding.

     In June 2003, one of our subsidiaries, J.I.C. Technology Company Limited, disposed of its transformers operation to a third party for a cash consideration of $2.4 million. The gain from disposal of this discontinued operation amounted to $2.0 million, net of $0.1 million shared by minority interest.

     In August 2003, we set up our first subsidiary, Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited in Macao as our PRC headquarters. Macao, like Hong Kong, is a special administrative region of the China and has recently introduced an incentive program to attract investment to Macao. In March and November 2004, we further established Zastron (Macao Commercial Offshore) Company Limited and J.I.C. (Macao Commercial Offshore) Company Limited in Macao, respectively.

     In November 2003, our common shares were listed in the Regulated Unofficial Market (Freiverkehr) on the Frankfurt Stock Exchange, in Germany. The stocks are being traded on Xetra, the Deutsche Borse AG electronic trading system under the stock symbol “884852”.

     In December 2003, we placed approximately $5.3 million into an escrow account for an investment in Stepmind. The investment was to occur in two phases. For the first phase, approximately $2.64 million, representing 7.66% of the equity interest in Stepmind, was released to Stepmind in January 2004. The second phase amounting to approximately $2.65 million was released to Stepmind in August 2004 subject to fulfillment of certain conditions. In August 2004, we disposed of our entire interest in Stepmind to one of the shareholders of Stepmind at the original subscription price for those shares.

     In April 2004, we increased our shareholding in TCL Mobile from approximately 3% to 9% through the acquisition of Jasper Ace Limited, or RF, modules.Jasper Ace, which directly holds a 9% equity interest in TCL Mobile, for a consideration of approximately $102.2 million. The consideration was satisfied by the exchange of our 72.2% equity interest in Mate Fair, plus cash of $25 million in cash, and the issuance of 1,416,764 new Nam Tai shares and resulted in a net investment cost of $79.5 million. In July 2004, Nam Tai transferred all its shares in TCL Mobile to TCL Communication Technology Holdings Limited, or TCL Communication, in exchange for 90 shares of TCL Communication. In August 2004, we further subscribed for 254,474,910 shares in TCL Communication at a consideration of approximately $16 million. The consideration was satisfied by the dividend receivable from TCL Communication. Together with the 90 shares it received in July 2004, Nam Tai in total holds 254,475,000 shares in TCL Communication, representing 9% of the shareholding of TCL Communication. In September 2004, shares of TCL Communication were listed on the Hong Kong Stock Exchange by way of introduction. There were no new shares issued or sold in connection with the listing, and therefore no dilution to Nam Tai’s original stake in TCL Communication. As of December 31, 2004, we still hold 254,475,000 shares, representing 9% of the total issued shares of TCL Communication.

     As of December 31, 2004, the Company’s investment in TCL Communication was stated at fair value based on the traded market price of TCL Communication’s shares. The Company recognized an unrealized loss of $58.3 million in its consolidated statements of income based on the Company’s cost of $79.5 million and a fair value of $21.2 million.

     In April 2004, shares of Nam Tai Electronic & Electrical Products Limited, or NTEEP, a wholly owned subsidiary of the Company, were listed on the Hong Kong Stock Exchange. Since all of the shares of NTEEP involved in the initial public offering, or IPO, were existing shares of NTEEP owned by Nam Tai, all of the proceeds raised in the IPO went to Nam Tai instead of NTEEP. The offer price of NTEEP’s share was $0.497, which resulted in net proceeds of approximately $92.8 million and a gain of approximately $71.1 million to the Company. As of December 31, 2004, we held 600,000,000 shares of NTEEP, representing 75% of the total issued shares of NTEEP.

     Also refer to the section of this Report entitled Item 5. Operating and Financial Review and Prospects for a further discussion of our investments and acquisitions.

     An important element of our strategy is to acquire companies that would complement our existing products and services, augment our market coverage and sales ability or enhance our technological capabilities. Accordingly, we may acquire additional businesses, products or technologies in the future or make investments in related businesses for strategic business purposes.

Capital Expenditures

     Our principal capital expenditures and divestitures over the last three years include the following:

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Our major capital expenditure in 2004 included:

•	$13.8 million for new factory expansion;
•	$7.7 million for the expansion of an LCD factory (which included 5.8 million paid as a deposit for fixed assets);
•	$0.7 million for the expansion of our high-resolution color LCD module production capacity;
•	$14.5 million for machineries used mainly for FPC sub-assemblies;
•	$5.6 million for other capital equipment; and
•	$2.1 million for construction work in relation to the electricity supply for Nam Tai Electronic (Shenzhen) Co., Ltd.

Our major capital expenditures in 2003 included:

•	$6.0 million for machinery for manufacturing RF modules;
•	$1.2 million for new factory expansion;
•	$0.4 million for machinery on FPC sub-assemblies;
•	$1.7 million for expansion of our high-resolution color LCD module production capacity;
•	$6.7 million for other capital equipment; and
•	$1.1 million for construction of a new trade union building for the use of our workers in China.

Our major capital expenditures in 2002 included a $12.3 million new STN LCD panel production line and $4.0included:

•	$12.3 million for a new STN LCD panel production line; and
•	$4.0 million for completion of the new factory expansion.      Our major capital expenditures in 2001 included: •  $13.0 million for the purchase and interior improvements on 23,000 square feet of contiguous prime office space at Shun Tak Centre in the Central district of Hong Kong, •  $6.4 million for the purchase of new staff residences in Hong Kong, 15 •  $5.5 million for the construction and machinery for a new 138,000 square foot five-story factory building within the Company’s existing manufacturing complex, •  $5.5 million for the purchase of new chip on glass production lines, and •  $2.0 million for the expansion of the front end process for producing LCD panels.      In order to expand production capacity, we also plan to buildhave built a new factory consisting of approximately 250,000265,000 square feet adjacent to our principal manufacturing facilities in Shenzhen, China. Planning for the project beganThe construction was completed in January 2003December 2004 and we expect constructionfull operations to be completed by the endcommence in April 2005. As of September in 2004. We have budgeted $40.0December 31, 2004, we had spent $15.0 million to cover the cost of construction, and fixtures and equipment for the new factory. We plan to financeThe financing for these improvements to our manufacturing facilities were obtained from proceeds raised through capital market transactions.internal resources. In October 2004, our existing production facility for the LCD panels segment also relocated to new factory premises which are approximately 670,000 square feet and twice the size of the former factory premises. This new factory provides room for the future expansion of production capacity. As of December 31, 2004, we had spent $7.7 million for this relocation and financed this amount with a combination of internal resources and bank financing. Other capital expenditures we have planned for 20032005 include: •    $12.0 8.0 million for machinery for manufacturing RF modules,land purchase;   •    $16.5 million for new factory expansion; •    $8.914.0 million for other capital equipment,machinery; and   •    $10.04.5 million for investment in a 25% interest in Alpha Star Investments Ltd., which we made in January 2003.other equipment.      Our plans for capital expenditures are subject to change from time to time and could result from, among other things, our consummation of any significant amount of additional acquisition or strategic investment opportunities, which we regularly explore. Business Overview      We are an electronics manufacturing and design services provider to a select group of the world’s leading original equipment manufacturers, or OEMs of telecommunicationtelecommunications and consumer electronic products. Our largest customers include Epson Precision (HK) Ltd., Sony Ericsson Mobile Communications AB and Texas Instruments Incorporated. Through our electronics manufacturing services or EMS, operations, we manufacture electronic components and subassemblies,sub-assemblies, including liquid crystal display, or LCD panels, transformers, LCD modules, RF modules, FPC sub-assemblies and radio frequency, or RF,image sensors modules. These components are used in variousnumerous electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game devices and microwave ovens. We also manufacture finished products, including cordlesscellular phones, palm-sized PC’s,PCs, personal digital assistants, electronic dictionaries, calculators, and digital camera accessories and BluetoothTM wireless headset accessory for use with cellular phones.      We assist our OEM customers in the design and development of their products and furnish full turnkey manufacturing services that utilize advanced manufacturing processes and production technologies. Our services include hardware and software design, component purchasing, assembly into finished products or electronic subassembliessub-assemblies and post-assembly testing. These services are value-added and assist us in 17 obtaining new business but do not represent a material component of our revenue. We also provide original design manufacturing, or ODM, services, in which we design and develop proprietary products that are sold by our OEM customers using their brand name.      We were founded in 1975 as an electronic products trading company based in Hong Kong and shifted our focus to manufacturing of electronic products in 1978. We moved our manufacturing facilities to China in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates, available and subsequently relocatedrelocating to Shenzhen, China in order to capitalize on opportunities offered in Southernsouthern China. We were reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. Our principal manufacturing and design operations are based in Shenzhen, China, approximately 30 miles from Hong Kong. Our principal executiveSome of our subsidiaries’ offices are located in Hong Kong and Macao, which provides us access to Hong Kong’s and Macao’s infrastructure of communication and banking and facilitates management of our China operations and transportationoperations. One of our products out of China through the port of Hong Kong.subsidiaries also has an office in Japan. 16 Our Customers      Historically, we have had substantial recurring sales from existing customers. About 96.2%89.4% of our 20022004 net sales came from customers that also used our services in 2001.2003. While we seek to diversify our customer base, a small number of customers currently generate a significant portion of our sales. Sales to our 10 largest customers accounted for 90.2%84.8%, 83.7%84.9% and 84.8%82.5% of our net sales during the years ended December 31, 2000, 20012002, 2003 and 2002,2004, respectively. Sales to customers accounting for 10% or more of our net sales in the year ended December 31, 2000, 20012002, 2003 or 20022004 were as follows:                           Year ended December 31, 2000 2001 2002 Epson Precision (HK) Ltd.     23.8 %     29.9 %     32.2 % Sony Ericsson Mobile Communications AB     N/A       *       16.9   Texas Instruments Incorporated     23.9       14.2       11.1   Sharp Corporation     14.7       *       *   Seiko Instruments Inc.     10.0       *       *                                         Year ended                     December 31,             2002     2003     2004   Epson Precision (HK) Ltd.     32.2 %     24.8 %     14.1 % Sony Ericsson Mobile Communications AB     16.9 %     11.3 %     *   Texas Instruments Incorporated     11.1 %     *       *   Toshiba Matsushita Display Technology Co. Ltd     *       10.6 %     *   Motorola Inc.     *       *       10.2 % Sharp Corporation     *       *       13.5 % Wuxi Sharp Electronic Components Co., Ltd.     *       *       10.1 % * Less than 10% of our total net sales.      Our largest OEM customers based on net sales during 20022004 include the following (listed alphabetically):       Customer Product Products Advance Watch Co. (Far East) Ltd.   LCD panels for watches Appeal Telecom Co., Ltd. CMOS sensor modules Canon Electronic Business Machines (H.K.) Co. Ltd.   Electronic dictionaries, calculators, PDAs and calculators Casine Electronics Ind. Co.  dictionaries, LCD panelspanel sub-assemblies for calculatorscopy machines and clockssoftware development Epson Precision (H.K.) Ltd PCB modules for cellular phones Hitachi Ferrite Electronics Ltd. Transformers Hitachi Media Electronics Co. Ltd.  Transformers Kanda Tsushin Kogyo Co Ltd (affiliate of Fujitsu) Caller ID function phones Maeda Global Net (HK) Co Ltd   LCD modules for cellular phones and FPC sub-assemblies Goyo Paper Working Co., Ltd. Game front light panel and back light panel assembly JCT Wireless Technology Ltd. RF modules and cellular phones in semi-knocked down, or SKD, form Kanda Tsushin Kogyo Co Ltd. (affiliate of Fujitsu) Assemblies for cordless phones Motorola Inc. CMOS sensor modules Nanox LtdLtd.   LCD panels for cordless phones and household appliances Nishimura Musen Denki Co. LtdNational Electronic & Watch Company Ltd.   TransformersLCD panels Optrex Corporation   Assemblies for LCD modules Polar Group LCD panels Seiko Instruments Inc.   Electronic dictionaries and PDAs, software development Sharp Corporation   Calculators, pocket computersFPC sub-assemblies, calculators, PDAs and control panel modulesdictionaries Sony Computer Entertainment Europe Ltd. Home entertainment products Sony Corporation   Electronic dictionaries and software development Sony Ericsson Mobile Communications AB   Mobile phone digital camera accessories, BluetoothTM wireless headset accessory Stanley Electric (Asia Pacific) Ltd.   LCD panels for car audio devices Texas Instruments Incorporated   Calculators Toshiba Battery Company Ltd*Matsushita Display Technology Co. Ltd.   Rechargeable battery packsLCD modules for cellular phones Vtech TelecommunicationsUniden HK Ltd.   LCD panels for phones Zexus TechnologyWuxi Sharp Electronic Components Co. Ltd.   LCD panels for watchesTelecom printed circuit board, or PCB, modules and FPC sub-assemblies 18 *  We sold rechargeable battery packs to Toshiba Battery Company Ltd., through a joint venture we had with this customer. We sold our interest in the joint venture to a Toshiba related company and ceased manufacturing rechargeable battery packs as of April 30, 2002. 17      At any given time, different customers account for a significant portion of our business. Percentages of net sales to customers vary from quarter to quarter and year to year and fluctuate depending on the timing of production cycles for particular products.      Sales to our OEM customers are primarily based on purchase orders we receive from time to time rather than firm, long-term purchase commitments from our customers. Although it is our general practice to purchase raw materials only upon receiving a purchase order, for certain customers we will occasionally purchase raw materials based on such customers’ rolling forecasts. Uncertain economic conditions and our general lack of long-term purchase commitments with our customers make it difficult for us to accurately predict revenue over the longer term. Even in those cases where customers are contractually obligated to purchase products from us or repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights because of the long-term nature of our customer relationships and for other business reasons, and instead may negotiate accommodations with customers regarding particular situations. Our Products      During 2003, our operations are generally organized in two segments, Consumer Electronics Products, or CEP, and LCD panels and transformers, or LPT. The activities of our LPT segment relate primarily to our J.I.C. subsidiary that we acquired in October 2000. In 2004, our operations were re-organized into three reportable segments consisting of consumer electronics and communication products, or CECP, telecommunication components assembly, or TCA and LCD panels, or LCDP. In 2003, CECP and TCA were classified as a single reportable segment as CEP while LCDP also comprised the transformers operations and collectively referred to as LPT as a result of the disposal of transformer business in 2003.      The dollar amount (in thousands) and percentage of our net sales by business segment and product category for the years ended December 31, 2000, 20012002, 2003 and 20022004 were as follows:                                                     Year ended December 31, 2000 2001 2002 Dollars Percent Dollars Percent Dollars Percent Consumer Electronic Products:                                                   Component assembly(1)   $ 103,288       48 %   $ 121,781       52 %   $ 103,628       44 %   LCD consumer products     98,043       46       73,596       32       94,207       40     Software development services     2,073       1       2,701       1       2,923       1   LCD Panels and Transformers(2)                                                   LCD panels     6,606       3       24,977       11       23,937       10     Transformers     3,678       2       10,981       4       11,324       5                                             $ 213,688       100 %   $ 234,006       100 %   $ 236,016       100 %                                                                                                             Year ended December 31,             2002     2003     2004       Dollars     Percent     Dollars     Percent     Dollars     Percent   Consumer Electronics and Communication Products   $ 94,032       40 %   $ 128,778       32 %   $ 163,584       31 % Telecom, Components Assembly:                                                 Telecom, components assembly(1)     103,800       44       232,163       57       316,695       59   Software development services     2,923       1       4,041       1       4,872       1   LCD Panels and Transformers                                                 LCD panels     23,937       10       35,040       9       48,710       9   Transformers(2)     11,324       5       6,284       1       —       —   Total   $ 236,016       100 %   $ 406,306       100 %   $ 533,861       100 % (1) (1)  Included in componenttelecom, components assembly are our sales from our manufacture of rechargeable battery packs through a joint venture we had with Toshiba Battery Co., Ltd. We sold our interest in the joint venture to a Toshiba relatedToshiba-related company and ceased manufacturing rechargeable battery packs as of April 30, 2002. Accordingly, revenue from sales of battery packs werewas not included after that date.   (2) LCD panels We sold our transformers operation to a third party in June 2003. Please refer to Note 19 “Segment Information” of the Consolidated Financial Statements and Item 8 Financial Information — Export Sales which sets forth the information of net sales to customers by geographic area. Consumer Electronic and Communication Products, or CECP      The consumer electronic and communication products we manufacture are primarily finished products and include: •    A BluetoothTM wireless headset accessory for cellular phones, which we began manufacturing in March 2004. •    CMOS sensor modules, which we began manufacturing in June 2003, for integration into various image-capturing devices such as digital cameras for cellular phones and components consist ofhome entertainment products. •    Digital camera accessories for use with cellular phones and home entertainment products. •    Electronic calculators that include basic function calculators, desktop display style, scientific and advanced graphic calculators. •    Digital management devices that include PDAs and electronic personal organizers. •    Linguistic products, manufacturedincluding electronic dictionaries, spell checkers and sold by our subsidiaries in the JIC Group. We acquired the JIC Group in 2000 and their sales were consolidated with ours beginning in October 1, 2000.language translators. Consumer Electronic ProductsTelecommunication Component Assembly, or TCA Component           Telecommunications Components Assembly      We manufacture the following subassembliessub-assemblies and components: •    Color and monochrome LCD modules to display information as part of telecommunication products such as cellular telephonesphones and telephone 19 systems, appliances and office automation products, such as copiers and facsimile machines. Our LCD modules could be manufactured for use in most other hand-held consumer electronic devices, such as electronic games and digital cameras. •    RF modules, which we began manufacturing in December 2002, for integration into cellular phones. These modules could be manufactured for use in most other hand-held consumer electronic products, such as PDAs, laptop computers and other products with wireless connectivity. 18 •    Cellular phones in SKD form.   •    FPC sub-assemblies which we began manufacturing in March 2003 for integration into various LCD modules. •    Front light panels for handheld video game devices. •    Back light panels for handheld video game devices, which we began manufacturing in August 2004. •    1.9 and 2.4 GHz high frequency cordless telephones, home feature phones, family radio systems and transceivers. LCD Consumer Products Software Development Services      The LCD-based consumer electronic products we manufacture are primarily finished products and include: •  Digital camera accessories for use with the cellular telephones. •  Electronic calculators that include basic function calculators, desktop display style, scientific and advanced graphic calculators. •  Digital management devices that include personal digital assistants, or PDAs, and electronic personal organizers. •  Linguistic products, including electronic dictionaries, spell checkers, and language translators. Software Development Services We offer our OEM customers software development services principally for the operation of electronic dictionary products many of which are manufactured by us, as well as personal organizers and MP3 devices.for major Japanese customers. In addition, to generating revenue from ourwe focus on research and development services, our software design,for car navigation products which typically occurs at the product design stage, oftenwe aim to results in our providing license and/or manufacturing services to the OEM assembly customers. LCD Panels and Transformers LCD Panels, or LCDP      With the acquisition of JICthe J.I.C. Group in October 2000, we began producing LCD panels and transformers. LCD Panels panels.      LCD panels are information display components and are featuredfound in numerous applications in electronics products, includingsuch as watches, clocks, calculators, pocket games, PDAs and cellularmobile and wirelesscordless telephones. Currently,We are a customized LCD panel manufacturer, and we use onlydevelop each product from design concept all the way to a small portion of the LCD panels in our assembly operations. We plan to increase the volume of LCD panels we supply to our assembly business. Transformers high quality mass producible product.      Transformers are generally used to increase or reduce the voltage of an electric power supply to allow a particular part of electrical equipment to be used. The transformers we produce are used in home appliances, telecommunications equipment, computers and computer peripherals. Our Manufacturing and Assembly Capabilities      We utilize the following production techniques: •    Chip on Film.Film,or COF, is an assembly method for bonding integrated circuit chips and other components onto a flexible printed circuit. This process allows for greater compression of the size of a product when assembled enabling the production and miniaturization of small form factor devices like cellular phones, PDAs, digital cameras and notebook PCs. AtAs of December 31, 2002,2004, we had two14 COF machines. These machines connect the bump of large scale integrated, or LSI, driver onto FPC pattern with anisotropic conductive film, or ACF, and mount chip resister cap components to FPC through surface mount technology, or SMT, is available. These COF machines have the ability to pitch fine to 38 micrometers and a total production capacity of up to 4,000,000 chips per month.   •    Chip On Glass.Glass,or COG, is a process that connects integrated circuits directly to LCD panels without the need for wire bonding. We apply this technology to produce advanced LCD modules for high-end electronic products, such as cellular phones and PDAs. AtAs of December 31, 2002,2004, we had seven21 COG lines. 19 lines in our principal manufacturing facilities. These machines provide an LCD of dimension of up to 200 millimeters (length) x 150 (width) x 2.2 (height), a process time per chip of five seconds, a pin pitch fine to 38 micrometers and a total production capacity of up to 4,000,000 chips per month. During 2004, our subsidiary, Jetup Electronic (Shenzhen) Co. Ltd., or Jetup, also started manufacturing COG LCD modules. As of December 31, 2004, Jetup had five COG lines and is capable of bonding 1,000,000 pieces of COG LCD modules a month. They are able to bond LCD panels up to sizes of 100 millimeters x 100 millimeters x 2.2 millimeters thick, with an accuracy of five microns’ tolerence, in a cycle time of 12-15 seconds per piece.   •    Chip On Board.Board,or COB, is a technology that utilizes wire bonding to connect large-scale integrated circuits directly to printed circuit boards. We use COB in the assembly of consumer products such as calculators, personal organizers and linguistic products. AtAs of December 31, 2002,2004, we had 7952 COB machines. These machines are fully automatic bonding machines and use ultrasonic mounting technology. The bonding time, pressure, power and each wire loop are under machine programmable control. These machines provide a high speed chip mounting time of per 2 millimeters wire per 0.25 second, a bond pad fine to 75 micrometers and a total production capacity of up to 3,000,000 chips per month.   •    Ball Grid Array. BGA is a method of mounting an integrated circuit or other component to a printed circuit board, or PCB. Rather than using pins that consume a large area of the PCB, the component is attached to the circuit board with small balls of solder at each contact. This method allows for greater component density and is used in more complex PCBs. At December 31, 2002, we had 12 BGA machines. •  Outer Lead Bonding.Bonding,or OLB, is an advanced technology used to connect PCBs and large-scale integrated circuits with a large number of connectors. We use this technology to manufacture complex miniaturized products, such as high-memory PDAs. AtAs of December 31, 2002,2004, we had three OLB machines. The machines include multi-pinned tape carrier packaged large scale integrated circuit, or TCP LSIC, bonding which is up to 280 pins, which also provide ultra thin assembly with module thickness to around one millimeter and high accuracy bonding with pin pitch to 100 micrometers. The total production capacity is 12,000 units per month.   •    Tape Automated Bonding with Anisotropic Conductive Film.Film,or TAB with ACF, is an advanced heat sealing technology that connects a liquid crystal display component with an integrated circuit in very small LCD modules, such as those used in cellular phones and pagers. AtAs of December 31, 2002,2004, we had seven35 systems of TAB with ACF machines. The machines provide process time of 24 to 25 seconds per component, a pin pitch fine to 200 micrometers and a total production capacity of up to 3,660,000 components per month. During 2004, Jetup also started manufacturing TAB LCD modules. As of December 31, 2004, Jetup had two TAB lines and is capable of bonding 250,000 pieces of TAB LCD modules a month. They are able to bond LCD panels up to sizes of 120 millimeters x 120 millimeters x 2.2 millimeters thick, with an accuracy of 10 microns’ tolerence in a cycle time of 20-25 seconds per piece. 20 •    Fine Pitch Heat Seal Technology.Technology,or FPHS technology, allows us to connect LCD displays to PCBs produced by chip on boardCOB and outer lead bonding that enableenables very thin connections. This method is highly specialized and is used in the production of finished products such as PDAs. AtAs of December 31, 2002,2004, we had eight machines utilizing FPHS technology. The machines provide a pin pitch fine to 260 micrometers and a total production capacity of up to 268,000 units per month.   •    Surface Mount Technology.Technology,or SMT, is a process by which electronic components are mounted directly on both sides of a printed circuit board, increasing board capacity, facilitating product miniaturization and enabling advanced automation of production. We use SMT for products such as electronic linguistic devices. AtAs of December 31, 2002,2004, we had 1629 SMT productions lines. The production time per chip ranges from 0.072 second per chip to 0.8 second per chip and high precision ranging from +/-0.05 millimeter to +/-0.1 millimeter. The components size ranges from 0.6 millimeter (length) x 0.3 millimeter (width) to 55 millimeters (length) x 55 millimeters (width). Ball grid array, or BGA, ball pitch is 0.5 millimeter and ball diameter is 0.2 millimeter. The total production capacity is 670,000,000 resistor capacitor chips per month.   •    Twisted Nematic LCDs.LCDs, Aor TN type LCD, is the most conventional and economical and is suitable for most common LCDs usedlow information content display systems such as those found in devices like calculators, watches, car audio, car clusters and watches. Atother medical instruments. As of December 31, 2002, we2004, J.I.C. had two TN LCD lines.lines capable of total capacity of about 100,000 pairs of glass panels (each sheet of glass of 360 millimeters x 400 millimeters size) per month.   •    Super-Twisted Nematic LCDs.LCDs,STN-typeor STN, type LCDs allow for clearer visibility and wider viewing angle than TN-type LCDs. STN LCDscapable of providing higher information content display systems are suitable for usefound in devices likeapplications such as cordless phones, mobile phones, MP3 players, pocket games and PDA personal digital assistants. We began manufacturing thesePDAs. J.I.C. started producing STN LCDs in the second quarter of 2002 and, atas of December 31 2002, we had one STN LCD line.2004, was equiped with a automated line capable of capacity 50,000 pairs of glass (each sheet of glass of 360 millimeters x 400 millimeters size) panels per month.      AtAs of December 31, 2002,2004, we had threefour clean rooms at our principal manufacturing facilities, which housed COF and COG capabilities for LCD module and front light or back light panel manufacturing. We also had threehave five clean rooms at another of our factories, which are used to manufacture LCD panels. Of our sevennine clean rooms at Januaryas of December 31, 2003, four2004, six were Classclass ten thousand, and three were Class oneclass thousand. Quality Control      We maintain strict quality control programs for our products, including the use of total quality management, or TQM, systems and advanced testing and calibration equipment. Our quality control personnel test the quality of incoming raw materials and components. During the production stage, our quality control personnel also test the quality of work-in-progress at several points in the production process. Finally, after the assembly stage, we conduct testing of finished products. In addition, we provide office space at our principal manufacturing facilities for representatives of our major customers to permit them to monitor production of their products and we provide them with direct access to our manufacturing personnel.      The facilities of Namtai Electronic (Shenzhen) Co. Ltd., or NTSZ, one of our subsidiaries, maintained ISO 9002 Certification from December 1993 until February 1996, and thereafter they maintained ISO 9001 Certification. All of our manufacturing facilities are eithercertified under ISO 9001 or ISO 9002 certified,quality standards, the International 20 Organization for Standardization’s, or ISOISO’s highest ratings.standards. The ISO is a Geneva-based organization dedicated to the development of worldwide standards for quality management guidelines and quality assurance. ISO 9000, which was the first quality system standard to gain worldwide recognition, requires a company to gather, analyze, document, monitor and make improvements where needed. The receipt ofOur certification under an ISO 9001 Certificationquality standard demonstrates that our manufacturing operations meet the most demanding of the established world standards. Our principal manufacturing facilities haveare also received thecertified under an ISO 14001 certification, aquality standard, which was published in 1996 to provide a structured basis for environmental management control.      We started the implementation of the Six Sigma approach in 2004 and our principal manufacturing facilities have been recognized by the China Association for Quality of the Chinese Government as a “National Advanced Enterprise for the Promotion of Six Sigma”. Six Sigma is an internationally recognized approach that uses facts and data to develop better solutions, thereby reducing defects and production times, and improving customer satisfaction. This approach allows the Company to lower its costs due to the minimization of manufacturing defects. This results in improved profit margins and higher competitiveness. Our Suppliers      We purchase thousands of different component parts from numerous suppliers. We are not dependent upon any single supplier for any key component. We purchase components from suppliers in Japan, China and elsewhere. We generally base component orders on received purchase orders in an effort to minimize our inventory risk by ordering components and products only to the extent necessary although for certain customers we will occasionally purchase raw materials based on such customer’s rolling forecasts.      The major component parts we purchase include the following: •    off-the-shelf and custom integrated circuits or “chips,”“chips”, most of which we purchase presently from Toshiba Corporation, and Sharp Corporation and certain of their affiliates;   •    LCD panels, which are available from many manufacturers. In the past2004, we have used two major suppliers,purchased LCD panels from Epson Hong Kong Ltd., Toshiba Matsushita Display Technology Co. Ltd., Optrex Corporation and Sharp Corporation for LCD panels and in the future we may produce some LCD supplies internally;   •    CMOS sensors, which we purchase mainly from Omnivision Technologies Inc.; •    solar cells and batteries, which are standard “off-the-shelf” items that we generally purchase in Hong Kong from agents of Japanese manufacturers; and   •    various mechanical components such as plastic parts, rubber keypads, PCBs, indium tin oxide, or ITO, glass used in the production of LCD panels, and packaging materials from various local suppliers in China. 21      Whenever practical, we use domestic China suppliers who are often able to provide items at low costs and with short lead times.      Certain components may be subject to limited allocation by certain of our suppliers. During 2000, there was an industry-wide shortage of components in the electronics industry as supply was unable to satisfy growing world demand. In some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production of assemblies using scarce components. These supply shortages have contributed to an increase in our inventory levels and reduction in our margins. We expect that shortages and delays in deliveries of some components will continue. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing delays, which could harm our relationships with current or prospective customers and reduce our sales.      The principal raw materials used by the Company are large scale integrated, or LSI, circuits (CMOS), semiconductors, LCD panels and batteries. At times, the pricing and availability of these raw materials can be volatile, due to numerous factors beyond the Company’s control, including general economic conditions, currency exchange rates, industry cycles, production levels or a supplier’s tight supply. In the past, we have asked our customers to share in the increased costs of raw materials where such increased costs would adversely affect the Company’s business, results of operations and financial condition. Our customers have generally agreed when so requested in the past. We cannot assure you, however, that our customers will agree to share costs in the future and that our business, results of operations and financial condition would not be adversely affected by increased volatility of raw materials. Production Scheduling      The typical cycle for a product to be designed, manufactured and sold to an OEM customer is one to two years, which includes the production period, the development period and the period for market research and data collection (which is undertaken primarily by our OEM customers). Initially an OEM customer gathers data from its sales personnel on products for which there is market interest, including features and unit costs. The OEM customer then contacts us, and possibly other prospective manufacturers, with forecasted total production quantities and design specifications or renderings. From that information, we in turn contact our suppliers and determine estimated component and material costs. We later advise our OEM customer of the development costs, charges (including molds, tooling and software design, if applicable) and unit cost based on the forecasted production quantities desired during the expected production cycle.      Once we and the OEM customer agree to the quotation for the development costs and the unit cost, we begin the product development if we are engaged to do so. This development period typically lasts less than six 21 months, but may be longer if software design is included. During this time we complete all molds, tooling and software required to manufacture the product with the development costs generally borne by our customer. Recently, some of our customers have started to request that we bear responsibility for paying development costs. For some products, we bear the development costs if we believe that we can recover these costs through our manufacturing relationship. Upon completion of the molds, tooling and software, we produce samples of the product for the customer’s quality testing, and, once approved, commence mass production of the product. We recover the development costs in relation to molds, tooling and software from our customers.      The production period usually lasts approximately six to 12twelve months. In some cases, our OEM customer handles all product design and development and engages us only at the point of initial production. Typically, more advanced products have shorter production runs. If total production quantities change, the OEM customer often provides only limited notice before discontinuing orders for a product. At any point in time we aremay be in different stages of the development and production periods for the various models under development or in production for our OEM customers.      Generally, our production is based on purchase orders received from OEM customers. Purchase orders are often supported by letters of credit or written confirmation from the OEM customer and generally may not be cancelled once confirmed without the mutual consent of the parties. Even in those cases where customers are contractually obligated to purchase products from us or repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights because of the long-term nature of our customer relationships and for other business reasons, and instead may negotiate accommodations with customers regarding particular situations.      We did not suffer a material loss resulting from the cancellation of OEM customer orders in 2000 or 2002.2001 to 2004. In 2001, we made anwrote down our inventory provision offor $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders. However, subsequently we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in our partial reversaland the gain of $2.0 million was recorded in cost of the provision insales during 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months. Sales and Marketing      We focus on developing close relationships with our customers at the development and design phases and continuing throughout all stages of production. We identify, develop and market new technologies that benefit our customers and position us well as an EMS provider.      Sales and marketing operations are integrated processes involving direct salespersons, project managers and senior executives. We direct our sales resources and activities at several management and staff levels within our customers and prospective customers. We receive unsolicited inquiries resulting from word of mouth, from public relations activities, and through referrals from current customers. We evaluate these opportunities against our customer selection criteria and assign direct salespersons. Transportation22 Seasonality      Typically, we sellHistorically, our sales and operating results are often affected by seasonality. Sales of calculators, personal organizers and linguistic products F.O.B. Hong Kong, which means thatare often higher during the second and third quarters in anticipation of the start of the school year and the Christmas buying season. Similarly, our customers are responsibleconsumer services for electronics products have historically been lower in the first quarter resulting from both the closing of our factories in China for the transportationChinese New Year holidays and the general reduction in sales following the holiday season. As we have diversified our services for complex components, we expect that seasonality may be less of finished products from Hong Kong to their final destination.a factor affecting our business. Transportation      Transportation of components and finished products to and from Shenzhen is by truck. Component parts purchased from Japan are generally shipped by air. To date, we have not been materially affected by any transportation problems. However, transportation difficulties affecting air cargo or shipping, such as an extended closure of ports that materially disruptdisrupts the flow of our customers’ products into the United States, could materially and adversely affect our sales and margins if, as a result, our customers delay or cancel orders or seek concessions to offset expediting charges they incurred pending resolution of the problems causing the port closures. Competition      General competition in the contract EMS industry is intense and characterized by price erosion, rapid technological change and competition from major international companies. This intense competition has 22 resulted in pricing pressures, lower sales and reduced margins. We believe that the principal competitive factors in our targeted markets are product quality, pricing, flexibility and timeliness in responding to design and schedule changes, reliability in meeting product delivery schedules, technological sophistication and geographic location. Many of our competitors have greater financial, technical, marketing, manufacturing, regional shipping capabilities and logistics support and personnel resources than we do and we may not be able to continue to compete successfully.      The EMS services we provide are available from many independent sources as well as from current and potential customers with in-house manufacturing capabilities. Our EMS competitors include Celestica, Inc., Flextronics International Ltd., Jabil Circuit, Inc., Sanmina-SCI Corporation, Hon Hai Precision Industry Co., Ltd., Jabil Circuit, Inc., Sanmina-SCI Corporation and Solectron Corporation. Our principal competitors in the manufacture of our traditional product lines of calculators, personal organizers and linguistic products include Kinpo Electronics, Inc. and Inventec Co. Ltd. Our competitors in the manufacturing of image capturing devices and their modules include Lite-On Technology Corporation, The Primax Group and Logitech International S.A. Our principal competitors in the manufacture of mobile phone accessories include Elcoteq Network Corp. Our competitors in the manufacturing of RF modules include Wavecom and WKK International (Holdings) Ltd. Our competitors in the manufacturing of LCD panels include Truly International Holdings Ltd. and Varitronix International Ltd. We have numerous competitors in the telecommunication, subassembliessub-assemblies and components product lines, including Philips, Samsung and Varitronics.Varitronix International Ltd. Our competitors in our FPC sub-assemblies business include Solectron Corporation. Research and Development      We invest in research and development for manufacturing and assembly technology that provide us with the potential to offer better and more technologically advanced services to our OEM customers or assist us in working with our OEM customers in the design and development of future products. We plan to continue acquiring advanced design equipment and to enhance our technological expertise through continued training of our engineers and further hiring of qualified system engineers. These investments are intended to improve the speed, efficiency and quality of our assembly processes.      In our ODM business, we are responsible for the design and development of new products, the rights to which we own. We sell these products to OEM customers to be marketed to end users under the customers’ brand names. To date, we have successfully developed a number of electronic dictionaries, cordless telephones and calculator products. Our efforts to expand or maintain the ODM business may not be successful and we may not achieve material revenues or profits from our efforts. To date, our ODM design activities have not been a material portion of our research and development budget. Patents, Licenses and Trademarks      We do not have any patents, licenses or trademarks on which our business is substantially dependent. Instead, we rely instead on our trade secrets, industry expertise and long-term relationships with our customers and suppliers. Organizational Structure      We are a holding company for Nam Tai Group Management Ltd.,Limited, Nam Tai Electronic & Electrical Products Limited, Zastron Precision-Tech Limited, Namtek Software Development Company Limited and J. I. C.J.I.C. Technology Company Limited and their subsidiaries. The chart below illustrates the organizational structure of the Company and our principal operating subsidiaries at Januaryas of December 31, 2003.2004. 23      Our significant operating entities are described below:   JIC Technology Company Ltd.      JIC Technology was formed in the Cayman Islands in January 2002 in connection with a restructuring agreement with Albatronics (Far East) Company Limited, of which we owned slightly more than 50% of the outstanding capital stock. JIC Technology is a holding company of JIC Group (B.V.I.) Limited and it is listed on the Hong Kong Stock Exchange. We currently hold 75% of the ordinary shares of JIC Technology, and upon conversion of the preference shares we own, we would own approximately 94% of JIC Technology.   J.I.C. Enterprises (Hong Kong) Ltd.      JIC Enterprises, incorporated in Hong Kong, was established in 1983 and has been in the LCD business for almost 20 years. Originally a small trading company for LCD panels and electronics products, JIC Enterprises is now strategically focused on the sales and marketing of LCD panels and is responsible for customer relationship development. 24   Jetup Electronic (Shenzhen) Co. Ltd.      Jetup Electronic was incorporated in 1993 in China and handles the manufacturing and processing works of LCD panels through its factory plants in Baoan County, Shenzhen.   Jieyao Electronics (Shenzhen) Co. Ltd.      Jieyao was incorporated in 1995 as a wholly foreign-owned enterprise with its factory located in Baoan County District, Shenzhen. The company acts as another manufacturing arm of JIC Group’s transformer division. Nam Tai Group Management Limited      Nam Tai Group Management Limited was established on March 9, 2001 in Hong Kong and provides management services to other group companies. Nam Tai Telecom (Hong Kong) Company Limited Nam Tai Telecom (Hong Kong) Company Limited was established in Hong Kong in August 1999, emerging from a successful acquisition of a Korea based telecommunication business. Located in the same office building as Nam Tai Electronic & Electrical Products Limited Nam Tai Telecom develops and sells high frequency wireless telecommunication products and LCD modules. Zastron Electronic (Shenzhen) Company Limited      Zastron Electronic (Shenzhen) Company Ltd. was organized as Zastron Plastic & Metal Products Electronic (Shenzhen) Co. Ltd. in March 1992 as a limited liability company pursuant to the relevant laws of China. Zastron engaged in production of metallic parts and PVC plastic products, much of which is used in products manufactured in our principal manufacturing facilities. In August 2002, Zastron Plastic & Metal Products Electronic (Shenzhen) Co. Ltd. changed its name to Zastron Electronic (Shenzhen) Co. Ltd. and the nature of business was expanded to include manufacturing of telecommunication products and LCD modules. In June 2002, Zastron’s equity interest was transferred from Nam Tai Electronic & Electrical Products Limited to Nam Tai Group Management Limited. In October 2002, Zastron’s silk screening business was transferred to Jieyao Electronics (Shenzhen) Co. Ltd. In December 2002, the equity interest of Zastron was transferred from Nam Tai Group Management Limited to Nam Tai Telecom (Hong Kong) Company Limited.   Nam Tai Electronic & Electrical Products Limited      Nam Tai Electronic & Electrical Products Limited, or NTEEP, was incorporated in November 1983June 2003 in the Cayman Islands, and becameis the holding company for Namtai Electronic (Shenzhen) Co., Ltd. in 1992. Marketing and customer relations are the main functions handled by Nam Tai Electronic & Electrical Products.Investments Consultant (Macao Commercial Offshore) Company Limited. Its shares were listed on the Hong Kong Stock Exchange on 28 April 2004 and we hold 75% of the issued ordinary shares of NTEEP. Namtai Electronic (Shenzhen) Co., Ltd.      Namtai Electronic (Shenzhen) Co., Ltd. was established as Baoan (Nam Tai) Electronic Co. Ltd. in June 1989 as a contractual joint venture company with limited liability pursuant to the relevant laws of China. The equity of Baoan (Nam Tai) Electronic Co. Ltd. was 70% owned 70% by Nam Tai Electronic & Electrical Products Limited and 30% owned by a Chinese company. In 1992, the Chinese company transferred all of its equity interest in the contractual joint venture to Nam Tai Electronic & Electrical Products Limited, a Hong Kong subsidiary of Nam Tai, which name was subsequently changed to Nam Tai Trading Company Limited, and the company changed its name to Namtai Electronic (Shenzhen) Co., Ltd. NamtaiIt is the principal operating arm of NTEEP. Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited      Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited was established in August 2003 in Macao, China. In March 2004, the equity interest of Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited was transferred from the Company to NTEEP and became its wholly owned subsidiary. Its principal business is the provision of management and sales co-ordination and marketing services to other companies within the NTEEP group. 24 Zastron Precision-Tech Limited      Zastron Precision-Tech Limited, or Zastron, was incorporated in June 2003 in the Cayman Islands, and is the holding company for Zastron Electronic (Shenzhen) Co., Ltd. and Zastron (Macao Commercial Offshore) Company Limited. Zastron Electronic (Shenzhen) Co. Ltd.      Zastron Electronic (Shenzhen) Co. Ltd. was organized as Zastron Plastic & Metal Products (Shenzhen) Ltd. in March 1992 as a limited liability company pursuant to the relevant laws of China. Zastron Plastic & Metal Products (Shenzhen) Ltd. was engaged in the production of metallic parts and PVC plastic products, much of which is used in the products manufactured in our principal manufacturing facilities. In August 2002, Zastron Plastic & Metal Products (Shenzhen) Ltd. changed its name to Zastron Electronic (Shenzhen) Co. Ltd. and expanded the nature of its business to include manufacturing of telecommunication products, LCD modules, TFT LCD modules and others. It also became one of our principal manufacturing arms. Zastron Electronic (Shenzhen) Co. Ltd. is currently a wholly-owned subsidiary of Zastron. Zastron (Macao Commercial Offshore) Company Limited      Zastron (Macao Commercial Offshore) Company Limited was established in March 2004 in Macao, China and is a wholly owned subsidiary of Nam Tai Electronic & Electrical Products. NamtaiZastron. Its principal business is the provision of management, sales co-ordination and marketing services to other companies within the Zastron group. J.I.C. Technology Company Limited      J.I.C. Technology Company Limited, or J.I.C., was formed in the Cayman Islands in January 2002 in connection with a reverse merger with Albatronics, of which we owned slightly more than 50% of the outstanding capital stock. J.I.C. was listed on the Hong Kong Stock Exchange in June 2002. We currently hold 71.63% of the issued ordinary shares of J.I.C. Jetup Electronic (Shenzhen) is our principalCo., Ltd.      Jetup Electronic was incorporated in 1993 in China and handles the manufacturing armand processing works of LCD panels through its factory plants in Baoan County, Shenzhen. J.I.C. (Macao Commercial Offshore) Company Limited      J.I.C. (Macao Commercial Offshore) Company Limited was incorporated in November 2004 in Macao, China and is engaged in researcha wholly-owned subsidiary of J.I.C. Technology Company Limited. Its principal business is the provision of management, sales co-ordination and development, manufacturing and assembling our electronic products in China. 25 marketing services to other companies with the J.I.C. Group. Namtek Software Development Company Limited      Namtek Software Development Company Limited was establishedincorporated in May 2002 in the Cayman Islands and is awas established as the holding company for Shenzhen Namtek Co., Ltd. and Namtek Japan Company Limited. Shenzhen Namtek Co., Ltd.      Shenzhen Namtek Co., Ltd. was organized in December 1995 as a limited liability company pursuant to the relevant laws of China. Shenzhen Namtek Co., Ltd. commenced operations in early 1996 developing and commercializing software for the consumer electronics industry, particularly for our customers and for products we manufacture or we will manufacture in the future. At December 31, 2002,2004, Shenzhen Namtek Co., Ltd employed approximately 7093 software engineers and provides the facilities and expertise to assist in new product development and research, enabling us to offer our customers program design for microprocessors, enhanced software design and development services, and strengthening our ODM capabilities. Namtek Japan Company Limited      Namtek Japan Company Limited was incorporated in June 2003 in Tokyo, Japan and is the sales and marketing arm of software business of Namtek Group in Japan. Property, Plant and Equipment      Our registered office in the British Virgin Islands is located at McNamara Chambers, P.O. Box 3342, Road Town, Tortola. Our principal 25 executive office in the British Virgin Islands is located at 116 Main Street, 3rd Floor, Road Town, Tortola. Corporate administrative matters are conducted at this office through our registered agent, McNamara Corporate Services Limited. We neitherdo not own nor leaseany property in the British Virgin Islands. The table below lists the locations, square footage, principal use and lease expiration dates of the facilities used in our principal operations.                           Owned or lease Location Square Footage Principal Use expiration date(1) Hong Kong     23,000     Executive offices     Owned     Principal Manufacturing Facilities                         Shenzhen, China     300,700       Manufacturing       2043         39,380       Offices       2043         231,943     Dormitories and cafeteria     2043         6,596       Recreational       2043     Other facilities                         Shenzhen, China     72,360     Manufacturing transformers     2009         27,093       Dormitories       2009         151,738     Manufacturing LCD panels     2007         108,181       Dormitories       2007         25,900     Silk screening operations     2007   Shekou, Shenzhen, China     6,650     Software development     2003   Shanghai, China     4,754     Software development     2005                                     Owned or lease Location   Square Footage     Principal Use   expiration date(1) Hong Kong     24,200     Offices   Owned(2) Macao     1,875     Offices   2005 Macao (for J.I.C. Macao)     964     Offices   2006 British Virgin Islands     300     Offices   2005 Principal Manufacturing Facilities     557,835     Manufacturing   2043/2049 (3) Shenzhen, China     87,462     Offices   2043/2049 (3)       189,952     Dormitories   2043/2049 (3)       26,939     Cafeteria   2043       33,826     Recreational   2049 Other facilities                 Other facilities Shenzhen, China     383,547     Manufacturing LCD panels   2012       32,005     Offices   2012       221,666     Dormitories   2012       22,259     Cafeteria   2012       14,548     Recreational   2012   Shekou, Shenzhen, China     12,374     Software development   2005 Tokyo, Japan     904     Software development   2005 (1) (1)  Only the Chinese government and peasant collectives may own land in China. Our principal manufacturing facilities are located on land in which we have entered into a land lease agreement with the Chinese government that gives us the right to use the land for 50 years. Based on our understanding of the practice as it exists today, at the expiration of the land lease we may be given the right to renew the lease. However, at the end of the lease term, all improvementimprovements we have made will revert to the government. For our other facilities, we have entered into factory building lease agreements with peasant collectives or other companies for 10 years or less. (2) Although we own the office space, the land on which the building is located is subject to a 75-year lease with the government that expires in 2055, with a right to renew for 75 more years. (3) Our principal manufacturing facilites occupy two pieces of land with 50-year leases which we acquired in 1993 and 1999, respectively.      In order to expand our production capacity, we plan to buildhave built a new factory consisting of approximately 250,000265,000 square feet on portions of the vacant land adjacent to our existing factory complexprincipal manufacturing facilities in Shenzhen, China. Planning for the project beganThe construction completed in January 2003 and we expect it to be completed by the end of the second quarter inDecember 2004. We have budgeted $40.0expect full operations can commence in April 2005. As of December 31, 2004, we had spent $15.0 million to cover the cost of construction and fixtures and 26 equipment for the new factory. We currently plan to financeThe financing of these improvements to our manufacturing facilities were obtained from proceeds received frominternal resources.      In October 2004, our existing production facility for the LCD panels segment also relocated to new factory premises which are approximately 670,000 square feet and twice the size of the former factory premises. This new factory provides room for future offeringsexpansion of our common shares. production capacity. As of December 31, 2004, we had spent $7.7 million for this relocation and financed this amount with a combination of internal resources and bank financing. Hong Kong      In 2001, our principal executive office wasHong Kong offices relocated to 15/F.,F, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road, Central, Hong Kong. The office is conveniently located above the ferry terminal and beside the highway, permitting easy transportation by sea or by land to and from the manufacturing facilities in Shenzhen. The purchase and renovation of the 23,00024,200 square feet of contiguous prime office space, including transaction fees, cost us $13.0 million.      WeAs of December 31, 2004, we own 2,722 square feet of office space at Room 811, Tower B, Hunghom Commercial Centre, 37 Ma Tau Wai Road, Hunghom, Kowloon, Hong Kong which was previously used by the JIC Group for administration and marketing and is now being leased out.      We own fiveone residential flatsflat in Hong Kong purchased for total consideration of $8,312,000. These properties are$1,108,000. This property is occupied by one member of senior management and formforms a part of theirhis compensation.      Until 1996, we owned approximately ten acres of land in Hong Kong carried on our books at a cost of approximately $523,000. Between 1997 and 20012004, we sold approximately 7.7 acres of land for net proceeds of $7,272,000,$7.28 million; realizing a gain of $7,018,000.$7.03 million. We plan to sell the remaining land and, pending the sale, to continue to carry the land at a cost of approximately $134,000. 26 Macao      In August 2003, we established our PRC headquarters in Macao, China and set up Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited in Macao, China. Macao, like Hong Kong, is a special administrative region of China and has recently introduced an incentive program to attract investments to Macao. In March and November 2004, we further established Zastron (Macao Commercial Offshore) Company Limited and J.I.C.(Macao Commercial Offshore) Company Limited in Macao, China, respectively. We currently lease three offices and all of them under two-year leases expiring in July 2005 and December 2006, respectively. The monthly rental cost is approximately $905 per office. Shenzhen, China Principal Manufacturing Facilities      Our principal manufacturing facilities are located in Baoan County, Shenzhen, China. TheIn December 1993, we acquired a 50-year lease for thisthe first piece of land was purchased for approximately $2.45 million in December 1993 and has a term of 50 years. Thismillion. The first phase facility consistsconsisted of 160,000 square feet of manufacturing space, 39,000 square feet of offices, 212,000 square feet of new dormitories, 26,000 square feet of full service cafeteria, and recreation facilities and a swimming pool. The total cost of this addition to our complex, excluding land, was approximately $21.8 million. In November 2000, we began construction of another addition to our factory complex. We completed construction in October 2002, adding a new five-story factory with 138,000 square feet of production facilities, including one floor for assembling, one floor of office space, one floor for warehouse use and two floors of class one thousand clean room facilities. Prior to this addition, we had only one floor of class ten thousand clean room facilities at our factory complex. As of December 31, 2002, we had spent $9.1 million to complete the construction of the new facility. With thethis new addition, we had approximately 626,000 square feet of manufacturing space at our principal manufacturing complexfacilities as of December 31, 2002.2002, with only minimal additions in 2003.      In July 1999, we purchased aanother vacant lot of approximately 280,000 square footfeet (approximately 6.5 acres) vacant lot bordering our current manufacturing complex located in Shenzhen, China at a cost of approximately $1.2 million. We plan to buildhave built another factory consisting of approximately 250,000265,000 square feet. Planning for the project beganfeet of space. Construction started in JanuarySeptember 2003 and we expect it to be completed by the end of the third quarter in December 2004. We have budgeted $40,000,000expect full operation can commence in April 2005. With this new addition, our principal manufacturing facilities now consists of 557,835 square feet of manufacturing space, 87,462 square feet of offices, 189,952 square feet of dormitories and 60,765 square feet of cafeteria space and a full services recreational building. As of December 31, 2004, we had spent $15.0 million to cover the cost of construction and fixtures and equipment for the new factory. We currently plan to financeThe financing for these improvements to our manufacturing facilities was obtained from internal resources. LCD Factory      In October 2003, Jetup Electronic (Shenzhen) Co., Ltd. entered into a portiontenancy agreement for new factory premises, which is also located in Baoan County, Shenzhen, China, and relocated to the new factory premises in October 2004. The new factory premises are about twice the size of the proceeds from a public offeringformer factory premises and consist of our common shares. Transformer Factory      Our transformer factory was leased in 1999 and has six floors of manufacturing space totaling about 72,000 square feet. The factory has an average monthly output of 2,534,335 units. The facility is under a ten-year lease that expires on October 31, 2009. 27 LCD Factory Our LCD factory was leased since 1997 and has over about 150,000383,547 square feet of manufacturing space. The facility produces LCD panels tospace, 32,005 square feet of offices, 221,666 square feet of dormitories, and 36,807 square feets of cafeteria and recreational spaces. This new factory provides room for the specificationsfuture expansion of our OEM customersproduction capacity. As of December 31, 2004, we had spent $7.7 million for this relocation and has an average monthly outputfinanced this amount with a combination of 10 to 12 million pieces. The lease of the facility will be expired on August 31, 2007. internal resources and bank financing. Software Development      We currently lease two offices in which we conduct software development. Our Shekou, Shenzhen, China office hasis approximately 6,65012,374 square feet, which we lease under atwo one-year lease expiring in August 2003. The monthly rental is approximately $4,480. Our Shanghai, China office, has approximately 4,754 square feet, which we lease under a three-year leaseleases expiring in July 2005. The monthly rental is approximately $4,033.$7,667. In July 2003, we opened an office in Tokyo, Japan to further expand our sales and marketing team in Japan for our software development business. The Tokyo office has approximately 904 square feet, which we lease under a two-year lease expiring in June 2005. The monthly rental for the Tokyo office is approximately $1,975.See Item 3. Key Information — “Risk Factors.” — “Risks Related to Our Operations in China, Hong Kong, Macao and Japan.” Item 5.Operating and Financial Review and Prospects      Except for statements of historical facts, this section contains forward-looking statements involving risks and uncertainties. You can identify these statements by forward-looking words including “expect,” “anticipate,” “believe,” “seek,” “estimate,” “intends,” “should,”“expect”, “anticipate”, “believe”, “seek”, “estimate”, “intends”, “should”, or “may.”“may”. Forward-looking statements are not guarantees of our future performance or results and our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the section of this Report entitled Item 3. Key Information –— “Risk Factors.” This section should be read in conjunction with our Consolidated Financial Statements included as Item 18 of this Report. 27 Operating Results Overview      We are an electronics manufacturing and design services provider to a select group of the world’s leading original equipment manufacturers, or OEMs of telecommunicationtelecommunications and consumer electronic products. Our largest customers include Epson Precision (HK) Ltd., Sony Ericsson Mobile Communications AB and Texas Instruments Incorporated. Through our electronics manufacturing services or EMS, operations, we manufacture electronic components and subassemblies,sub-assemblies, including liquid crystal display, or LCD panels, transformers, LCD modules, RF modules, FPC sub-assemblies and radio frequency, or RFimage sensors modules. These components are used in variousnumerous electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game devices and microwave ovens. We also manufacture finished products, including cordlesscellular phones, palm-sized PC’s, personal digital assistants,PCs, PDAs, electronic dictionaries, calculators, and digital camera accessories and BluetoothTM wireless headset accessory for use with cellular phones.      We assist our OEM customers in the design and development of their products and furnish full turnkey manufacturing services that utilize advanced manufacturing processes and production technologies. Our services include hardware and software design, component purchasing, assembly ofinto finished electronic products, or electronic subassembliessub-assemblies and post-assembly testing. These services are value-added and assist us in obtaining new business but do not represent a material component of our revenue. We also provide original design manufacturing, or ODM services, in which we design and develop proprietary products that are sold by our OEM customers using their brand name. Net Sales and Cost of Sales      We derive our net sales principally from manufacturing services that we provide to OEMs of telecommunications and consumer electronic products. The market for the products we manufacture is generally characterized by declining unit prices and short product life cycles. Sales to our OEM customers are primarily based on purchase orders we receive from time to time rather than firm, long-term purchase commitments from our customers. We recognize sales, net of product returns and warranty costs, typically at the time of product shipment or, in some cases, as services are rendered.      A substantial percentage of our net sales are to a small number of customers. During the years ended December 31, 2000, 2001 and 2002, sales to our ten largest customers were 90.2%, 83.7% and 84.8% of our net sales, respectively. Furthermore, our customers accounting for 10% or more of our net sales aggregated 28 approximately 72.4%, 44.1% and 60.2% of our total sales, respectively, for the same three-year period. The loss of any of our largest customers or a substantial reduction in orders from any of them would materially and adversely affect our business and operating results. Our production is typically based on purchase orders received from OEM customers. However, for certain customers, we will occasionally purchase raw materials based on such customers’ rolling forecasts. Purchase orders are often supported by letters of credit or written confirmation from our OEM customer.customers. We generally do not obtain firm, long-term commitments from our customers. Uncertain economic conditions and our general lack of long-term purchase commitments with our customers make it difficult for us to accurately predict our revenue over the longer term. Even in those cases where customers are contractually obligated to purchase products from us or to repurchase unused inventory from us, we may elect not to immediately enforce our contractual rights because of the long-term nature of our customer relationships and for other business reasons, and instead may negotiate accommodations with customers regarding particular situations. We did not suffer a material loss resulting from the cancellation of OEM customer orders in 2000 or 2002. In 2001 however, we made an inventory provision of $3.8 million to cost of sales for slow moving raw materials relating to cancelled, reduced or delayed orders. Subsequently, we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in a partial reversal of $2.0 million of the provision in 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months. Gross Margins      Our gross margins and operating income generally improve during periods of high-volume and high-capacity utilization in our manufacturing facilities and decline during periods of low-volume and low-capacity utilization. Over the last several years our gross profit margins have declined substantially, from 24.3% in 1998, to 17.2% for 1999, to 14.8% for 2000, to 12.8% in 2001 and increasing to 16.1% in 2002. Before the $3.8 million inventory provision in 2001 and our subsequent reversal of $2.0 million of this provision in 2002 discussed above, our gross margin was 14.5% in 2001 and 15.3% in 2002.      An increased mix of more complexComplex products that generally have relatively high material costs as a percentage of total unit costs and accordingly our strategic shift to produce more of such products has historically been a factor that has adversely affected our gross margins. This is the primary reason for the decline in our gross margins between 19981999 and 2001. During this period, we diversified our product mix from predominantly low complexity electronic products, including calculators and electronic dictionaries, to include more complex components and subassemblies,sub-assemblies, like LCD modules and RF modules. We believe our gross margin improved in 2002 and 2003 as a result of the experience we acquired in manufacturing these more complex products as we changed our strategic focus. Despite the lower gross margin on more complex products, we believe that the opportunity for growth in the demand for these complex products justifies the shift in our strategic focus. Furthermore, we believe that the experience in manufacturing processes and know-how that we have developed from producing more complex products are a competitive advantage for us relative to many of our competitors.      The increased costs associated with developing advanced manufacturing techniques to produce complex products on a mass scale and at a low cost hashave also negatively impacted our gross margins. For example, in our initial production runs of LCD modules and RF modules, we experienced low production yields and other inefficiencies that caused our gross margin to decrease. Although we believe we have improved the efficiency and quality of our manufacturing processes relating to LCD modules and RF modules, we may not be able to improve or maintain our gross margin for these products. Furthermore, in December 2002 we began to produce RF modules, and, in January 2003, we began to produce color and thin film transistor, or TFT LCD modules, each a complex component used in a variety of devices. The increased costs associated with manufacturing these products and other new complex products could have a negative impact on our future gross margins. The complex manufacturing processes involved in the production of complex products is also capital intensive, thereby increasing our fixed overhead costs. It has been our strategy to shift our focus more to the business of key components sub-assembly. The key components sub-assembly business generally accounts for relatively lower gross profit margin business. Nam Tai has been very successful in shifting its focus to key components sub-assembly, which accounted for 59% of our sales in 2004. We believe that the strong growth of this business will offset the impact of lower gross profit margins and we can continue to achieve strong growth in our overall profits. In the long run, we expect to achieve an overall gross profit margins of around 12%. 2928 Selling, General and Administrative Expenses      Our selling, general and administrative, or SG&A, expenses, consist primarily of salary and benefits, depreciation and amortization of our non-manufacturing fixed and intangible assets, office expenses, and professional fees. Research and DevelopmentIncome Taxes      We invest in research and development for manufacturing and assembly technology that provide us with the potentialUnder current BVI law, our income is not subject to offer better and more technologically advanced services to our OEM customers or assist us in the design and development of future products for them. We plan to continue acquiring advanced design equipment and to enhance our technological expertise through continued training of our engineers and further hiring of qualified system engineers. These investments are intended to improve the speed, efficiency and quality of our manufacturing processes. Operating Realignment      In 2001, we restructured certain of our operations to better align our manufacturing, engineering and administrative resources. Related to this restructuring, we incurred $300,000 of costs related to employee severance charges that were included in cost of sales. We also incurred severance charges of approximately $700,000 related to the elimination of certain administrative positions that were included in selling, general and administrative expenses in that year. Income Taxes      Our principal operations, which are conducted through subsidiaries, aretaxation. Subsidiaries operating in Hong Kong and China. We calculateChina are subject to income taxes as described below, and our subsidiary operating in Macao is exempted from income taxes. This would be valid unless the Macao government changes its policy towards offshore companies.      Under current Cayman Islands law, Nam Tai Electronic & Electrical Products Limited, Zastron Precision-Tech Limited, J.I.C. Technology Company Limited and Namtek Software Development Company Limited are not subject to profit tax in the Cayman Islands as they have no business operations in the Cayman Islands. However, they may be subject to Hong Kong income taxes as described below if they are registered in Hong Kong.      The provision for current income taxes of ourthe subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16% for 2002 and 17.5% for both 2003 and 2004 to the estimated taxable income earned in or derived from Hong Kong during the applicable period.      The basic corporate tax rate for Foreign Investment Enterprises in China, such as our ChinaChinese subsidiaries, is currently 33% (30% state tax and 3% local tax). However, because all of our ChinaChinese subsidiaries are located in Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in the regions in which our subsidiaries operate in Shenzhen are not currently assessingassessed any local tax.tax, though that could change at any time. Moreover, several of our ChinaChinese subsidiaries are entitled to certain tax benefits and certain of our ChinaChinese subsidiaries have qualified for tax refunds as a result of reinvesting their profits earned in previous years in China for a minimum period of five years.China.      Efforts by the Chinese government to increase tax revenues could result in decisions or interpretations of the tax laws by the Chinese tax authorities whichthat are unfavorable to us and which increase our future tax liabilities, or deny us expected refunds. Changes in Chinese tax laws or their interpretation or application may subject us to additional Chinese taxation in the future.      Our effective tax rates were 8%, 1% and 1% for 2002, 2003 and 2004, respectively. The significant factors that caused our effective tax rates to differ from the applicable statutory rates of 15% were as follows:                               2002   2003   2004 Applicable statutory tax rates     15 %     15 %     15 % Effect of loss / income for which no income tax benefit/expense is receivable/payable     6 %     (2 %)     (10 %) Tax losses not recognised     —       —       1 % Tax holidays and incentives     (5 %)     (5 %)     (3 %) Effect of China tax concessions, giving rise to no China tax liability     (21 %)     (8 %)     (3 %) Under / (over) provision of income tax expense in prior years     5 %     —       —   Other items which are not assessable (deductible) for tax purposes     8 %     1 %     1 % Effective tax rates     8 %     1 %     1 % Strategic Investments      An important element of our strategy is to make investments in companies that provide the potential to complement our existing products and services, become new customers, augment our market coverage and sales ability, enhance our technological capabilities and expand our service offerings. We account for investments of less than 20% under the cost method and we account for investments between 20% and 50% under the equity method. Our material investments over the last five years include:      Stepmind. In December 2003, we placed approximately $5.3 million into an escrow account for an investment in Stepmind. The investment was to occur in two phases. For the first phase, approximately $2.64 million, representing 7.66% of the equity interest in Stepmind, was released to Stepmind in January 2004. The second phase amounting to $2.65 million was released to Stepmind in August 2004 subject to fulfillment of certain conditions. In August 2004, we disposed of our entire interest in Stepmind to one of the shareholders of Stepmind at the original subscription price for those shares. 29 Alpha Star/ JCT Wireless.JCT.In January 2003, we invested $10.0 million for a 25% equity interest in Alpha Star Investments Ltd., the ultimate parentholding company of Hong Kong based JCT Wireless Technology Company Limited, or JCT. JCT is engaged in the design, development and marketing of wireless communication terminals and wireless application software and is using us to manufacture wireless communication terminals and their related RF modules. 30 In September 2004, we made an impairment to write down our $10.0 million investment in Alpha Star to a fair value of approximately $3.0 million. As of December 31, 2004, another analysis had been conducted by an independent valuer, who determined that no further impairment to value was required.      TCL Group.Over the period from September 2000 through November 2002, we made three investments in the TCL Group of companies and disposed of a portion of one investment.the investment in 2002 and 2003. In 2004, we further increased our investment in TCL Mobile from holding approximately 3% to 9% through the acquisition of Jasper Ace. The TCL Groupgroup of companies is a leading OEM for numerous consumer electronic and telecommunications products in the domestic Chinese market. •    In September 2000, we made a strategic investment of $2.0 million to acquire a 5% indirect equity interest (through a 25% direct equity interest in Mate Fair Group Limited)Fair) in both TCL Mobile Communication (HK) Co., Ltd. and Huizhou TCL Mobile Communication Co., Ltd., or together known as TCL Mobile. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in China and overseas markets. In October 2002, we began to provide TCL Mobile with LCD modules used in its mobile phones. However, sales to TCL Mobile were not material for 2002. •    In January 2002, we acquired a 6% equity interest in TCL Corporation (formerly known as TCL Holdings Corporation Ltd.), the parent of the TCL Group of companies, for approximately $12.0 million. •    In November 2002, Mate Fair Group Limited sold a portion of its equity interest in Huizhou TCL Mobile Communication Co. Ltd. for which we received proceeds of approximately $10.4 million, reducing our indirectdirect equity interest (held through Mate Fair Group Limited)Fair) in TCL Mobile to approximately 3%. •    In November 2002, we invested $5.1 million in the 3% convertible notes of TCL International Holdings Limited that are due in November 2005. TCL International Holdings Limited is another company in the TCL Group and is publicly listed on the Hong Kong Stock Exchange. Those convertible notes of TCL International Holdings Limited were disposed of in August 2003 for approximately $5.03 million. •    In April 2004, we increased our shareholding in TCL Mobile from approximately 3% to 9% through acquiring Jasper Ace, which directly holds 9% equity interest in TCL Mobile, at a consideration of approximately $102.2 million. The consideration was satisfied, by the exchange of our 72.2% equity interest in Mate Fair, plus cash of $25 million and the issuance of 1,416,764 new Nam Tai shares and resulted in a net investment cost of $79.5 million.      Deswell Industries.In September 2000, we purchased 500,000 common shares in Deswell Industries Inc., a Nasdaq-listed company, representing approximately 9% of the outstanding shares of Deswell at the time of the purchase for an aggregate of $7.5 million. Deswell is a manufacturer of injection-molded plastic parts and components, electronic products and subassembliessub-assemblies and metallic molds and accessory parts for OEMs and contract manufacturers. During the first quarter of 2002, we sold our Deswell shares in the open market for aggregate proceeds of $10.1 million.      Group Sense. In May 1998, we acquired 20%The following details the impact of our strategic investments on our income statements for each of the outstanding shares of Group Sense (International) Limited, a Hong Kong public listed company, for cash of $16.3 million, which was reduced by a pre-acquisition dividend of $460,000. Group Senseyears ended 2002, 2003 and its subsidiaries manufacture consumer electronics products. During the period from February to November 2000, we disposed of our Group Sense shares for cash aggregating $28.1 million.2004:                                       2002     2003     2004         (in thousands) Cost Investments                         Included in other income:                         Deswell   Realized gain on disposal of marketable securities   $ 642     $ —     $ —   Deswell   Dividend income received from marketable securities     114       —       —   TCL Corporation   Dividend income received from investment     803       1,696       926   Huizhou TCL   Dividend income received from investment     —       2,018       17,369                                   $ 1,559     $ 3,714     $ 18,295                               Equity Investments Included in equity in income (loss) of affiliated companies:                         Mate Fair       $ 10,741     $ —     $ —   Alpha Star Investments Limited   $ —     $ 498     $ (6,806 )                             Equity in income (loss) of affiliated companies   $ 10,741     $ 498     $ (6,806 ) Included in other income:                         Mate Fair   Release of unamortized goodwill of affiliated companies   $ (520 )   $ —     $ —                                     $ 10,221     $ 498     $ (6,806 )                             Albatronics. In December 1998, we acquired slightly over 50% of the outstanding shares of Albatronics (Far East) Company Limited, a Hong Kong public listed company, for cash of approximately $10.0 million. Albatronics and its subsidiaries were engaged in the trading of electronic components and manufacturing of consumer electronics products. Despite our direct cash investment, Albatronics’ financial position weakened dramatically and it became unable to pay its liabilities as they came due. As a result, we wrote off our entire investment in Albatronics.30 Toshiba Joint Venture      In March 2000, we formed a joint venture with Toshiba Battery Company Ltd. called BPC (Shenzhen) Co., Ltd., or BPC, to manufacture rechargeable lithium ion battery packs at our manufacturing complex in Shenzhen, China. Toshiba Battery Company Ltd. owned a 13% interest in BPC and we owned the balance of BPC for a cash investment of $1.3 million. During 2000 and 2001 and from January 1 to April 30, 2002, we recognized net sales of $6.2 million, $21.1 million, and $7.8 million, respectively, from Toshiba and its related companies. In 2002, we sold our 87% joint venture interest in BPC and a related manufacturing license to a Toshiba relatedToshiba-related company for an aggregate of $2.9 million, resulting in a gain of $77,000. 31     Based on the 2001 full year results of BPC, we estimate that the sale of BPC will result in a reduction of annual revenues for 2002 of approximately $21.1 million and a reduction in profits of $1.3 million for 2002. We further estimate that the BPC sale will result in a reduction of annual operating expenses of approximately $600,000 for 2002. Cash flows from operations for 2002 would decline by approximately $1.7 million. JICJ.I.C. Group Acquisition      We acquired J.I.C. Group (BVI) Limited, or the JICJ.I.C. Group in October 2000 for $32.8 million. We paid a portion of the purchase price to the seller by issuing approximately 1.163.48 million of our common shares and paid $11.0 million in cash. The JICJ.I.C. Group is principally engaged in the manufacture and marketing of transformers and LCD panels, a key component for a variety of consumer electronic products. We accounted for the acquisition of the JICJ.I.C. Group under the purchase method of accounting and the results of the JICJ.I.C. Group’s operations have been consolidated with our results since the date of its acquisition. JIC Group Minority Interest      In June 2002, through a restructuring of our interest in the JIC Group,reverse merger, we arranged for the listing of the JICJ.I.C. Group on The Stock Exchange of Hong Kong Limited. As a result, our effective interest in the JIC Group reduced from 100% to 92.9%. However, our interest in the JIC Group became publicly tradable shares on the Hong Kong Stock Exchange. InTo effect the second quarterlisting, we entered into an agreement with the liquidators of Albatronics to effect the restructuring proposal of Albatronics and the listing of J.I.C. Technology Company Limited as this arrangement was more cost effective than using an initial public offering.      Due to the reverse merger, our effective interest in the J.I.C. Group was reduced from 100% to 92.9%. As a result of this reduction in interest during 2002, we accountedhave released unamortized goodwill of $1.5 million, representing 7.1% of the goodwill that had previously been recorded upon purchasing the J.I.C. Group in October 2000. The release of unamortized goodwill is included as part of the loss on the reverse merger of the J.I.C. Group.      In August 2002, we acquired an additional 7,984,000 ordinary shares of J.I.C. Technology Company Limited for a cash consideration of $437,000, resulting in additional goodwill of $253,000. As of December 31, 2002, we held 93.97% of effective interest in J.I.C. Group, which represented 74.78% of the existing ordinary shares and 93.97% of the outstanding ordinary shares upon full conversion of the 598,420,000 preference shares.      During the period from June to November 2003, we disposed of a total of 42,600,000 ordinary shares of J.I.C. Technology Company Limited for cash consideration of $4.0 million. The disposal resulted in a net gain on partial disposal of a subsidiary of $1.8 million and the releasing of unamortized goodwill of $1.2 million. The release of unamortized goodwill is netted off with the gain on the partial disposal of a subsidiary. In November 2003, we converted 175,100,000 preference shares into 170,000,000 ordinary shares of J.I.C. Technology Company Limited.      In June 2003, in order to concentrate its effort on its LCD panels reporting unit, J.I.C. Technology Company Limited disposed of its transformers reporting unit to a third party for a cash consideration of $2.4 million. Sales of the transformers reporting unit for the restructuring byyears ended December 31, 2002 and 2003 were $11.3 million and $6.3 million, respectively, and were insignificant compared to the creationsales as a whole. The net income from this discontinued operation for the years ended December 31, 2002 were also immaterial. In 2003, the net income from discontinued operation represented the gain of a minority interest and a comparable reduction in$2.0 million, being the proceeds from the disposal less the carrying value of the net assets of JIC. We discussed the accounting treatment oftransformers reporting unit, and minority interests. Excluding this gain, the JIC restructuring in our consolidated financial statementsbasic and diluted earnings per share for the six monthsyear ended June 30, 2002 with HLB Hodgson Impey Cheng, our auditor at the time. We believed,December 31, 2003 would have been $1.04 and HLB concurred, at the time we released our consolidated financial statements for the six months ended June 30, 2002 that our accounting treatment complied, where applicable, with the relevant generally accepted accounting principles of Hong Kong and the United States.$1.02, respectively.      During the third quarter, in connection with this transactionperiod from November to December 2004, we were then considering, we were requested to engage Deloitte Touche Tohmatsu to review our interim operations for the six months ended June 30, 2002. On October 23, 2002, Deloitte Touche Tohmatsu communicated that, based on its review, the financial results for the six months ended June 30, 2002 may be materially misstated as a resultfurther disposed of a departure from generally accepted accounting principles with respect to the absencetotal of 128,000,000 ordinary shares of J.I.C. Technology Company Limited for cash consideration of $12.95 million. The disposal resulted in a net gain on partial disposal of a $1.5subsidiary of $6.25 million. During the same period, we converted all 423,320,000 preference shares into 410,990,290 ordinary shares. As of December 31, 2004, we held 546,890,978 ordinary shares of J.I.C. Technology Company Limited, equivalent to 71.63% of issued ordinary shares. 31 Summary of Results      Net sales for 2004 increased 31% to $533.8 million goodwill charge relatingcompared to $406.3 million for 2003. The increase in sales was primarily due to an increase in the creation of the 7.1% minority interestsales in telecom components sub-assemblies and optical devices. The increase in our subsidiary, JIC. As a result, managementnet sales base year-over-year represents stronger demand from existing customers, as well as organic growth from new and our Board of Directors again discussed the accounting treatment with HLB. Shortly thereafter, HLB resigned as our auditors for unrelated reasons described in “Change in Public Accountants”. In doing so, HLB provided us with no additional information as to the appropriate accounting treatment for the $1.5 million goodwill in question and suggested that the issue would most appropriately be addressed by the independent auditors that succeeded them.existing customers.      We brought the issue to the attention of Grant Thornton, whom we had retained as our independent auditors in December 2002. While we believed that our original accounting was accurate, based on our consultations with Grant Thornton, we determined that it would be more prudent and conservative to include a charge of $1.5 million in other income/(expense), net in 2002. We then decided to revise our previously issued financial information issued in the second quarter of 2002 in order to reflect the charge for the 7.1% JIC minority interest, which we announced in a press release issued before the market opened on February 18, 2002. Operating Segments      Our operations are generally organized in two segments, Consumer Electronics Products, or CEP, and LCD panels and transformers, or LPT. The activities of our LPT segment relate primarily to our JIC subsidiary that we acquired in October 2000. Prior to our acquisition of JIC, we operated as a single segment; therefore, our comparison offollowing table sets forth key operating results (in thousands, except per share data) for the years ended December 31, 20012002, 2003 and 2000 presented below is not described on a segment basis.2004:                               Year Ended December 31,               2002     2003     2004   Net sales   $ 236,016     $ 406,306     $ 533,861   Gross profit     38,060       66,290       76,476   Operating income     17,052       37,387       43,378   Net income     20,023       43,802       66,885   Basic earnings per share     0.57       1.09       1.57   Diluted earnings per share     0.57       1.07       1.57   Key Performance Indicators      Consumer Electronics Products. Our CEP segment is primarily engaged inThe following table sets forth, for the manufacture and assemblyquarterly periods indicated, certain of electronic components, subassemblies and finished products for OEMs of electronic and telecommunications products. The electronic components and subassembliesmanagement’s key financial performance indicators that our CEP segment produces are primarily LCD modules used in a wide variety of consumer electronic products including cellular phones, personal digital assistants, or PDAs, digital cameras and microwave ovens. In December 2002, our CEP segment also began producing RF modules, used in cellular phones and other electronic devices with wirelessmanagement utilizes to assess the Company’s operating results:                                       Three Months Ended       December 31,     September 30,     June 30     March 31,       2003     2003     2003     2003   Sales cycle (1)   27 days   23 days   27 days   32 days Inventory turns (2)   13 turns   17 turns   16 turns   9 turns Days in accounts receivable (3)   58 days   61 days   60 days   61 days Days in accounts payable (4)   60 days   60 days   55 days   69 days                                       Three Months Ended       December 31,     September 30,     June 30     March 31,       2004     2004     2004     2004   Sales cycle (1)   9 days   29 days   41 days   29 days Inventory turns (2)   20 turns   15 turns   11 turns   10 turns Days in accounts receivable (3)   62 days   54 days   86 days   56 days Days in accounts payable (4)   72 days   49 days   79 days   64 days (1)   The sales cycle is calculated as the sum of days in accounts receivable and days in inventory, less the days in accounts payable. (2)   Inventory turns are calculated as the ratio of four times our year to date cost of sales divided by inventory, net, at period end divided by numbers of quarters. (3)   Days in accounts receivable is calculated as the ratio of accounts receivable, net, at period end divided by year to date average daily net sales. (4)   Days in accounts payable is calculated as the ratio of accounts payable, net, at period end divided by year to date average daily net cost of sales. 32 features. The finished products that our CEP segment assembles include digital camera accessories for cellular phones, handheld electronic calculators, dictionaries and linguistic products. Within our CEP segment, we also provide software development services to our OEM customers. LCD Panels and Transformers. Our LPT segment manufactures LCD panels for use in numerous electronic products, including watches, clocks, calculators, pocket games, PDAs and cellular and wireless telephones. The transformers produced by our LPT segment are used in home appliances, telecommunications equipment, computers and computer peripherals. Seasonality      Historically, our sales and operating results are often affected by seasonality. Sales of calculators, personal organizers and linguistic products are often higher during the second and third quarters in anticipation of the start of the school year and Christmas buying season. Similarly, our consumer services for electronics products have historically been lower in the first quarter resulting from both the closing of our factories in China for the Chinese New Year holidays and the general reduction in sales following the holiday season. As we have diversified our services for complex components, we expect that seasonality may be less of a factor affecting our business. Application of Critical Accounting Policies and Estimates      The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted accounting principles in the United States of America requires management to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. For further discussion of our significant accounting policies, refer to Note 2 — “Summary of Significant Accounting Policies” to the Consolidated Financial Statements. Marketable securities      Marketable securities at December 31, 2004 are principally equity securities and are classified as available-for-sale. Securities classified as available-for-sale are stated at fair value with unrealized gains and losses recorded as a separate component of accumulated other comprehensive income (loss). Fair value is determined by reference to market price or analysis conducted by independent valuer. In the event where the fair value of the securities has been below the carrying value for a period of time, we will assess whether this decline in value is other-than-temporary.      Our assessment includes the consideration of the duration and severity of the decline in values and our ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of the fair value up to or beyond the cost of the investment, and an assessment of the evidence indicating that the cost of the investment is recoverable within a reasonable period of time which outweighs the evidence to the contrary. If it is determined that the decline is other-than-temporary, an impairment charge to the income statement will be made. Valuation of long-lived assets, including goodwill and purchased intangible assets      The Company reviews the carrying value of its long-lived assets, including goodwill and purchased intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses the recoverability of the carrying value of long-lived assets, other than goodwill and purchased intangible assets with indefinite useful lives, by first grouping its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, the Company records an impairment charge to the extent the carrying value of the long-lived asset exceeds its fair value. The Company determines fair value through quoted market prices in active markets or, if quoted market prices are unavailable, through the performance of internal analysis of discounted cash flows or external appraisals. The undiscounted and discounted cash flow analyses are based on a number of estimates and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the asset group, discount rate and long-term growth rate.      To assess goodwill for impairment, the Company performs an assessment of the carrying value of its reporting units at least on an annual basis or when events and changes in circumstances occur that would more likely than not reduce the fair value of the Company’s reporting units below their carrying value. If the carrying value of a reporting unit exceeds its fair value, the Company would perform the second step in its assessment process and would record an impairment charge to earnings to the extent the carrying amount of the reporting unit goodwill exceeds its implied fair value. The Company estimates the fair value of its reporting units through internal analysis and external valuations, which utilize income and market valuation approaches through the application of capitalized earnings, discounted cash flow and market comparable methods. These valuation techniques are based on a number of estimates and assumptions, including the projected future operating results of the reporting unit, discount rate, long-term growth rate and appropriate market comparables. 33      The Company’s assessments of impairment of long-lived assets, including goodwill and purchased intangible assets, and its periodic review of the remaining useful lives of its long-lived assets are an integral part of the Company’s ongoing strategic review of its business and operations. Therefore, future changes in the Company’s strategy and other changes in the operations of the Company could impact the projected future operating results that are inherent in the Company’s estimates of fair value, resulting in impairments in the future. Additionally, other changes in the estimates and assumptions, including the discount rate and expected long-term growth rate, which drive the valuation techniques employed to estimate the fair value of long-lived assets and goodwill could change and, therefore, impact the assessments of impairment in the future.      In performing the annual assessment of goodwill for impairment, the Company determined that none of the reporting units’ carrying values were close to exceeding their respective fair values. Revenue recognition      The Company recognizes revenue when all of the following conditions are met: •   Persuasive evidence of an arrangement exists; Revenue Recognition•   Delivery has occurred or services have been rendered; •   Price to the customer is fixed or determinable; and •   Collectibility is reasonably assured.      Revenue from sales of products is generally recognized when the title is passed to customers upon shipment and when collectibility is assured. ProvisionThe Company does not provide its customers with the right of return (except for discountsquality), price protection, rebates or discounts. There are no customer acceptance provisions associated with the Company’s products, except for quality. All sales are based on firm customer orders with fixed terms and rebates to customers, returnsconditions, which generally cannot be modified. Deferred Income Taxes      We provide deferred income taxes using the asset and other adjustments are providedliability method. Under this method, we recognize deferred income taxes for all significant temporary differences and classified as current or non-current based upon the classification of the related asset or liability in the same periodfinancial statements. We provide a valuation allowance to reduce the related sales are recorded. Inventory Reserves amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax asset will not be realized.      Our inventories are stated atWhen considering whether a valuation allowance is necessary, we will assess the lowerhistory of cost or market value. We determine costoperating losses and unexpired tax credit, losses expected in the future and any unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on the first-in, first-out basis. Our industry is characterized by rapid technological change, short-term customer commitments and rapida continuing basis in future years. Therefore, any changes in demand, as well as many other lowerour assessment of cost or market considerations.the above would impact our estimation of the amount of valuation allowance. Accruals and Provisions for Loss Contingencies      We make provisions for estimated excessall loss contingencies when information available to us prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and obsolete inventorythe amount of loss can be reasonably estimated.      For provisions or accruals related to litigations, we make provisions based on information from legal counsels and the best estimation of management. As discussed in Note (19b) to our consolidated financial statements, we are involved in various legal proceedings and contingencies. We have recorded a liability for the Tele-Art matter in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”, or FAS 5. FAS 5 requires a liability to be recorded based on our regular reviewsestimate of inventory quantities on hand and the latest forecastsprobable cost of product demand and production requirementsthe resolution of a contingency. The actual resolution of this contingency may differ from our customers.estimates. If actual market conditions orthe contingency were settled for an amount greater than our customers’ product demands areestimate, a future charge to income would result. Likewise, if the contingency were settled for an amount that is less favorable than those projected, additional provisions may be required. Our current reserve for slow moving or obsolete raw materials is $1.5 million. We did not make any material provisions relatingour estimate, a future credit to inventory for 2002.income would result.      In 2001, we made an inventory provision of $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders. However, subsequently, we were able to use some of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in a partial reversal of $2.0 million of the provision in 2002. Of the remaining $1.8 million of slow-moving inventory, $1.2 million was scrapped and $600,000 will be scrapped in the next six months.34 33 Impairment or disposal of long-lived assets Results of Operations In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, that was applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and portions of Accounting Principles Board Opinion No. 30,“Reporting the Results for Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. On January 1, 2002, we adopted SFAS No. 144. The adoption of SFAS No. 144 did not have any significant impact on our financial position and results of operations. We continually review our long-lived assets for impairment. In 2002, we determined that long-lived assets were not impaired. Goodwill      The excess of the purchase price over the fair value of net assets acquired is recorded on our consolidated balance sheet as goodwill. As of December 31, 2002, we had goodwill of $21.3 million, the majority of which was from our acquisition of JIC in 2000. Prior to January 1, 2002, we amortized goodwill to expense on a straight-line basis over various periods ranging from 4 to 15 years. In June 2001, the Financial Accounting Standard Board, or the FASB, issued SFAS No. 142,“Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives will not be amortized but will be evaluated for impairment on an annual basis. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 142 on January 1, 2002. In order to assist us in our evaluation of goodwill upon adoption of SFAS No. 142, we retained the services of an independent appraisal firm, whose reports assisted us in determining that our goodwill was not impaired as of January 1, 2002. After our impairment evaluation, we determined that $339,000 of the net assets we acquired in 1999 from Micro Business Systems Industries Company Limited, a telecommunication business, was obsolete and recorded an impairment for that amount in our financial statements at December 31, 2002. Income Taxes      We provide for all taxes based on profits whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the PRC, we have reasonable grounds to believe that income taxes paid by Namtai Electronic (Shenzhen) Co., Ltd., Zastron Electronic (Shenzhen) Co. Ltd (formerly known as Zastron Plastic & Metal Products (Shenzhen) Ltd), Shenzhen Namtek Company Limited, Jieyao Electronics (Shenzhen) Co., Ltd. and Jetup Electronic (Shenzhen) Co., Ltd. in respect of any year would be refunded after the profits earned in that year are reinvested in the business by way of capital injection. Accordingly, any PRC tax paid by these subsidiaries during the year is recorded as an amount recoverable at the balance sheet date when an application for reinvestment of profits has been filed and a refund is expected unless there is an indication from the PRC tax authority that the refund will be refused. Deferred income taxes are provided to recognize the effect of the difference between the financial statement and income tax bases of measuring assets and liabilities. Investments      We apply the equity method of accounting for investments in affiliates when we have a 20% to 50% interest in those entities. Under the equity method, original investments are recorded at cost and adjusted by our share of undistributed earnings or losses of these entities, which results in our recording corresponding earnings or losses in our income statement. Nonmarketable investments in which we have less than 20% interest and in which we do not have the ability to exercise significant influence over the investee are 34 accounted for using the cost method and are initially recorded at cost and periodically reviewed for impairment. Income from these investments are recognized to the extent of dividends received and gains or losses are recognized upon disposition or impairment of the investments. Operating Results The following table presents selected consolidated financial information stated as a percentage of net sales for the years ended December 31, 2000, 2001,2002, 2003 and 20022004 (certain amounts may not calculate due to rounding and amounts may not add due to rounding).                                                           2000 2001 2002 Total CEP LPT Total CEP LPT Total Net sales     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 % Cost of sales     (85.2 )     (88.3 )     (81.0 )     (87.2 )     (83.4 )     (86.5 )     (83.9 )                                             Gross profit     14.8       11.7       19.0       12.8       16.6       13.5       16.1   Selling, general and administrative expenses     (8.3 )     (8.3 )     (15.2 )     (9.4 )     (7.4 )     (8.6 )     (7.6 ) Research and development expenses     (1.6 )     (1.4 )     (0.6 )     (1.2 )     (1.1 )     (1.5 )     (1.1 ) Impairment of goodwill     —       —       —       —       (0.2 )     —       (0.2 )                                             Income from operations     4.9       2.0       3.2       2.2       7.9       3.4       7.2   Equity in (loss) income of affiliated companies     (0.1 )     0.9       —       0.8       5.4       —       4.6   Other income (expense)   �� 6.5       0.5       5.1       1.2       (2.4 )     (3.4 )     (2.6 ) Interest expense     (0.1 )     (0.1 )     (0.0 )     (0.1 )     (0.4 )     (0.2 )     (0.3 )                                             Income (loss) before income taxes and minority interests     11.2       3.3       8.3       4.1       10.5       (0.2 )     8.9   Income taxes benefit (expense)     0.0       (0.1 )     (0.2 )     (0.1 )     (0.4 )     (0.2 )     (0.3 )                                             Income (loss) before minority interests     11.2       3.2       8.1       4.0       10.1       (0.4 )     8.6   Minority interests     0.0       (0.1 )     —       (0.1 )     —       (0.1 )     (0.1 )                                             Net income (loss)     11.2 %     3.1 %     8.1 %     3.9 %     10.1 %     (0.5 )%     8.5 %                                                                           Year Ended December 31,       2002     2003     2004   Net sales     100.0 %     100.0 %     100.0 % Cost of sales     (83.9 )     (83.7 )     (85.7 )                     Gross profit     16.1       16.3       14.3   Selling, general and administrative expenses     (7.6 )     (6.1 )     (5.2 ) Research and development expenses     (1.1 )     (1.0 )     (1.0 ) Impairment of goodwill     (0.2 )     —       —                       Income from operations     7.2       9.2       8.1   Other (expenses) income, net     (2.9 )     0.7       3.2   Gain on partial disposal of subsidiaries     —       0.5       14.5   Unrealised loss on marketable securities     —       —       (10.9 ) Interest income     0.3       0.2       0.2   Interest expense     (0.3 )     —       —                       Income before income taxes and minority interests     4.3       10.6       15.1   Income taxes     (0.3 )     (0.1 )     (0.2 )                     Income before minority interests and equity in income (loss) of affiliated companies     4.0       10.5       14.9   Minority interests     (0.1 )     (0.3 )     (1.1 ) Equity in income (loss) of affiliated companies     4.6       0.1       (1.3 )                     Income after minority interests and equity in income (loss) of affiliated companies     8.5       10.3       12.5   Discontinued operation     —       0.5       —                       Net income     8.5 %     10.8 %     12.5 %                     Year ended December 31, 2002 Compared to Year ended December 31, 2001 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003      Net Sales.Our net sales increased 31.4% to $533.9 million for 2004, up from $406.3 million in 2003. The increase was due to increased sales levels across all business segments. Specific increases include a 27.0% increase in the sales of consumer electronics and communication products, a 36.4% increase in the sales of telecommunication components assembly, a 17.9% increase in the sales of LCD panels and a 20.6% increase in the sales of software development services. The increased sales levels were due to the addition of new customers, and organic growth in these business segments. The increase in the consumer electronics and communication products was primarily attributable to the increased sales levels in optical devices. The increase in telecom, components assembly was primarily attributable to sales of FPC sub-assemblies in 2004 and the increase in sales of levels of mobile phone handsets in SKD forms and lighting panels for hand-held devices.      The following table sets forth, for the periods indicated, revenue by business segments expressed as a percentage of net sales. The distribution of revenue across our business segments has fluctuated, and will continue to fluctuate, as a result of numerous factors, including but not limited to the following: increased business from new and existing customers, fluctuations in customer demand and seasonality.                               Year Ended December 31,       2002     2003     2004   Consumer Electronics and Communication Products     40 %     32 %     31 % Telecommunication Components Assembly :                         Telecommunication components assembly(1)     44 %     57 %     59 % Software development services     1 %     1 %     1 % LCD Panels and Transformers                         LCD panels     10 %     9 %     9 % Transformers(2)     5 %     1 %     —                             100 %     100 %     100 %                     (1)   Included in telecommunication components assembly are our sales from our manufacture of rechargeable battery packs through a joint venture we had with Toshiba Battery Co., Ltd. We sold our interest in the joint venture to a Toshiba-related company and ceased manufacturing rechargeable battery packs as of April 30, 2002. Accordingly, revenue from sales of battery packs was not included after that date. (2)   We sold our transformers operation to a third party in June 2003. 35 Gross Profit.Gross profit decreased to 14.3% of net sales in 2004 from 16.3% in 2003. Generally, the gross margin for box-built products is higher than key components assembly. Our target was to shift our business to the high-growth and high-technology key components assemblies sector, and we succeeded in increasing net sales in the TCA segment. The percentage decrease in gross profit was primarily due to a higher proportion of TCA segment revenue. Additionally, we have been impacted by the reduction of input credit in respect of value-added tax related to domestic purchase materials by the PRC government during 2004.      In terms of dollar values, gross profit for 2004 increased by $10.2 million from 2003, due to the increased revenue base. Selling, General and Administrative Expenses.Selling, general and administrative expenses increased to $28.1 million, or 5.2% of net sales in 2004 from $24.9 million, or 6.1% of net sales in 2003. The $3.2 million increase was primarily attributable to the increase in sales commission paid to marketing staff as a result of increased revenue, and the commission paid to external agents for particular products during 2004. The decrease as a percentage of net sales was due primarily to the increased revenue base in 2004. Research and development Expenses.Research and development expenses in 2004 increased to $5.0 million from $4.0 million in 2003 but remained flat, increasingat 1.0% of net sales for each of 2004 and 2003. The absolute dollar increase was primarily attributable to the recruitment of more engineers to support our R&D activities, including design of production process, development of new products and products associated with customer design-related programs. Other (Expenses) Income.During 2004, other income was $17.3 million. We received $17.4 million and $0.9 million dividend income from our investment in TCL Communication and TCL Corporation, respectively. This income was partially offset by 0.9%,$0.2 million in bank charges and $0.9 million in other non-operating charges.      During 2003, other income was $2.9 million. The amount included dividend income of $2.0 million from our indirect investment in TCL Communication, dividend income of $1.7 million from TCL Corporation, and income of $0.5 million related to the recovery of a non-trade receivable which had been written off previously. This income was partially offset by $0.3 million in bank charges during 2003. Gain on Partial Disposal of Subsidiaries.In April 2004, one of the previously wholly-owned subsidiaries of the Company, NTEEP, completed a public offering of its common stock on The Hong Kong Stock Exchange. As a result, the Company disposed of a 25% interest in this subsidiary, resulting in a gain on partial disposal of US$71.1 million.      In November and December 2004, the Company disposed of 128 million ordinary shares of J.I.C. for cash consideration of $12.9 million. The disposal resulted in a net gain on partial disposal of interest in J.I.C. of $6.3 million after deducting the release of unamortized goodwill of $3.5 million.      During 2003, we recorded a $1.8 million gain on partial disposal of interest in J.I.C. Unrealized Loss of Marketable Securities. At December 31, 2004, the Company’s investment in TCL Communication was stated at fair value based on the traded market price of TCL Communication’s shares and the Company recognized an unrealized loss of $58.3 million, based on the Company’s cost of $79.5 million and a fair value of $21.2 million. As the loss is considered to be other-than-temporary, it has been recorded in the consolidated statements of income. Interest Income. Interest income increased to $1.1 million in 2004 from $0.8 million in 2003. The increase was primarily due to higher average cash balances, partially offset by lower interest yields on cash deposits. Interest Expense.Interest expense increased to $195,000 in 2004 from $121,000 in 2003. This increase was primarily a result of the draw-down of a $7.0 million fixed-term loan by J.I.C. Income Taxes.Income tax expenses of $879,000 for 2004 compares to $399,000 for 2003. The increase was primarily the result of not receiving full tax refunds for several of our PRC entities for taxes paid in previous years that we have normally been eligible to receive full tax refunds in the past as a result of the strict enforcement of certain regulations. Minority Interests.Minority interest increased to $6.0 million in 2004 from $1.1 million in 2003. The increase was primarily the result of the increase in minority shareholders’ share of NTEEP’s profit of approximately $4.9 million since its listing in April 2004. In addition, the minority shareholders’ share of profits of the J.I.C. Group for 2004 increased to $254,000 from $211,000 in 2003, and the minority shareholders’ share of profits of Namtek Software Development Company Limited for 2004 increased to $472,000 from $296,000 in 2003. The minority shareholders’ share of profits of Mate Fair for 2004 decreased to $405,000 from $560,000. Equity in Income (Loss) of Affiliated Companies.We recorded an equity in loss of $6.8 million for 2004 of Alpha Star but recognized $0.5 million in equity in income for 2003. The amount in 2004 included an impairment charge of approximately $5.6 million upon careful assessment of various factors relevant to the affiliate, including the competitive handset market in the PRC and $1.2 million share of loss of Alpha Star. For additional information, see Note 8 — “Investment in Affiliated Companies, Equity Method – Alpha Star” to the Consolidated Statements of Income. 36 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Net Sales.Our net sales increased significantly by 72.2% to $406.3 million for 2003 compared to $236.0 million for 20022002. The increase was primarily attributable to sales of the telecommunication components assembly products of approximately $232.2 million in 2003 compared to $234.0$103.8 million in 2002, an increase of $128.4 million. This increase was mainly as a result of an increase in sales of telecom LCD and PCB modules and the launch of new products in 2003, like RF modules, SKD handsets, front light panel assembly, and flash light for cellular phones.      In addition, we also experienced increased sales in consumer electronics and communication products. Sales of consumer electronics and communication products amounted to approximately $128.8 million in 2003 compared to $94.0 million in 2002, an increase of $34.8 million. This increase was mainly driven by the PC camera, which was first launched in 2003.      Sales of LCD panels and transformers increased by 17.2% to $41.3 million for 2001. Sales in the CEP segment increased by 1.4%2003 compared to $200.8$35.3 million for 2002 compared to $198.0 million for 2001.2002. The primary reason for the increase wasin sales of digital camera accessories for cellular phones that we first producedLCD panels and transformers was the increase in 2001the sales of LCD panels of approximately $39.8$35.0 million in 2002for 2003 compared to only $3.2$23.9 million in 2001, an increase of $36.6 million. This increasefor 2002, which was partially offset by the sale of our joint venture interest in BPC (Shenzhen) Co., Ltd. to a Toshiba-related company on April 30, 2002 resulting in a decrease of ourin the sales of approximately $13.2 million in 2002 as comparedtransformers due to sales in 2001. We also experienced decreased sales in 2002 of calculators, personal digital assistants, and linguistics products and LCD modules of $9.6 million, $6.7 million and $3.5 million, respectively, as compared to levels in 2001. We believe that these decreases resulted from pricing pressures and the completiondisposal of the lifecycle or obsolescence of certain of these products that were not replaced by comparable devices.      Salestransformers operation in the LPT segment decreased by 1.9% to $35.3 million for 2002 compared to $36.0 million for 2001. The primary reason for the decrease in sales was the reduction in LCD panel selling price caused by market competition partially offset by an increase in the number of LCD panels sold.June 2003.      Gross Profit.Our gross profit increased by 26.7%,74.2% to $66.3 million for 2003 compared to $38.1 million for 2002 from $30.0 million for 2001.2002. Our gross profit margin also increased slightly in 20022003 to 16.1%16.3% from 12.8% in 2001. Before the inventory provision of $3.8 million in 2001 for slow-moving raw materials relating to cancelled, reduced or delayed orders and our subsequent reversal of $2.0 million of this provision in 2002 discussed below, our consolidated gross margin was 14.5% in 2001 and 15.3%16.1% in 2002. 35      Gross profit in the CEP segment increased 43.7% to $33.3 million, or 16.6% of net sales, for 2002 compared to $23.2 million, or 11.7% of net sales, for 2001.     The primary reason for this increase was our inventory provisionthe increase in 2001sales as described above in the explanation of $3.8 million for slow-moving raw materials relating to cancelled, reduced or delayed orders within the CEP segment that was recorded in our costfluctuation of sales. In 2002, we“Net Sales”. We were also able to use somekeep our product gross margin relatively stable in 2003. The increase in gross profit margin was offset by the gain of these raw materials in production or we received compensation for the unused raw materials from certain of our customers, resulting in our partial reversal ofa $2.0 million due to the recovery of the provisioninventory written down to cost of sales in 2002. Before the inventory provision of $3.8 million in 2001 and our subsequent reversal of $2.0 million of this provision in 2002, our gross margin for the CEP segment was 13.6% in 2001 and 15.6% in 2002. Also contributing to the increase in gross profit in 2002 is a $300,000 non-recurring charge to our cost of sales in 2001 related to employee severance charges for direct labor in the CEP segment. In addition to these specific factors, our gross profit margin increased in 20022003 due to our ability to negotiate advantageous price terms with certain of our suppliers and our focus on reducing overhead costs.      GrossIn addition, the gross profit inof the LPT segment decreased 30.7% to $4.8 million, or 13.5% of net sales, for 2002 compared to $6.8 million, or 19.0% of net sales, for 2001also increased. This increase was as a result of lower selling prices for LCD panels driven by increased competitor as well as increased depreciation chargesincreases in relation to a new STN LCD panel line that commenced operationsthe sales proportion of high margin products and the disposal of the transformers operation in June 2002.2003. The impact of the discontinued operations of transformers on gross profit contribution was insignificant as the margin of transformers products was low.      Selling, generalGeneral and administrative expenses.Administrative Expenses.SG&A expenses for 2002 decreased2003 increased by approximately $4.0$6.9 million to $24.9 million, or 6.1% of net sales, from $18.0 million, or 7.6% of net sales, from $22.0in 2002.      This increase was primarily due to an approximately $5.1 million or 9.4% of net salesincrease in 2001.      SG&A expenses in the CEP segment decreased 9.6% to $14.9 million, or 7.4% of net sales, for 2002 compared to $16.5 million, or 8.3% of net sales, for 2001. This decrease was driven primarily by our cost realignment and tightened cost controls that reduced salaries and benefits expenses, due to $6.0 million from $8.1 millionan increase in 2001. Our salaries and benefits expenseheadcount, an approximately 10% increase in 2001 included $700,000 of restructuring expenses primarily related to severancesalary for certain administrative positions that we eliminated. The decreases in our CEP segment were partially offset by increases in selling expenses of $600,000employees and a $3.9 million incentive bonus due to the implementation of a new commission incentive programbonus scheme in January 2002.2003, which was calculated based on operating profit, as well as a $0.9 million increase in selling expenses, which was primarily due to more sales commissions paid as sales increased.      Our SG&A expenses in our LPT segment alsoinclude provisions for bad debt expenses, which decreased from $138,000 in 2002 to $3.0 million, or 8.6% of net sales, from $5.5 million, or 15.2% of net sales,$91,000 in 2001.2003. The decrease in SG&A expenses in our LPT segment in 2002 is primarily related to terminating the amortization of goodwill as a result of our adoption of the new accounting rule, SFAS No. 142, effective January 1, 2002. During the year ended December 31, 2001 our amortization of goodwill in the LPT segment was approximately $1.6 million. SG&A expenses in our LPT segment were also lower in 2002 dueallowance has been attributable to the decrease in stock option compensation expenseimplementation of $839,000 in 2002 compared to 2001.tighter credit controls.      Research and development expenses.Development Expenses.Research and development expenses for 2002 decreased2003 increased to $4.0 million, or 1.0% of net sales, from $2.7 million, or 1.1% of net sales, from $3.0 million, or 1.2% of net sales in 2001. On a segment basis, research and development expenses decreased in the CEP segment by $584,000, or 21.3%,2002. The increase was due to a reduction in related staff, which was partially offset by an increase in the LPT segmentnumber of $316,000 in relationstaff related to the additionexpansion of a new STN LCD line forour production capacity and the development of new products including the development of LCD panels for TCL Mobile.we manufacture.      Goodwill impairment.Impairment.In 2002, we determined that $339,000 of unamortized goodwill related to our 1999 acquisition of a telecommunications company was impaired as the technology of the acquired company had become obsolete.      Other (Expenses)/Income, Net.Other income, net, during 2003 was $2.9 million. This amount included dividend income of $2.0 million from Operations.our indirect investment in Huizhou TCL Mobile Communication Co., Ltd., dividend income of $1.7 million from TCL Corporation and income of $0.5 million related to the recovery of a non-trade receivable which had been written off previously. This income was partially offset by a $0.3 million bank charge during 2003. Gain on Partial Disposal of Subsidiaries. Gain on partial disposal of subsidiaries in 2003 of $1.8 million represented gain on partial disposal of interests in J.I.C. Technology while the amount in 2002 of $17,000 represented the gain on disposal of a subsidiary, BPC (Shenzhen) Co. Ltd. Interest income. Interest income decreased to $788,000 in 2003 from $799,000 in 2002 due to lower average cash balances and lower interest yields on cash deposits. Interest Expense.Interest expense decreased to $121,000 for 2003 compared to $790,000 for 2002. The decrease in interest expenses is the result of the early repayment of a $12.9 million bank loan in January 2003. 37 Income from operationsTaxes.Income tax expenses decreased to $399,000 for 2003 compared to $773,000 for the prior year. The decrease is primarily the result of our receipt of tax refunds for several of our PRC entities for taxes paid in previous years. Minority Interests.Minority interests increased by approximately $11.9 million$903,000, or 550.6%, to $17.1 million, or 7.2%$1,067,000 in 2003 from $164,000 in 2002. Minority interests in 2003 included $211,000 from the minority shareholders’ share of sales,profits of the J.I.C. Group for 2002 compared to $5.1 million, or 2.2%2003, $560,000 from the minority shareholders’ share of sales,profits of Mate Fair for 2001. On a segment basis,2003 and $296,000 from the operating incomeminority shareholders’ share of our CEP segment increased $12.0 million to $15.9 million, or 7.9%profits of net sales, in 2002 compared to $3.9 million, or 2.0% of net sales, in 2001. This increase in operating income is attributable to the increase in gross profit and decrease in SG&A expenses and R&D expenses described above. The operating income of our LPT segment remained constant at $1.2 million in both 2002 and 2001.Namtek Software Development Company Ltd. for 2003.      Equity in Income of Affiliated Companies.Equity in income of affiliated companies was $0.5 million in 2003 compared to $10.7 million in 2002 compared to $1.9 million in 2001.2002. The income in 2002 includes $8.6 million, which2003 represents our share of the gain fromnet earnings of our proportional 25% investment in Alpha Star Investments Limited for the sale by Mate Fair of a portion of its interesttwelve months ended December 31, 2003. The income in TCL Mobile, and $2.1 million for2002 represents our 36 proportional share of the net earnings of our 25% investment in Mate Fair for the five months ended May 31, 2002. Fair.      Other Income/(Expense), net.Discontinued Operation. Other expense, net, during the year ended December 31, 2002 was $6.0 million. This amount included expensesDiscontinued operation in 2003 represented $2.0 million gain on disposal of $5.2 million for our provision of legal contingencies related to the liquidation of Tele-Art Inc., $2.7 million of loss related to the creation of a minority interest in our JIC Group subsidiary, including the release of unamortized goodwill, $1.4 million of legal and professional fees related to the JIC minority interest transaction, $610,000 of finance charges related to the early repayment of a $12.9 million fixed term loan, $520,000 for release of unamortized goodwill of affiliated companies - Mate Fair $307,000 of finance charges and $771,000 of miscellaneous expenses primarily related to non-operating legal fees. These expenses were partially off set by gains of $3.3 million related to the partial recovery of a judgment debt in the Tele-Art case,entire transformers operation, net of expenses, $917,000 of dividend income primarily from our indirect investment in TCL Corporation $799,000 of interest income and $642,000 of realized gain from the disposal of marketable securities. The costs of defending the recently announced class action litigation could substantially increase our expenses in future periods, and any adverse determination could be significant.$0.1 million shared by minority interest. Interest Expense. Interest expenses increased to $790,000 for 2002 compared to $178,000 for 2001. The increase in interest charges is the result of $15 million in long-term debt that we obtained in the fourth quarter of 2001 and $4.5 million obtained in the second quarter of 2002. Income Taxes. Income tax expenses of $773,000 for 2002 compares to $227,000 for the prior year. The increase is primarily the result of our not receiving tax refunds for two of our PRC entities for taxes paid in previous years that we have normally been eligible to receive in the past. Minority Interest. Minority interest decreased $66,000, or 28.7%, to $164,000 in 2002 from $230,000 in 2001. Minority interest in 2002 included $107,000 from the minority shareholder’s share of profits of BPC from January 1, 2002 through April 30, 2002, the date we sold BPC and $57,000 from the minority shareholder’s share of profits of JIC Group from June 4, 2002, the date of listing, through December 31, 2002. Minority interest in 2001 represented an entire year of the minority shareholder’s share of BPC’s profit. Net Income. Net income increased by $11.0 million, or 121.4%, to $20.0 million or 8.5% of net sales, for 2002 compared to $9.0 million, or 3.9% of net sales, for 2001. This resulted in diluted earnings per share for 2002 of $1.86 ($1.89 basic) compared to $0.87 ($0.88 basic) for 2001. Net income for the CEP segment increased 230% to $20.2 million for 2002 compared to $6.1 million for 2001. The increase in CEP’s net income is the result of a higher gross profit margin, the increase in equity in income from affiliated companies, and decreased general and administrative expenses described above. Net Income for the LPT segment decreased by $3.1 million or 106.6% to a loss of $191,000 compared to net income of $2.9 million for 2001. The net loss position in year 2002 for LPT was the result of lower gross profit margin, and the release of unamortized goodwill as described above.                Year ended December 31, 2001 Compared to Year ended December 31, 2000 Net Sales. Our net sales increased by 9.5% to $234.0 million for 2001 compared to $213.7 million for 2000. We attribute this growth in sales to our acquisition of the JIC Group, full year results from our battery pack joint venture and our focus on manufacturing key components for telecommunication products and other complex components and subassemblies resulting from our investment in high-technology manufacturing equipment. The acquisition of the JIC Group in October 2000 contributed $36.0 million in sales for 2001 compared to $10.3 million in 2000. The startup of our battery pack joint venture with a Toshiba-related company in June of 2000 contributed $21.1 million to our net sales in 2001 compared to $6.2 million for 2000. Sales of subassemblies and components, particularly LCD modules for mobile phones, increased by approximately $14.7 million in 2001 compared to 2000. Sales increases in these categories were partially offset by sales of calculators, telecommunication products, and PDAs and linguistic products, which decreased by $23.4 million, $9.3 million and $4.3 million, respectively, compared to the prior year period. Gross Profit. Our gross profit decreased 4.9% to $30.0 million for 2001 from $31.6 million for 2000. Our gross margin also decreased in 2001 to 12.8% from 14.8% in 2000. Our inventory provision of $3.8 million for 37 slow moving raw materials relating to cancelled, reduced or delayed orders by our customers is the primary reason for the decline in our gross profit and gross margin. Before this charge, our gross margin in 2001 was 14.5%. Our shift in product mix towards more complex and capital intensive subassemblies and components, combined with a reduction in sales of higher margin finished goods such as calculators, also contributed to the decline in our gross profit in 2001. Pricing pressure caused by the increasingly competitive environment for electronic products was another factor in our gross profit decline. Our cost of sales for 2001 also included $300,000 related to severance payments for direct labor employees who were terminated as part of our restructuring activities in that period. Selling, General and Administrative Expenses. For 2001, SG&A increased 24.5% to $22.0 million from $17.6 million in 2000. As a percentage of net sales, SG&A expense increased to 9.4% in 2001 from 8.3% in 2000. This increase reflected amortization charges related to the acquisition of JIC Group of $1.6 million in 2001 compared to $406,000 in 2000, the addition of JIC Group’s SG&A expenses, excluding goodwill amortization, of $3.0 million for an entire year in 2001 compared to $2.0 million for the fourth quarter of 2000, stock option compensation expense of $839,000 in 2001 compared to nil in 2000 and various realignment charges, including employee severance charges, of $700,000 in 2001. Research and Development Expenses. Research and development expenses for 2001 decreased 15.3% to $3.0 million or 1.2% of net sales from $3.5 million or 1.6% of net sales in 2000. The decrease was related to a reduction of some R&D related staff in 2001 as well as the closure of our Korean research and development office in the latter part of 2000. Income from Operations. Income from operations decreased by approximately $5.4 million to $5.1 million, or 2.2% of sales, for 2001 compared to $10.5 million, or 4.9% of sales, for 2000. This decrease in operating income is attributable to the decrease in gross profit and our increase in SG&A expense, as described above. Equity in Income of Affiliated Companies. Equity in income of affiliated companies was $1.9 million for 2001 compared to a loss of $189,000 for 2000. The gain in 2001 was primarily related to our indirect investment in TCL Mobile. Equity in loss of affiliated companies in 2000 was related to $18,000 gain from our indirect investment in TCL Mobile, that was made in September 2000 offset by the $207,000 loss on the write off of our investment in Shanghai Q&T Tech. Co., Ltd. Other Income (Expense), net. Other income, net, decreased to $2.7 million for 2001 compared to $13.9 million for 2000. Other income in 2001 included unrealized gains on marketable securities of $1.6 million interest income of $1.2 million, foreign exchange gains of $530,000, and dividend income received from marketable securities of $525,000 offset by the write-off of a non-trade receivable of $500,000, bank charges of $333,000 and miscellaneous expenses of $294,000. In 2000, other income was comprised primarily of gains related to sales of investments of $10.8 million and interest income of $3.3 million. The decrease in interest income from 2000 to 2001 was the result of lower cash balances and lower interest rates in 2001 compared to 2000. Interest Expense. Interest expenses rose to $178,000 for 2001 compared to $165,000 for 2000. The increase in interest charges is the result of $15.0 million in long-term debt that we obtained in the fourth quarter of 2001 offset by a reduction in interest rates. Income Taxes. The income tax expense of $227,000 for 2001 compares to a benefit of $33,000 for 2000. The primary reason for the increase in 2001 was an increase in our taxable income compared to 2000. Minority Interest. Minority interest changed $242,000 from a loss of $12,000 in 2000 to a profit of $230,000 in 2001. Minority interest in 2001 represented the minority shareholder’s share of BPC’s profit. The minority interest in 2000 represented the minority shareholder’s share of the loss of BPC. Net Income. Net income decreased by $15.0 million, or 62.3%; to $9.0 million or 3.9% of net sales, for 2001 compared to $24.0 million, or 11.2% of net sales for 2000. This resulted in diluted earnings per share for 2001 of $0.87 ($0.88 basic) compared to $2.56 ($2.63 basic) for 2000. The decrease in net income and earnings per share is the result of the decrease in gross profit, the increase in SG&A expense and the decrease in income, as described above. 38 Liquidity and Capital Resources Liquidity      We have financed our growth and cash needs to date primarily from internally generated funds, proceeds from the sale of our strategic investments, sales of our common stock and bank debt. We do not use off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through special purpose entities, as sources of liquidity. Our primary uses of cash have been to fund expansions and upgrades of our manufacturing facilities, to make strategic investments in potential customers and suppliers and to fund increases in inventory and accounts receivable resulting from increased sales.      We had positive net working capital of $87.4$218.2 million at December 31, 20022004 compared to positive net working capital of $84.0$93.5 million at December 31, 2001.2003. Our working capital requirements and capital expenditures could continue to increase in order to support future expansions of our operations through acquisition of land, construction of a new factory and machinery purchases. It is possible that future expansions may be significant and may require the payment of cash. Future liquidity needs will also depend on fluctuations in levels of inventory and shipments, changes in customer order volumes and timing of expenditures for new equipment.      We currently believe that during the next twelve months, our capital expenditures will be in the range of $35 million to $55 million, principally for land, machinery and equipment, and expansion in China. We believe that our level of resources, which include cash flows from operations, our currentand cash balanceequivalents, marketable securities, accounts receivable and funds available borrowings under our working capital and credit facilities, will be sufficientadequate to meetfund these capital expenditures and our working capital needs and planned capital expendituresrequirements for the next 12twelve months. Should we desire to consummate significant additional acquisition opportunities or undertake significant expansion activities, our capital needs would increase and could possibly result in our need to increase available borrowings under our revolving credit facilities or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on terms that we would consider acceptable.      The following table sets forth, for the year ended December 31 2002, 2003 and 2004, selected consolidated cash flow information (in thousands):                               Year Ended December 31,               2002     2003     2004   Net cash provided by operating activities   $ 39,502     $ 44,272     $ 75,210                             Net cash (used in) provided by investing activities     (33,760 )     (21,669 )     37,729                             Net cash provided by (used in) financing activities     18,085       (43,253 )     (14,117 )                           Effect of foreign currencies on cash flows     (26 )     —       —                                                 Net increase (decrease) in cash and cash equivalents   $ 23,801     $ (20,650 )   $ 98,822                       38      Net cash provided by operating activities for 2004 was $39.5$75.2 million. This consisted primarily of $66.9 million in 2002. Cash provided by operating activities in 2002 was primarily attributable toof net income, of $20.0$13.9 million plusof depreciation and amortization, expense of $10.6$58.3 million dividends of $10.5 million and the non-cashunrealized loss on restructuring of JIC Group of $2.7marketable securities, $6.8 million non-cash equity in incomeloss of an affiliated companies of $10.7company and $6.0 million and non-cashin minority interests offset by $6.2 million in gain on share redemptionpartial disposal of $3.5 million.J.I.C., $71.1 million gain on partial disposal of NTEEP and $15.9 million in dividend income. Our working capital related to operating activities also decreasedincreased, driven by an increase of $17.0$33.9 million in accounts payable and $3.0 million in accrued expenses and $10.1others payables, a decrease of $2.6 million of proceedsin amount due from marketable securitiesa related party, $3.9 million in inventories and $2.6 million in prepaid expenses and other receivables, offset by increases in accounts receivable of $8.5 million and inventory of $7.6$28.3 million.      Our inventory increased in 2002 as a result of our anticipation of The increase in sales. Accountsaccounts receivable increasedand accounts payable was due to increased sales in the fourth quarter relative to sales in the prior year period. The increase in accrued expenses is primarily related to a $5.2 million provision for legal contingencies. Accounts payable increased due to support for higher inventory levels. The proceeds from marketable securities relates to the disposallevels of our holdings in Deswell Industries, Inc.business during 2002.2004.      Net cash provided by operatinginvesting activities in 2001 was $23.2 million. Cash provided by operating activities in 2001 wasof $37.7 million for 2004 consisted primarily attributable to net income of $9.0 million, plus depreciationproceeds from partial disposal of $9.1 million, amortizationsubsidiaries and investments of intangible assets of $2.0$95.4 million and stock option costs of $839,000 offset by non-cash equity in income of affiliates of $1.9$5.6 million, and unrealized gain on marketable securities of $1.6 million. Our decrease in working capital related to operating activities was driven by a decrease in inventory of $15.3 million offset by a decrease in accounts payable and accrued expenses of $6.1 million and an increase in accounts receivable of $4.4 million.      Our inventory decreased in 2001 due to our increased focus on inventory management and our increased use of domestic China suppliers with shorter delivery lead times. Inventory also decreased due to our $3.8 million provision for slow-moving raw materials relating to cancelled, reduced or delayed orders. The increase in our accounts receivable was primarily related to the increase in our net sales while the decrease in our accounts payable and accrued expenses related to the decrease in inventory levels.      Net cash used in investing activities was $33.8 million in 2002. Cash used in investing activities was primarily related to our $12.0 million strategic investment in TCL Holdings Corporation and $5.1 million in convertible notes of TCL International Holdings Ltd as well as capital expenditures of $18.5 million offset byrespectively, proceeds of $1.7 million related to the disposal of our joint venture interest in BPC. Our capital expenditures in 2002 included a $12.3 million new STN LCD panel production line and $4.0 million for completion of the new factory expansion.      Net cash used in investing activities was $35.4 million in 2001. Cash used in investing activities was primarily related to capital expenditures of $36.0 million offset by proceeds from the disposal of property, plant and equipment of $698,000. Our major$4.5 million, offset by capital expenditures of $38.6 million and increase in 2001 included: •  $13.0 million for the purchase and interior improvements on 23,000 square feetdeposits for property, plant and equipment of $4.4 million and acquisition of marketable securities of TCL Communication of $25.1 million. Capital expenditure in 2004 mainly consisted of contiguous prime office space at Shun Tak Centre in the Central district of Hong Kong, 39 •  $6.4 million for the purchase of new staff residences in Hong Kong, •  $5.5 million for the construction and machinery for a new 138,000 square foot five-story factory building within our principal manufacturing facilities, •  $5.5 million for the purchase of new chip on glass production lines, and •  $2.0 million for the expansion of the front end process for producing LCD panels.      In the past three years we have invested significant amountsconstruction of casha new factory and purchases of machinery and equipment which were used to expand our manufacturing capacity and to upgrade our equipment to produce increasingly complex products. We believe that we will continue      Net cash used in financing activities of $14.1 million for 2004 resulted primarily from $19.4 million paid to make significant cash investmentsshareholders as dividends, $5.4 million in the future to broaden our manufacturing capabilities and increase our capacity. In this regard, we intend to spend approximately $40.0 million to construct and equip another factory consistingrepayment of approximately 250,000 square feet on land adjacent to our principal manufacturing facilities in Shenzhen, China.bank loans, offset by proceeds of bank loans of $10.6 million.      Net cash provided by operating activities was $44.3 million in 2003. Cash provided by operating activities in 2003 was primarily attributable to net income of $43.8 million plus depreciation and amortization expense of $12.2 million, offset by the gain on disposal of transformers operation, net of minority interests of $2.0 million and a gain on the partial disposal of our J.I.C. Group for $1.8 million. Our working capital related to operating activities net of the effect of the disposal of a subsidiary decreased, driven by an increase of $11.1 million in accounts receivable, $3.0 million in prepaid expenses and other receivables, $2.7 million in the amount due from a related party and $8.5 million in inventories, which was offset by increases in accounts payable of $18.0 million, and accrued expenses and other payables of $1.2 million.      Our inventories increased in 2003 as a result of our anticipation of increases in sales. Accounts receivable increased due to an increase in sales in the fourth quarter relative to sales in the prior year. Accounts payable increased due to increased inventory purchases. Accrued expenses increased due to the provision of an incentive bonus in 2003.      Net cash used in investing activities was $21.7 million in 2003. Cash used in investing activities primarily related to our $10.0 million and $0.4 million strategic investments in Alpha Star Investments Limited and iMagic Infomedia Technology Limited, respectively, and $5.3 million prepayment for a long-term investment in Stepmind, as well as capital expenditures of $17.1 million and an increase in deposits for property, plant and equipment of $3.1 million, offset by $2.6 million proceeds on disposal of property, plant and equipment, $2.4 million proceeds on disposal of transformers operation to a third party, $4.0 million proceeds on the partial disposal of our J.I.C. Group, and $5.0 million proceeds on the disposal of convertible notes of TCL International Holdings Ltd.      Net cash used in financing activities was $18.1$43.3 million for 2002.in 2003. Cash provided byused in financing activities for 20022003 primarily resulted from net proceeds of $36.5$37.8 million paid to shareholders as dividends and $14.0 million in bank loans repayment offset by $8.5 million received from the exercise of optionsoptions.      Except as discussed above, there are no material transactions, arrangements and warrantsrelationships with unconsolidated affiliated entities that are reasonably likely to affect liquidity.      For the years ended December 31, 2003 and $4.5 million received from a four-year variable rate term loan offset by $16.7 million paid to shareholders as dividends, $2.7 million2004, the Company has made guarantees for the repayment of bankdebt, loans and $3.5 million forcredit facilities held by various wholly owned subsidiaries aggregating up to a maximum guarantee of $49,756,000 and $49,205,000, respectively. The terms of the repurchaseguarantees correspond with the terms of our common shares pursuant to our share buy-back program. Net cash provided by financing activities was $12.0 million for 2001, which primarily resulted from $15.0 million of proceeds from a bankthe underlying debt, loan and $4.3 million of proceeds received from the exercise of options and warrants offset by $3.9 million of cash dividends and $3.4 million for the repurchase of the our shares. credit facility agreements. Capital Resources      As of December 31, 2002,2004, we had $82.5$160.6 million in cash and cash equivalents, consisting of cash and short-term deposits, compared to $58.7$61.8 million atas of December 31, 2001.2003. Our short-term debt were $15.0long-term bank borrowing was $8.0 million and $3.7$2.8 million atas of December 31, 20022004 and at December 31, 2001,2003, respectively.      At39      As of December 31, 2002,2004, we had in place general banking facilities with two financial institutions aggregating $58.2$87.9 million. The maturity of these facilities is generally up to 90 days. These banking facilities are guaranteed by us and there is an undertaking not to pledge any assets to any other banks without the prior consent of our bankers. However, these covenants do not have any impact on our ability to undertake additional debt or equity financing. Interest rates are generally based on the banks’ reference lending rates. Our facilities permit us to obtain overdrafts, lines of credit for forward exchange contracts, letters of credit, import facilities, trust receipt financing, shipping guarantees, working capital and working capital.revolving loans. No significant commitment fees are required to be paid for the banking facilities. These facilities are subject to annual review and approval. As atof December 31, 2002,2004, we had utilized approximately $8.9$3.4 million under such general credit facilities and had available unused credit facilities of $66.1$84.5 million.      As atof December 31, 2002,2004, we had debt of $16.8 million, including the current portion of $14.0 million, comparedtwo four-year term loans, which allowed us to debt of $15.0 million, including the current portion of $2.1 million at December 31, 2001. A portion of this debt was obtained in the fourth quarter of 2001, had a seven-year term and carried a fixed rate of interest of 5.05% for the first four years changingborrow up to a floating ratemaximum amount of 1% over the Singapore Interbank Money Market Offer Rate, or SIBOR, for the final three years.$4.5 million and $7.0 million. The loan was secured by a property with net book value of $11.4 million. Principal repayments of $535,000 were made on a quarterly basis for the term of the loan. At December 31, 2002, the outstanding balance of the loan was $12.9 million. On January 3, 2003, we repaid the entire outstanding balance of this loan. 40      Our debtamounted to $8.1 million as of December 31, 2002 also included unsecured long-term debt of $4.52004 and $2.8 million that we obtained in May 2002. This debt has a term of four years and bears interest of 1.5% over 3 month LIBOR (with a cap at 7.5%), with principal repayments of $281,250 due on a quarterly basis. At December 31, 2002, the outstanding balance of the loan was $3.9 million, including the current portion of $1.1 million.      A summary of our contractual obligations and commercial commitments as of December 31, 20022003. Here is as follows:an analysis of the term loans:                                                                                                                       Outstanding     Outstanding       Date of                   Amount                     balance at     balance at       draw     Amount     No. of     per     Interest     First     December 31,     December 31,       down     drawn     installments     installment     rate     repayment     2004     2003             (in million)           (in million)                 (in million)   Term loan 1   May 2002   $ 4.5       16     $ 0.3     1.5% over LIBOR, changed to 0.75% over LIBOR in August 2004   August 2002   $ 1.7     $ 2.8   Term loan 2                                                                     April 2004   $ 1.6       16     $ 0.1     0.75% over LIBOR   July 2004   $ 1.4       —       June 2004   $ 3.6       16     $ 0.2     0.75% over LIBOR   September 2004   $ 3.2       —       December 2004   $ 1.8       16     $ 0.1     0.75% over LIBOR   March 2005   $ 1.8       —                                                                 Total                                                   $ 8.1     $ 2.8                                                                                                                                 Payments due by period 2008 and Contractual obligation Total 2003 2004 2005 2006 2007 thereafter Long-term debt   $ 16,797,000     $ 13,985,000     $ 1,125,000     $ 1,125,000     $ 562,000     $ —     $ —   Operating leases     3,935,000       779,000       727,000       745,000       731,000       565,000       388,000   Capital expenditures     20,856,000       20,856,000       —       —       —       —       —                                               Total   $ 41,588,000     $ 35,620,000     $ 1,852,000     $ 1,870,000     $ 1,293,000     $ 565,000     $ 388,000                                               Our contractual obligations for long-term debt arrangements and future minimum lease payments under non-cancelable operating lease arrangements as of December 31, 2004 are summarized below. We do not participate in, or secure financing for, any unconsolidated limited purpose entities. Non-cancelable purchase commitments do not typically extend beyond the normal lead-time of several weeks at most. Purchase orders beyond this time frame are typically cancelable.                                                               Payments due by period                                                               2010 and   Contractual obligation   Total     2005     2006     2007     2008     2009     thereafter   Long-term bank   $ 8,038,000     $ 2,875,000     $ 2,313,000     $ 1,750,000     $ 1,100,000     $ —     $ —   borrowing                                                         Operating leases     9,136,000       1,243,000       1,116,000       1,169,000       1,215,000       1,215,000       3,178,000   Capital expenditures     17,080,000       17,080,000       —       —       —       —       —   Purchase obligations     115,136,000       115,136,000       —       —       —       —       —   Total   $ 149,390,000     $ 136,334,000     $ 3,429,000     $ 2,919,000     $ 2,315,000     $ 1,215,000       3,178,000        There are no material restrictions (including foreign exchange controls) on the ability of our non-China subsidiaries to transfer funds to us in the form of cash dividends, loans, advances or product or material purchases. With respect to our China subsidiaries, with the exception of a requirement that 10% of profits be reserved for future developments, there are no restrictions on the payment of dividends and the removal of dividends from China once all taxes are paid and assessed and losses, if any, from previous years have been made good. In the event that dividends are paid by our China subsidiaries, such dividends will reduce the amount of reinvested profits and, accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. Impact of Inflation      Inflation and deflation in China, and Hong Kong and Macao has not had a material effect on our past business. During times of inflation, we have generally been able to increase the price of its products in order to keep pace with inflation. 40 Exchange Controls      There are no exchange control restrictions on payments of dividends, interest, or other payments to nonresident holders of our securities or on the conduct of our operations in Hong Kong and Macao, where the offices of some of our principal executive officessubsidiaries are located, or in the British Virgin Islands, where we are incorporated. Other jurisdictions in which we conduct operations may have various exchange controls. With respect to our China subsidiaries, with the exception of a requirement that 10% of profits be reserved for future developments, there are no restrictions on the payment of dividends and the removal of dividends from China once all taxes are paid and assessed and losses, if any, from previous years have been made good. We believe such restrictions will not have a material effect on our liquidity or cash flows. Recent changesChanges in accounting standardsAccounting Standards      In August 2001,March 2004, the FASB issuedEmerging Issues Task Force, or EITF, reached a consensus in EITF 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The consensus was that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 143, “Accounting for Asset Retirement Obligations.” This Statement addresses financial accountingNos. 115 and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires a company to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e. the associated asset retirement costs) and to depreciate124, that cost over the remaining useful life of the asset. The liability is adjustedare impaired at the end of each period to reflect the passage of time (i.e. accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Companies are required to adopt SFAS No. 143balance sheet date but for which an other-than-temporary impairment has not been recognized. This EITF consensus is effective for fiscal years beginningending after JuneDecember 15, 2002. We adopted 41 SFAS No. 143 on January��1, 2003. We do not believe its adoption will have a material effect on our financial position, results of operations, or cash flows.      In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are applicable in fiscal years beginning after May 15, 2002, the provisions related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, and all other provisions are effective for financial statements issued on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of SFAS No. 145 would be reclassified in most cases following adoption. In the current year, we adopted the provisions of SFAS No. 145 related to the accounting treatment for the gain or loss on debt extinguishment. The result of this adoption is that a $610,000 finance charge incurred for the early extinguishment of our long term debt that would have been recorded as an extraordinary item under the previous accounting rules has been included as an expense from continuing operations. We do not expect the adoptionAdoption of the remaining provisions of SFAS No. 145 to have a material effectEITF consensus did not result in an impact on our financial position, results of operations, or cash flows.      In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The requirements of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002; however, early application is encouraged. We do not expect the adoption of SFAS No. 146 to have a material effect on ourCompany’s financial position, results of operations or cash flows.      In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We are currently evaluating the effects of FIN 45; however, we do not expect that the adoption of FIN 45 will have a material effect on our financial position, results of operations, or cash flows.      In December 2002,2004, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” SFAS No. 148 amends151 clarifies the accounting that requires abnormal amounts of idle facility expenses, freight, handling costs, and spoilage costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred on or after July 1, 2005. The Company is currently evaluating the impact of this standard on its consolidated financial statements.      In December 2004, the FASB issued SFAS No. 123R,“Share-Based Payment”. This statement is a revision to SFAS No. 123 “Accountingand supercedes APB Opinion No. 25. This statement establishes standards for Stock-Based Compensation,”the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide alternative methodsservice, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of transition for a voluntary changeemployee share options and similar instruments will be estimated using option pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In accordance with the standard, the Company will adopt SFAS No. 123R effective July 1, 2005.      Upon adoption, the Company has two application methods to choose from: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method, the Company would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied, as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, the Company would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. Under this method, the Company is permitted to apply this presentation to all periods presented or to the start of accountingthe fiscal year in which SFAS No. 123R is adopted. The Company would follow the same guidelines as in the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. The Company has not yet determined which methodology it will adopt but believes that the impact that the adoption of SFAS No. 123R will have on its financial position or results of operations will approximate the magnitude of the stock-based employee compensation. In addition, SFAS No. 148 amendscompensation cost disclosed in Note 2 (p) pursuant to the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. We do not expect the adoption of SFAS 148 to have a material effect on our financial position, results of operations, or cash flows.148. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK41 Currency Fluctuations      We sell a majority of our products in U.S. dollars and pay for our material components in Japanese yen, U.S. dollars, Hong Kong dollars, and Chinese renminbi. We pay labor costs and overhead expenses in renminbi, the currency of China (the basic unit of which is the yuan), Hong Kong dollars, and Japanese yen. 42 The exchange rate Research and Development      Our research and development expenditure mainly comprised of salaries and benefits paid to our research and development personnel and is mainly for the Hong Kong dollardevelopment of advanced manufacturing techniques to the U.S. dollar has been fixed by the Hong Kong government since 1983produce complex products on a mass scale and at approximately HK$7.80 to US$1.00 through the currency issuing banks in Hong Konga low cost. We expense our research and accordingly has not in the past presented a currency exchange risk. This could change in the future if those in Hong Kong arguing for a floating currency system prevail in the ongoing debate over whether to continue to peg the Hong Kong dollar to the US dollar.      We believe our most significant foreign exchange risk results from material purchases made in Japanese yen. Approximately 14%, 16%, and 8% of our materialdevelopment costs have been in Japanese yen duringas incurred. For the years ended December 31, 2000, 2001,2002, 2003 and 2002. Sales made in yen account for less than 7%2004, we incurred research and development expenses of sales forapproximately $2.7 million, $4.0 million and $5.0 million, respectively. Trend Information      Currently, our operations consist of three reportable segments, Consumer Electronics and Communication Products, Telecommunication Components Assembly and LCD panels.      We plan to continue to leverage on our solid customer relationships and to expand our business. During 2004, we were able to expand our product line to higher growth products and we were able to benefit from the years ended December 31, 2000, 2001 and 2002. Our business and operating results could be materially and adversely affected in the event of a severe increase in production capacity from the valuecommencement of operation of our new factory premises.      For Consumer Electronics and Communication Products, we will continue to focus on optical devices, educational products, cellular phone accessories and home entertainment products. In 2004, we began delivering new products, like Bluetooth™ wireless headset accessory for cellular phones and new home entertainment products, in addition to the Eyetoy USB cameras for Playstation 2. Since June 2003, we have been able to diversify our product range from finished products to component assemblies and began manufacturing the high growth CMOS sensor modules for integration into various image capturing devices such as cellular phones with built-in camera functions.      For Telecom Component Assembly, we will continue to focus on high-growth products which require advance technological production know-how. In addition to high-end color LCD modules, we began manufacturing FPC sub-assemblies in March 2003 for integration into various LCD modules and other products, like infotainment consumer electronic products. We plan to seek opportunities to expand our product line and customer base for these products.      LCD panels are found in numerous applications in electronics products, such as watches, clocks, calculators, pocket games, PDAs and mobile and cordless telephones. We are a customized LCD panel manufacturer, and we develop each product from design concept all the way to a high quality mass producible product. The LCD panels segment moved to new premises, which are about 670,000 square feet and are twice the size of the yenold factory premises. This new factory will provide room for future expansion of production capacity.      It has been our strategy to shift our focus more to the US dollar at a time whenbusiness of key components sub-assembly. The key components sub-assembly business generally accounts for relatively lower gross profit margin business. Nam Tai has been very successful in shifting its focus to key components sub-assembly, which accounted for 59% of our sales made in yen are insufficient to cover our material purchases in yen.      Effective January 1, 1994, China adopted a floating currency system whereby the official exchange rate equaled the market rate. Since the market and official renminbi rates were unified, the value of the renminbi against the dollar has been stable.2004. We believe that the strong growth of this business will offset the impact of lower gross profit margins and we can continue to achieve strong growth in our overall profits. In the long run, we expect to achieve an overall gross profit margins of around 12%. Off-balance Sheet Arrangement      For the year of 2004, the Company did not have any devaluation ofoff-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the renminbi would benefit us by reducing our costs in China, provided that devaluation or other economic pressures do not lead to fundamentalCompany’s financial condition, changes in the present economic climate in China.financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.      Foreign exchange transactions involving the renminbi take place through the Bank of China or other institutions authorized to buy and sell foreign exchange or at an approved foreign exchange adjustment center (known as a “swap center”). In the past, when exchanging Hong Kong dollars for Chinese renminbi, we used a swap center to obtain the best possible rate. When translating the Chinese company accounts into U.S. dollars, we use the same exchange rate as quoted by the People’s Bank of China. Since January 1, 1994, when China adopted a floating currency system (whereby the official rate is equal to the market rate), swap centers and banks in China offer essentially the same market rates, facilitating the exchange of Hong Kong dollars for renminbi. The adoption of a floating currency system has had no material impact on us.42      Beginning on December 1, 1996, the Chinese renminbi became fully convertible under the current accounts. There are no restrictions on trade-related foreign exchange receipts and disbursements in China. Capital account foreign exchange receipts and disbursements are subject to control, and organizations in China are restricted in foreign currency transactions that must take place through designated banks.      We may elect to hedge our currency exchange risk when we judge such action may be required. In an attempt to lower the costs of expenditures in foreign currencies, we will periodically enter into forward contracts or option contracts to buy or sell foreign currency(ies) against the U.S. dollar through one of our banks. As a result, we may suffer losses resulting from the fluctuation between the buy forward exchange rate and the sell forward exchange rate, or from the price of the option premium.      At December 31, 2002 we held no option or future contracts and during the year we did not purchase or sell any commodity or currency options. We are continuing to review our hedging strategy and there can be no assurance that we will not suffer losses in the future as a result of hedging activities. Foreign Currency Risk      As at December 31, 2002 we had no open forward contracts or option contracts to purchase or sell foreign currencies. 43 Cash on hand at December 31, 2002 of $82,477,000 was held in the following currencies. Equivalent U.S. Dollar Holdings December 31, 2002 Japanese yen 438,000 United States dollars 78,408,000 Hong Kong dollar 3,293,000 Chinese renminbi 338,000 Interest Rate Risk Short-term interest rate risk      Our interest expenses and income are sensitive to changes in interest rates. All of our cash reserves and short-term borrowings are subject to interest rate changes. Cash on hand of $82.5 million as of December 31, 2002 was invested in short-term interest bearing investments having a maturity of three months or less. As such, interest income will fluctuate with changes in short term interest rates. In November 2002, we purchased a $5.1 million in principal amount of a 3% convertible note due in November 2005. As the interest rate on the convertible note is fixed, we do not expect fluctuations in interest rates to materially effect our cash flows and net income. As of December 31, 2002, we had $8.9 million outstanding on our credit facilities, including $985,000 in short-term notes payable resulting in minimal interest rate risk. Long-term interest rate risk      As of December 31, 2002, we had $16.8 million in long-term debt including the current portion of $14.0 million.      We obtained a seven-year $15.0 million term loan in the fourth quarter of 2001 with a fixed rate of interest of 5.05% for the first four years and 1% over the SIBOR rate for the last three years. The term loan had an outstanding balance of $12.9 million as of December 31, 2002. We repaid this term loan on January 3, 2003.      We also obtained a four-year term loan with borrowings in May 2002 totaling $4.5 million at a rate of 1.5% over three months LIBOR repayable in 16 quarterly installments of approximately $281,000 beginning August 2002. The term loan had an outstanding balance of $3.9 million as of December 31, 2002.      The potential effect of a hypothetical 1% increase in interest rates for 2002 indebtedness would be insignificant to our cash flows and net income. 44 Item 6.Directors, Senior Management and Employees Directors and Senior Managers      Our current directors and senior management, and their ages as of January 31, 2003February 28, 2005, are as follows:               Name Age Position with Nam Tai Tadao Murakami     5861     Chairman of the Board and member of the Board of Directors Joseph Li     5153     Chief Executive Officer, President and member of the Board of Directors M. K. Koo 58 Chief Financial Officer and member of the Board of Directors Karene Wong     3941     Managing DirectorChairman of NTEEthe Board of Namtai Electronic and Electrical Products Limited Y. C. ChangGuy Bindels     44     Managing DirectorChief Executive Officer of Namtai Electronic (Shenzhen) Co. Ltd.and Electrical Products Limited Patinda LeiJoseph Hsu     3640     Managing Director Nam Tai TelecomChief Financial Officer of Namtai Electronic and Electrical Products Limited L. P. WangChen Yee, William     46     Managing Director of ZastronNamtai Electronic (Shenzhen) Co., Ltd. Kazuhiro AsanoPatinda Lei     51 Managing Director of Namtek Software Seitaro Furukawa 6138     Chairman of the Board of JICZastron Precision-Tech Limited Bobby Hirasawa 40 Chief Financial Officer of Zastron Precision-Tech Limited George Shih 48 Managing Director of Zastron Electronic (Shenzhen) Co., Ltd. Seitaro Furukawa 63 Chairman of the Board of J.I.C. Technology Company Limited Ivan Chui     4446 Chief Executive Officer of J.I.C. Technology Company Limited Colin Yeoh 40 Chief Financial Officer of J.I.C. Technology Company Limited Lap Kei Yuen 40     Managing Director of J.I.C. Enterprises (HK) LimitedJetup Electronic (Shenzhen) Co., Ltd. Lorne WaldmanKazuhiro Asano     3653     SecretaryChairman of the Board of Namtek Software Development Company Limited Charles ChuM. K. Koo     4560     Member of the Board of Directors Peter R. Kellogg     6062     Member of the Board of Directors Stephen Seung     5558 Member of the Board of Directors and Secretary Dr. Wing Yan (William) Lo 44 Member of the Board of Directors Charles Chu 48 Member of the Board of Directors Mark Waslen 44     Member of the Board of Directors      Tadao Murakami.Mr. Murakami has served Nam Tai in various executive capacities since 1984. He became our Secretary and a Director in DecemberNovember 1989. Since June 1989, he has been employed as the President of our Hong Kong subsidiary. In July 1994, Mr. Murakami succeeded Mr. Koo as President and, in June 1995, became our Chief Executive Officer until September 1998. Mr. Murakami assumed the position of Vice-Chairman in January 1996, and Chairman from September 1998 until March 1, 2001 and again starting February 1, 2002. He is in charge of our manufacturing and marketing operations.With effect from January 1, 2005, Mr. Murakami studied technology in Japan Electronic Technology College in 1964.became a non-executive director of the Company but maintained his role as Chairman of the Board.      Joseph Li.Mr. Li, co-founder of JICthe J.I.C. Group, has served in various senior executive positions since we acquired the JICJ.I.C. Group in October 2000. Mr. Li assumed the position of Chief Executive Officer in May 2002. Mr. Li has directed JICJ.I.C. Group’s business development since founding JIC GroupJ.I.C. group in 1980. M. K. Koo.Mr. Koo has servedLi resigned as Chairmana member of the Board of Nam Tai and its predecessor companies from inception until September 1998 and as Senior Executive Officer, Corporate Strategy, Finance and Administration and Chief Financial Officer.Directors in July 2003. In addition to his current roles asApril 2004, he resumed position of Chief Financial Officer of J.I.C. Technology Company Limited. In January 2005, he resigned from the position of Chief Financial Officer of J.I.C. and a director, he remains responsible for mergers and acquisitions, and administrative matters. Mr. Koo received his Bachelorassumed the position of Laws degree from National Taiwan University in 1970.Chief Financial Officer of the Company.      Karene Wong.Ms. Wong joined us in MarchJune 1989 and was promoted to Managing Director of our subsidiary Nam Tai Electronic & Electrical Products Ltd. (Hong Kong) on January 1, 2001. She was further promoted to Chairman of Nam Tai Electronic & Electrical Products Limited (Cayman Islands) in October 2003. Before joining us, Ms. Wong was Assistant to the Sales Manager at Wright Joint & Co. Ltd. Ms. Wong is responsible for our sales and marketing operations and supporting employee recruitment and training.      Y. C. Chang.Guy Bindels.Mr. ChangBindels joined the Nam Tai Group as Research and Development Director in March 2003 and became a director of Nam Tai Electronic & Electrical Products Limited in March 2004. He was promoted to Chief Executive Officer of Nam Tai Elecrtronic & Electrical Products Limited since July 2004 and is responsible for the research and development activities of the group. Before joining the Nam Tai Group, he worked with the research and development unit of Alcatel for 19 years. He graduated from “Ecole Nationale d’ Ingenieur de Brest” (Engineering School located in Brest) in France in 1983. Joseph Hsu. Mr. Hsu is the Chief Financial Officer of Nam Tai Electronic & Electrical Products Limited. He joined the Nam Tai Group in February 2004 and has nearly 11 years of investment banking experience. Mr. Hsu worked in the corporate finance division of the Hongkong and Shanghai Banking Corporation Limited from 1992 to 2003, where his last position was Corporate Finance Director. Mr. Hsu is a qualified accountant and is an Associate Member of the Hong Kong Society of Accountants and an Associate Member of the Institute of Chartered Accountants in England and Wales. Mr. Hsu graduated with a Bachelor’s Degree in Economics and Accounting from Leeds University, UK and an MSc degree in Management Science from the Imperial College of Science and Technology, University of London, UK. Chen Yee, William.Mr. Chen assumed the positionpost of Managing Director of our principal manufacturing subsidiary, NamtaiNam Tai Electronic (Shenzhen) Co., Ltd. Mr. Chang joined us in 1991September 2003. Before joining Nam Tai, he had 15 years of experience in plant and assumed the positionproduction management with Jabil Circuits (China) Limited, Dongguan Nokia Mobile Phones Limited, China and Marine Engine Rebuilders, Inc., Philippines. He obtained a Bachelor’s Degree in Industrial Psychology from Far Eastern University in Philippines in 1982 and a Master’s Degree in Business Administration from University of Assistant General Manager of Production before being promoted to Vice General Manager of our principal manufacturing facility in Shenzhen China in late 1997, and Managing DirectorSouthern Queensland, Australia in 1999. Prior to joining Nam 4543 Tai, he was Assistant Production Manager for Inventec Co. Ltd. and Production and Quality Control Manager for Supercom Co. Ltd. Mr. Chang is a graduate of Chin-I College in Taiwan. From March 1, 2000 until assuming his current position, he served us as Chief Operating Officer.      Patinda Lei.Ms. Lei joined Nam Tai Group in May 1990. In June 2002, she assumed the position of Managing Director of our subsidiary Nam Tai Telecom (Hong Kong) Company Limited since June 2002.and in September 2003, became the Chairman of the Board of Zastron Precision-Tech Limited. Ms. Lei has worked with Nam Tai Group for 10fourteen years specializing in promoting, generating and monitoring sales revenues on various high-end electronics products. SheMs. Lei graduated from the ScienceFaculty of Engineering of Tokyo University of TokyoScience in 1990, majoringJapan with a degree in Industrial Engineering.management science.      L. P. Wang.Bobby Hirasawa. Mr. Wang assumedHirasawa is the Chief Financial Officer of Zastron Precision-Tech Limited. He joined Nam Tai Group in July 2004 and has more than 15 years of experience in the financial industry. He has previously worked at Nomura International (HK) Limited, Jardine Fleming Securities, SG Securities and Kokusai Securities. He has worked in Tokyo, Shanghai and Hong Kong. He graduated from Meiji Gakuin University in Japan. George Shih.Mr. Shih took up the post of Chief Operating Officer of the Nam Tai Group when he joined us in June 2003 and was transferred to assume the position of Managing Director of our subsidiary Zastron Electronic (Shenzhen) Co., Ltd. in AugustMay 2004. Before joining Nam Tai, he had 20 years of experience in electronics manufacturing services in various management roles with Solectron Corporation. Mr. Shih has obtained a Bachelor’s Degree in Materials Science and Engineering from National Tsing Hua University, Taiwan in 1978. In 1980, he also obtained a Master’s Degree in Industrial Engineering from University of Texas, USA in 1980. He further obtained a Master’s Degree in Electrical and Computer Engineering from University of Texas, USA in 1983. Seitaro Furukawa.Mr. Furukawa assumed the position of Chairman of the Board of our subsidiary J.I.C. Technology Company Limited in March 2002. He has more than 23extensive experience in international operational management. He held management positions in the Japan offices of General Electric, Admiral International Company and Thompson CSF. After joining the J.I.C. Group in 1992 as a Managing Director, he assumed responsibility for production management and monitoring daily operations of the LCD plant in Shenzhen. Mr. Furukawa received his Bachelor’s of English Literature degree from Aoyama University in 1965 and his Bachelor’s of Technology and Metallurgy degree from Kogakuin University in 1967. Ivan Chui.Mr. Chui is the co-founder and Chief Executive Officer of our subsidiary J.I.C. Technology Company Limited. Mr. Chui has directed J.I.C. Group’s marketing activities since founding J.I.C. Group in 1980. He has over 20 years of experience in the electronics industry.LCD business and has extensive experience in doing business with Japanese companies. Colin Yeoh.Mr. Yeoh joined J.I.C. Group in September 2003 and assumed the post of Managing Director of Jetup Electronic (Shenzhen) Co., Ltd. in October 2004. In January 2005, he assumed the position of Chief Financial Officer of the J.I.C. Group. Before joining the J.I.C. Group, he worked for Varitronix, a customised LCD manaufacturer, from 1994 to 2003, in the field of operations. Prior to Varitronix, he worked in GEC Marconi Hirst Research (UK) from 1990 to 1994, in the field of optical and display system research. Mr. Yeoh was awarded a PhD in Liquid Crystal Devices in 1990 at Imperial College (London, UK), Master of Science in Microwaves and Modern Optics in 1986 from University College London (UK) and Bachelor of Science in Electrical and Electronic Engineering from University College London (UK). Lap Kei Yuen.Mr. Yuen is currently the Managing Director of Jetup Electronic (Shenzhen) Co., Ltd. He joined Nam Taithe J.I.C. Group in 1997 as production engineering manager and was promoted to vice managing director in 2002. He was further promoted to managing director of Zastron Electronics (Shenzhen) Co. Ltd. in August of the same year.1986. Prior to joining Nam Tai, Mr. Wang held several management positionsJ.I.C., he served as a Production Manager in various companiesSlexs Watch Co., Ltd. from 1984 to 1986. With his excellent performance, he was appointed as the representative to study LC Injection technology in TaiwanJapan in 1994 and China. Mr. Wang graduated from Chinese Military Academyhas been a Vice Managing Director of Jetup since 2000. He has 20 years of experience in Taiwanthe LCD industry. While in 1979.charge of Jetup’s operations, he successfully established the LCD front process, middle process and rear process production lines. He became the Managing Director of Jetup on January 1, 2005.      Kazuhiro Asano.Mr. Asano assumed the position of Managing DirectorChairman of the Board of our subsidiary Namtek Software Development Co. Ltd.Company Limited in June 2002. Mr. Asano joined Nam Tai in 1995 as a general manager and was promoted to managing directorManaging Director of Shenzhen Namtek Company Limited in 1997. In his current position, he is responsible for the overall corporate management and business development for our software business. Prior to joining Nam Tai, Mr. Asano was the general manager of Seiko Instruments Inc., a private Japanese consumer electronics company, and was responsible for its electronic dictionary division. Mr. Asano graduated from Tsuyama Government Industrial College, Japan with a degree in electrical engineering in 1972.      Seitaro Furukawa.M.K. Koo.Mr. Furukawa assumed the position ofKoo has served as Chairman of the Board and Managing Director of our subsidiary J. I. C. Technology Company Limited in March 2002. He has extensive experience in international operational management. He held management positions in the Japan offices of General Electric, Admiral International Company and Thompson CSF. After joining the J.I.C. Group in 1992 as a managing director, he assumed responsibility for production management and monitoring daily operations of the LCD plant in Shenzhen. Mr. Furukawa received his Bachelor of English Literature degree from Aoyama University in 1965 and his Bachelor of Technology and Metallurgy degree from Kogakuin University in 1967. Ivan Chui.Mr. Chui is the co-founder and Managing Director of our subsidiary J.I.C. Enterprises (Hong Kong) Ltd. Mr. Chui has directed JIC Group’s marketing activities since founding JIC Group in 1980. Lorne Waldman.Mr. Waldman was appointed Secretary of Nam Tai Electronics, Inc. in October 1997.and its predecessor companies from inception until September 1998. He then became our Senior Executive Officer, responsible for corporate strategy, finance and administration and also served as the Company’s Chief Financial Officer. Mr. Waldman received a Bachelor of Commerce DegreeKoo has resigned from the Universityposition of Calgary in 1990. In 1994 heChief Financial Officer on January 1, 2005 but maintained his role as a non-executive director of the Company. Mr. Koo received his Law and MBA degrees from the University of British Columbia. Charles Chu.Mr. Chu originally served as a Director from August 1987 to September 1989. He was reappointed a Director in December 1992. Since July 1988, Mr. Chu has been engaged in the private practice of law in Hong Kong. Mr. Chu serves on our audit committee. Mr. Chu received his BachelorBachelor’s of Laws degree and Post-Graduate Certificate of Laws from theNational Taiwan University of Hong Kong in 1980 and 1981, respectively.1970.      Peter R. Kellogg.Mr. Kellogg was elected to our Board of Directors in June 2000. Mr. Kellogg was a Senior Managing Director of Spear, Leeds & Kellogg, a registered broker-dealer in the United States and a specialist firm on the New York Stock Exchange until the firm merged with Goldman Sachs in 2000 when2000. Mr. Kellogg became a Senior Advisory Director. Mr. Kelloggserved on our Audit Committee until July 8, 2003. He currently serves on our audit committee.Compensation Committee and Nominating and Corporate Governance Committee. Mr. Kellogg is also a member and Chairman of the Board of the Ziegler Companies. 44      Stephen Seung.Mr. Seung was appointed a Directordirector of Nam Tai in 1995. Mr. Seung is an attorney and a C.P.A. and has been engaged in the private practice of law in New York since 1981. Mr. Seung received a B.S. degree in Engineering from the University of Minnesota in 1969, an M.S. degree in Engineering from the University of California at Berkeley in 1971, an MBA degree from New York University in 1973 and a J.D. degree from New York Law School in 1979. Mr. Seung serves on our audit committee and acts as our authorized agent in the United States. He served on our Audit Committee until October 2003. With effect from October 15, 2003, Mr. Seung also assumed the role of Secretary of the Company. Dr. Wing Yan (William) Lo. Dr. Lo was elected to our Board of Directors at our annual meeting of shareholders on July 8, 2003. Dr. Lo is currently the Executive Director and Vice President of China Unicom Ltd., a telecommunications operator in China that is listed on both the Hong Kong and New York Stock Exchanges. From 1998 to 1999, Dr. Lo was the chief executive officer of Citibank’s Global Consumer Banking business for Hong Kong. Dr. Lo was the founding Managing Director of Hongkong Telecom IMS Ltd. Dr. Lo holds an M. Phil. degree in molecular pharmacology and a Ph.D. degree in genetic engineering, both from Cambridge University, England. He is also an Adjunct Professor of The School of Business, Hong Kong Baptist University as well as a Governor of a newly established independent school, the ISF Academy. In 1998, Dr. Lo was appointed as a Justice of the Peace of Hong Kong. In 2003, he was appointed as Committee Member of Shantou People’s Political Consultative Conference. Dr. Lo currently serves on the BoardNominating and Corporate Governance Committee acting as the Chairman and also serves on our Audit Committee and Compensation Committee. Charles Chu.Mr. Chu originally served as a Director from November 1987 to September 1989. He was reappointed a Director in November 1992. Since July 1988, Mr. Chu has been engaged in the private practice of Directorslaw in Hong Kong. Mr. Chu serves on the Compensation Committee acting as Chairman. He also serves on our Audit Committee and audit committeeNominating and Corporate Governance Committee. Mr. Chu received his Bachelor’s of Deswell Industries, Inc.Laws degree and Post-Graduate Certificate of Law from the University of Hong Kong in 1980 and 1981, respectively. 46 Mark Waslen. Mr. Waslen was appointed a director of Nam Tai at our annual meeting of shareholders on July 8, 2003 and currently serves on the Audit Committee acting as Chairman. He also serves on our Compensation Committee and Nominating and Corporate Governance Committee. Previously, Mr. Waslen was employed with Nam Tai during the periods from 1990 to 1995 and from June 1998 to October 1999 in various capacities, including Financial Controller, Secretary and Treasurer. Mr. Waslen has been employed with various accounting firms, including Peat Marwick Thorne, Deloitte Touche Tohmatsu and is currently employed with BME + Partners Chartered Accountants. Mr. Waslen is a C.F.A., C.A. and a C.P.A. and received a Bachelor’s of Commerce (Accounting Major) from University of Saskatchewan in 1982.      No family relationship exists among any of the named directors, executive officers or key employees. No arrangement or understanding exists between any of our directors or executive officers and any other person pursuant to which any director or executive officer was elected as a director or executive officer of Nam Tai. Directors are elected each year at our annual meeting of shareholders and serve until their successors take office or until their death, resignation or removal. Executive officers serve at the pleasure of the Board of Directors. Compensation of Directors and Senior Managers      The aggregate compensation we and our subsidiaries paid during the year ended December 31, 20022004 to all directors and officers as a group for services in all capacities was approximately $1.7$4.2 million, including compensation in the form of housing in Hong Kong for our Chairman of the Board and our Chief Executive Officer, and President and our Chief Financial Officer.      Directors who are not employees of Nam Tai nor any of its subsidiaries are paid $3,000 per month for services as a director, $750 per meeting attended in person and $500 per meeting attended by telephone. In addition, they are reimbursed for all reasonable expenses incurred in connection with their services as a director.      Members of our key staff are eligible for annual cash bonuses based on their performance and that of the division in which they are assigned for the relevant period. Key staff members of a division will be entitled to share up to 15% of the operating income from that division during the year. Our executive officers in charge of the business unit recommend the participating staff members and the amount, if any, to be allocated from the division’s profit pool to an eligible individual.      According to the relevant laws and regulations in China, we are required to contribute 8% to 9% of the stipulated salary set by the local government of Shenzhen, China, to the retirement benefit schemes to fund the retirement benefits of our employees. Our principal obligation with respect to these retirement benefit schemes is to make the required contributions under the scheme. No forfeited contributions may be used by us to reduce the existing level of contributions. 45 Prior to December 2000, we maintained staff contributory retirement plans (defined contribution pension plans), which covered certain of our employees.employees in Hong Kong. From December 2000 onwards, we terminated our existing staff contributory retirement plans and enrolled all of our eligible employees in Hong Kong into a Mandatory Provident Fund, or MPF, program. TheIn August 2003, we set up our first subsidiary, Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited, in Macao, China. We enrolled all of our eligible employees in Macao into a retirement benefit scheme, or RBS. Both the MPF is a defined contribution program and independent trustees manageRBS are available to all employees aged 18 to 64 and with at least 60 days of service under the assetsemployment of the program. We make contributions ofNam Tai in Hong Kong and Macao. Contributions are made by us at 5% based on the staff’s relevant income with theincome. The maximum relevant income for contribution purpose per employee of $2,565is $3,000 per month. OurStaff members are entitled to 100% of the Company’s contributions, together with accrued returns, irrespective of their length of service with us, but the benefits are required by law to be preserved until the retirement age of 65 for employees in Hong Kong while the benefit can be withdrawn by the employees in Macao at the end of employment contracts.      The cost of our contribution cost to the contributorystaff retirement plans (including the MPF)in Hong Kong, Macao and China amounted to $174,000, $151,000$617,000, $982,000 and $127,000$1,363,000 for the years ended December 31, 2000, 20012002, 2003 and 2002,2004, respectively.      In August 1990, we fixed compensation for loss of office at $500,000 for Mr. M.K. Koo and $300,000 for Mr. Tadao Murakami. We also fixed the age of retirement for directors, including Messrs. Koo and Murakami, at age 65 years. We have accrued the entire $800,000 on account of this compensation for loss of office.office, which was paid out in 2005. Board Practices      All directors hold office until our next annual meeting of shareholders, which generally is in June of each calendar year, or until their respective successors are duly elected and qualified or their positions are earlier vacated by resignation or otherwise. All executive officers are appointed by the boardBoard and serve at the pleasure of the board.Board. There are no director service contracts providing for benefits upon termination of employment. Our boardBoard of directors has determined,Directors decided, effective December 31, 2002, to grant future options under our stock option plansplan only to our outside, non-employee directors. However, in July 2004, our Board of Directors decided to resume granting options to management and key staff members as incentive based on their performance. Corporate Governance Guideline      We have adopted a set of corporate governance guidelines, which are available on our website athttp://www.namtai.com/ corpgov/corpgov.htm. The contents of this website address, other than the corporate governance guidelines, the code of ethics and committee charters, are not a part of this Form 20-F. Stockholders also may request a free copy of our corporate governance guidelines in print form from: Pan Pacific I.R. Ltd. Attention: Investor Relations Office Suite 1790 - 999 W. Hastings Street Vancouver, BC Canada V6C 2W2 Toll Free Telephone: 1-800-661-8831 Committee Charters      The charters for our audit committee, compensation committee and nominating and corporate governance committee are available on our website athttp://www.namtai.com/corpgov/corpgov.htm. The contents of this website address, other than the corporate governance guidelines, the code of ethics and committee charteres, are not a part of this Form 20-F. Stockholders may request a copy of each of these charters from the address and phone number set forth above under “—Corporate Governance Guideline.” Audit Committee      Nam Tai has established an audit committee whose primary duties consist of the board of directors reviews, actsreviewing, acting on and reportsreporting to the boardBoard of directorsDirectors with respect to various auditing and accounting matters, including the selection of our auditors, the scope of the annual audits and the fees to be paid to the auditors and the performance of ourthe independent auditors and our accounting practices. Our Audit CommitteeThe audit committee currently consists of three independent non-executive directors, Messrs. Seung,Waslen, Chu and Kellogg.      The Compensation CommitteeLo. Mr. Waslen, who was elected by the full Board of Directors, currently acts as the Chairman of the boardaudit committee. 46      In November 2003, the SEC approved the final NYSE corporate governance guidelines. Pursuant to NYSE Section 303A, three committees, namely the audit committee, nominating and corporate governance committee and compensation committee, are to be set up by all domestic filers and should be composed entirely of independent directors. For purposes of keeping with the best practice, Nam Tai established the compensation committee and the nominating and corporate governance committee on July 30, 2004. The composition and primary duties of these committees are set forth as below.      Pursuant to the requirements of NYSE Section 303A.11, the Company has evaluated its corporate governance standards in light of the corporate governance standards required of domestic companies under NYSE standards. Based on this evaluation, the Company has determined that there are no significant ways in which its corporate governance standards differ from those required of domestic companies by the NYSE. Compensation Committee      Nam Tai has established a compensation committee whose primary duties consist of evaluating and making recommendations to the Board of Directors regarding the compensation of the Company’s directors determines the salariesand equity-based and incentive compensation programs of the officersCompany. The compensation committee currently consists of four independent non-executive directors, Messrs. Chu, Lo, Waslen and Kellogg. Mr. Chu, who was elected by the full Board of Directors, currently acts as the Chairman of the compensation committee. Nominating and Corporate Governance Committee      Nam Tai (other than Messrs. Murakami, Liestablished a nominating and Koo,corporate governance committee on July 30, 2004, whose salaries are decided each year by our board’s outside directors)primary duties consist of identifying and provides recommendations forrecommending to the salariesBoard of Directors individuals qualified to become Board members and incentive compensationdeveloping and recommending to the Board and administering the corporate governance guidelines of all employees and consultants and administers various compensation, stock and benefit plans of Nam Tai. The Compensation Committee consists of Messrs. Murakami, Li and Koo. 47 the Company.      The Investment Committeenominating and corporate governance committee currently consists of four independent non-executive directors, Messrs. Lo, Chu, Waslen and Kellogg. Dr. Lo, who was elected by the full Board of Directors, currently acts as the Chairman of the board of directors may make strategic investments in companies of amounts less than $5 million with approval of other members of the board. The Investment Committee consists of Messrs. Murakami, Linominating and Koo.corporate governance committee. Options of Directors and Senior Management      The following table provides information concerning the options owned by our current Directors and Senior Management at January 31,as of February 28, 2005. All share numbers subject to options and exercise price per share have been adjusted to give effect to a three-for-one stock split effective on June 30, 2003 and a ten-for-one stock dividend effective on November 7, 2003.                           Number of common shares Exercise subject to Price ($) Expiration Name options per share Date Tadao Murakami     40,000       13.94       3/16/2004         25,000       19.85       4/30/2005   Joseph Li     20,000       19.85       4/30/2005   M. K. Koo     40,000       14.50       6/22/2004         39,000       19.85       4/30/2005   Karene Wong     10,000       19.85       4/30/2005   Y.C. Chang     12,000       19.85       4/30/2005   Patinda Lei     3,000       13.94       3/16/2004         10,000       19.85       4/30/2005   L. P. Wang     10,000       19.85       4/30/2005   Kazuhiro Asano     —       —       —   Seitaro Furukawa     10,000       19.85       4/30/2005   Ivan Chui     10,000       19.85       4/30/2005   Lorne Waldman     5,000       19.85       4/30/2005   Charles Chu     5,000       16.38       6/8/2003         5,000       14.50       6/22/2004         5,000       19.85       4/30/2005   Peter R. Kellogg     5,000       16.38       6/8/2003         5,000       14.50       6/22/2004         5,000       19.85       4/30/2005   Stephen Seung     5,000       16.38       6/8/2003         5,000       14.50       6/22/2004         5,000       19.85       4/30/2005                                 Number of                   common shares     Exercise             subject to     Price ($)     Expiration   Name   options     per share     Date   Tadao Murakami     180,000       19.40       7/30/2006         350,000       20.84       2/4/2007   Joseph Li     30,000       19.40       7/30/2006         50,000       20.84       2/4/2007   Karene Wong     —       —       —   Guy Bindels     —       —       —   Joseph Hsu     —       —       —   Chen Yee, William     —       —       —   Patinda Lei     —       —       —   Bobby Hirasawa     —       —       —   George Shih     —       —       —   Seitaro Furukawa     —       —       —   Ivan Chui     —       —       —   Colin Yeoh     —       —       —   Lap Kei Yuen     —       —       —   Kazuhiro Asano     —       —       —   M.K. Koo     180,000       19.40       7/30/2006         350,000       20.84       2/4/2007   Charles Chu     16,500       16.82       7/8/2006         15,000       19.40       7/30/2006   Peter R. Kellogg     16,500       6.02       4/30/2005         16,500       16.82       7/8/2006         15,000       19.40       7/30/2006   Stephen Seung     16,500       16.82       7/8/2006         15,000       19.40       7/30/2006   Wing Yan (William) Lo     16,500       16.82       7/8/2006         15,000       19.40       7/30/2006   Mark Waslen     15,000       19.40       7/30/2006   47      Please refer to page 49 of this Report, which sets forth the shareholding information of each of the director and senior management of the Company. Employee Stock Option and Incentive Plan      Our 1993 andIn July 2004, our Board of Directors has decided to resume granting stock options under our 2001 stock option plans provideplan,which provides for the grant of stock options to directors, employees (including officers), and consultants. ThePursuant to the amended 2001 stock option plan, the terms and conditions of individual grants may vary subject to the following: (i) the exercise price of incentive stock options may not normally be less than market value on the date of grant; (ii) the term of incentive stock options may not exceed ten years from the date of grant; (iii) the exercise price of an option can notcannot be altered once granted; and (iv) every non-employee director who is not our employee shall, on an annual basis upon their election to the boardBoard of directorDirector at the Annual General Meeting, be automatically granted 5,00015,000 options, with an exercise price equal to 100% of the fair market value of the common shares on the date of grant. At January 31, 2003,February 28, 2005, options to purchase 372,0001,737,050 shares were outstanding under our Stock Options Plansamended 2001 stock option plan and 602,233259,869 shares were available for future grant under them. The full text of our amended 2001 stock option plan, amended on July 30, 2004, we hereby file as Exhibit 4.18 with this Annual Report on Form 20-F for 2004.      Our boardBoard of directors has determined,Directors decided, effective December 31, 2002, to grant future options under our stock option plans only to our non-employee directors. After December 31, 2002,However, our Board of Directors decided to resume granting options to management and key staff members as incentive based on their performance in July 2004. Thereafter, incentive compensation paid to management and other key employees will bewas in the form of either cash bonuses.bonuses and/or stock options. 48 Employees      AtAs of December 31, 2002,2004, we employed 4,2745,636 persons on a full-time basis, of which 4,2015,574 were employed in China, 49 were employed in Hong Kong, 10 were employed in Macao, 2 were employed in Japan and 1 was employed in the British Virgin Islands. Of these employees, approximately 4,131 were engaged in manufacturing, approximately 1505 were engaged in administrative, research and development, quality control, engineering and marketing positions, and the balance in supporting jobs such as security, janitorial, food and medical services.      As of December 31, 2003, we employed 4,476 persons on a full-time basis, of which 4,385 were employed in China, 62 were employed in Hong Kong, 24 were employed in Macao, 4 were employed in Japan and 1 was employed in the British Virgin Islands. Of these employees, approximately 3,415 were engaged in manufacturing, approximately 1,061 were engaged in administrative, research and development, quality control, engineering and marketing positions, and the balance in supporting jobs such as security, janitorial, food and medical services.      As of December 31, 2002, we employed 4,246 persons on a full-time basis, of which 4,173 were employed in China and 73 were employed in Hong Kong. Of these employees, approximately 2,9432,915 were engaged in manufacturing, approximately 1,331 were engaged in administrative, research and development, quality control, engineering and marketing positions, and the balance in supporting jobs such as security, janitorial, food and medical services.      We are not a party to any material labor contract or collective bargaining agreement.contracts. The nature of our arrangement with our manufacturing employees is such that we can increase or reduce staffing levels without significant difficulty, cost or penalty. Although we have experienced no significant labor stoppages and believe relations with our employees are satisfactory, this situation may not continue in the future, and any labor difficulties could lead to increased costs and/or interruptions in our production.      We maintain an employee incentive compensation program in China whereby a regular bonus is paid to employees on the employee’s return to work following the Chinese New Year holiday. We believe this program has contributed to a lower employee turnover in our factories relative to other China-based manufacturing enterprises. It is the practice of one of our subsidiaries to enter into a collective agreement with its trade union. The collective agreement usually sets out the minimum standard for the wages, working hours and other benefits of the workers. The priorcurrent collective agreement between our subsidiary and its trade union expiredexpires on December 31, 2002. Our subsidiary currently intends to enter into another agreement.2005 and will be renewed. Item 7.Major Shareholders and Related Party Transactions      The following table sets forth certain information known to us regarding the beneficial ownership of our common shares as of January 31, 2003,February 28, 2005, by: •    each person (or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) known by us to own beneficially 5% or more of our common shares; and •    each of our current directors and senior management; and •  each of the selling shareholders.management. 48 We are not directly owned or controlled by another corporation or by any foreign government.                   Shares beneficially(1) owned Name Number Percent M. K. Koo     2,305,131 (2)     18.9   Peter R. Kellogg     1,483,600 (3)     12.2   I.A.T. Reinsurance Syndicate Ltd.      1,300,000 (3)     10.7   Li & Chui Holdings (BVI) Ltd.      1,061,087       8.7   Joseph Li     1,099,987 (4)     9.1   Ivan Chui     1,089,987 (5)     9.0   Tadao Murakami     732,155 (6)     6.0   Karene Wong     10,000 (7)     *   Y. C. Chang     12,000 (7)     *   Patinda Lei     13,000 (7)     *   L. P. Wang     10,000 (7)     *   Kazuhiro Asano     —       —   Seitaro Furukawa     10,000 (7)     *   Lorne Waldman     5,600 (8)     *   Charles Chu     25,000 (9)     *   Stephen Seung     26,000 (10)     *   49government, natural or legal person.                       Shares beneficially(1) owned       Name   Number(12)   Percent   M. K. Koo     6,975,786 (2)     16.2   Peter R. Kellogg     5,679,680 (3)     13.3   I.A.T. Reinsurance Syndicate Ltd.     5,108,300 (3)     12.0   Li & Chui Holdings (B.V.I.) Ltd.     2,935,087       6.9   Joseph Li     3,093,957 (4)     7.2   Ivan Chui     2,980,957 (5)     7.0   Tadao Murakami     2,379,225 (6)     5.5   Karene Wong     39,100       *   Guy Bindels     1,000       *   Joseph Hsu     2,000       *   Chen Yee, William     —       —   Patinda Lei     25,300       *   Bobby Hirasawa     3,000       *   George Shih     —       —   Seitaro Furukawa     —       —   Colin Yeoh     —       —   Lap Kei Yuen     1,800       *   Kazuhiro Asano     —       —   Charles Chu     84,000 (7)     *   Stephen Seung     84,800 (8)     *   Wing Yan (William) Lo     31,500 (9)     *   Mark Waslen     25,000 (10)     *   * Less than 1%. (1)   Pursuant to the rules of the Securities and Exchange Commission, shares of common shares that an individual or group has a right to acquire within 60 days pursuant to the exercise of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on 12,130,66842,664,536 common shares outstanding as of January 31, 2003.February 28, 2005.   (2)   Includes options to purchase 79,000530,000 common shares exercisable within 60 days of January 31, 2003.February 28, 2005.   (3)   Mr. Kellogg holds directly 168,600523,380 common shares and options to purchase 15,00048,000 common shares exercisable within 60 days of January 31, 2003.February 28, 2005. Indirectly, through I.A.T. Reinsurance Syndicate Ltd., Mr. Kellogg holds 1,300,0005,108,300 common shares. I.A.T. Reinsurance Syndicate Ltd. is a Bermuda Corporationcorporation of which Mr. Kellogg is the sole holder of voting stock. Mr. Kellogg disclaims beneficial ownership of these shares.   (4)   Consists ofIncludes shares held of record by Li & Chui Holdings (B.V.I.) Limited for which Mr. Li shares investment and voting control with Mr. Chui. These are the same shares shown in the table for Ivan Chui. In addition, Mr. Li holds 20,000Also, includes options to purchase 80,000 common shares exercisable within 60 days of January 31, 2003.February 28, 2005.   (5)   Consists ofIncludes shares held of record by Li & Chui Holdings (B.V.I.) Limited for which Mr. Chui shares investment and voting control with Mr. Li. These are the same shares shown in the table for Joseph Li. In addition, Mr. Chui holds (6)   Includes options to purchase 10,000530,000 common shares exercisable within 60 days of January 31, 2003.February 28, 2005     (6)(7)   Includes options to purchase 65,00031,500 common shares exercisable within 60 days of January 31, 2003.February 28, 2005.     (7)(8)   Consists ofIncludes options to purchase 31,500 common shares exercisable within 60 days of January 31, 2003.   (8)  Includes options to purchase 5,000 common shares exercisable within 60 days of January 31, 2003.   (9)  Includes options to purchase 15,000 common shares exercisable within 60 days of January 31, 2003. (10)  Includes options to purchase 15,000 common shares,February 28, 2005, and 10,00020,300 common shares that are registered to Violet Seung, Mr. Seung’s wife, as to which Mr. Seung disclaims beneficial ownership. (9)   Consists of options to purchase common shares exercisable within 60 days of February 28, 2005. (10)   Includes options to purchase 15,000 common shares exercisable within 60 days of February 28, 2005. (11)   All the share numbers have been adjusted to give effect to a three-for-one stock split effective on June 30, 2003 and a ten-for-one stock dividend effective on November 7, 2003. (12)   These share numbers include options owned by these individuals and assume that these options will be exercised.      All of the holders of our common shares have equal voting rights with respect to the number of common shares held. As of January 31, 2003,February 28, 2005, there were approximately 856766 holders of record of our common shares. According to information supplied by our transfer agent, 733 holders of 49 record with addresses in the United States held 83129,642,848 of our outstanding common shares.      The following table reflects the percentage ownership of our common shares beneficially owned by our major shareholders during the past three years:                           Percentage Ownership(1) February 28, February 28, January 31, 2001 2002 2003 M. K. Koo     28.6       29.2       18.9   Peter R. Kellogg     13.8       14.2       12.2   I.A.T. Reinsurance Syndicate Ltd.      12.7       12.7       10.7   Li & Chui Holdings (BVI) Ltd.      10.4       10.6       8.7   Joseph Li     10.4       10.6       9.1   Ivan Chui     10.4       10.6       9.0   Tadao Murakami     8.1       8.9       6.0                                         Percentage Ownership(1)           March 31,   March 1,   February 28,     2003   2004   2005 M. K. Koo     18.9       12.9       16.2   Peter R. Kellogg     12.2       12.7       13.3   I.A.T. Reinsurance Syndicate Ltd.     10.7       11.3       12.0   Li & Chui Holdings (B.V.I.) Ltd.     8.7       7.1       6.9   Joseph Li     9.1       7.3       7.2   Ivan Chui     9.0       7.2       7.0   Tadao Murakami     6.0       4.5       5.5   (1)   Based on 10,218,340, 10,259,940,36,392,004, 41,231,272 and 12,130,66842,664,536 common shares outstanding on March 31, 2003, March 1, 2004 and February 28, 2001 and 2002 and on January 31, 2003,2005, respectively. 50There are no arrangements that may, at a subsequent date, result in a change of control of the Company. Certain Relationships and Related Transactions      In 2000, we formed a joint venture company with Toshiba Battery Company Ltd., or Toshiba, called BPC (Shenzhen) Co., Ltd., to manufacture rechargeable lithium ion battery packs at our manufacturing complex in Shenzhen, China. Toshiba owned a 13.3% interest in BPC and we owned the balance. Since the establishment of BPC (Shenzhen) Co., Ltd in 2000, we recognized net sales of $6.2 million, $21.1 million and $7.8 million, purchased raw materials of $22.4 million, $23.1 million and $7.8 million, acquired property, plant and equipment of $814,000, $50,000 and zero, from Toshiba Battery Company Ltd and its related companies for the years ended December 31, 2000 and 2001 and for the period from January 1, 2002 through April 2002, respectively. In addition, we also acquired a license for $1.0 million from Toshiba Battery Company Ltd. During 2002, we sold the license and our joint venture interest in BPC (Shenzhen) Co., Ltd to a Toshiba related company for $800,000 and $2.1 million, respectively, resulting in a gain of $60,000 and $17,000, respectively.      In January 2003, we invested $10.0 million for a 25% equity interest in Alpha Star Investments Ltd., the ultimate parent of Hong Kong based JCT Wireless Technology Company Limited, or JCT. JCT is engaged in the design, development and marketing of wireless communication terminals and wireless application software. In connection with our investment, Mr. Koo was appointed as a director to Alpha Star Investment Ltd.’s Board of Directors. Mr. Koo resigned from the Board of Directors of Alpha Star Investment Ltd. on July 12, 2004. We are manufacturingcurrently manufacture wireless communication terminals and related modules for JCT. As part of our investment, Alpha Star Investment Ltd. agreed to have us manufacture the RF modules for at least 50 percent of the orders it, or any of its subsidiaries, receives for RF modules provided we perform such manufacturing services at a price comparable to the market. As of December 31, 2004, we were owed $66,000 from JCT. For the year ended December 31, 2004, we recognized net sales of $34.2 million to JCT and purchased raw materials of approximately $12.4 million from JCT and its related companies.      On February 16, 2004, by unanimous consent following resolutions without meeting, the Board of Directors adopted a resolution for the sale of a residential property located in Hong Kong by a wholly-owned subsidiary of the Company, Nam Tai Group Management Limited or NTGM, to Mr. Tadao Murakami, Chairman of the Board of Directors, for consideration of approximately $1.8 million, which is close to the original acquired cost and appraised market price.value of the property as of January 31, 2004. The agreement for the sale of the property was entered into between Nam Tai Group Management Limited and Mr. Tadao Murakami on March 10, 2004.      On December 10, 2004, by unanimous consent, the Board of Directors of Nam Tai Group Management Limited, adopted a resolution for assigning the beneficial interest of Nam Tai Group Management Limited in 10 units of debentures of nominal value of approximately $1,603 each, issued by The Clearwater Bay Golf & Country Club to Mr. Koo at the consideration of approximately $231,000, which represented the book value of the debentures in the financial statements of Nam Tai Group Management Limited. An agreement was entered between Nam Tai Group Management Limited and Mr. Koo on December 10, 2004. Item 8.Financial Information Financial Statements      OurThe Consolidated Financial Statements are set forth under Item 18.have been appended to this Form 20-F (see pages F-1 to F-36). From year-end dated December 31, 2004 to our reporting date of March 4, 2005, there has been no significant changes on our consolidated Financial StatementsStatements. Change in Public Accountants      In May of 2002, upon consideration and to reduce our professional fees, our Board of Directors, including our Audit Committee, recommended that HLB Hodgson Impey Cheng replace Deloitte Touche Tohmatsu as our independent auditors. This change was included in our proxy statement and approved by our shareholders at our annual meeting on June 14, 2002. Deloitte Touche Tohmatsu did not resign or refuse to stand for re-election, and none of Deloitte Touche Tohmatsu’s reports on the financial statements for either of the two years prior to the change and included in this Report contained an adverse opinion, disclaimer, modification or qualification. 50      In November 2002, HLB advised us that they could not meet our audit requirements for the agreed fees and on a cost-effective basis because the increasingly complex regulatory guidelines for the auditing of public companies would require them to perform a significant portion of the final audit work with personnel from a U.S. affiliate. HLB submitted their resignation accordingly. There were no disagreements with HLB on any matter or accounting principle, practice, financial statement disclosure, or auditing scope or procedure.      In December 2002, in contemplation of our intention to list on the New York Stock Exchange,NYSE, we sought a replacement firm with a strong U.S. and Asian presence and an ability to handle our audit requirements. Accordingly, our Board of Directors appointed Grant Thornton as our independent public accountants based on Grant Thornton’s ranking among accounting firms in the U.S. and our Board’s belief that Grant Thornton would be acceptable to our shareholders. The appointment of Grant Thornton was accepted by our shareholders at our annual meeting held on July 8, 2003. Accordingly, Grant Thornton issued the audited account for 2002.      In August 2003, we set up the PRC’s headquarters in Macao, China, due to our continuous increase in investment in PRC. Since Grant Thornton does not have an office in Macao and does not have a licence to handle Macao statutory tax filings, Grant Thornton tendered its resignation as our auditors. Deloitte Touche Tohmatsu, who had been our auditors from 1998-2001, was hired to audit for both 2002 and 2003. Deloitte Touche Tohmatsu has been appointed as our auditors as of October 24, 2003. Grant Thornton will, however, continue to provide tax advisory services to us, other than with respect to Macao. Legal Proceedings      We are not a party to any legal proceedings other than routine litigation incidental to our business and there are no material legal proceedings pending with respect to our property, other than as described below. 51 Tele-Art Litigation      In June 1997, weNam Tai filed a petition in the British Virgin Islands for the winding up of Tele-Art, Inc. on account of an unpaid judgment debt owed to us.Nam Tai. The High Court of Justice granted an order to wind up Tele-Art, Inc. in July 1998 and the Eastern Caribbean Court of Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to our Articles of Association, we redeemed and cancelled 138,500415,500 (Note 1) shares of Nam Tai registered in the name of Tele-Art, Inc. at a price of $11.19$3.73 per share to offset substantially all of the judgment debt of $799,000 plus interest and legal costs totallingtotaling approximately $1.7 million, including dividends that we had withheld and credited against the judgment debt.      Following the completion of the redemption, we received notice that the liquidator had obtained an ex-parte injunction preventing us from redeeming Nam Tai shares beneficially owned by Tele-Art, Inc. On February 4, 1999, the liquidator of Tele-Art, Inc. filed a further summons in the BVIBritish Virgin Islands on its behalf seeking, among other matters: •    A declaration as to the respective priorities of the debts of Tele-Art, Inc. to the Bank of China, us,Nam Tai, and other creditors and their respective rights to have their debts discharged out of the proceeds of the Tele-Art, Inc.’s Nam Tai shares; •    An order setting aside the redemption of 138,500415,500 (Note 1) shares, and ordering delivery of all shares in our possession or control of to the liquidator; and •    Payment of all dividends in respect of Tele-Art, Inc.’s Nam Tai shares.      On March 26, 2001, we filed a summons seeking to remove the liquidator for failing to act diligently in the performance of his duties and for knowingly misleading the court. On September 3, 2002, the liquidator submitted a letter of resignation prior to the scheduled removal hearing. As of FebruaryA new liquidator was appointed by the BVI court on July 11, 2003, new liquidators have not been appointed.2003.      On July 5, 2002, upon our application, the court ordered the removal of the liquidator’s ex-parte injunction and ordered an inquiry into damages. Nam Tai filed its amended Points of Claim of Defence on April 16, 2004. There are currently applications before the Court of Appeal in the British Virgin Islands to determine the progress of this matter as Nam Tai has sought to enter judgment against David Hague, the former liquidator, who has applied to strike out Nam Tai’s claim for damages. On August 9, 2002, the court delivered a decision awarding us a judgment against Tele-Art, Inc. for approximately $34.0 million. On August 12, 2002, we redeemed and cancelled, pursuant to its Articles of Association, the remaining 169,727509,181 (Note 2) shares beneficially owned by Tele-Art, Inc. at a price of $18.41$6.14 per share. Including the dividends which we had withheld and credited against the judgment, this offset a further $3.5 million, approximately, in judgment debts owed to us by Tele-Art, Inc. We recorded the $3.3 million redemption net of expenses as other income in the third quarter of 2002. 51      On January 21, 2003, judgment was delivered on the liquidators’ February 4, 1999 summons declaring that the redemption and set offset-off of dividends on the 138,500415,500 (Note 1) shares be set aside and that all Tele-Art, Inc. property withheld by us be delivered to Tele-Art, Inc. in liquidation. The orders granted in the judgment were substantially different from the relief sought in the February 12,4, 1999 application. On February 4, 2003, we filed an application for a stay of execution and leave to appeal the decision listing eight grounds of appeal, which was granted on June 23, 2003. The case was heard on January 12, 2004 and judgment was delivered on April 26, 2004. It was held that the redemption by Nam Tai of 415,500 (Note 1) Nam Tai’s shares owned by Tele-Art, Inc. was proper, however, Nam Tai must return the redemption proceeds and dividends payable received to the liquidator for distribution to the creditors. David Hague, the former liquidator of Tele-Art, Inc. who filed the original application in 1999, has obtained leave to appeal to the Privy Council, the final appellate court for the British Virgin Islands, that part of the Court of Appeal judgment which upheld the applicationredemption of the Tele Art shares by Nam Tai. It is pending.not expected that this appeal will be heard before 2006. The court also held that Bank of China was a secured creditor but the court did not determine the amount owed by Tele-Art, Inc. to Bank of China. We dispute that finding, and among other matters, have argued that the proof of debt by Bank of China was incomplete and invalid.      Our legal representativesBank of China has submitted that it is a secured creditor. In this respect, the Bank’s position is that as of December 6, 2004, the debt from Tele-Art Limited, a former wholly-owned subsidiary of Tele-Art, Inc. (the loan was also guaranteed by Tele-Art, Inc.) was HK$21,985,970.16 (approximately US$2.8 million) with interest accruing at HK$4,264.7 (or US$547) daily. The liquidator, however, took the view in his third liquidator report which was submitted to the Court on October 13, 2004, that Bank of China’s proof of debt was incomplete. The liquidator has requested the Court’s approval to take further action and demand that Bank of China provide further information for his consideration. Nam Tai is of the view that the amount of debt owed by Tele-Art Limited to Bank of China may not exceed $1.4 million. It should further be noted that apart from Nam Tai, the liquidator admitted the proof of debts of two other unsecured creditors which together amounted to approximately $33,000. David Hague, the former liquidator, has submitted a claim for $381,860 in respect of fees and expenses for work done while acting as liquidator of Tele Art, Inc. These fees however are subject to the approval of the court and as such are still pending as they have advised usnot yet been approved. The Liquidator filed a Summons for the approval of his third report on October 13, 2004 and this was heard on December 14, 2004. The Court inter alia ordered that we have real prospectsthe Liquidator continue the administration of success on appeal against the January 21, 2003 decision and we plan to vigorously fight for such an outcome. However,liquidation of Tele-Art, Inc. substantially in accordance with his proposals contained in said report as well as the second report.      As of December 31, 2002, due to the uncertainty of the final outcome of the litigation as a result of the January 21, 2003 judgment and in accordance with SFAS No. 5,“Accounting for Contingencies”, we were advised by Grant Thornton and have maderecorded a 2002 provision for $5.2 million for both share redemption plus all dividends declared and withheld by us,as a component of accrued expenses pending a final determination of this matter by the courts. IfThis represented the then-best estimate of the net monetary expense we would incur if our appeal is successfulunsuccessful and all legal matters related to Tele Art, Inc. are finalized, then the $5.2 million will be reversed into incometwo judgment debts in the related period.      If our appeal is not successful, and the 308,227 share redemption is set aside, we believe that these shares would be sold by Tele-Art, Inc.’s liquidator, once appointed, in the open market at the market price prevailing at the time of sale. For example, if these shares had been sold at the February 21, 2003 closing price of $26.50, the proceeds the liquidator would have realized before commissions, plus withheld dividends of $518,000, would have been approximately $8.7 million for the estate of Tele-Art, Inc. (in liquidation). We have two judgments debts against Tele-Art Inc. in the aggregate amount, including interest, costs, and related expenses, 52 of approximately $38.0 million. Furthermore, per the last liquidator report that was filed with the court there appear to be no proven unsecured creditors of Tele-Art, Inc. and the estimated liabilities for all other unsecured creditors are approximately $80,000. The Bank of China is claiming to be a secured creditor in thetotal amount of $2.2 million, and the January 21, 2003 judgment found that the Bank of China is secured and we are unsecured. We dispute that finding, and among other matters, have argued that the Bank of China has not yet submitted any proof of an outstanding debt. The now resigned liquidator is claiming to have incurred approximately $385,000 in costs for work as the liquidator. Accordingly, if we are not successful on our appeal of the January 21, 2003 judgment, we will seek to recover our $38.0 million in judgment debts (including interest, costs, and related expenses) is determined as having the lowest priorities in recovering from the estate of Tele-Art, Inc. Accordingly, any amounts recoveredAs of November 7, 2003, apart from the estateNam Tai, a total of three other creditors of Tele-Art, Inc., which in management’s opinion could exceedincluding Bank of China, had submitted their proof of debt to the liquidator. These claims, together with the claim by David Hague, the former liquidator of the Company for outstanding fees and expenses, amounted to approximately $3.4 million. As a result, the 2002 provision for $5.2 million provision basedwas reduced to $3.9 million in the fourth quarter of 2003.      With the two judgment debts as well as the several costs orders in favour of Nam Tai, Nam Tai is the major unsecured creditor of Tele-Art, Inc. holding approximately 99.9% outstanding debts of Tele-Art, Inc. Pursuant to the judgment of April 26 2004, we are in negotiations with the liquidator on the current market pricedistribution of Nam Tai’s sharesthe redemption proceeds among the unsecured creditors. If our proposal is accepted by the liquidator and current information regardingapproved by the court, as well as all the legal matters related to Tele-Art, Inc. creditors, wouldfinalized, including the final determination of the creditor’s position of Bank of China, then the remaining portion of $3.9 million provision will also be recognized as otherreversed into income upon recovery. for the related period.      Because Tele-Art, Inc. is in liquidation, we may not realizeHowever, the entire amount of our judgment. The actual amount of the recovery, if any, is uncertain, and is dependent on a number of factors including the value of our shares when sold in the market, and the final determination of other creditors’ positions.Bank of China’s position. We plan to continue to pursue vigorously all legal alternatives available to seek to recover the maximum amount of the outstanding debt from Tele-Art, Inc. (in liquidation) as well as to pursue other parties that may have assisted in any transfers of the assets from Tele-Art, Inc. In furtherance of this objective, Nam Tai commenced proceedings in 2002 against David Hague, the former liquidator of Tele-Art, Inc., and PriceWaterhouseCoopers for, inter alia, negligence and breach of statutory duty in their conduct of the liquidation. This matter is still in its initial stages as the Defendants are seeking leave to appeal against the dismissal of their challenge to the jurisdication of the BVI courts in this matter. We may incur substantial additional costs in pursuing our recovery and such costs may not be recoverable. Note 1.   Subsequent to November 7, 2003, the number of shares was adjusted to 457,050 to reflect the ten-for-one stock dividend. 2.   Securities Class ActionsSubsequent to November 7, 2003, the number of shares was adjusted to 560,099 to reflect the ten-for-one stock dividend. Putative Class Actions      On February 21,March 11, 2003, accordingwe were served with a complaint in an action captioned Michael Rocco v. Nam Tai, et al., 03 Civ. 1148 (S.D.N.Y.), or the Rocco Action. In addition to published accounts, several lawsuits wereNam Tai, certain directors are named as defendants. On or about April 9, 2003, a second complaint was filed against usin an action captioned A.J. & Celine Steigler v. Nam Tai, et al., 03 Civ. 2462 (S.D.N.Y.), or the Steigler Action, and certain of our officerstogether with the Rocco 52 Action, the Actions. The Actions have been consolidated since July 2003 and directors in the United States District Court for the Southern District of New York. To date, no complaint has been served on us, or,purports to our knowledge, any officer or director. According to press releases made public by counsel claiming to have filed the complaints, these complaints are brought on behalf ofrepresent a putative class of purchaserspersons who purchased the common stock of our stockNam Tai from July 29, 2002 through February 18, 2003. Plaintiffs in the Actions assert claims under Sections 10(b) and raise various categories of claims including alleged violations of Section 10(b)20(a) of the Securities Exchange Act of 1934 and allege that misrepresentations and/or omissions were made during the alleged class period concerning the partial reversal of an inventory provision and a charge to goodwill related to Nam Tai’s LPT segment. Our motion to dismiss was denied on September 27, 2004. The putative class action has not been certified as a class action by issuing false and misleading statements regarding our financial performance and failingthe court but we expect plaintiffs to issue timely reports concerning adverse developmentsseek such certification in certain material litigation. We believe that we havethe near future. The court has set May 23, 2005 to hear the certification motion. Nam Tai believes it has meritorious defenses to such allegations and if the complaints are served and the actions prosecuted, intendintends to defend this actionthe case vigorously. However, this litigation could be very costly and divert our management’s attention and resources. In addition, we have no insurance covering our liability, if any, or that of our officers and directors, and we will have to pay the costs of defense. Any adverse determination in this litigation could also subject us to significant liabilities, any or all of which could materially and adversely affect our business and operating results. Export Sales Geographic Markets      Approximate percentages of net sales to customers by geographic area based upon location of product delivery are set forth below for the periods indicated:                           Year ended December 31, Geographic Areas 2000 2001 2002 Hong Kong     46 %     27 %     24 % Europe     9       10       26   North America     24       24       17   China     5       11       12   Japan     9       10       11   Other     7       18       10                             100 %     100 %     100 %                                                   Year ended December 31, Geographic Areas   2002   2003   2004 China (excluding Hong Kong)     12 %     25 %     25 % Europe (excluding Estonia)     18       21       18   Japan     11       17       6   United States     14       14       11   Hong Kong     24       9       30   Estonia     8       5       1   North America (excluding United States)     3       —       1   Korea     7       6       4   Other     3       3       4         100 %     100 %     100 % 53 Dividend PolicyDividends      We have paid an annual dividend for the last 10eleven consecutive years. On February 14, 2003,7, 2005, we announced that we were increasing our regular annual dividend to $0.60$1.32 per share to be declared and paid quarterly commencing with the first quarter 20032005 dividend of $0.15$0.33 per share. The following table sets forth the total cash dividends and dividends per share we have declared for each of the five years in the period ended December 31, 2002:                                           Year ended December 31, 1998 1999 2000 2001 2002 Total dividends declared (in thousands)   $ 2,829     $ 2,942     $ 12,190     $ 4,134     $ 17,056                                   Regular dividends per share   $ 0.28     $ 0.32     $ 0.36     $ 0.40     $ 0.48   Special dividends     —       —       1.00       —       1.00                                   Total dividends per share   $ 0.28     $ 0.32     $ 1.36     $ 0.40     $ 1.48                                   2004, adjusted to give effect to a three-for-one stock split effective on June 30, 2003.                                                       Year ended December 31,             2000     2001     2002     2003     2004   Total dividends declared (in thousands)   $ 12,190     $ 4,134     $ 17,056     $ 37,584     $ 20,424   Regular dividends per share   $ 0.12     $ 0.13     $ 0.16     $ 0.20     $ 0.48   Special dividends     0.33       —       0.33       0.80       —   Total dividends per share   $ 0.45     $ 0.13     $ 0.49     $ 1.00     $ 0.48        It is our general policy to determine the actual annual amount of future dividends, if any, based upon our growth during the preceding year. Future dividends, if any, will be in the form of cash or stock or a combination of both. We may not be able to pay dividends in the future or may decide not to declare them in any event. We will determine the amounts of the dividends when they are declared and even if dividends are declared in the future we may not continue them in any future period.      We declared special dividends in 20002002 and 20022003 for the reasons described below: •  In 2000, as a result of a realized gain we made from our sale of our investment in Group Sense (International) Ltd.; and •    In 2002, primarily as a result of a realized gain we made from our sale of approximately one-third of our indirectdirect investment in Huizhou TCL Mobile Communication Company Ltd.; and      We do no business in the United States that subjects us to United States income taxes on our income and we do not expect to receive dividends from any United States company or any foreign company that has income effectively connected with a United States trade or business. Accordingly, we expect that any cash dividends we pay to our shareholders who are subject to United States income tax will remain taxable if the recent tax proposal relating to exempting dividends from United States income tax is enacted as proposed. •    In 2003, in celebration of our fifteenth anniversary since our listing and IPO in 1988, our fifteenth consecutive year of profitability, and the transfer of our shares from the NASDAQ National Market to the NYSE in January 2003. 53 Item 9.The Listing      Our common shares are traded exclusively in the United States.States on the NYSE. On January 23, 2003, our common shares were listed on the New York Stock ExchangeNYSE under the symbol “NTE.” Prior to that, our common shares were quoted on the Nasdaq National Market under the symbol “NTAI.”      The following table sets forth the high and low closing sales prices for our common shares for the quarters in the three-year period ended December 31, 2004, adjusted to give effect to a three-for-one stock split effective on June 30, 2003:                                                                               2002     2003     2004                       Average                     Average                     Average                       Daily                     Daily                     Daily                       Trading                     Trading                     Trading       High     Low     Volume(1)     High     Low     Volume(1)     High     Low     Volume(1)   First Quarter   $ 6.35     $ 5.15       153,210     $ 11.30     $ 7.92       363,270     $ 34.24     $ 22.30       927,119   Second Quarter     7.73       6.10       143,827       14.13       6.94       288,459       28.00       13.99       509,173   Third Quarter     6.86       5.33       54,983       32.90       12.87       734,330       23.51       16.10       412,488   Fourth Quarter     9.07       6.17       303,351       42.48       26.25       1,393,722       23.14       18.07       283,030   (1)   Determined by dividing the sum of the reported daily volume for the quarter by the number of trading days in the quarter. The following table sets forth the high and low closing sale prices for our common shares for the quarters indicated through February 27, 2003 as reported by the Nasdaq National Market before January 23, 2003 and the New York Stock Exchange since then:                                                   2001 2002 2003 High Low High Low High Low First Quarter   $ 19.13     $ 12.13     $ 19.04     $ 15.45     $ 33.68     $ 25.50   Second Quarter     15.01       12.25       23.18       18.30                   Third Quarter     15.31       11.30       20.59       16.00                   Fourth Quarter     17.91       12.50       27.20       18.50                   54 The following table sets forth the high and low closing sale prices as reported by The Nasdaq National Market for each of the last five years ended December 31:                   Year ended High Low December 31, 2002     $27.20       $15.45   December 31, 2001     19.12 5     11.30   December 31, 2000     20.62 5     12.93 8 December 31, 1999     19.00       8.00   December 31, 1998     17.62 5     9.37 5 31, adjusted to give effect to a three-for-one stock split effective on June 30, 2003:                                               Daily                       Trading   Year ended   High     Low     Volume(1)   December 31, 2004   $ 34.24     $ 13.99       532,568   December 31, 2003     42.48       6.94       597,858   December 31, 2002     9.07       5.15       164,011   December 31, 2001     6.38       3.77       81,656   December 31, 2000     6.88       4.31       113,644   (1)   Determined by dividing the sum of the reported daily volume for the year by the number of trading days in the year.      The following table sets forth the high and low closing sale prices during each of the most recent six months through January 31, 2003 as reported by the Nasdaq National Market before January 23, 2003 and the New York Stock Exchange since then:                   Month ended High Low January 31, 2003   $ 33.68     $ 25.50   December 31, 2002     27.20       22.45   November 30, 2002     22.33       20.25   October 31, 2002     20.55       18.50   September 30, 2002     19.62       17.28   August 31, 2002     20.59       18.50   months:                                               Daily                       Trading   Month ended   High   Low     Volume(1)   February 28, 2005   $ 24.35       18.80       503,174   January 31, 2005     19.49       17.25       253,252   December 31, 2004     19.82       18.07       242,014   November 30, 2004     20.00       18.28       335,390   October 31, 2004     23.14       19.50       271,686   September 30, 2004     22.85       18.75       318,162   (1)   Determined by dividing the sum of the reported daily volume for the month by the number of trading days in the month.      On February 27, 2003,March 11, 2005, the last reported sale price of our common shares on the New York Stock ExchangeNYSE was $26.30$27.12 per share. As of January 31, 2003,February 28, 2005, there were 856766 holders of record of our common shares. 54 Item 10.Additional Information Share Capital      Our authorized capital consists of 20,000,000200,000,000 common shares, $0.01 par value per share,share. On June 20, 2003, we announced a three-for-one stock split effective on June 30, 2003 and a ten-for-one stock dividend effective November 7, 2003. As of which 12,130,668February 28, 2005, 42,664,536 common shares were outstanding on January 31, 2003.outstanding. Memorandum and Articles of Association      Holders of our common shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of our common shares do not have cumulative voting rights in the election of directors. All of our common shares are equal to each other with respect to liquidation and dividend rights. Holders of our common shares are entitled to receive dividends if and when declared by our Board of Directors out of funds legally available under British Virgin Islands law. In the event of our liquidation, all assets available for distribution to the holders of our common shares are distributable among them according to their respective holdings. Holders of our common shares have no preemptive rights to purchase any additional, unissued common shares. All of our outstanding common shares are and the newly issued common shares we are offering pursuant to this prospectus, will be when issued and paid for, duly authorized, validly issued and nonassessable. All of our outstanding common shares are in registered form and the newly issued common shares we are offering pursuant to this prospectus, will be, registered rather thando not have any outstanding bearer shares.      Pursuant to our Memorandum and Articles of Association and pursuant to the laws of the British Virgin Islands, our boardBoard of directorsDirectors without shareholder approval may amend our Memorandum and Articles of Association. This includes amendments to increase or reduce our authorized capital stock. Our ability to amend our Memorandum and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in control of Nam Tai, including a tender offer to purchase our common shares at a premium over the then currentthen-current market price. 55      We have never had any class of stock outstanding other than our common shares nor have we ever changed the voting rights with respect to our common shares.      Our registered office is at McNamara Chambers, P.O. Box 3342, Road Town, Tortola, British Virgin Islands and we have been assigned company number 3805. Our object or purpose is to engage in any act or activity that is not prohibited under British Virgin Islands law as set forth in Clause 4 of theour Memorandum of Association. As an International Business Company, and as set forth in Clause 6, we are prohibited from doing business with persons resident in the British Virgin Islands, owning real estate in the British Virgin Islands, or acting as a bankaccepting banking deposits or insurance company.contracts of insurance. We do not believe these restrictions materially affect our operations.      Paragraph 60 of our Amended Articles of Association, or Articles, provides that a director may be counted as one of a quorum in respect of any contract or arrangement in which the director is materially interested;interested or makes with the Company; however, if the agreement or transaction cannot be approved by a resolution of directors without counting the vote or consent of any interested director, the agreement or transaction may only be validated by approval or ratification by a resolution of the shareholders, who are referred under the law of the British Virgin Islands as “members.” Paragraph 53 of the Articles allows the directors to vote compensation to themselves in respect of services rendered to us. Paragraph 69 of the Articles provides that the directors may by resolution exercise all the powers on our behalf to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever we borrow money or as security for any of our debts, liabilities or obligations or those of any third party. These borrowing powers can be altered by an amendment to the Articles. There is no provision in ourthe Articles for the mandatory retirement of directors; however, we have fixed 65 as the mandatory age of retirement for our directors. Directors are not required to own our shares in order to serve as directors.      Paragraph 85 of the Articles allows us to deduct from any shareholder’s dividends amounts owing to us by that shareholder. Paragraph 13.1 provides that we can redeem shares at fair market value from any shareholder against whom we have a judgment debt.      Paragraph 12 of the Articles provides that without prejudice to any special rights previously conferred on the holders of any existing shares, any of our shares may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividends, voting, return of capital or otherwise as the directors may from time to time determine.      Paragraph 14 of the Articles provides that if at any time the authorized share capital is divided into different classes or series of shares, the rights attached to any class or series may be varied with the consent in writing of the holders of not less than three fourthsthree-fourths of the issued shares of any other class or series of shares which may be affected by such variation.      Provisions in respect of the holding of general meetings and extraordinary general meetings are set out in Paragraphs 27 to 46 of the Articles and under the International Business Companies Act. The directors may convene meetings of our shareholders at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of shareholders holding more than 30 percent of the votes of our outstanding voting shares. Other than providing, if requested, reasonable proof of a holder’s status as a holder of our shares as of the applicable record date, there is no condition to the admission of a shareholder or his or her proxy holder to our meetings of shareholders. 55      British Virgin Islands law and our Memorandum and Articles of Association impose no limitations on the right of nonresident or foreign owners to hold or vote our securities.      There are no provisions in our Memorandum of Association or Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.      As a result of the issuance of additional common shares in 2003 pursuant to the three-for-one stock split and increase in the number of Common Shares reserved for issuance under the Company’s 1993 Stock Option Plan and 2001 Stock Option Plan, the authorized share capital of the Company was enlarged from $200,000 to $2,000,000 and number of shares was increased from 20,000,000 to 200,000,000. The full text of our Amended Articles and Memorandum, wereamended on June 26, 2003, had been filed as Exhibit 2.1 in1.1 with the Company’s 1998 Annual Report on Form 20-F.20-F for 2003. 56 Transfer Agent      Registrar and Transfer Agent Company, 10 Commerce Drive, Cranford, New Jersey 07016-3572, U.S.A., is the United States transfer agent and registrar for our common shares. Material Contracts      The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which Nam Tai or any subsidiary of Nam Tai is a party, for the two years immediately preceding the filing of this report: •   SaleAn Agreement was entered into between J.I.C. Technology Company Limited and Purchase Agreement dated March 27, 2001 between Nam Tai and Shun Tak CentreGlory Gate Enterprises Limited on June 28, 2003 for the 15th Floordisposal of China Merchants Tower, Shun Tak Centre, Nos. 168-200 Connaught Road Central, Hong Kong for approximately US$11.3 million.transformers operation to Glory Gate Enterprises Limited. •   On July 9, 2001 we3, 2003, a Sale and Purchase Agreement was entered into an indemnification agreement with each of our directors providing for basic indemnification and expense reimbursement. •  We signed a facility letter on September 24, 2001 with The Hong Kong and Shanghai Banking Corporation Limited for a $15,000,000 long-term loan the terms of which are described in Note 11 of the Notes to the Consolidated Financial Statements. •  On January 14, 2002 we entered into a restructuring agreement with the joint liquidators of Albatronics. Under the restructuring agreement we injected our wholly-owned subsidiary JIC Group into a new company for 92.9% ownership in the new company on a fully diluted basis after conversion of preference shares. Albatronics’ listing status on the Hong Kong Stock Exchange was withdrawn and the new company was listed on the Hong Kong Stock Exchange by way of introduction and free from the liabilities of Albatronics. Immediately following completion of the restructuring, we, the creditors and the public beneficially owned approximately 70.4%, 24.1% and 5.5% of the enlarged issued ordinary share capital of the new company, respectively, and we also hold preference shares. Upon our full conversion of the preference shares, we, the creditors and the public will own approximately 92.9%, 5.8% and 1.3% of the enlarged issued ordinary share capital of the new company respectively. No holder of preference shares is entitled to exercise its conversion right if such conversion would result in the minimum public float of 25% as required under the Hong Kong Stock Exchange Listing Rules not being met. Consummation of the restructuring agreement was subject to the fulfillment of a number of conditions including approval by Albatronics’ creditors and shareholders and the Listing Committee of the Stock Exchange of Hong Kong and the receipt of other regulatory and court approvals. The restructuring was consummated in the second quarter of 2002. •  Share Transfer Agreement dated January 25, 2002 between Hui Zhou City Investment Holdings Co., Ltd., as seller, and Namtai Electronic (Shenzhen) Co., Ltd., as buyer, under which Hui Zhou City agreed to transfer a 6% equity interest in TCL Holdings Corporation Ltd. to Namtai Electronic for RMB98,520,000 (approximately $12.0 million). •  J.I.C. Enterprises (Hong Kong) Ltd. signed a banking facility letter on March 27, 2002 with Shanghai Commercial Bank Ltd. for a four-year term loan with borrowings totaling $4,500,000. The loan is charged at an annual rate of 1.5% over the 3-month London Interbank Offered Rate and is repayable in 16 quarterly payments of US$281,250 plus interest accrued. •  On April 24, 2002, Nam Tai Electronic & Electrical Products Limited or NTEE,(Hong Kong) and Nam Tai Electronic & Electrical Products Limited (Cayman Islands) regarding the purchase of the entire 100% interest in Nam Tai Electronic (Shenzhen) Co., Ltd. by Nam Tai Electronic & Electrical Products Limited (Cayman Islands). •   On August 22, 2003, we entered into a Sale and Purchase Agreement with Toshiba Battery Co., Ltd., or Toshiba, and A&T Battery Corp., or ATB, under which NTEE agreed to transfer its 86.7% equity interest in BPC (Shenzhen) Co., Ltd. to ATB in exchangeCitigroup Global Markets Limited for $1,300,000 from ATB and $800,000 from Toshiba, which was related to the termination of a license. •  We entered into a Subscription Agreement with TCL International Holdings Ltd. on September 6, 2002 under which we agreed to purchase HK$40,000,000 (approximately $5.1 million)sale of 3% convertible notes of TCL International Holdings Ltd. that mature three years after issuance.at an aggregate price of HK$39,555,068.49 (approximately $5.03 million). 57 •   On October 28, 2003, a Construction Agreement, with commencement date of September 23, 2003, was entered into between Namtai Electronic (Shenzhen) Co., Ltd. and Takasago Thermal Engineering (Hong Kong) Co., Ltd. for the construction of new factory premises. The construction was completed by the end of the fourth quarter in 2004. •   WeOn December 9, 2003, an Investment Agreement and Shareholders Agreement was entered into a Subscription Agreement with Alpha Star Investments Ltd. (“Alpha Star”) on January 6, 2003 under whichamong Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai agreed to purchase 1,625,000 newly issued ordinary sharesElectronics, Inc. for acquiring an 11.33% equity interest in Stepmind with a consideration of Alpha Star (25% ownership) for $10,000,000. We agreed to sign a shareholders agreement and Alpha Star agreed to place with us or a party we nominate at least 50% of the orders for radio frequency modules that it or its subsidiaries receive.approximately $5.3 million. •   On January 8, 2003, we2, 2004, a Supplemental Agreement was entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. for consenting to release the second phrase of payment and increase capital investment in Stepmind should Stepmind fulfill certain conditions. •   On March 10, 2004, an Agreement was entered into between Nam Tai Group Management Limited and Frontier Profit Inc. for selling Flat A, 22nd Floor, Tower 2 and Car Parking Space No. A86, The Leighton Hill, 2B Broadwood Road, Happy Valley, Hong Kong to Frontier Profit Inc. with a consideration of approximately $1.8 million. •   On March 26, 2004, a Memorandum of Understanding was signed by Namtai Electronic (Shenzhen) Co., Ltd. and Nam Tai Electronic & Electrical Products Limited (Hong Kong) to confirm the respective rights and liabilities of Nam Tai Electronic & Electrical Products Limited (Hong Kong) and Namtai Electronic (Shenzhen) Co., Ltd. under an internal restructuring. •   On March 31, 2004, a Sale and Purchase Agreement was entered into between Nam Tai Electronics, Inc. and Mr. Wong Toe Yeung regarding purchasing the entire issued share capital of Jasper Ace Limited from Mr. Wong Toe Yeung with the consideration of disposal of a 72.2% interest in Mate Fair Group Limited, cash of $25 million and 2,389,974 shares issued by Nam Tai Electronics, Inc. •   On April 8, 2004, a Trademark License Agreement was entered into between Nam Tai Electronics, Inc. and Nam Tai Electronic & Electrical Products Limited for the use of certain “Namtai” trademarks. 56 •   On April 15, 2004, a Deed of Indemnity was entered into between Nam Tai Electronics, Inc., and Nam Tai Electronic & Electrical Products Limited in favour of Nam Tai Electronic & Electrical Products Limited regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. •   On April 15, 2004, an Underwriting Agreement was entered into among Nam Tai Electronics, Inc. as the selling shareholder and the Hongkong and Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited, Cazenove Asia Limited, DBS Asia Capital Limited and VC CEF Capital Limited as public offer underwriters regarding the public offering of 20,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. •   On April 21, 2004, a Supplemental Agreement was entered into between Nam Tai Electronics, Inc., and Mr. Wong Toe Yeung regarding to adjust the consideration for purchasing entire issued share capital of Jasper Ace Limited by canceling 973,210 common shares of Nam Tai Electronics, Inc., issued to Top Scale Company Limited on April 21, 2004. •   On April 22, 2004, an Underwriting Agreement was entered into among Nam Tai Electronics, Inc. as the selling shareholder and the Hongkong and Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited, Cazenove Asia Limited, DBS Asia Capital Limited and VC CEF Capital Limited as international placing underwriters regarding the international placing of 180,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. •   On April 22, 2004, a Pricing Determination Agreement was entered into among Nam Tai Electronics, Inc., Nam Tai Electronic & Electrical Products Limited and the Hongkong and Shanghai Banking Corporation Limited for determining the offering price of the shares of Nam Tai Electronic & Electrical Products Limited to be HK$3.88 per share. •   On April 22, 2004, a Stock Borrowing Agreement was entered into between Nam Tai Electronics, Inc. and the Hongkong and Shanghai Banking Corporation Limited regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. •   On August 4, 2004, an Accession Agreement was entered into between Welcome Success Technology Ltd. and Mr. Alain Jolivet in relation to the transfer of entire interest in Stepmind to Remote Reward SAS and became a party to the Shareholders Agreement with the other three shareholders of Alpha Star Investments Ltd. (“Alpha Star”) under which each shareholder is granted a right of first refusalentered into among Nam Tai Electronics, Inc., AGF Innovation 3, AGF Innovation 4, AGF Innovation 5, Mighty Wealth Group Limited, Remote Reward SAS, Mr. Alain Jolivet and is generally prohibited from competing against Alpha Star.Mr. Andre Jolivet executed on November 28, 2003, December 9, 2003 and December 10, 2003. •   On August 18, 2004, an Escrow Agreement was entered into among Nam Tai Electronics, Inc., Welcome Success Technology Ltd., Remote Reward SAS, Johnson Stokes & Master, Mr. Andre Jolivet and Mr. Alain Jolivet in relation to the disposal of 1,457,720 shares in Stepmind to Remote Reward SAS with a consideration of Euros 4,253,301.98. •   On August 19, 2004, a Subscription Agreement was entered into among TCL Industries Holdings (HK) Limited, TCL International Holdings Limited, Cheerful Asset Investments Limited, Jasper Ace Limited, Mate Fair Group Limited, and TCL Communication Technology Holdings Limited for subscribing 254,474,910 shares in TCL Communication Technology Holdings Limited in a consideration of RMB131,283,020. •   On September 20, 2004, a Deed of Assignment of Trademarks was entered into between Nam Tai Electronics, Inc. and Namtai Electronic (Shenzhen) Co., Ltd. for assigning “Namtai & device” trademarks to Nam Tai Electronics, Inc. •   Banking Facilities Letter from the Hongkong and Shanghai Banking Corporation Limited to Nam Tai Group Management Limited on September 24, 2004 regarding the renewal of Overdraft Facility of HK$500,000, Treasury Facilities of US$30,000,000 and Corporate Card of HK$1,100,000. •   On October 15, 2004, a Share Transfer Agreement was entered into between J.I.C. Enterprises (Hong Kong) Limited and J.I.C. Technology Company Limited for the disposal of the entire issued share capital of Jetup Electronic (Shenzhen) Co., Ltd. to J.I.C. Technology Company Limited for a consideration of HK$105,878,396. Exchange Controls      There are no exchange control restrictions on payments of dividends, interest, or other payments to nonresident holders of Nam Tai’s securities or on the conduct of our operations in Hong Kong and Macao or where our principal executive offices are located in the British Virgin Islands, where Nam Tai is incorporated. Other jurisdictions in which we conduct operations may have various exchange controls. With respect to our China subsidiaries, with the exception of a requirement that 10% of profits be reserved for future developments, there are no restrictions on the payment of dividends and the removal of dividends from China once all taxes are paid and assessed and losses, if any, from previous years have been made good. In the event that dividends are paid by our China subsidiaries, such dividends will reduce the amount of reinvested profits and accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. We believe such restrictions will not have a material effect on our liquidity or cash flow. 57 Taxation United States Federal Income Tax Consequences      The discussion below is for general information only and is not, and should not be interpreted to be, tax advice to any holder of our common shares. Each holder or a prospective holder of our common shares is urged to consult his, her or its own tax advisor. General      This section is a general summary of the material United States federal income tax consequences to U.S. Holders, as defined below, of the ownership and disposition of our common shares as of the date of this prospectus.report. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, the applicable Treasury regulations promulgated and proposed thereunder, judicial decisions and current administrative rulings and practice, all of which are subject to change, possibly on a retroactive basis. The summary applies to you only if you hold our common shares as a capital asset for tax purposes (that is, generally for investment purposes), and it does not purport to be a comprehensive descriptionwithin the meaning of allSection 1221 of the tax considerations that may be relevant to the ownership of our common shares. The summary is based on current law. Changes in the law may alter your tax treatment of holding our common shares, possibly on a retroactive basis.Code. The United States Internal Revenue Service, or the IRS, may challenge the tax consequences described below, and we have not requested, nor will we request, a ruling from the IRS or an opinion of counsel with respect to the United States federal income tax consequences of acquiring, holding or disposing of our common shares. TheThis summary does not purport to be a comprehensive description of all the tax considerations that may be relevant to the ownership of our common shares. In particular, the discussion below does not cover tax consequences that depend upon your particular tax circumstances nor does it cover any state, local or foreign law, or the possible application of United States federal estate or gift tax. You are urged to consult your own tax advisors regarding the application of the United States federal income tax laws to your particular situation as well as any state, local, foreign and the United States federal estate and gift tax consequences of the ownership and disposition of the common shares. In addition, this summary does not take into account any special United States federal income tax rules that apply to a particular holder of our common shares, including, without limitation, the following: •   a dealer in securities or currencies; •   a trader in securities that elects to use a market-to-market method of accounting for yourits securities holdings; •   a financial institution or a bank; 58 •   an insurance company; •   a tax-exempt organization; •   a person that holds our common shares in a hedging transaction or as part of a straddle or a conversion transaction; •   a person whose functional currency for United States federal income tax purposes is not the U.S. dollar; •   a person liable for alternative minimum tax; •   a person that owns, or is treated as owning, 10% or more, by voting power or value, of our common shares; or •   a person who receives our shares pursuant to the exercise of employee stock options or otherwise as compensation. Tax Consequences to U.S. Holders      For purposes of the discussion below, you are a “U.S. Holder” if you are a beneficial owner of our common shares who or which is: •   an individual United States citizen or resident alien of the United States (as specifically defined for United States federal income tax purposes); •   a corporation, or other entity treated as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States or any State or political subdivision thereof; •   an estate whose income is subject to United States federal income tax regardless of its source; or •   a trust (x) if a United States court can exercise primary supervision over the trust’s administration and one or more U.S.United States persons are authorized to control all substantial decisions of the trust or (y) if it was in existence on August 20, 1996, was treated as a U.S.United States person prior to that date and has a valid election in effect under applicable treasuryTreasury regulations to be treated as a U.S. person; or •  any other person or entity that would be subject to United States federal income tax on a net income basis in respect of the common shares.person. 58 Distributions on Our Common Shares      Subject to the passive foreign investment company, or PFIC, considerations discussed below, for cash dividends, the gross amount of any suchcash distribution (other than in liquidation)or the fair market value of any property distributed that you receive with respect to our common shares generally will be subject to tax as ordinary dividend income to the extent such distribution does not exceed our current or accumulated earnings and profits, or E&P, as calculated for United States federal income tax purposes. Such income will be includable in your gross income on the date of receipt. Subject to certain limitations, dividends paid to noncorporate U.S. Holders, including individuals, may be eligible for a reduced rate of taxation if we are a “qualified foreign corporation” for U.S. federal income tax purposes. A qualified foreign corporation includes (i) a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States that includes an exchange of information program, and (ii) a foreign corporation if its stock with respect to which a dividend is paid is readily tradable on an established securities market within the United States, but does not include an otherwise qualified corporation that is a PFIC. We believe that we will be a qualified foreign corporation for so long as we are not a PFIC and our common shares are considered to be readily tradable on an established securities market within the United States. No assurances can be made that our Company’s status as a qualified foreign corporation will not change. To the extent any distribution exceeds our E&P, such distribution will first be treated as a tax-free return of capital to the extent of your adjusted tax basis in our common shares and will be applied against and reduce such basis on a dollar-for-dollar basis (thereby increasing the amount of gain and decreasing the amount of loss recognized on a subsequent disposition of such shares). To the extent that such distribution exceeds your adjusted tax basis in our common shares, the distribution will be such to taxtreated as gain recognized on a sale or exchange of our common shares.capital gain. Because we are not a United States corporation, no dividends-received deduction will be allowed to corporations with respect to dividends paid by us.      DividendsFor United States foreign tax credit limitation purposes, dividends received on our common shares will be treated for United States federal income tax purposes, as foreign source income and generally will be “passive income,” or in the case of certain holders, “financial services income. A U.S. Holder” For taxable years beginning after December 31, 2006, dividends generally will be “passive category income,” or in the case of certain holders, “general category income.” You may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of foreign withholding taxes, if any, imposed on dividends received on our common shares. 59      We do no business in the The rules governing United States that subjects us to United States income taxes on our income,foreign tax credits are complex, and we do not expectrecommend that you consult your tax advisor regarding the applicability of such rules to receive dividends from any U.S. company or any foreign company that has income effectively connected with a U.S. trade or business. Accordingly, we expect that any cash dividends we pay to our shareholders who are subject to United States income tax will remain taxable if the recent tax proposal relating to exempting dividends from United States income tax is enacted as proposed.you. Sale, Exchange or Other Disposition of Our Common Shares      Subject to the passive foreign investment companyPFIC considerations discussed below, generally, in connection with the sale, exchange or other taxable disposition of our common shares: •   you will recognize capital gain or loss equal to the difference (if any) between: —–   the amount realized on such sale, exchange or other taxable disposition and   —–   your adjusted tax basis in such common shares (your adjusted tax basis in the shares you hold generally will equal your U.S. dollar cost of such shares); •   such gain or loss will be long-term capital gain or loss if your holding period for our common shares is more than one year at the time of such sale or other disposition;   •   such gain or loss will generally be treated as United States source for United States foreign tax credit purposes; and   •   your ability to deduct capital losses is subject to limitations. Passive Foreign Investment CompanyPFIC Considerations      A foreign corporation will be treated as a passive foreign investment company, or PFIC for United States federal income tax purposes if, after applying relevant look-through rules with respect to the income and assets of subsidiaries, 75% or more of its gross income consists of certain types of passive income or 50% or more of the gross value of its assets is attributable to assets that produce passive income or are passive.held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other that rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. We presently believe that we are not a PFIC and do not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. If we were to be classified as a PFIC in any taxable year, (i) U.S. Holders would generally be required to treat any gain on sales of our shares held by them as ordinary income and to pay an interest charge on the value of the deferral of their United States federal income tax attributable to such gain and (ii) distributions paid by us to our U.S. Holders could also be subject to an interest charge. In addition, we would not provide information to our U.S. Holders that would enable them to make a “qualified electing fund” election under which, generally, in lieu of the foregoing treatment, our earnings would be currently included in their United States federal income. Tax Consequences to Non-U.S. Holders59      If you are not a U.S. Holder, you are a “Non-U.S. Holder.” Distributions      You generally will not be subject to United States federal income tax, including withholding tax, on distributions made on our common shares unless: •  you conduct a trade or business in the United States and •  the distributions are effectively connected with the conduct of that trade or business (and, if an applicable income tax treaty so requires as a condition for you to be subject to United States federal income tax on a net income basis in respect of income from our common shares, such distributions are attributable to a permanent establishment that you maintain in the United States).      If you meet the requirements set forth above, you generally will be subject to tax in respect of such dividends in the same manner as a U.S. Holder, as described above. In addition, any effectively connected dividends received by a non-United States corporation may also, under certain circumstances, be subject to an 60 additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Sale or Other Disposition of Our Common Shares      Generally, you will not be subject to United States federal income tax, including withholding tax, in respect of gain recognized on a sale or other taxable disposition of our common shares unless: •  your gain is effectively connected with a trade or business that you conduct in the United States (and, if an applicable income tax treaty so requires as a condition for you to be subject to United States federal income tax on a net income basis in respect of gain from the sale or other disposition of our common shares, such gain is attributable to a permanent establishment maintained by you in the United States), or •  you are an individual Non-U.S. Holder and are present in the United States for at least 183 days in the taxable year of the sale or other disposition, and certain other conditions exist.      You will be subject to tax in respect of any gain effectively connected with your conduct of a trade or business in the United States generally in the same manner as a U.S. holder, as described above. Effectively connected gains realized by a non-United States corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Backup Withholding and Information Reporting      Payments, (or other taxable distributions)including dividends and proceeds of sales, in respect of our common shares that are made in the United States or by a United States related financial intermediary will be subject to United States information reporting rules. In addition, such payments may be subject to United States federal backup withholding tax. You will not be subject to backup withholding provided that: •   you are a corporation or other exempt recipient, or   •   you provide your correct United States federal taxpayer identification number and certify, under penalties of perjury, that no loss of exemption fromyou are not subject to backup withholding has occurred.withholding.      If you are a Non-U.S. Holder, you generally are not subject to information reporting and backup withholding, but you may be required to provide a certification of your non-United States status in order to establish that you are exempt.      Amounts withheld under the backup withholding rules may be credited against your United States federal income tax, liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.IRS in a timely manner. BRITISH VIRGIN ISLANDS TAX CONSIDERATIONS      Under the International Business Companies Act of the British Virgin Islands as currently in effect, a holder of common equity, such as our common shares, who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common equity and is not liable to the British Virgin Islands for income tax on gains realized on sale or disposal of such shares. Furthermore, there are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on persons who are not residents of the British Virgin Islands. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated under the International Business Companies Act.      Our common shares are not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands. 61Documents on Display      Nam Tai Electronics, Inc. is subject to the information requirements of the Securities and Exchange Act of 1934, and, in accordance with the Securities Exchange Act of 1934, Nam Tai Electronics, Inc. files annual reports on Form 20-F within six months of its fiscal year end, and submit other reports and information under cover of Form 6-K with the SEC. You may read and copy this information at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Recent filings and reports are also available free of charge though the EDGAR electronic filing system at www.sec.gov. You can also request copies of the documents, upon payment of a duplicating fee, by writing to the public reference section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room or accessing documents through EDGAR. As a foreign private issuer, Nam Tai Electronics, Inc. is exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements to shareholders. Item 11.Quantitative and Qualitative Disclosure About Market Risk Currency Fluctuations      See Exchange Rate Fluctuation discussionWe sell a majority of our products in US dollars and pay for our material components in Japanese yen, U.S. dollars, Hong Kong dollars, and Chinese renminbi. We pay labor costs and overhead expenses in Chinese renminbi, the currency of China (the basic unit of which is the yuan), Hong Kong dollars and Japanese yen. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at approximately HK$7.80 to US$1.00, through the currency-issuing banks in Hong Kong and, accordingly, has not in the past presented a currency exchange risk. This could change in the future if those in Hong Kong arguing for a floating currency system prevail in the ongoing debate over whether to continue to peg the Hong Kong dollar to the US dollar.      We believe our most significant foreign exchange risk factor sectionresults from material purchases made in Japanese yen. Approximately 8%, 16% and MD&A6%, respectively, of our material costs have been in Japanese yen during the years ended December 31, 2002, 2003, and 2004. Sales made in Japanese yen account for less than 11% of sales for the years ended December 31, 2002, 2003 and 2004. Our business and operating results could be materially and adversely affected in the event of a severe increase in the value of the Japanese yen to the US dollar at a time when our sales made in Japanese yen are insufficient to cover our material purchases in Japanese yen.      Beginning on pages 10December 1, 1996, the Chinese renminbi became fully convertible under the current accounts. There are no restrictions on trade-related foreign exchange receipts and 42, respectively.disbursements in China. Capital account foreign exchange receipts and disbursements are subject to control, and organizations in China are restricted in foreign currency transactions that must take place through designated banks. 60      We may elect to hedge our currency exchange risk when we judge that such action may be required. In an attempt to lower the costs of expenditures in foreign currencies, we may enter into forward contracts or option contracts to buy or sell foreign currency(ies) against the U.S. dollar through one of our banks. As a result, we may suffer losses resulting from the fluctuation between the buy forward exchange rate and the sell forward exchange rate, or from the price of the option premium.      As of December 31, 2004, we held no option or future contracts and during the year we did not purchase or sell any commodity or currency options. We are continuing to review our hedging strategy and there can be no assurance that we will not suffer losses in the future as a result of hedging activities. Foreign Currency Risk      See Foreign Currency Risk discussionAs of December 31, 2004, we had no open forward contracts or option contracts to purchase or sell foreign currencies.      Cash on hand at December 31, 2004 of $160,649,000 was held in MD&A on page 43.the following currencies. Equivalent U.S. Dollar Holdings December 31, 2004 Japanese yen 5,554,000 United States dollars 131,561,000 Hong Kong dollar 5,823,000 Chinese renminbi 17,700,000 Macao Pataca 11,000 Interest Rate Risk Short-term interest rate risk      See Interest Rate Risk discussionOur interest expenses and income are sensitive to changes in MD&Ainterest rates. All of our cash reserves and short-term borrowings are subject to interest rate changes. Cash on page 44.hand of $160.6 million as of December 31, 2004 was invested in short-term interest-bearing investments having a maturity of three months or less. As such, interest income will fluctuate with changes in short-term interest rates. In 2004, we had $1.1 million in interest income and $195,000 in interest expense.      As of December 31, 2004, we had utilized approximately $3.4 million of our credit facilities, including $2.1 million in short-term notes payable resulting in minimal interest rate risk. Long-term interest rate risk      As of December 31, 2004, we had $8.0 million in long-term bank borrowing, including the current portion of $2.9 million.      Our long-term bank borrowing consisted of a $4.5 million term loan obtained in May 2002, has a term of four years and bear interest at a rate of 1.5% and subsequently changed to 0.75% effective August 2004 over three months’ LIBOR repayable in 16 quarterly installments of $281,250 beginning August 2002. The outstanding balance as of December 31, 2004 was $1.7 million. A $1.6 million term loan obtained in April 2004 has a term of four years and bears interest at a rate of 0.75% over three months’ LIBOR repayable in 16 quarterly installments of $100,000 beginning July 2004. The outstanding balance as of December 31, 2004 was $1.4 million. A $3.6 million term loan obtained in June 2004 has a term of four years and bears interest at a rate of 0.75% over three months’ LIBOR repayable in 16 quarterly installments of $225,000 beginning September, 2004. The outstanding balance as of December 31, 2004 was $3.2 million. A $1.8 million term loan obtained in December 2004 has a term of four years and bears interest at a rate of 0.75% over three months’ LIBOR repayable in 16 quarterly installments of $112,500 beginning March 2005.      We obtained a seven-year $15.0 million term loan in the fourth quarter of 2001 with a fixed rate of interest of 5.05% for the first four years and 1% over the SIBOR rate for the last three years. The term loan had an outstanding balance of $12.9 million as of December 31, 2002. We repaid this term loan on January 3, 2003. Item 12.Description of Securities Other Than Equity Securities      Not applicable 61 PART II Item 13.Defaults, Dividend Arrearages and Delinquencies      Not applicable Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds      Not applicable Item 15.Controls and Procedures      Our Chief Executive OfficerEvaluation of Disclosure Controls and our Chief Financial Officer, after evaluatingProcedures      As required by Rule 13a-14 under the Securities Exchange Act of 1934, as of December 31, 2004, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in USRules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act Rules 13a-14(c)) within 90 daysof 1934). This evaluation was carried out under the supervision and with the participation of the dateCompany’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company’s controls and procedures were designed and provided reasonable assurance of preventing errors and irregularities.      Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosures. The Company’s management have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 20-F,report and have concluded that as of such date, the Company’s disclosure controls and procedures were effectiveeffective.      The Company has confidence in its internal controls and procedures and has expanded its efforts to ensuredevelop and improve its controls. Nevertheless, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that material information relating tothe Company’s disclosure procedures and controls, or its internal controls, will necessarily prevent all error or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that the Company was made knownis subject to them by othersresource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all internal control issues or instances of fraud, if any, within the Company particularly during the periodbe detected. Changes in which this Form 20-F was being prepared.Internal Controls      There werehave been no significant changes in the Company’s internal controls or in other factors that could significantly affect theseinternal controls subsequent to the date ourthe Company carried out this evaluation. Item 16.[Reserved] Item 16 A. Audit Committee Financial Expert      The Company’s Board of Directors has determined that one member of the Audit Committee, Mark Waslen, qualifies as an “audit committee financial expert” as defined by Item 401(h) of Regulation S-K, adopted pursuant to the Securities Exchange Act of 1934. Mr. Waslen has a degree in Accounting and is a C.F.A., C.A. and a C.P.A. In addition to serving in various financial positions, including Nam Tai Group Financial Controller from 1990 to 1995 and Treasurer from 1998 to 1999, at Nam Tai, Mr. Waslen has worked at Peat Marwick Thorne, Deloitte Touche Tohmatsu and BME+ Partners Chartered Accountants.      All three members of the audit committee, Messrs. Waslen, Chu and Lo, are independent non-executive directors. 62 Item 16 B. Code of Ethics      The Company has adopted a Code of Ethics for the Chief Executive Officer and our Chief Financial Officer, completed their evaluation, nor were there any significant deficiencies or material weaknesseswhich applies to the Company’s principal executive officers and to its principal financial and accounting officers. In July 2004, the Code of Ethics was revised to apply to all employees. A copy of the revised Code of Ethics is attached as Exhibit 14.1 to this Annual Report on Form 20-F. These codes have been posted on our website, which is located athttp://www.namtai.com/corpgov/corpgov.htm. The contents of this website address, other than the corporate governance guidelines, the code of ethics and committee charters, are not a part of this Form 20-F. Stockholders may request a free copy in print form from: Pan Pacific I.R. Ltd. Attention : Investor Relations Office Suite 1790 - 999 W. Hastings Street Vancouver, BC Canada V6C 2W2 Toll Free Telephone : 1-800-661-8831 Item 16 C. Principal Accountant Fees and Services      Deloitte Touche Tohmatsu has served as our independent public accountant for each of the fiscal years in the Company’s internal controls requiring corrective actions.three-year period ended December 31, 2004, for which audited financial statements appear in this annual report on Form 20-F. The auditor is elected annually at the Annual General Meeting. The Audit Committee will propose to the Annual General Meeting convening on June 6, 2005 that Deloitte Touche Tohmatsu be elected as the auditor for 2005. Item 16.     [Reserved]     The following table presents the aggregate fees for professional services and other services rendered by Deloitte Touche Tohmatsu to us in 2004 and 2003.                       2004     2003       US$’000     US$’000   Audit Fees(1)     702       271   Audit-related Fees(2)     21       1   Tax Fees(3)     3       11   All Other Fees(4)     15       8                 Total     741       291                 62 (1) Audit Fees consist of fees billed for the annual audit of our consolidated financial statements and the statutory financial statements of our subsidiaries. They also include fees billed for other audit services, which are those services that only the external auditor reasonably can provide, and include the provision of comfort letters and consents, and attestation services relating to the review of documents filed with the SEC. The fees for 2004 include US$159 of accrued audit fees for the 2004 year-end audit that were not billed until 2005. The fees for 2003 included $40 of accrued audit fees for the 2003 year-end audit that were not billed until 2004. (2) Audit-related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor. (3) Tax Fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, tax advice related to mergers and acquisitions, transfer pricing, and requests for rulings or technical advice from tax authorities; tax planning services; and expatriate tax compliance, consultation and planning services. (4) All Other Fees includes business advisory service fee. 63 Audit Committee Pre-approval Policies and Procedures      The Audit Committee of our Board of Directors is responsible, among other matters, for the oversight of the external auditor subject to the relevant regulations of the SEC and NYSE. The Audit Committee has adopted a policy, or the Policy, regarding pre-approval of audit and permissible non-audit services provided by our independent auditors.      Under the Policy, the Chairman of the Audit Committee is delegated the authority to grant pre-approvals in respect of all auditing services including non-audit service, but excluding those services stipulated in Section 201 “Service Outsider the Scope of Practice of Auditors”. Moreover, if the Audit Committee approves an audit service within the scope of the engagement of the audit service, such audit service shall be deemed to have been pre-approved. The decisions of the Chairman of the Audit Committee made under delegation authority to pre-approve an activity shall be presented to the Audit Committee at each of its scheduled meetings.      Requests or applications to provide services that require specific approval by the Audit Committee are submitted to the Audit Committee by both the external auditor and the Chief Financial Officer.      During 2003 and 2004, services provided to us by Deloitte Touche Tohmatsu representing less than 49.6% and 0.0%, respectively, of the total non-audit service fees were approved by the Audit Committee pursuant to the de minima exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Item 16 D. Purchases of Equity Securities by the Issuer and Affiliated Purchasers      Not applicable PART III Item 17.Financial Statements      Not Applicable Item 18.Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS       Independent Auditors’ Reports   F-1 F-2 Consolidated Statements of Income for the years ended December 31, 2000, 20012002, 2003 and 2002 2004   F-3 Consolidated Balance Sheets as of December 31, 20012003 and 2002 2004   F-4 Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2000, 20012002, 2003 and 2002 2004   F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 20012002, 2003 and 2002 2004   F-6 – F-7 Notes to Consolidated Financial Statements   F-8 – F-36      The information required within the schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission is either not applicable or is included in the notes to the Consolidated Financial Statements. 6364 Item 19Exhibits.           The following exhibits are filed as part of this annual report: Exhibit Number DESCRIPTION 1.1 Memorandum and Articles of Association, as amended on June 26, 2003.* 4.1 Purchase Agreement entered into between Citigroup Global Markets Limited and Nam Tai Electronics, Inc. on August 22, 2003 for the sale of 3% convertible notes of TCL International Holdings Ltd. at an aggregate price of HK$39,555,068.49 (approximately $5.03 million).* 4.2 Agreement entered into between J.I.C. Technology Company Limited and Glory Gate Enterprises Limited on June 28, 2003 for the disposal of transformers operation to Glory Gate Enterprises Limited for approximately $2.4 million.* 4.3 Equity Interest Transfer Agreement between Nam Tai Electronic & Electrical Products Limited HK and Nam Tai Electronic & Electrical Products Limited July 3, 2003. 4.4 Construction Agreement, with commencement date of September 23, 2003, entered into between Namtai Electronic (Shenzhen) Co. Ltd. and Takasago Thermal Engineering (Hong Kong) Co. Ltd. on October 28, 2003 for the construction of new factory premises.* 4.5 An Investment Agreement and Shareholders Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on December 9, 2003 for acquiring an 11.33% equity interest in Stepmind with a consideration of approximately $5.3 million.* 4.6 A Supplemental Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on January 2, 2004 for consenting to the release of the second phase of payment and increasing capital investment in Stepmind should Stepmind fulfill certain conditions.* 4.7 Land Title Rights Issued by Shenzhen Municipal Bureau of Planning and Land Resources February 16, 2004. 4.8 An Agreement entered into between Nam Tai Group Management limited and Frontier Profit Inc. on March 10, 2004 for selling Flat A, 22nd Floor, Tower 2 and Car Parking Space No. A86, The Leighton Hill, 28 Broadwood Road, Happy Valley, Hong Kong to Frontier Profit Inc.* 4.9 A Memorandum of Understanding signed by Namtai Electronic (Shenzhen) Co., Ltd. and Nam Tai Electronic & Electrical Products Limited (Hong Kong) on March 26, 2004 to confirm the respective rights and liabilities of Nam Tai Electronic & Electrical Products Limited (Hong Kong) and Namtai Electronic (Shenzhen) Co., Ltd. under an internal restructuring. 4.10 A Sale and Purchaser Agreement entered into between Nam Tai Electronics, Inc. and Mr. Wong Toe Yeung on March 31, 2004 regarding purchasing the entire issued share capital of Jasper Ace Limited from Mr. Wong Toe Yeung with the consideration of disposal 72.2% interest in Mate Fair Group Limited, cash of $25 million and 2,389,974 shares issued by Nam Tai Electronics, Inc. 4.11 A Trademark License Agreement entered into between Nam Tai Electronics, Inc. and Nam Tai Electronic & Electrical Products Limited on April 8, 2004 for the use of certain “Namtai” trademarks. 4.12 A Deed of Indemnity entered into between Nam Tai Electronics, Inc, and Nam Tai Electronic & Electrical Products Limited on April 15, 2004 in favour of Nam Tai Electronic & Electrical Products Limited regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. 4.13 An Underwriting Agreement entered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited, Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as public offer underwriters on April 15, 2004 regarding the public offering of 20,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. 4.14 A Supplemental Agreement entered into between Nam Tai Electronics, Inc, and Mr. Wong Toe Yeung on July 27, 2004 to adjust the consideration for purchasing the entire issued share capital of Jasper Ace Limited by canceling 973,210 common shares of Nam Tai Electronics, Inc, issued to Top Scale Company Limited on April 21, 2004. 4.15 An Underwriting Agreement entered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited, Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as international placement underwriters on April 22, 2004 regarding the international placing of 180,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. 4.16 A Pricing Determination Agreement entered into among Nam Tai Electronics, Inc., Nam Tai Electronic & Electrical Products Limited and the Hongkong and Shanghai Banking Corporation Limited on April 22, 2004 for determining the offering price of the shares of Nam Tai Electronic & Electrical Products Limited to be HK$3.88 per share. 4.17 A Stock Borrowing Agreement entered into between Nam Tai Electronics, Inc. and the Hongkong and Shanghai Banking Corporation Limited on April 22, 2004 regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. Exhibit Number DESCRIPTION 4.18 Amended 2001 Option Plan July 30, 2004 4.19 An Accession Agreement entered into between Welcome Success Technology Ltd. and Mr. Alain Jolivet on August 4, 2004 in relation to the transfer of entire interest in Stepmind to Remote Reward SAS and who became a party to the Shareholders Agreement which entered into among Nam Tai Electronics, Inc. , AGF Innovation 3, AGF Innovation 4, AGF Innovation 5, Mighty Wealth Group Limited, Remote Reward SAS, Mr. Alain Jolivet and Mr. Andre Jolivet executed on November 278, 2003, December 9, 2003 and December 10, 2003. 4.20 An Escrow Agreement entered into among Nam Tai Electronics, Inc., Welcome Success Technology Limited, Remote Reward SAS, Johnson Stokes & Master, Mr. Andre Jolivet and Mr. Alain Jolivet on August 18, 2004 in relation to the disposal of 1,457,720 shares in Stepmind to Remote Reward SAS with a consideration of Euros 4,253,301.98. 4.21 A subscription Agreement entered into among TCL Industries Holdings (HK) Limited, TCL International holdings Limited, Cheerful Asset Investments Limited, Jasper Ace Limited, Mate Fair Group Limited, and TCL Communication Technology Holdings Limited on August 19, 2004 for subscribing 254,474,910 shares in TCL Communication Technology Holdings Limited in a consideration of RMB131,283,020. 4.22 A Deed of Assignment of Trademarks entered into between Nam Tai Electronics, Inc. and Namtai Electronic (Shenzhen) Co. Ltd. on September 20, 2004 for assigning “Namtai & device” trademarks to Nam Tai Electronics, Inc. 4.23 A Banking Facilities Letter from the Hongkong and Shanghai Banking Corporation Limited to Nam Tai Group Management Limited on September 24, 2004 regarding the renewal of Overdraft Facility of HK$500,000, Treasury Facilities of US$30,000,000 and Corporate Card of HK$1,100,000. 4.24 A Share Transfer Agreement entered into between J.I.C. Enterprises (Hong Kong) Limited and J.I.C. Technology Company Limited on October 15, 2004 for the disposal of the entire issued share capital of Jetup Electronic (Shenzhen) Co. Ltd. to J.I.C. Technology Company Limited for a consideration of HK$105,878,396. 8.1 Diagram of Company’s subsidiaries. See Page 24 of this report. 10.1 Letter from MCW. Todman & Co. dated February 10, 2003. ** 10.2 Letter from MCW. Todman & Co. dated February 17, 2003. ** 12.1 Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 12.2 Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 14.1 Code of Ethics. 23.1 Consent of Deloitte Touche Tohmatsu. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Previously filed with the registrant’s Form 20-F filed with the SEC on March 10, 2004. ** Previously filed with the registrant’s Form 20-F filed with the SEC on February 28, 2003. NAM TAI ELECTRONICS, INC. Independent Auditors’ ReportINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) Report of Independent Registered Public Accounting Firm F-2 Consolidated Statements of Income for the years ended December 31, 2002, 2003 and 2004 F-3 Consolidated Balance Sheets as of December 31, 2003 and 2004 F-4 Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2002, 2003 and 2004 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 F-6 – F-7 Notes to Consolidated Financial Statements F-8 – F-36 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.: We have audited the accompanying consolidated balance sheetsheets of Nam Tai Electronics, Inc. and Subsidiaries (the “Company”)subsidiaries as of December 31, 2002,2003 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company as of December 31, 2001 and for the two years then ended were audited by other auditors whose report dated March 15, 2002, expressed an unqualified opinion on those statements.      We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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 Nam Tai Electronics, Inc. and Subsidiaries at December 31, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.      As discussed in note 2(f) to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangibles. /s/ GRANT THORNTON Hong Kong February 21, 2003 F-1 Independent Auditors’ Report To the Shareholders and the Board of Directors of Nam Tai Electronics, Inc.:      We have audited the accompanying consolidated balance sheet of Nam Tai Electronics, Inc. and Subsidiaries (the “Company”) as of December 31, 2001, and the related consolidated statements ofcomprehensive income, shareholders’ equity and cash flows for each of the twothree years in the period ended December 31, 2001.2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.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. AnThe Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, 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, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nam Tai Electronics, Inc. and Subsidiaries as ofsubsidiaries at December 31, 2001,2003 and 2004, and the results of their operations and their cash flows for each of the twothree years in the period ended December 31, 20012004 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE TOUCHE TOHMATSU Certified Public Accountants Hong Kong March 15, 2002 4, 2005 F-2 NAM TAI ELECTRONICS, INC. Nam Tai Electronics, Inc. and Subsidiaries Consolidated StatementsCONSOLIDATED STATEMENTS OF INCOME (In thousands of IncomeUS dollars, except per share data)                           Year Ended December 31, 2000 2001 2002 (In thousands of US dollars, except per share data) Net sales   $ 213,688     $ 234,006     $ 236,016   Cost of sales     182,096       203,974       197,956                       Gross profit     31,592       30,032       38,060                       Selling, general and administrative expenses     17,646       21,974       17,983   Research and development expenses     3,489       2,954       2,686   Impairment of goodwill     —       —       339                       Total operating expenses     21,135       24,928       21,008                       Income from operations     10,457       5,104       17,052   Equity in (loss) income of affiliated companies     (189 )     1,867       10,741   Other income (expense), net     13,853       2,709       (6,043 ) Interest expense     (165 )     (178 )     (790 )                     Income before income taxes and minority interests     23,956       9,502       20,960   Income taxes benefit (expense)     33       (227 )     (773 )                     Income before minority interests     23,989       9,275       20,187   Minority interests     12       (230 )     (164 )                     Net income   $ 24,001     $ 9,045     $ 20,023                       Basic earnings per share   $ 2.63     $ 0.88     $ 1.89                       Diluted earnings per share   $ 2.56     $ 0.87     $ 1.86                                                     Year ended December 31,       2002     2003     2004     Net sales - third parties   $ 228,167     $ 385,524     $ 499,680   Net sales - related party     7,849       20,782       34,181         Total net sales     236,016       406,306       533,861   Cost of sales     197,956       340,016       457,385         Gross profit     38,060       66,290       76,476                                   Selling, general and administrative expenses     17,983       24,866       28,053   Research and development expenses     2,686       4,037       5,045   Impairment of goodwill     339       —       —         Total operating expenses     21,008       28,903       33,098                                   Income from operations     17,052       37,387       43,378   Other (expenses) income, net     (6,859 )     2,899       17,283   Gain on partial disposal of subsidiaries     17       1,838       77,320   Unrealized loss on marketable securities     —       —       (58,316 ) Interest income     799       788       1,110   Interest expense     (790 )     (121 )     (195 )       Income before income taxes and minority interests     10,219       42,791       80,580   Income taxes     (773 )     (399 )     (879 )                                 Income before minority interests and equity in income (loss) of affiliated companies     9,446       42,392       79,701   Minority interests     (164 )     (1,067 )     (6,010 ) Equity in income (loss) of affiliated companies     10,741       498       (6,806 )                                 Income after minority interests and equity in income (loss) of affiliated companies     20,023       41,823       66,885   Discontinued operation     —       1,979       —                                   Net income   $ 20,023     $ 43,802     $ 66,885                                   Basic earnings per share   $ 0.57     $ 1.09     $ 1.57                                   Diluted earnings per share   $ 0.57     $ 1.07     $ 1.57         See accompanying notes to the consolidated financial statementsstatements. F-3 NAM TAI ELECTRONICS, INC. Nam Tai Electronics, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS (In thousands of US dollars, except share data) Consolidated Balance Sheets                   December 31, 2001 2002 (In thousands of US dollars, except share data) ASSETS Current assets                 Cash and cash equivalents   $ 58,676     $ 82,477   Marketable securities     9,505       —   Accounts receivable, less allowance for doubtful accounts of $31 and $122 at December 31, 2001 and 2002, respectively     41,968       50,944   Inventories, net     11,892       19,200   Prepaid expenses and deposits     2,377       1,867   Income taxes recoverable     1,353       855                 Total current assets     125,771       155,343   Investment in affiliated companies, equity method     3,921       —   Investments, at cost     —       15,982   Convertible notes     —       5,128   Property, plant and equipment, net     70,414       75,914   Goodwill, net     22,089       21,308   Intangible assets, net     971       —   Other assets     1,407       1,411                 Total assets   $ 224,573     $ 275,086                 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities                 Notes payable   $ 1,547     $ 985   Long term bank loans — current portion     2,140       13,985   Accounts payable     27,929       38,714   Accrued expenses     6,329       12,609   Amount due to a related party     2,733       —   Dividend payable     1,023       1,442   Income taxes payable     88       200                 Total current liabilities     41,789       67,935   Deferred income taxes     151       112   Long term bank loans — non-current portion     12,860       2,812                 Total liabilities     54,800       70,859                 Minority interests     422       2,099   Commitments and contingencies     —       —   Shareholders’ equity                 Common shares ($0.01 par value — authorized 20,000,000 shares; shares issued and outstanding at December 31, 2001 — 10,401,940, December 31, 2002 — 12,019,668)     104       120   Additional paid-in capital     111,368       147,828   Retained earnings     57,864       54,182   Accumulated other comprehensive income (loss)     15       (2 )               Total shareholders’ equity     169,351       202,128                 Total liabilities and shareholders’ equity   $ 224,573     $ 275,086                                       December 31,       2003     2004     ASSETS                 Current assets:                 Cash and cash equivalents   $ 61,827     $ 160,649   Marketable securities     —       41,906   Accounts receivable, less allowance for doubtful accounts of $119 and $157 at December 31, 2003 and 2004, respectively     62,090       90,362   Amount due from a related party     2,707       66   Inventories     27,032       23,096   Prepaid expenses and other receivables     9,799       12,087   Income taxes recoverable     4,922       6,566                           Total current assets     168,377       334,732                     Investment in an affiliated company     9,855       3,049   Investments, at cost     16,366       —   Property, plant and equipment, net     77,647       97,441   Deposits for property, plant and equipment     3,327       7,701   Goodwill, net     20,137       15,831   Intangible assets, net     551       459   Other assets     1,435       1,260                           Total assets   $ 297,695     $ 460,473                           LIABILITIES AND SHAREHOLDERS’ EQUITY                                   Current liabilities:                 Notes payable   $ 1,879     $ 2,080   Long term bank loans - current portion     1,125       2,875   Accounts payable     55,674       89,570   Accrued expenses and other payables     13,633       16,661   Dividend payable     2,062       5,120   Income taxes payable     530       183                           Total current liabilities     74,903       116,489                     Deferred income taxes     78       —   Long term bank loans - non-current portion     1,688       5,163                           Total liabilities     76,669       121,652                           Minority interests     3,908       33,768         Commitments and contingencies     —       —                     Shareholders’ equity:                 Common shares (2004: $0.01 par value - authorized 200,000,000 shares)     412       426   Additional paid-in capital     206,845       241,756   Retained earnings     9,863       56,324   Accumulated other comprehensive (loss) income     (2 )     6,547                           Total shareholders’ equity     217,118       305,053                           Total liabilities and shareholders’ equity   $ 297,695     $ 460,473         See accompanying notes to the consolidated financial statementsstatements. F-4 Nam Tai Electronics, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity                                                     Accumulated Common Common Additional other Total shares shares paid-in Retained comprehensive shareholders’ outstanding amount capital earnings income (loss) equity (In thousands of US dollars, except share and per share data) Balance at January 1, 2000     8,840,823     $ 88     $ 80,870     $ 44,566     $ 44     $ 125,568   Share buy-back program     (5,600 )     —       —       (73 )     —       (73 ) Shares issued as compensation     10,000       —       136       —       —       136   Shares issued on exercise of advisors’ warrants     58,030       1       1,183       —       —       1,184   Shares issued on exercise of options     149,500       1       1,568       —       —       1,569   Shares issued for acquisition of subsidiaries     1,161,087       12       21,783       —       —       21,795   Advisors’ warrants and options     —       —       423       —       —       423   Comprehensive income:                                                   Net income     —       —       —       24,001       —       24,001     Foreign currency translation     —       —       —       —       (49 )     (49 ) Dividends ($1.36 per share, including special dividend of $1 per share)     —       —       —       (12,190 )     —       (12,190 )                                       Balance at December 31, 2000     10,213,840     $ 102     $ 105,963     $ 56,304     $ (5 )   $ 162,364   Share buy-back program     (227,900 )     (2 )     —       (3,351 )     —       (3,353 ) Shares issued on exercise of advisors’ warrants     300,000       3       3,072       —       —       3,075   Shares issued on exercise of options     116,000       1       1,231       —       —       1,232   Advisors’ warrants     —       —       263       —       —       263   Issue of options     —       —       839       —       ��       839   Comprehensive income:                                                   Net income     —       —       —       9,045       —       9,045     Foreign currency translation     —       —       —       —       20       20   Dividends ($0.40 per share)     —       —       —       (4,134 )     —       (4,134 )                                       Balance at December 31, 2001     10,401,940     $ 104     $ 111,368     $ 57,864     $ 15     $ 169,351   Share buy-back program     (197,600 )     (2 )     —       (3,526 )     —       (3,528 ) Share redemption     (169,727 )     (2 )     —       (3,123 )     —       (3,125 ) Shares issued on exercise of public warrants     1,460,655       15       29,782       —       —       29,797   Shares issued on exercise of options     524,400       5       6,668       —       —       6,673   Advisors’ options     —       —       10       —       —       10   Comprehensive income:                                                   Net income     —       —       —       20,023       —       20,023     Foreign currency translation     —       —       —       —       (17 )     (17 ) Dividends ($1.48 per share, including special dividend of $1 per share)     —       —       —       (17,056 )     —       (17,056 )                                       Balance at December 31, 2002     12,019,668     $ 120     $ 147,828     $ 54,182     $ (2 )   $ 202,128                                         See accompanying notes to the consolidated financial statements F-5 Nam Tai Electronics, Inc. and Subsidiaries Consolidated Statements of Cash Flows                             Year Ended December 31, 2000 2001 2002 (In thousands of US dollars) Cash flows from operating activities:                         Net income   $ 24,001     $ 9,045     $ 20,023                       Adjustments to reconcile net income to net cash (used in) provided by operating activities:                         Depreciation     6,965       9,136       10,397   Amortization of intangible assets     733       2,035       222   Impairment of goodwill — Micro Business Systems Industries Company Limited (“MBS”)     —       —       339   Amortization of advisors’ warrants and options     423       263       10   Staff option costs     —       839       —   Share redemption and dividend withheld — Tele-Art, Inc. (“Tele-Art”)     —       —       (3,519 ) (Gain) Loss on disposal of property, plant and equipment     (244 )     378       977   Gain on disposal of investments — Group Sense (International) Limited (“Group Sense”)     (9,435 )     —       —   Gain on disposal of investment in an affiliated company — Group Sense     (1,346 )     —       —   Release of unamortized goodwill of affiliated companies — Mate Fair Group Limited (“Mate Fair”)     —       —       520   Gain on disposal of a subsidiary and related intangible assets — BPC (Shenzhen) Co., Ltd. (“BPC”)     —       —       (77 ) Loss on disposal of other assets     —       —       21   Loss on restructuring of subsidiaries — J.I.C. Group (B.V.I.) Limited and its subsidiaries (“JIC Group”)     —       —       2,655   Unrealized gain on marketable securities     (433 )     (1,568 )     —   Realized gain on marketable securities     —       —       (642 ) Equity in loss (income) of affiliated companies     189       (1,867 )     (10,741 ) Dividend income from affiliated companies — Mate Fair     —       —       10,456   Fair value of shares issued as compensation     136       —       —   Deferred income taxes     (110 )     117       (39 ) Minority interests     (12 )     230       164   Changes in current assets and liabilities (net of effects of acquisitions and disposals):                           (Acquisition of) Proceeds from marketable securities     (7,504 )     —       10,147     Increase in accounts receivable     (5,137 )     (4,378 )     (8,531 )   (Increase) Decrease in inventories     (13,245 )     15,302       (7,625 )   Decrease (Increase) in prepaid expenses and deposits     407       (620 )     496     Decrease in income taxes recoverable     28       689       498     (Decrease) Increase in notes payable     (6,331 )     48       (562 )   Increase (Decrease) in accounts payable and accrued expenses     7,203       (6,062 )     16,967     (Decrease) Increase in income taxes payable     (114 )     (354 )     112     Increase (Decrease) in amount due to a related party     2,691       2       (2,766 )                     Total adjustments     (25,136 )     14,190       19,479                       Net cash (used in) provided by operating activities     (1,135 )     23,235       39,502                       F-6 Nam Tai Electronics, Inc. and SubsidiariesNAM TAI ELECTRONICS, INC. Consolidated Statements of Cash Flows — (Continued)                           Year Ended December 31, 2000 2001 2002 (In thousands of US dollars) Cash flows from investing activities:                         Acquisition of long term investment — TCL Corporation     —       —       (11,968 ) Acquisition of convertible notes — TCL International Holdings Limited     —       —       (5,128 ) Purchase of property, plant and equipment     (3,579 )     (36,013 )     (18,485 ) Acquisition of JIC Group, net of cash acquired     (7,872 )     —       —   Acquisition of additional shares in subsidiaries, net of cash acquired — JIC Group and Mate Fair     —       (85 )     (436 ) Decrease (Increase) in other assets     123       (38 )     (25 ) Proceeds from disposal of property, plant and equipment     388       698       628   Purchase of interest in affiliated companies     (2,243 )     —       —   Proceeds from disposal of investment     24,214       —       —   Proceeds from disposal of investment in an affiliated company     3,875       —       —   Proceeds from disposal of a subsidiary and related intangible assets, net of cash disposed of — BPC     —       —       1,654                       Net cash provided by (used in) investing activities     14,906       (35,438 )     (33,760 )                     Cash flows from financing activities:                         Dividends paid     (11,973 )     (3,947 )     (16,654 ) Share buy-back program     (73 )     (3,353 )     (3,528 ) Repayment of bank loans     —       —       (2,703 ) Repayment of short term debt     (1 )     (24 )     —   Proceeds from bank loans     —       15,000       4,500   Proceeds from shares issued on exercise of options and warrants     2,753       4,307       36,470   Contribution by minority interests     200       —       —                       Net cash (used in) provided by financing activities     (9,094 )     11,983       18,085                       Effect of foreign currencies on cash flows     4       —       (26 )                     Net increase (decrease) in cash and cash equivalents     4,681       (220 )     23,801   Cash and cash equivalents at beginning of year     54,215       58,896       58,676                       Cash and cash equivalents at end of year   $ 58,896     $ 58,676     $ 82,477                       Supplemental schedule of cash flow information:                         Interest paid   $ 165     $ 178     $ 790   Income taxes paid (received)   $ 129     $ (249 )   $ 227                       Non cash investing transaction:                         Acquisition of subsidiaries by issue of shares — JIC Group   $ 21,795     $ —     $ —                       Non cash financing transaction:                         Share redemption and dividend withheld — Tele-Art   $ —     $ —     $ 3,519                       See accompanying notes to the consolidated financial statements F-7 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2001 and 2002 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (In thousands of US dollars, except share and per share data)                                                                                               Accumulated     Total             Common     Common     Additional             Other     Share-             Shares     Shares     Paid-in     Retained     Comprehensive     holders’     Comprehensive       Outstanding     Amount     Capital     Earnings     Income (loss)     Equity     Income (loss)   Balance at January 1, 2002     31,205,820     $ 312     $ 111,333     $ 57,691     $ 15     $ 169,351           Share buy-back program     (592,800 )     (6 )     —       (3,522 )     —       (3,528 )         Share redemption     (509,181 )     (5 )     —       (3,120 )     —       (3,125 )         Shares issued on exercise of public warrants     4,381,965       44       29,753       —       —       29,797           Shares issued on exercise of options     1,573,200       15       6,658       —       —       6,673           Advisors’ options (note 11b)     —       —       10       —       —       10           Net income     —       —       —       20,023       —       20,023     $ 20,023   Foreign currency translation     —       —       —       —       (17 )     (17 )     (17 )                                                         Comprehensive income                                                   $ 20,006                                                           Cash dividends ($0.49 per share, including special dividend of $0.33 per share)     —       —       —       (17,056 )     —       (17,056 )                                                                                 Balance at December 31, 2002     36,059,004       360       147,754       54,016       (2 )     202,128           Shares issued on exercise of options     1,425,600       14       8,494       —       —       8,508           Issue of stock dividend     3,746,668       38       50,333       (50,371 )     —       —           Compensation expense (note 3(b)(iv))     —       —       264       —       —       264           Net income     —       —       —       43,802       —       43,802     $ 43,802                                                           Cash dividends ($1.00 per share, including special dividend of $0.80 per share)     —       —       —       (37,584 )     —       (37,584 )                                                                                 Balance at December 31, 2003     41,231,272       412       206,845       9,863       (2 )     217,118           Shares issued on exercise of options     16,500       —       72       —       —       72           Shares issued on acquisition of a subsidiary     2,389,974       24       58,769       —       —       58,793           Cancellation of shares issued on acquisition of a subsidiary     (973,210 )     (10 )     (23,930 )     —       —       (23,940 )         Net income     —       —       —       66,885       —       66,885     $ 66,885   Unrealized gain of marketable securities     —       —       —       —       6,549       6,549       6,549                                                           Comprehensive income                                                   $ 73,434                                                           Cash dividends ($0.48 per share)     —       —       —       (20,424 )     —       (20,424 )                       Balance at December 31, 2004     42,664,536     $ 426     $ 241,756     $ 56,324     $ 6,547     $ 305,053                         1. Company Information      Nam Tai Electronics, Inc. and Subsidiaries (the “Company” or “Nam Tai”) is an electronics manufacturing and design services providerSee accompanying notes to a select group of the world’s leading original equipment manufacturers, or OEMs, of telecommunication and consumer electronic products. The Company’s largest customers include Epson Precision (HK) Ltd., Sony Ericsson Mobile Communications AB and Texas Instruments Incorporated. Through its electronics manufacturing services, or EMS, operations, the Company manufactures electronic components and subassemblies, including liquid crystal display, or LCD, panels, transformers, LCD modules and radio frequency, or RF, modules. These components are used in various electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys and microwave ovens. The Company also manufactures finished products, including cordless phones, palm-sized PC’s, personal digital assistants, electronic dictionaries, calculators and digital camera accessories for use with cellular phones.      The Company operates in two segments: consumer electronic products (“CEP”) and LCD panels and transformers (���LPT”). The Company’s principal operations, which are conducted through subsidiaries, are in the Hong Kong Special Administrative Region (“Hong Kong”) and the People’s Republic of China (the “PRC”). The PRC resumed sovereignty over Hong Kong effective July 1, 1997 and politically Hong Kong is an integral part of China. However, for simplicity and as a matter of definition only, our references to PRC in these consolidated financial statements means the PRC and all of its territories excluding Hong Kong.statements.      The Company was founded in 1975 as an electronic products trading company based in Hong Kong and shifted its focus to manufacturing of electronic products in 1978. The Company moved its manufacturing facilities to the PRC in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates available and subsequently relocated to Shenzhen, PRC in order to capitalize on opportunities offered in Southern China. The Company was reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands in August 1987. The Company’s principal manufacturing and design operations are based in Shenzhen, PRC, approximately 30 miles from Hong Kong. Its principal executive offices are located in Hong Kong, which provides it access to Hong Kong’s infrastructure of communication and banking and facilitates management of its PRC operations and transportation of its products out of PRC through the port of Hong Kong.F-5 2. Summary of Significant Accounting Policies (a) Principles of consolidation      The consolidated financial statements include the financial statements of the Company and all its subsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation. (b) Cash and cash equivalents      Cash and cash equivalents include all cash balances and certificates of deposit having a maturity date of three months or less upon acquisition. (c) Marketable securities      All marketable securities are classified as trading securities and are stated at fair market value. Market value is determined by the most recently traded price of the security at the balance sheet date. Net realized and unrealized gains and losses on trading securities are included in other income. The cost of securities sold is based on the average cost method and income earned is included in other income. F-8 Nam Tai Electronics, Inc. and SubsidiariesNAM TAI ELECTRONICS, INC. NotesCONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of US dollars)                               Year ended December 31,       2002     2003     2004     Cash flows from operating activities:                         Net income   $ 20,023     $ 43,802     $ 66,885                                   Adjustments to reconcile net income to net cash provided by operating activities:                         Depreciation and amortization of property, plant and equipment     10,397       12,172       13,924   Amortization of intangible assets     222       92       92   Loss (gain) on disposal of property, plant and equipment     977       (6 )     347   Loss (gain) on disposal of other assets     21       —       (19 ) Loss on disposal of convertible notes     —       102       —   Loss on disposal of investment     —       —       67   Realized gain on marketable securities - trading     (642 )     —       —   Impairment of goodwill - business acquired from Micro Business Systems Industries Company Limited (“MBS”)     339       —       —   Unrealised loss on marketable securities TCL Communication Technology Holdings Limited (“TCL Communication”)     —       —       58,316   Release of unamortized goodwill of an affiliated company - Mate Fair Group Limited (“Mate Fair”)     520       —       —   Gain on disposal of a subsidiary and related intangible assets - BPC (Shenzhen) Co. Ltd (“BPC”)     (77 )     —       —   Gain on disposal of a subsidiary - Jieyao Electronics (Shenzhen) Co., Ltd. (“Jieyao”)     —       (1,979 )     —   Gain on partial disposal of a subsidiary - J.I.C. Technology Company Limited (“JIC Technology”)     —       (1,838 )     (6,249 ) Gain on partial disposal of a subsidiary - Nam Tai Electronic & Electrical Products Limited (“NTEEP”)     —       —       (71,071 ) Loss on reverse merger of subsidiaries - J.I.C. Group (B.V.I.) Limited and its subsidiaries (“JIC Group”)     2,655       —       —   Compensation cost on transfer of interest in a subsidiary - Namtek Software Development Company Limited (“Namtek Software”)     —       509       —   Amortization of advisors’ warrants and options     10       —       —   Share redemption and dividend withheld in settlement of a receivable - - Tele-Art, Inc. (“Tele-Art”)     (3,519 )     —       —   Equity in (income) loss of affiliated companies less dividend received     (285 )     (498 )     6,806   Dividend income     —       —       (15,913 ) Deferred income taxes     (39 )     (34 )     (78 ) Minority interests     164       1,067       6,010   Changes in current assets and liabilities (net of effects of acquisitions and disposals):                         Proceeds from marketable securities - trading     10,147       —       —   Increase in accounts receivable     (8,531 )     (11,146 )     (28,272 ) (Increase) decrease in amount due from a related party     —       (2,707 )     2,641   (Increase) decrease in inventories     (7,625 )     (8,554 )     3,936   Decrease (increase) in prepaid expenses and other receivables     496       (3,027 )     2,654   Decrease (increase) in income taxes recoverable     498       (4,067 )     (1,644 ) (Decrease) increase in notes payable     (562 )     894       201   Increase in accounts payable     10,816       17,971       33,896   Increase in accrued expenses and other payables     6,151       1,189       3,028   Increase (decrease) in income taxes payable     112       330       (347 ) Decrease in amount due to a related party     (2,766 )     —       —         Total adjustments     19,479       470       8,325                                   Net cash provided by operating activities   $ 39,502     $ 44,272     $ 75,210         F-6 NAM TAI ELECTRONICS. INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of US dollars)                               Year ended December 31,       2002     2003     2004     Cash flows from investing activities:                         Purchase of property, plant and equipment   $ (18,485 )   $ (17,053 )   $ (38,611 ) Increase in deposits for property, plant and equipment     —       (3,103 )     (4,374 ) Prepayment for long term investment     —       (5,277 )     —   Increase in other assets     (25 )     (24 )     (37 ) Acquisition of an affiliated company - Alpha Star     —       (10,000 )     —   Acquisition of long term investments - TCL Corporation/ iMagic Infomedia Technology Limited     (11,968 )     (384 )     —   (Acquisition) proceeds from disposal of convertible notes - TCL International Holdings Limited     (5,128 )     5,026       —   Acquisition of additional shares in subsidiaries, net of cash acquired - - JIC Group and Mate Fair     (436 )     —       —   Acquisition of marketable securities - TCL Communication     —       —       (25,084 ) Proceeds from partial disposal of subsidiaries - JIC Technology and Namtek Software/JIC Technology and NTEEP     —       4,165       95,449   Proceeds from disposal of property, plant and equipment     628       2,595       4,546   Proceeds from disposal of investment     —       —       5,609   Proceeds from disposal of other assets     —       —       231   Proceeds from disposal of a subsidiary, net of cash disposal of - Jieyao     —       2,386       —   Proceeds from disposal of a subsidiary and related intangible assets, net of cash disposal of — BPC     1,654       —       —         Net cash (used in) provided by investing activities     (33,760 )     (21,669 )     37,729                                   Cash flows from financing activities:                         Cash dividends paid     (16,654 )     (37,777 )     (19,414 ) Share buy-back program     (3,528 )     —       —   Repayment of bank loans     (2,703 )     (13,984 )     (5,375 ) Proceeds from bank loans     4,500       —       10,600   Proceeds from shares issued on exercise of options and warrants     36,470       8,508       72         Net cash provided by (used in) financing activities     18,085       (43,253 )     (14,117 )                                 Effect of foreign currencies on cash flows     (26 )     —       —                                   Net increase (decrease) in cash and cash equivalents     23,801       (20,650 )     98,822   Cash and cash equivalents at beginning of year     58,676       82,477       61,827         Cash and cash equivalents at end of year   $ 82,477     $ 61,827     $ 160,649                                   Supplemental schedule of cash flow information:                         Interest paid   $ 790     $ 121     $ 195   Income taxes paid, net     227       4,183       2,953                                   Non-cash financing transactions:                         Share redemption and dividend withheld in settlement of a receivable - Tele-Art   $ 3,519     $ —     $ —         See accompanying notes to Consolidated Financial Statements — (Continued)consolidated financial statements. F-7 NAM TAI ELECTRONICS, INC. December 31, 2001 and 2002NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of US dollars, except share and per share data) (d) Inventories 1. Company Information Nam Tai Electronics, Inc. and subsidiaries (the “Company” or “Nam Tai”) is an electronics manufacturing and design services provider to a selected group of the world’s leading original equipment manufacturers, or OEMs, of telecommunication and consumer electronic products. Through its electronics manufacturing services, or EMS, operations, the Company manufactures electronic components and subassemblies, including liquid crystal display, or LCD, panels, LCD modules, radio frequency, or RF, modules, flexible printed circuit subassemblies and image sensors modules. These components are used in numerous electronic products, including cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game devices and microwave ovens. The Company also manufactures finished products, including cellular phones, palm-sized PC’s, personal digital assistants, electronic dictionaries, calculators, digital camera accessories and Bluetooth™ wireless headset accessory for use with cellular phones. The Company was founded in 1975 and moved its manufacturing facilities to the People’s Republic of China (the “PRC”) in 1980 to take advantage of lower overhead costs, lower material costs and competitive labor rates available and subsequently relocated to Shenzhen, PRC in order to capitalize on opportunities offered in Southern China. The Company was reincorporated as a limited liability International Business Company under the laws of the British Virgin Islands (“BVI”) in August 1987. The Company’s principal manufacturing and design operations are based in Shenzhen, the PRC, approximately 30 miles from the Hong Kong Special Administrative Region (“Hong Kong”). Its PRC headquarters are located in the Macao Special Administrative Region (“Macao”). Some of the subsidiaries’ offices are located in Hong Kong and Macao, which provides it access to Hong Kong’s and Macao’s infrastructure of communication and banking and facilitates management of its PRC operations. The Company’s principal manufacturing operations are conducted in the PRC. The PRC resumed sovereignty over Hong Kong and Macao effective July 1, 1997 and December 20, 1999, respectively, and politically Hong Kong and Macao are integral parts of China. However, for simplicity and as a matter of definition only, our references to PRC in these consolidated financial statements means the PRC and all of its territories excluding Hong Kong and Macao. In 2004, Nam Tai’s operations were re-organized into three reportable segments consisting of consumer electronics and communication products (“CECP”), telecommunication components assembly (“TCA”) and LCD panels (“LCDP”). In 2003, CECP and TCA were classified as a single reportable segment as consumer electronic products (“CEP”) while LCDP also comprised the transformers operations and collectively referred to as LCD panels and transformers (“LPT”). Through the disposal of a subsidiary in 2003, the Company discontinued its transformers operations, details of which are set out in note 3(b)(iii). 2. Summary of Significant Accounting Policies Inventories are stated at the lower of cost or market value. Cost is determined on the first-in, first-out basis. Provisions for potentially obsolete or slow-moving inventory are recorded based on management’s analysis of inventory levels. The following represents the movement in the inventory provision for the years ended December 31,                           2000 2001 2002 Balance at January 1,   $ (479 )   $ (487 )   $ (4,741 ) (Provided for) Reversal during the year     (12 )     (4,247 )     1,970   Write off during the year     —       —       1,271   Others     4       (7 )     14                       Balance at December 31,   $ (487 )   $ (4,741 )   $ (1,486 )                     (a) Principles of consolidation The consolidated financial statements include the financial statements of the Company and all its subsidiaries. The Company consolidates companies in which it has controlling interest of over 50%. All significant intercompany accounts, transactions and cash flows have been eliminated on consolidation. The equity method of accounting is used when the Company has the ability to exercise significant influence over the operating and financial policies of an investee, which is normally indicated by a 20% to 50% interest in other entities. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities and distributions received, if any. Non-marketable investments in which the Company has less than 20% interest and in which does not have the ability to exercise significant influence over the investee are initially recorded at cost and periodically reviewed for impairment. (b) Cash and cash equivalents Cash and cash equivalents include all cash balances and certificates of deposit having a maturity date of three months or less upon acquisition.      During 2002, the Company was able to use portions of the raw materials that had been previously provided for in production or the Company received compensation for the unused raw materials. This change in accounting estimate resulted in the partial reversal of the provision of approximately $2,000 in 2002.F-8 (e) Property, plant and equipment      Property, plant and equipment are recorded at cost and include interest on funds borrowed to finance construction. No interest was capitalized for the years ended December 31, 2000, 2001 and 2002. The cost of major improvements and betterments is capitalized whereas the cost of maintenance and repairs is expensed in the year incurred. Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Gains and losses from the disposal of property, plant and equipment are included in income from operations and gains and losses from the disposal of unused land are reported in other income (expense) in the consolidated statements of income.      The majority of the land in Hong Kong is owned by the government of Hong Kong which leases the land at public auction to non-governmental entities. With the exception of those leases which expire after June 30, 1997 and before June 30, 2047 with no right of renewal, the Sino-British Joint Declaration extends the terms of all currently existing land leases for another 50 years beyond June 30, 1997. Thus, all of the Company’s leasehold land in Hong Kong are considered to be medium-term assets. The cost of such leasehold land is amortized on the straight-line basis over the respective terms of the leases.      All land in other regions of the PRC is owned by the PRC government. The government in the PRC, according to PRC law, may sell the right to use the land for a specified period of time. Thus all of the Company’s land purchases in the PRC are considered to be leasehold land and are amortized on the straight-line basis over the respective term of the right to use the land.      (f) Goodwill and licenses      The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Prior to January 1, 2002, goodwill was amortized to expense on a straight-line basis over various periods ranging from 4 to 15 years. Costs incurred in the acquisition of licenses are capitalized and amortized to expense on a straight-line basis over the shorter of license period or 5 to 7 years. In June 2001, the Financial Accounting Standard Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”. This statement provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for F-9 Nam Tai Electronics, Inc. and Subsidiaries 2. Summary of Significant Accounting Policies - continued (c) Marketable securities Marketable securities at December 31, 2004 are principally equity securities and are classified as available-for-sale. Securities classified as available-for-sale are stated at fair value with unrealized gains and losses recorded as a separate component of accumulated other comprehensive income (loss). Realized gains and losses on the sale of the available-for-sale securities are determined using the specific-identification method and are reflected in other income (expenses). (d) Inventories Inventories are stated at the lower of cost or market value. Cost is determined on the first-in, first-out basis. Write down of potentially obsolete or slow-moving inventory are recorded based on management’s analysis of inventory levels. For the Company’s CECP and TCA reporting units, the Company orders inventory from its suppliers based on firm customer orders for product that is unique to each customer. The inventory is utilized in production as soon as all the necessary components are received. The only reason that inventory would not be utilized within six months is if a specific customer deferred or cancelled an order. As the inventory is typically unique to each customer’s products, it is unusual for the Company to be able to utilize the inventory for other customers’ products. Therefore, the Company’s policy is to negotiate with the customer for the disposal of such inventory that remained unused for six months. The Company does not generally write down its inventories as usually, the customers are held to their purchase commitments. However, there are cases where customers are contractually obligated to purchase the unused inventory from the Company, but the Company may elect not to immediately enforce such contractual right for business reasons. In this connection, the Company will consider writing down these inventory items which remained unused for over six months at the Company’s own cost. Prior to writing down, management would determine if the inventory can be utilized in other products. For the Company’s LCDP segment, due to the nature of the business, LCDP customers do not always place orders advance enough to enable the Company to order inventory from suppliers based on firm customer orders. Nonetheless, management reviews its inventory balance on a regular basis and writes down all inventory over six months old if it is determined that the relevant inventory can not be utilized in the foreseeable future. (e) Property, plant and equipment Property, plant and equipment are recorded at cost and include interest on funds borrowed to finance construction. No interest was capitalized for the years ended December 31, 2002, 2003 and 2004. The cost of major improvements and betterments is capitalized whereas the cost of maintenance and repairs is expensed in the year incurred. Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Gains and losses for the disposal of leasehold land are included in other income (expenses) while gains and losses from the disposal of other property, plant and equipment are included in income from operations. The majority of the land in Hong Kong is owned by the government of Hong Kong which leases the land at public auction to non-governmental entities. All of the Company’s leasehold land in Hong Kong have leases of not more than 50 years from the respective balance sheet dates. The cost of such leasehold land is amortized on a straight-line basis over the respective terms of the leases. All land in other regions of the PRC is owned by the PRC government. The government in the PRC, according to PRC law, may sell the right to use the land for a specified period of time. Thus all of the Company’s land purchases in the PRC are considered to be leasehold land and are amortized on a straight-line basis over the respective term of the right to use the land. Depreciation rates computed using the straight-line method are as follows: Classification Years Land use right, leasehold land and buildings 20 to 50 years Machinery and equipment 4 to 12 years Leasehold improvements 3 to 7 years Furniture and fixtures 4 to 8 years Automobiles 4 to 6 years Tools and molds 4 to 6 years Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002F-9 (In thousands of US dollars, except share and per share data) impairment on an annual basis. SFAS No. 142 was effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 on January 1, 2002. Upon adoption of SFAS No. 142, the Company evaluated goodwill for impairment and determined that there was no impairment at January 1, 2002. Later in 2002, the Company determined that goodwill was impaired by $339 related to Micro Business Systems Industries Company Limited (“MBS”) (see note 3(b)(ii)). The following transitional disclosure represents the Company’s reported and adjusted net income, basic earnings per share, and fully diluted earnings per share adding back amortization beginning January 1, 2000:                           2000 2001 2002 Net income                         As reported   $ 24,001     $ 9,045     $ 20,023   Add back: goodwill amortization     600       1,826       —                       As adjusted   $ 24,601     $ 10,871     $ 20,023                       Basic earnings per share                         As reported   $ 2.63     $ 0.88     $ 1.89   Add back: goodwill amortization     0.07       0.18       —                       As adjusted   $ 2.70     $ 1.06     $ 1.89                       Diluted earnings per share                         As reported   $ 2.56     $ 0.87     $ 1.86   Add back: goodwill amortization     0.06       0.18       —                       As adjusted   $ 2.62     $ 1.05     $ 1.86                            (g) Impairment or disposal of long-lived assets In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, that was applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB’s new rules on asset impairment supersede SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and portions of Accounting Principles Board (“APB”) Opinion No. 30,“Reporting the Results for Operations”. The statement requires a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. The statement also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. On January 1, 2002, the Company adopted SFAS No. 144. The adoption of SFAS No. 144 did not have any significant impact on the financial position and results of operations of the Company.      (h) Equity method of accounting      The equity method of accounting is used when the Company has a 20% to 50% interest in other entities. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities. Nonmarketable investments in which the Company has less than 20% interest and in which it does not have the ability to exercise significant influence over the investee are initially recorded at cost and periodically reviewed for impairment. F-10 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data)      (i) Revenue recognition      Revenue from sales of products is generally recognized when the title is passed to customers upon shipment and when collectibility is assured. Provision for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.      (j) Research and development costs Research and development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. 2. (k)  Advertising expensesSummary of Significant Accounting Policies - continued The Company expenses advertising costs as incurred. Advertising expenses were $173, $141 and $528 for the years ended December 31, 2000, 2001 and 2002, respectively. (f) Goodwill and licenses (l)  The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheet as goodwill. Prior to January 1, 2002, goodwill was amortized to expense on a straight-line basis over various periods ranging from 4 years to 15 years. Costs incurred in the acquisition of licenses are capitalized and amortized to expense on a straight-line basis over the shorter of the license period or 5 to 7 years. With effect from January 1, 2002, the Group adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Under this statement goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment at the reporting unit level on at least an annual basis. A reporting unit is an operating segment or one level below an operating segment (i.e. a component) as defined in SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. Through May 2002, the Company operated in two reporting units, which were its then operating segments of CEP and LPT. Beginning in June 2002, the Company segregated its then LPT segment into two reporting units: LCD panels and transformers. In June 2003, the Company disposed of its transformers operation through the disposal of a subsidiary, details of which are set out in note 3(b)(iii). Effective April 2004, the Company operated in three reporting units which were its reportable segments of CECP, TCA and LCDP. The evaluation of goodwill for impairment involves two steps: (1) the identification of potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill and (2) the measurement of the amount of goodwill loss by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill and recognizing a loss by the excess of the latter over the former. For future impairment tests, the Company will measure fair value based either on internal models or independent valuations. (g) Impairment or disposal of long-lived assets The Company reviews its long-lived assets for potential impairment based on a review of projected undiscounted cash flows associated with these assets. Long-lived assets are included in impairment evaluations when events and circumstances exist that indicate the carrying amount of these assets may not be recoverable. Measurement of impairment losses for long-lived assets that the Company expects to hold and use is based on the estimated fair value of the assets. Long-lived assets to be disposed of are stated at the lower of fair value or carrying amount. Expected future operating losses from discontinued operations are recorded in the periods in which the losses are incurred. (h) Revenue recognition The Company recognizes revenue when all of the following conditions are met: •   Persuasive evidence of an arrangement exists, •   Delivery has occurred or services have been rendered, •   Price to the customer is fixed or determinable, and •   Collectibility is reasonably assured. Revenue from sales of products is recognized when the title is passed to customers upon shipment and when collectibility is assured. The Company does not provide its customers with the right of return (except for quality), price protection, rebates or discounts. There are no customer acceptance provisions associated with the Company’s products, except for quality. All sales are based on firm customer orders with fixed terms and conditions, which generally cannot be modified. F-10 2. Summary of Significant Accounting Policies - continued (i) Shipping and handling costs Shipping and handling costs are classified as to cost of sales for material purchased and selling expenses for those costs incurred in the delivery of finished products. During the years ended December 31, 2002, 2003, and 2004, shipping and handling costs classified as costs of sales were $536, $466 and $536, respectively. During the years ended December 31, 2002, 2003 and 2004, shipping and handing costs classified as selling expenses were $808, $870 and $767, respectively. (j) Research and development costs Research and development costs are incurred in the development of new products and processes, including significant improvements and refinements to existing products and are expensed as incurred. (k) Advertising expenses The Company expenses advertising costs as incurred. Advertising expenses were $528, $261 and $265 for the years ended December 31, 2002, 2003 and 2004, respectively. (l) Staff retirement plan costs The Company’s costs related to the staff retirement plans are charged to the consolidated statement of income as incurred. (m)  Income taxes The Company provides for all taxes based on profits whether due at year end or estimated to become due in future periods but based on profits earned to date. However, under the current tax legislation in the PRC, the Company has reasonable grounds to believe that income taxes paid by Namtai Electronic (Shenzhen) Co., Ltd. (“NTSZ”), Zastron Electronic (Shenzhen) Co. Ltd. (“Zastron”) (formerly known as Zastron Plastic & Metal Products (Shenzhen) Ltd.), Shenzhen Namtek Company Limited (“Namtek”), Jieyao Electronics (Shenzhen) Co., Ltd. (“Jieyao”) and Jetup Electronic (Shenzhen) Co., Ltd. (“Jetup”) in respect of any year would be refunded after the profits earned in that year are reinvested in the business by way of capital injection. Accordingly, any PRC tax paid by these subsidiaries during the year is recorded as an amount recoverable at the balance sheet date when an application for reinvestment of profits has been filed and a refund is expected unless there is an indication from the PRC tax authority that the refund will be refused. Deferred income taxes are provided to recognize the effect of the difference between the financial statement and income tax bases of measuring assets and liabilities. (n)  The Company’s costs related to the staff retirement plans (see note 14) are charged to the consolidated statement of income as incurred. (m) Income taxes PRC tax paid by subsidiaries operating in the PRC during the year is recorded as an amount recoverable at the balance sheet date when management has filed or has the intention to file an application for reinvestment of profits and a refund is expected unless there is an indication from the PRC tax authority that the refund, or a portion of which, will be refused. Deferred income taxes are provided using the asset and liability method. Under this method, deferred income taxes are recognized for all significant temporary differences and classified as current or non-current based upon the classification of the related asset or liability in the financial statements. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all, the deferred tax asset will not be realized. (n) Foreign currency transactions and translations All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the respective transaction dates. Monetary assets and liabilities existing at the balance sheet date denominated in currencies other than functional currencies are remeasured at the exchange rates existing on that date. Exchange differences are recorded in the consolidated statement of income. The functional currencies of the Company and its subsidiaries include the U.S. dollar, Hong Kong dollar or the Chinese Renminbi. The financial statements of all subsidiaries with functional currencies other than the U.S. dollar, the reporting currency, are translated in accordance with SFAS No. 52, “Foreign Currency Translation”. All assets and liabilities are translated at the rates of exchange ruling at the balance sheet date and all income and expense items are translated at the average rates of exchange over the year. All exchange differences arising from the translation of subsidiaries’ financial statements are recorded as a component of comprehensive income. The exchange rate between the Hong Kong dollar and the U.S. dollar were approximately 7.7989,7.7643 and 7.7732 as of December 31, 2002, 2003 and 2004, respectively. The exchange rate between the Chinese Renminbi and the U.S. dollar is based on the applicable rate of exchange quoted by the People’s Bank of China prevailing at the balance sheet date and were approximately 8.2773, 8.2767 and 8.2765 as of December 31, 2002, 2003 and 2004, respectively.      All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the respective transaction dates. Monetary assets and liabilities existing at the balance sheet date denominated in currencies other than functional currencies are translated at the exchange rates existing on that date. Exchange differences are recorded in the consolidated statement of income.F-11 The Company and its subsidiaries have adopted the U.S. dollar, Hong Kong dollar or the Renminbi as their functional currencies. The financial statements of all subsidiaries with functional currencies other than the U.S. dollar are translated in accordance with SFAS No. 52,“Foreign Currency Translation”. All assets and liabilities are translated at the rates of exchange ruling at the balance sheet date and all income and expense items are translated at the average rates of exchange over the year. All exchange differences arising from the translation of subsidiaries’ financial statements are recorded as a component of comprehensive income. F-11 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) The exchange rate between the Hong Kong dollar and the U.S. dollar has been pegged (HK$7.80 to US$1.00) since October 1983. The exchange rate between Renminbi and the U.S. dollar is based on the prevailing market rate. 2. Summary of Significant Accounting Policies - continued (o)  (o) Earnings per share On June 20, 2003, the Company’s board of directors declared a 1 for 3 stock split of its outstanding common shares. Each shareholder of record on June 30, 2003 received two additional shares for each common share held at that date. In addition, the Company retained the current par value of $0.01 per share. Accordingly, all references to numbers of common shares, per share data and stock option data in the accompanying financial statements have been restated to reflect the stock split on a retroactive basis. On October 24, 2003, the Company’s board of directors declared an issuance of stock dividend to shareholders at the ratio of one dividend share for every ten shares held by the shareholders of record on November 7, 2003. For the purposes of earnings per share calculation, all references to numbers of common shares and per share data have been restated to reflect this stock dividend. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the year. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. (p) Stock options The Company does not recognize compensation expense for employee stock-based compensation if the strike-price is equal to or greater than the market price of the stock at the date of grant. The Company’s policy is to generally grant stock-based compensation to employees with a stock price equal to the market price of the stock on the date of grant. The Company continues to account for stock-based compensation arrangements under Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees”and provides additional financial statement disclosure in accordance with SFAS No. 123,“Accounting for Stock-Based Compensation". The Company recognizes compensation expense for all stock-based compensation granted to non-employees by estimating the fair value of the stock-based compensation utilizing the Black-Scholes option-pricing model. See note 11. The Company has two stock-based employee compensation plans, as more fully described in note 11(b). Stock-based employee compensation costs are not reflected in net income when options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition.                               Year ended December 31,       2002     2003     2004   Net income, as reported   $ 20,023     $ 43,802     $ 66,885   Less: Stock based compensation costs under fair value based method for all awards     (1,491 )     (582 )     (4,476 )           Net income, pro forma       $ 18,532     $ 43,220     $ 62,409                                           Basic earnings per share   As reported   $ 0.57     $ 1.09     $ 1.57       Pro forma   $ 0.53     $ 1.07     $ 1,47                                           Diluted earnings per share   As reported   $ 0.57     $ 1.07     $ 1.57       Pro forma   $ 0.52     $ 1.06     $ 1.47             In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.123R,“Share-Based Payment”. This statement is a revision to SFAS 123 and supersedes APB Opinion No. 25 (see note 2(t)).      Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year.F-12 Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the year. The weighted average number of common shares outstanding is adjusted to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. 2. (p)  Stock optionsSummary of Significant Accounting Policies - continued SFAS No. 123,“Accounting for Stock-Based Compensation”, allows companies which have stock-based compensation arrangements with employees to adopt a new fair value basis of accounting for stock options and other equity instruments or to continue to apply the existing accounting rules under APB Opinion No. 25,“Accounting for Stock Issued to Employees,” but with additional financial statement disclosure. The Company continues to account for stock-based compensation arrangements under APB Opinion No. 25 and provides additional disclosures required by SFAS No. 123. (q)(q)  Use of estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (r) Comprehensive income Accumulated other comprehensive income (loss) represents unrealized gains on marketable securities and foreign currency translation adjustments and is included in the consolidated statement of shareholders’ equity. (s) Fair value disclosures The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, income taxes recoverable, notes payable, accounts payable, accrued expenses and other payables approximate their fair values due to the short term nature of these instruments. The carrying amount of long term debt also approximates fair value due to the variable nature of the interest calculations. (t) Recent changes in accounting standards In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus in EITF 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The consensus was that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS Nos. 115 and 124, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. This EITF consensus is effective for fiscal years ending after December 15, 2003. Adoption of the EITF consensus did not result in an impact on the Company’s financial position, results of operations or cash flows. In November 2004, the FASB issued SFAS No. 151,“Inventory Costs - an amendment of ARB No. 43, Chapter 4.”SFAS No. 151 clarifies the accounting that requires abnormal amounts of idle facility expenses, freight, handling costs, and spoilage costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred on or after July 1, 2005. The Company is currently evaluating the impact of this standard on its consolidated financial statements. In December 2004, the FASB issued SFAS No. 123R,“Share-Based Payment”. This statement is a revision to SFAS No. 123 and supercedes APB Opinion No. 25. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. In accordance with the standard, the Company will adopt SFAS No. 123R effective July 1, 2005. Upon adoption, the Company has two application methods to choose from: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method the Company would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied as well as compensation cost for awards that were granted prior to, but not vested as of the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, the Company would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. Under this method, the Company is permitted to apply this presentation to all periods presented or to the start of the fiscal year in which SFAS No. 123R is adopted. The Company would follow the same guidelines as in the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. The Company has not yet determined which methodology it will adopt but believes that the impact that the adoption of SFAS No. 123R will have on its financial position or results of operations will approximate the magnitude of the stock-based employee compensation cost disclosed in Note 2 (p) pursuant to the disclosure requirements of SFAS No. 148. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.F-13 3. (r)  Comprehensive incomeInvestment in Subsidiaries The Company reports comprehensive income in accordance with SFAS No. 130,“Reporting Comprehensive Income”. Accumulated other comprehensive income (loss) represents foreign currency translation adjustments and is included in the consolidated statements of shareholders’ equity. The comprehensive income of the Company was $23,952, $9,065 and $20,006 for the years ended December 31, 2000, 2001 and 2002, respectively. (a) Subsidiaries                                       Percentage of ownership     Place of   Principal   as at December 31     incorporation   activity   2003   2004   Consolidated principal subsidiaries:                                                   Jasper Ace Limited (“Jasper Ace”)   BVI   Investment holding     —       100 % J.I.C. Technology Company Limited (“JIC Technology”)   Cayman Islands   Investment holding     74.86 %*     71.63 % J.I.C Enterprises (Hong Kong) Limited   Hong Kong   Manufacturing and trading**     74.86 %*     71.63 % Jetup Electronic (Shenzhen) Co., Limited (“Jetup”)   PRC   Manufacturing     74.86 %*     71.63 % J.I.C. (Macao Commercial Offshore) Company Limited   Macao   Trading of electronic components and the provision of marketing, management and technical consultancy services     -       71.63 % Nam Tai Electronic & Electrical Products Limited (“NTEEP”)   Cayman Islands   Investment holding     100 %     75 % Nam Tai Group Management Limited   Hong Kong   Provision of management services     100 %     100 % Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited   Macao   Provision of management and sales co-ordination and marketing services     100 %     75 % Nam Tai Telecom (Hong Kong) Company Limited   Hong Kong   Inactive     100 %     100 % Nam Tai Trading Company Limited (“NTTC”, formerly known as Nam Tai Electronic & Electrical Products Limited)   Hong Kong   Inactive     100 %     100 % Namtai Electronic (Shenzhen) Co., Ltd.   PRC   Manufacturing and trading     100 %     75 % Namtek Japan Company Limited   Japan   Provision of sales co-ordination and marketing services     80 %     80 % Namtek Software Development Company Limited (“Namtek Software”)   Cayman Islands   Investment holding     80 %     80 % Shenzhen Namtek Company Ltd.   PRC   Software development     80 %     80 % Zastron Electronic (Shenzhen) Co. Ltd.   PRC   Manufacturing and trading     100 %     100 % Zastron Precision-Tech Limited (“ZPTL”, formerly known as Nam Tai Telecom (Cayman) Company Limited)   Cayman Islands   Investment holding     100 %     100 % Zastron (Macao Commercial Offshore) Company Limited   Macao   Provision of sales co-ordination and marketing services     -       100 % Mate Fair Group Limited   BVI   Investment holding     72.22 %   — * Upon full conversion of the preference shares held by the Company, the Company would have an effective interest of 88.39% in these subsidiaries as of December 31, 2003 (see note 3(b)(ii)). (s)  ** Fair value disclosures Business ceased subsequent to December 31, 2004. The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable, notes payable, accounts payable and amount due to a related party approximate fair value due to the short term maturity of these instruments. The carrying amount of long term debt also approximates fair value due to the variable nature of the interest calculations. The fair value of the Company’s convertible notes is estimated based on the current rates offered to the Company for notes of similar terms and maturities. F-14 (t) New accounting pronouncements In August 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations”. This Statement addresses financial accounting and reporting for obligations associated with the retirement of F-12 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires a company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. SFAS No. 143 also requires a company to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e. the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is adjusted at the end of each period to reflect the passage of time (i.e. accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Companies are required to adopt SFAS No. 143 for fiscal years beginning after June 15, 2002. Management has adopted SFAS No. 143 on January 1, 2003, and does not believe its adoption will have a material effect on the Company’s financial position, results of operations, or cash flows.      In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 are applicable in fiscal years beginning after May 15, 2002, the provisions related to SFAS No. 13 are effective for transactions occurring after May 15, 2002, and all other provisions are effective for financial statements issued on or after May 15, 2002; however, early application is encouraged. Debt extinguishments reported as extraordinary items prior to scheduled or early adoption of SFAS No. 145 would be reclassified in most cases following adoption. In the current year, management adopted the provisions of SFAS No. 145 related to the accounting treatment for the gain or loss on debt extinguishment. The result of this adoption is that $610 finance charge incurred for the early extinguishment of the Company’s long term debt (see note 11) that would have been recorded as an extraordinary item under the previous accounting rules have been included as an expense from continuing operations. Management does not expect the adoption of the remaining provisions of SFAS No. 145 to have a material effect on the Company’s financial position, results of operations, or cash flows. In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The requirements of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002; however, early application is encouraged. Management does not expect the adoption of SFAS No. 146 to have a material effect on the Company’s financial position, results of operations, or cash flows. In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. Management is currently evaluating the effects of FIN 45; however, it does not expect that the adoption of FIN 45 will have a material effect on the Company’s financial position, results of operations, or cash flows. In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensa- F-13 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) tion,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. Management does not expect the adoption of SFAS No. 148 to have a material effect on the Company’s financial position, results of operations, or cash flows. At December 31, 2002, the Company has two stock-based employee compensation plans, as more fully described in note 12(a). The Company accounts for these plans under the recognition and measurement principles of APB No. 25,“Accounting for Stock Issued to Employees”, and related interpretations. Stock-based employee compensation costs are not reflected in net income when options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. During 2001, the Company recorded compensation cost of $839 as 105,400 options granted under the plan had an exercise price less than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation”, to stock-based employee compensation.                                   Year ended December 31, 2000 2001 2002 Net income, as reported   $ 24,001     $ 9,045     $ 20,023   Less: Stock based compensation costs under fair value based method for all awards     (2,216 )     (2,331 )     (1,491 )                     Net income, pro forma   $ 21,785     $ 6,714     $ 18,532                       Basic earnings per share     As reported     $ 2.63     $ 0.88     $ 1.89         Pro forma     $ 2.39     $ 0.65     $ 1.75                               Diluted earnings per share     As reported     $ 2.56     $ 0.87     $ 1.86         Pro forma     $ 2.32     $ 0.65     $ 1.73                               (u) Reclassification      Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the net income or financial position for any year presented. F-14 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) 3. Investment in Subsidiaries - continued (a) Subsidiaries                                   Percentage of ownership at December 31, Place of incorporation Principal activity 2001 2002 Consolidated principal subsidiaries:                                 J.I.C. Technology Company Limited     Cayman Islands       Investment holding       —       93.97 % J.I.C. Enterprises (Hong Kong) Limited     Hong Kong     Investment holding, manufacturing and trading     100 %     93.97 % J.I.C. Electronics Company Limited     Hong Kong       Inactive       100 %     93.97 % J.I.C. Group (B.V.I.) Limited     BVI       Investment holding       100 %     93.97 % Jetup Electronic (Shenzhen) Co., Ltd.      PRC       Manufacturing       100 %     93.97 % Jieda Electronics (Shenzhen) Co., Ltd.      PRC       Inactive       100 %     93.97 % Jieyao Electronics (Shenzhen) Co., Ltd.      PRC       Manufacturing       100 %     93.97 % Nam Tai Group Management Limited     Hong Kong     Provision of management services     100 %     100 % Nam Tai Electronic & Electrical Products Limited     Hong Kong       Trading       100 %     100 % Nam Tai Telecom (Hong Kong) Company Limited     Hong Kong       Trading       100 %     100 % Namtai Electronic (Shenzhen) Co., Ltd.      PRC       Manufacturing       100 %     100 % Namtek Software Development Company Limited     Cayman Islands       Investment holding       —       100 % Shenzhen Namtek Company Limited     PRC       Software development       100 %     100 % Zastron Electronic (Shenzhen) Co. Ltd. (formerly known as Zastron Plastic & Metal Products (Shenzhen) Ltd.)     PRC       Manufacturing       100 %     100 % Mate Fair Group Limited     BVI       Investment holding       25 %     72.22 % BPC (Shenzhen) Co., Ltd.      PRC       Manufacturing       86.67 %     —   Unconsolidated subsidiary:                                 Albatronics (Far East) Company Limited (in liquidation)     Hong Kong     Ceased business in August 1999     50.00025 %     —   F-15 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) (b) Acquisitions and dispositions (b) Significant transactions   (i)   In 1998,March 2000, NTTC, a wholly-owned subsidiary of the Company, acquired 50.00025%together with Toshiba Battery Co., Ltd. (“TBCL”), established BPC, a wholly foreign owned enterprise in Shenzhen, PRC. NTTC had a 86.67% interest in BPC and the investment cost of $1,300 was contributed in cash. BPC was located within the outstanding sharesCompany’s manufacturing complex where it produced and sold high-end, environmentally friendly, rechargeable lithium ion battery packs. Effective April 30, 2002, the Company sold its 86.67% joint venture interest in BPC to a TBCL related company for $2,131 resulting in a gain of $17. During the period from January 1, 2002 through April 30, 2002, the Company recognized net sales of $7,849 from TBCL and its related companies. (ii)   In June 2002, through a reverse merger, the Company arranged for the listing of JIC Group (B.V.I.) Limited and its subsidiaries (the “JIC Group”) on The Stock Exchange of Hong Kong Limited (the “SEHK”). To effect the listing, the Company entered an agreement with the liquidators of Albatronics (Far East) Company Limited (“Albatronics”), whose shares had been listed on the SEHK and which was placed into voluntary liquidation in August 1999. The Company owned slightly more than 50% of the outstanding capital stock of Albatronics. Under the agreement, the Company agreed to transfer the JIC Group into JIC Technology, a Hong Kong publicly listed company.new company, for a controlling interest in JIC Technology. Prior to it being placed into voluntary liquidation, Albatronics and its subsidiaries were engaged in the trading of electronic components and manufacturing of consumer electronics products. Due to the troubled financial condition of Albatronics at December 31, 1998, it was probable that the Company would never be in a position to exercise control over Albatronics as such control would rest with the creditors of Albatronics. Accordingly, the Company did not consolidate Albatronics’ financial statements at December 31, 1998, for the year then ended or for any subsequent period. As of December 31, 1999 the investment was written off. On February 1, 2000, the Company received an invitation soliciting offers for the rescue or restructuring of Albatronics from Albatronics’ liquidators. In June 2002, Albatronics’ listing status on the SEHK was withdrawn and JIC Technology was listed on the SEHK free from the liabilities of Albatronics. For the Company’s contribution to JIC Technology, the Company received a combination of ordinary and preference shares, which are analogous to common stock and convertible preferred stock, respectively, of companies organized under U.S. law. The Company, the creditors of Albatronics and the Hong Kong public who held shares of Albatronics received ordinary shares of JIC Technology equal to approximately 70.4%, 24.1% and 5.5%, respectively, of the outstanding ordinary shares of JIC Technology. The Company also received preference shares of JIC Technology, which upon their full conversion, would result in the Company, the creditors and the Hong Kong public owning approximately 92.9%, 5.8% and 1.3%, respectively, of the outstanding ordinary shares of JIC Technology. On June 4, 2002, the reverse merger was completed and all the shares of Albatronics were transferred to the liquidators for a nominal consideration. The then preference shares were non-redeemable, non-voting shares that ranked pari passu with ordinary shares of JIC Technology on the payment of dividends or other distribution other than on a winding-up. No holder of preference shares (including the Company) may convert them if such conversion would result in the minimum public float of 25% that is required under the Hong Kong Stock Exchange listing rules not being met. Due to the reverse merger, the Company’s effective interest in the JIC Group reduced from 100% to 92.9%. As a result of this reduction in interest during 2002, the Company has released unamortized goodwill of $1,483, representing 7.1% of the goodwill that had previously been recorded upon purchasing the JIC Group in October 2000. The release of unamortized goodwill is included as part of the loss on reverse merger of the JIC Group of $2,655. During 1999, the Company commenced legal proceedings against Albatronics seeking compensation to recover its investment and seeking damages for breach of representations, warranties and undertakings. The case was settled and the Company withdrew its legal proceedings against Albatronics at December 31, 2001.F-15 In January 2002, the Company entered into a restructuring agreement with the liquidators of Albatronics (see note 3(b)(iv)). 3. Investment in Subsidiaries - continued (b) Significant transactions - continued (ii)- continued In August 2002, the Company acquired an additional 7,984,000 ordinary shares of JIC Technology for a cash consideration of $437, resulting in additional goodwill of $253. As of December 31, 2002, the Company held 93.97% effective interest in J.I.C. Group, which represented 74.78% of the existing ordinary shares and 93.97% of the outstanding ordinary shares upon full conversion of the preference shares. During the period from June to November 2003, the Company disposed of totally 42,600,000 ordinary shares of JIC Technology for cash considerations of $4,005. The disposal resulted in a net gain on partial disposal of a subsidiary of $1,838 after deducting the releasing of unamortized goodwill of $1,171. In November 2003, the Company converted 175,100,000 preference shares into 170,000,000 ordinary shares of JIC Technology. As at December 31, 2003, the Company held 263,900,688 ordinary shares of JIC Technology, equivalent to 74.86% of issued ordinary shares, and 423,320,000 preference shares. Upon full conversion of the preference shares owned, the Company would have held approximately 88.39% of JIC Technology as of December 31, 2003. In November and December 2004, the Company disposed of totally 128,000,000 ordinary shares of JIC Technology for cash considerations of $12,902. The disposal resulted in a net gain on partial disposal of a subsidiary of $6,249 after deducting the releasing of unamortized goodwill of $3,518. The Company also converted all outstanding preference shares into 313,902,912 ordinary shares of JIC Technology resulting in 71.63% equity interest held in JIC Technology as of December 31, 2004. (iii)   In order to concentrate its effort on its LCD panels reporting unit, in June 2003, JIC Technology disposed its transformers reporting unit to a third party for a cash consideration of $2,426. Sales of the transformers reporting unit for the years ended December 31, 2002 and 2003 were $11,324 and $6,284, respectively, and were insignificant comparing to the sales of the Company as a whole. The income from operations of the transformers reporting unit was less than 3% and 1% of the Company’s income from operations for the years ended December 31, 2002 and 2003, respectively. The transformers reporting unit had no non-operating income or expenses for the years ended December 31, 2002 and 2003. The proceeds from the disposal exceeded the carrying value of the net assets of the transformers reporting unit, resulting in a gain from discontinued operation, net of minority interests, in 2003 of $1,979. The carrying amounts of the assets and liabilities of the transformers reporting unit at the date of disposal were as follows: Net assets disposed of:           Property, plant and equipment   $ 559   Cash     40   Other assets     870   Liabilities     (1,176 )         Total   $ 293           (iv)   In January 2003, the Company disposed of 20% of its equity interest in Namtek Software to a company which is owned by the management of Namtek Software for a cash consideration of $160. As of the date of disposal, Namtek Software was fair valued at $3,347. Accordingly, a charge to compensation expense of $509 and a credit to additional paid-in capital of $264 (being the difference between the net asset value and fair value of Namtek Software disposed) resulted. F-16 3. Investment in Subsidiaries - continued (b) Significant transactions - continued (v)   In September 2000, the Company acquired a 5% indirect shareholding in both Huizhou TCL Mobile Communication Co., Ltd. (“Huizhou TCL”) and TCL Mobile Communication (HK) Co., Ltd. (collectively “TCL Mobile”) through the acquisition of 25% of the outstanding shares of Mate Fair, a privately held investment holding company incorporated in the BVI with a 20% shareholding interest in TCL Mobile. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in the PRC as well as overseas markets. The acquisition in Mate Fair was satisfied by cash consideration of approximately $2,036. The 25% share of the net book value of Mate Fair on that date was approximately $511. Goodwill of approximately $1,525 was recorded by the Company and was initially being amortized on a straight-line basis over 10 years starting in September 2000. In May 2002, due to the increase of capital in Huizhou TCL, Mate Fair’s direct interest in Huizhou TCL was diluted from 20% to 18% and accordingly, the Company’s 5% indirect interest in Huizhou TCL was diluted to 4.5%. As a result of the dilution, the Company recognized the release of unamortized goodwill of approximately $132 and the share of Mate Fair’s loss on deemed disposal of Huizhou TCL of approximately $336 as part of the equity in income of affiliated companies. Mate Fair ceased the equity method of accounting for Huizhou TCL since it no longer held at least a 20% interest in Huizhou TCL. In late 2002, TCL Mobile Communications (HK) Co., Ltd. was acquired by Huizhou TCL. On November 11, 2002, through a series of linked transactions, the Company effectively exchanged its 4.5% indirect interest in Huizhou TCL for a 3.033% direct interest plus cash consideration. This was accomplished by Mate Fair selling a 13.8% equity interest in Huizhou TCL for $10,424, which resulted in a gain of $9,022 that was included in equity in income of affiliated companies. Also, as part of these linked transactions, the Company increased its shareholding in Mate Fair from 25% to 72.22% for $3 by the subscription of additional 3,028 shares in Mate Fair, and recognized an additional release of unamortized goodwill of approximately $388. The Company invested $5,128 of the proceeds in TCL International Holdings Limited 3% convertible notes (see note 9(a)). In April 2004, the Company increased its equity interest in Huizhou TCL to 9% through exchange of its existing 72.2% interest in Mate Fair, which had a 3.033% equity interest in Huizhou TCL, and acquiring the entire issued share capital of Jasper Ace, a holding company with no operations, which directly holds 9% equity interest in Huizhou TCL. The acquisition was satisfied by the exchange of the Company’s 72.2% equity interest in Mate Fair, cash of $25,000, and 1,416,764 new shares in the Company upon a pricing adjustment in July 2004 resulting in the cancellation of 973,210 shares of the Company previously issued as part of the purchase consideration. (vi)   In April 2004, one of the then wholly owned subsidiaries of the Company, NTEEP, completed public offering of its common stock on the SEHK in which the Company disposed of a 25% interest in this subsidiary resulting in a gain on partial disposal of US$71,071. F-17 3. Investment in Subsidiaries - continued (c) Establishment of subsidiaries (i)   In June 2003, Namtek Software established Namtek Japan Company Limited, a subsidiary incorporated in Japan, at an investment cost of $85. Its principal activity is sales co-ordination and marketing of software.   (ii)   In 1999,June 2003, the Company established two wholly-owned subsidiaries, namely ZPTL and NTEEP, incorporated in the Cayman Islands. Their principal activity is to act as investment holding companies. (iii)   In August 2003, the Company established Nam Tai Investments Consultant (Macao Commercial Offshore) Company Limited, a wholly-owned subsidiary incorporated in Macao, at an investment cost of $13. Its principal activity is provision of consultancy services to other group companies, and to act as the Company’s PRC headquarters due to the continuous increase in investment in China. (iv)   In March 2004, the ZPTL established Zastron (Macao Commercial Offshore) Company Limited, a subsidiary incorporated in Macao, at an investment cost of $13. Its principal activity is provision of sales co-ordination and marketing activities to group companies. (v)   In November 2004, J.I.C. Technology established J.I.C. (Macao Commercial Offshore) Company Limited, a wholly owned subsidiary incorporated in Macao, at an investment cost of $13. Its principal activity is trading of electronic components, and the provision of marketing, management and technical consultancy services. (d) Retained earnings Retained earnings are not restricted as to the payment of dividends except to the extent dictated by prudent business practices. The Company believes that there are no material restrictions, including foreign exchange controls, on the ability of its non-PRC subsidiaries to transfer surplus funds to the Company in the form of cash dividends, loans, advances or purchases. With respect to the Company’s PRC subsidiaries, there are restrictions on the payment of dividends and the removal of dividends from the PRC. In the event that dividends are paid by the Company’s PRC subsidiaries, such dividends will reduce the amount of reinvested profits and accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. However, the Company believes that such restrictions will not have a material effect on the Company’s liquidity or cash flows. In addition, pursuant to the PRC regulations, a certain portion of the profits made by these subsidiaries must be set aside for future capital investment and are not distributable, and amounted to $400 and $6,164 as of December 31, 2003 and 2004 respectively. 4. Inventories Inventories consist of the following:                   At December 31,   2003     2004   Raw materials   $ 17,448     $ 19,815   Work-in-progress     4,534       1,578   Finished goods     5,050       1,703             $ 27,032     $ 23,096         5. Property, Plant and Equipment, net Property, plant and equipment, net consist of the following:                   At December 31,   2003     2004   At cost                 Land use right, leasehold land and buildings   $ 47,777     $ 45,499   Machinery and equipment     61,417       80,479   Leasehold improvements     12,506       15,226   Furniture and fixtures     1,967       2,026   Automobiles     1,432       1,427   Tools and molds     132       196         Total     125,231       144,853   Less: accumulated depreciation and amortization     (50,283 )     (60,706 ) Construction in progress     2,699       13,294         Net book value   $ 77,647     $ 97,441         As at December 31, 2004, the Company has entered into commitments for capital expenditure for property, plant and equipment of approximately $17,080, which are expected to be disbursed during the year ending December 31, 2005. F-18 6. Goodwill Goodwill consists of the following:                               CECP     LCDP             Segment     Segment             (reporting     (reporting             unit)     unit)     Total   Balance at January 1, 2003   $ 788     $ 20,520     $ 21,308   Goodwill release related to disposition of 5.58% interest in JIC Technology (see note 3(b)(ii))     —       (1,171 )     (1,171 )       Balance at December 31, 2003   $ 788     $ 19,349     $ 20,137   Goodwill release related to disposition of 16.76% interest in JIC Technology     —       (3,518 )     (3,518 ) Goodwill release related to disposition of 72.22% interest in Mate Fair     (788 )     —       (788 )       Balance at December 31, 2004   $ —     $ 15,831     $ 15,831         No goodwill has been assigned to the “transformer” reporting unit of the previous LPT Segment as the Company’s purchase of the JIC Group was exclusively for the “LCD panel” reporting unit. The Company acquired certain net assets from MBS, a telecommunication business including the design, research and development, and marketing of telecommunication products, for a consideration of $951 including acquisition costs. The acquisition was accounted for as a purchase and the results of operations of the acquired business have been included in the accompanying consolidated financial statements since the date of acquisition.products. The excess of the purchase consideration over the fair value of the assets acquired of $175 was $776 and was recorded as goodwill which was being amortized on a straight-line basis over 4 years. The results of operations of the business acquired were not material in relation to the consolidated results of operations of the Company. In 2002, the Company determined that the previously acquired technology had become obsolete. Therefore, the Company recorded an impairment for the remaining goodwill of $339 and accelerated the amortization of the license fees (included in intangible assets) by $173.   7.   (iii)  In March 2000, Nam Tai Electronic & Electrical Products Limited (“NTEE”), a wholly-owned subsidiary of the Company, together with Toshiba Battery Co., Ltd. (“TBCL”), established BPC (Shenzhen) Co., Ltd. (“BPC”), a wholly foreign owned enterprise in Shenzhen, PRC. NTEE had a 86.67% interest in BPC and the investment cost of $1,300 was contributed in cash. BPC was located within the Company’s existing manufacturing complex where it produced and sold high-end, environmentally friendly, rechargeable lithium ion battery packs. Effective April 30, 2002, the Company sold its 86.67% joint venture interest in BPC to a TBCL related company for $2,131 resulting in a gain of $17. For the years ended December 31, 2000, 2001 and during the period from January 1, 2002 through April 30, 2002, the Company recognizedIntangible Assets, net sales of $6,232, $21,072 and $7,849, respectively, from TBCL and its related companies. (iv)   In October 2000, the Company acquired all of the outstanding shares of J.I.C. Group (B.V.I.) Limited (“JIC”), a company incorporated in the BVI. The purchase price was the initial consideration of $32,776, less a purchase price adjustment based on earnings. The initial consideration was satisfied by a cash consideration of $10,981 and the issuance of 1,161,087 shares in the Company at $18.77 each, being the average market closing price as reported on the Nasdaq Stock F-16 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) Market (“Nasdaq”) for each day during the period from September 26, 2000 to October 24, 2000 (inclusive) on which Nasdaq is open for trading and on which at least 10,000 shares were traded. JIC and its subsidiaries (“JIC Group”) are principally engaged in the manufacture and trading of LCD panels and transformers. Their production base is located at Shenzhen and Bao An, which are used by three subsidiaries of JIC namely, Jieda Electronics (Shenzhen) Co. Ltd. (“Jieda”), Jetup and Jieyao, all being wholly foreign owned enterprises in the PRC. The purchase price adjustment based on earnings is the amount of shortfall, if any, between the net income of JIC Group for the year ended March 31, 2001 and the guaranteed profit amount of $3,846, multiplied by 8.5. As the net income of JIC Group for the year ended March 31, 2001 met this guaranteed profit requirement, no adjustment to the purchase price was made. The acquisition was accounted for as a purchase and the results of JIC Group have been included in the accompanying consolidated financial statements since the date of acquisition. The excess of the purchase consideration over the fair value of the net assets acquired of $10,002 was $22,774 and has been recorded as goodwill which was being amortized on a straight-line basis over 15 years. Upon the Company’s adoption of SFAS No. 142, the goodwill is no longer being amortized (see note 2(f)). During 2001, the Company incurred legal and professional fees of $85 to complete the acquisition of JIC which was adjusted to goodwill. Had the acquisition of JIC occurred on January 1, 2000, the following would be the unaudited pro forma consolidated results of operations for the year ended December 31, 2000. Net sales, net income, basic earnings per share and diluted earnings per share would have been $239,327, $25,492, $2.53 and $2.47, respectively. In June 2002, through a restructuring of the Company’s interest in the JIC Group, the Company arranged for the listing of the JIC Group on The Stock Exchange of Hong Kong Limited. To effect the listing, the Company entered a restructuring agreement with the liquidators of Albatronics, whose shares had been listed on The Stock Exchange of Hong Kong Limited and which was placed into voluntary liquidation in August 1999. The Company owned slightly more than 50% of the outstanding capital stock of Albatronics (see note 3(b)(i)). Under the restructuring agreement the Company agreed to transfer the JIC Group into J.I.C. Technology Company Limited, a new company, for a controlling interest in J.I.C. Technology Company Limited. Albatronics’ listing status on The Stock Exchange of Hong Kong Limited was withdrawn and J.I.C. Technology Company Limited was listed on The Stock Exchange of Hong Kong Limited free from the liabilities of Albatronics. For the Company’s contribution to J.I.C. Technology Company Limited, the Company received a combination of ordinary and preference shares, which are analogous to common stock and convertible preferred stock, respectively, of companies organized under U.S. law. The Company, the creditors of Albatronics and the Hong Kong public who held shares of Albatronics received ordinary shares of J.I.C. Technology Company Limited equal to approximately 70.4%, 24.1% and 5.5%, respectively, of the outstanding ordinary shares of J.I.C. Technology Company Limited. The Company also received preference shares of J.I.C. Technology Company Limited, which upon their full conversion, would result in the Company, the creditors and the Hong Kong public owning approximately 92.9%, 5.8% and 1.3%, respectively, of the outstanding ordinary shares of J.I.C. Technology Company Limited. On June 4, 2002, the restructuring was completed and all the shares of Albatronics were transferred to the liquidators for a nominal consideration. The preference shares are non-redeemable, non-voting shares that rank pari passu with ordinary shares of J.I.C. Technology Company Limited on the payment of dividends or other distribution other than on a winding-up. No holder of preference shares F-17 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) (including the Company) may convert them if such conversion would result in the minimum public float of 25% that is required under the Hong Kong Stock Exchange listing rules not being met. Due to the Company’s restructuring of its interest in the JIC Group, the Company’s effective interest in the JIC Group reduced from 100% to 92.9%. As a result of this reduction in interest during 2002, the Company has released unamortized goodwill of $1,483, representing 7.1% of the goodwill that had previously been recorded upon purchasing the JIC Group in October 2000. The release of unamortized goodwill is included as part of the loss on restructuring of the JIC Group. In August 2002, the Company acquired an additional 7,984,000 shares of JIC Technology Company Limited for a cash consideration of $437, resulting in additional goodwill of $253. As at December 31, 2002, the Company held 74.8% of the existing ordinary shares and 94.0% of the outstanding ordinary shares upon full conversion of the preference shares. (c) Establishment of subsidiaries (i)   In March 2001, the Company established Nam Tai Group Management Limited, a wholly-owned subsidiary in Hong Kong, at an investment cost of $1 (one dollar) contributed in cash. Its principal activity is to provide management services to other group companies.       (ii)Amortized intangible assets, net consist of the following:                   At December 31,   2003     2004   Gross carrying amount of licenses   $ 643     $ 643   Accumulated amortization     (92 )     (184 )       Net carrying amount   $ 551     $ 459             In MayAmortization expense charged to income from operations for the year ended December 31, 2002, 2003 and 2004 was $222, $92 and $92, respectively. Amortization expense on intangible assets for each of the Company established Namtek Software Development Company Limited, a wholly-owned subsidiary incorporated in the Cayman Islands, at an investment cost of $800. Its principal activitynext five years is an investment holding company of Shenzhen Namtek Company Limited.as follows:           Year ending December 31,         - 2005   $ 92   - 2006     92   - 2007     92   - 2008     92   - 2009     91           Total   $ 459           (d) Retained earningsF-19      Retained earnings are not restricted as to the payment of dividends except to the extent dictated by prudent business practices. The Company believes that there are no material restrictions, including foreign exchange controls, on the ability of its non-PRC subsidiaries to transfer surplus funds to the Company in the form of cash dividends, loans, advances or purchases. With respect to the Company’s PRC subsidiaries, there are restrictions on the purchase of materials by these companies, the payment of dividends and the removal of dividends from the PRC. In the event that dividends are paid by the Company’s PRC subsidiaries, such dividends will reduce the amount of reinvested profits and accordingly, the refund of taxes paid will be reduced to the extent of tax applicable to profits not reinvested. However, the Company believes that such restrictions will not have a material effect on the Company’s liquidity or cash flows. 4. Marketable Securities In September 2000, the Company purchased 500,000 common shares for $7,504. These marketable securities were classified as trading securities and included in current assets. During the first quarter of 2002, the Company sold its interest for an aggregate of $10,147 resulting in a realized gain of $642.                   December 31, 2001 2002 Cost   $ 7,504     $ —   Unrealized gain on marketable securities     2,001       —                 Market value   $ 9,505     $ —                 F-18 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) 5. Inventories Inventories consist of the following:                   December 31, 2001 2002 Raw materials   $ 13,332     $ 16,840   Work-in-progress     1,823       1,937   Finished goods     1,478       1,909                       16,633       20,686   Less: Provision for inventories     (4,741 )     (1,486 )                   $ 11,892     $ 19,200                 6. Property, Plant and Equipment Property, plant and equipment consist of the following:                           Estimated December 31, Useful Lives 2001 2002 Land, land use right and buildings     20 – 50  years     $ 38,592     $ 41,938   Machinery and equipment     4 – 12  years       41,974       51,648   Leasehold improvements     3 – 7  years       11,862       10,237   Furniture and fixtures     4 – 7  years       1,930       1,646   Automobiles     4 – 6  years       1,631       1,536   Tools and molds     4 – 6  years       127       77                         Total             96,116       107,082   Less: accumulated depreciation and amortization             (35,122 )     (40,669 ) Construction in progress             5,321       9,501   Deposit paid for the acquisition of leasehold land and buildings             4,099       —                         Net book value           $ 70,414     $ 75,914                              As at December 31, 2002, the Company has entered into commitments for capital expenditure for property, plant and equipment of approximately $20,856, which are expected to be disbursed during the year ending December 31, 2003. F-19 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) 7. Goodwill Goodwill consists of the following:                             CEP LPT Segment Segment Total Balance at January 1, 2001   $ 533     $ 23,297     $ 23,830   Goodwill acquired during the year     —       85       85   Goodwill amortization     (194 )     (1,632 )     (1,826 )                     Balance at December 31, 2001   $ 339     $ 21,750     $ 22,089   Goodwill acquired during the year:                           Additional acquisition of JIC Technology Company Limited (see note 3(b)(iv))     —       253       253     Additional goodwill of Mate Fair, net     788       —       788   Impairment of MBS goodwill (see note 3(b)(ii))     (339 )     —       (339 ) Goodwill release related to disposition of 7.1% interest in JIC Group (see note 3(b)(iv))     —       (1,483 )     (1,483 )                     Balance at December 31, 2002   $ 788     $ 20,520     $ 21,308                       8. Intangible Assets Amortized intangible assets consist of licenses of the following:                   December 31, 2001 2002 Gross carrying amount   $ 1,335     $ 1,335   Accumulated amortization     (364 )     (586 ) Disposal (see note 17)     —       (749 )               Net carrying amount   $ 971     $ —                      Amortization expense charged to income from operations for the years ended December 31, 2000, 2001 and 2002 was $133, $209 and $222, respectively. 9. Investment in Affiliated Companies, Equity Method (a) Mate Fair      In September 2000, the Company acquired a 5% indirect shareholding in both Huizhou TCL Mobile Communication Co., Ltd. (“Huizhou TCL”) and TCL Mobile Communication (HK) Co., Ltd. (collectively “TCL Mobile”) through the acquisition of 25% of the outstanding shares of Mate Fair Group Limited (“Mate Fair”), an investment holding company incorporated in the BVI with a 20% shareholding interest in TCL Mobile. TCL Mobile is engaged in manufacturing, distributing and trading of digital mobile phones and accessories in the PRC as well as overseas markets. The acquisition in Mate Fair was satisfied by a cash consideration of approximately $2,036. The 25% share of the net book value of Mate Fair on that date was approximately $511. Goodwill of approximately $1,525 was recorded by the Company and was being amortized on a straight line basis over 10 years from September 2000 to August 2010. The amortization expense for the years ended December 31, 2000 and 2001 was $51 and $153, respectively. As of December 31, 2000 and 2001, the Company had a 5% indirect interest in Huizhou TCL since its acquisition of Mate Fair. F-20 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data)      In May 2002, due to the increase of capital in Huizhou TCL, Mate Fair’s direct interest in Huizhou TCL was diluted from 20% to 18% and the Company’s 5% indirect interest in Huizhou TCL was diluted to 4.5%. As a result of the dilution, the Company recognized the release of unamortized goodwill of approximately $132 and the share of Mate Fair’s loss on deemed disposal of Huizhou TCL of approximately $336 as part of the equity in (loss) income of affiliated companies. Mate Fair ceased the equity accounting for Huizhou TCL since it no longer held at least a 20% interest in Huizhou TCL.      On November 11, 2002, the Company disposed of 1.467% of its indirect interest in Huizhou TCL at a consideration of approximately $10,424 through Mate Fair selling its 13.8% equity interest in Huizhou TCL. The Company invested $5,128 of the proceeds in TCL International Holdings Limited 3% convertible notes (see note 10(a)). Also on November 11, 2002, the Company increased its shareholding in Mate Fair from 25% to approximately 72.22% for $3. Effectively, the Company now has a 3.033% indirect interest in Huizhou TCL. As a result of the above shareholding change, the Company recognized an additional release of unamortized goodwill of approximately $388.      Prior to November 11, 2002, the Company held a 25% interest in Mate Fair. Therefore, Mate Fair had been accounted for as an affiliated company and the results of Mate Fair has beeninvestments accounted for under the equity method in the consolidated financial statements from the date of acquisition.are disclosed below. The Company shared the results of has not made any loans or guarantees or has any contingent liabilities with these companies. Mate Fair Mate Fair forwas accounted as an affiliated company until November 11, 2002. Details of the period from January 1, 2002 to November 10, 2002 of $10,741.      As the Company’s investment in Mate Fair has increased from 25% to 72.22%,are set out in note 3(b)(v). Alpha Star In January 2003, the Company has consolidated Mate Fairfurther expanded its business to include wireless communication technology and related products. The Company made a strategic investment of $10,000 by subscribing for a 25% shareholding in Alpha Star, a BVI company, which is the first time asultimate holding company of November 11, 2002. The consolidated statement of income reflects Mate Fair’s equity in earnings through November 10, 2002, and consolidates Mate Fair’s results of operations for the period from November 11, 2002 through December 31, 2002.      In addition, the remaining unamortized goodwill of Mate Fair was transferred from investment in affiliated companies to the Company’s goodwill account. The following table presents summarized financial information for Mate Fair until the point it became consolidated:                   For the Year Ended For the Period from December 31, January 1, 2002 to 2001 November 10, 2002 Operating income   $ 8,077     $ 91,757   Net income   $ 8,077     $ 91,757   Non-current assets   $ 10,452     $ 4,014   Shareholders’ equity   $ 10,452     $ 4,018   (b) Shanghai Q&T      In March 2000, NTSZ, a wholly-owned subsidiary of theJCT Wireless Technology Company acquired 42.5% of the equity interest in Shanghai Q&T Tech. Co., Ltd.Limited (“Shanghai Q&T”) (formerly known as Red Net Technology Co., Ltd.JCT”), a company registeredengaged in the PRCdesign, development and marketing of wireless communication terminals and wireless application software. The Company also manufactures wireless communication terminals and related modules for $207.JCT. As part of the agreement, Alpha Star agreed to purchase from the Company at least 50 percent of the orders it, or any of its subsidiaries, receives for RF modules provided the Company performs such manufacturing services at a price comparable to the market. The resultsfair value of Shanghai Q&T have been accounted for under the equity methodthis arrangement was estimated to be $643 and is included in the consolidated financial statements frombalance sheet as an intangible asset (note 7). The Company had one representative on Alpha Star’s board of directors until his resignation in July 2004. The Company initially recorded goodwill of approximately $5,596 as a result of the dateacquisition of acquisition.Alpha Star. The Company recorded $498 on equity in earning of Alpha Star for 2003 but recognized an equity in loss of $1,210 for 2004. In the third quarter of 2004, the Company recorded an other-than-temporary cash impairment charge of approximately $5,596 to write-down its investment in Alpha Star upon careful assessment of various factors relevant to the affiliate, including the competitive handset market in the PRC.      The Company’s interest in Shanghai Q&T was reduced to zero sinceAs of December 31, 2000 as Shanghai Q&T incurred losses during2003 and 2004, JCT owed the Company $2,707 and $66. For the year ended December 31, 2000. The Company does not have any further financial commitment in this company. F-21 Nam Tai Electronics, Inc.2003 and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) (c) Group Sense      In 1998,2004, the Company acquired 20%recognized net sales of the outstanding shares$20,782 and $34,181 to JCT and purchased raw materials of Group Sense (International) Limited (“Group Sense”), a Hong Kong publicly listed company. Group Sense$5,456 and $12,398 from JCT and its subsidiaries manufacture consumer electronics products.related companies, respectively.      Starting from February 2000, the Company began to dispose of its shareholding in Group Sense and up to November 2000, the Company had disposed of its entire interest in Group Sense for cash of $28,089 in aggregate. In February 2000, the Company sold a portion of its shareholding in Group Sense, resulting in a gain on disposal of investment in an affiliated company of $1,346 and the reduction of shareholding in Group Sense below the 20% level. Upon the reduction of shareholding in Group Sense below the 20% level in 2000, the equity method was discontinued and the carrying amount at the date of discontinuance became the cost of investment, which was subsequently included in the calculation of the gain on disposal of investment in 2000 upon sale of the Company’s remaining ownership interest. The Company then continued to dispose of all of its remaining shareholding in Group Sense, resulting in a gain of $9,435 in 2000. Total gain on disposal of the entire shareholdings in Group Sense during 2000 amounted to $10,781.9. Investments 10. Investments in TCL The Company has threehad various investments in TCL groupGroup of companies.companies in the form of convertible notes, and available for sale marketable securities. During the year ended December 31, 2003, the Company disposed of the convertible notes. During the year ended December 31, 2004, the investments at cost became marketable securities upon the listing of these investments on public stock exchanges. The Company has not incurred any material operating revenue or expenses from the TCL groupGroup of companies, for the years ended December 31, 2000, 20012002, 2003 and 2002.2004. (a) Convertible Notes (a) Convertible Notes On November 11, 2002, related to thein connection with its disposal of 1.467% indirect interest in Huizhou TCL (see note 9(a)3(b)(v)) for approximately $10,424, the Company purchased $5,128 in 3% convertible notes (“CB Note”) due in November 2005 of TCL International Holdings Limited, a company publicly listed company on The Stock Exchange of Hong Kong Limited. The term ofthe SEHK. In August 2003, the CB Note is three years with an interest ratewas disposed of 3% per annum. The CB Note is convertible into sharesby the Company for a consideration of TCL International Holdings Limited at the conversion price$5,026, resulting in a loss of approximately $0.33 per share.$102. (b)F-20 9. Investments at Cost— continued (i) TCL Corporation (b) Investments, at cost/available for sale investment securities (i) TCL Corporation In January 2002, the Company acquired a 6% equity interest in TCL Holdings Corporation (formerlyLtd., now known as TCL Holdings Corporation, Ltd.) for a consideration of $11,968. TCL Corporation, aan enterprise established in the PRC, state-owned enterprise, is the parent company of the TCL groupGroup of companies. TCL Corporation’s scope of business includes the import and export of raw materials, the design, manufacturing and sales and marketing of telephones, VCD players, color television sets, mobile phones and other consumer electronic products. TCL Corporation changed from a limited liability company to a company limited by shares in April 2002 (the “Establishment Date”). (ii) HuizhouIn January 2004, TCL Corporation listed its A-shares on the Shenzhen Stock Exchange at RMB4.26 (equivalent to US$0.52) per A-share. The Company’s interest in TCL Corporation has then been diluted to 3.69% and represents 95.52 million promoter’s shares of TCL Corporation after its initial public offering. According to Article 147 of the Company Law of the PRC, the Company is restricted to transfer its promoter’s shares within three years from the Establishment Date. The Company hasis, however, entitled to dividend and other rights similar to the holders of A-shares. As these promoter’s shares have a restriction on their sale prior to April 2005, the Company hired a third party valuation firm to determine the fair value of these shares as of December 31, 2004 and recognized an unrealized gain of $6,549 based on the Company’s cost of $11,968 and an estimated fair value of $20,700. (ii) Huizhou TCL The Company had a 3.033% indirectdirect interest in Huizhou TCL. As described in note 3(b)(v), the Company increased its equity interest in Huizhou TCL throughto 9%. In August 2004, as part of the preparation for TCL Communication’s public offering on SEHK, the shares in Huizhou TCL were exchanged for the shares in TCL Communication. In September 2004, TCL Communication’s public offering was completed. At December 31, 2004, the Company’s subsidiary, Mate Fair (see note 9(a)). This investment in TCL Communication is stated at fair value based on the traded market price of TCL Communication’s shares and recognized an unrealized loss of $58,316 based on the Company’s cost is $4,014 at December 31, 2002.of $79,522 and a fair value of $21,206. 11. Investment in Stepmind In December 2003, the Company paid approximately $5,277 (Euros 4,250) into an escrow account for an investment in Stepmind, which was included in prepaid expenses and other receivables at December 31, 2003. Approximately $2,646 (Euros 2,122) was released from the escrow account in January 2004 for the Company’s first phase of investment and was included in investments. In August 2004, the remaining balance in the escrow account was released. In the same month, the Company disposed of its entire interest in Stepmind to one of the shareholders of Stepmind at the original subscription price. As a result, a loss of $67, representing the legal and administrative costs incurred, was noted. F-21 10. Bank Loans and Banking Facilities The Company has credit facilities with various banks representing notes payable, trade acceptances, import facilities and overdrafts. At December 31, 20012003 and 2002,2004, these facilities totalled $76,494totaled $62,256 and $58,244,$87,923, of which $9,730$53,947 and $8,889$84,495 were utilizedunused at December 31, 20012003 and 2002,2004, respectively. The maturity of these F-22 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) facilities is generally up to 90 days. Interest rates are generally based on the banks’ usual lending rates in Hong Kong and the credit lines are normally subject to annual review. The banking facilities are secured by guarantees given by Nam Tai and certain subsidiaries and restrict the pledge of assets to any other banks without the prior consent of the Company’s bankers. The notes payable, which include trust receipts and shipping guarantees, may not agree to utilized banking facilities due to a timing difference between the Company receiving the goods and the bank issuing the trust receipt to cover financing of the purchase. The Company recognizes the outstanding letter of credit as a note payable when the goods are received, even though the bank may not have issued the trust receipt. However, this will not affect the total bank facility utilization, as an addition to the trust receipts will be offset by a reduction in the same amount of outstanding letters of credit.                   December 31, 2001 2002 Outstanding letters of credit   $ 8,183     $ 7,904   Trust receipts     994       908   Usance bills pending maturity     553       57   Documents in transit     —       20                 Total banking facilities utilized     9,730       8,889   Less: Outstanding letters of credit     (8,183 )     (7,904 )               Notes payables   $ 1,547     $ 985                                   At December 31,   2003     2004         Outstanding letters of credit   $ 6,430     $ 1,348   Trust receipts     1,531       1,257   Usance bills pending maturity     348       823         Total banking facilities utilized     8,309       3,428   Less: Outstanding letters of credit     (6,430 )     (1,348 )       Notes payable   $ 1,879     $ 2,080              The Company has a seven-year term loan with borrowings in October 2001 totalling $15,000 at a fixed interest rate of 5.05% in the first four years and at a rate of 1% over Singapore Interbank Money Market Offer Rate (“SIBOR”) for the following three years. The loan is secured by a property with net book value of $11,400. At December 31, 2002, the bank loan had an outstanding balance of $12,860. On January 3, 2003, the Company repaid the entire outstanding balance due to the bank, resulting in a finance charge on early repayment of $610. A subsidiary of the Company has an unsecured four-year term loan with borrowings in May 2002 totallingtotaling $4,500 at a rate of 1.5% p.a. over three months London Interbank Offered Rate, (“LIBOR”), repayable in 16 quarterly instalments of approximately $281 beginning August 31, 2002. The interest rate was reduced to 0.75% p.a. over three months London Interbank Offered Rate in 2004. During the year 2004, it has obtained another unsecured four-year term loan totaling $7,000 at a rate of 0.75% p.a. over three months London Interbank Offered Rate, repayable in 16 quarterly instalments of $438 beginning in July 2004. At December 31, 2002,2004, the loanloans had an outstanding balancebalances of $3,937.$8,038. There are no restrictive financial covenants associated with these term loans. The long term debt isdebts are repayable as follows for the years ending December 31:           2003   $ 13,985   2004     1,125   2005     1,125   2006     562               $ 16,797                     - 2005   $ 2,875   - 2006     2,313   - 2007     1,750   - 2008     1,100               $ 8,038           12. Common Shares11. Shareholders’ Equity (a) Stock Options (a) The Company has only one class of common shares authorized, issued and outstanding. (b) Stock options In August 1993, the Board of Directors approved a stock option plan which authorized the issuance of 300,000900,000 vested options to key employees, consultants or advisors of the Company or any of its subsidiaries. In December 1993, January 1996 and April 1999, the option plan was amended and the maximum number of F-23 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) shares to be issued pursuant to the exercise of options granted was increased to 650,0001,950,000 and 1,000,0003,000,000 and 1,425,000,4,275,000, respectively. The options granted under this plan vest immediately and generally have a term of three years, but cannot exceed ten years. The options are granted to employees based on past performance and/or expected contribution to the Company. In May 2001, the Board of Directors approved another stock option plan which would grant 5,00015,000 options to each independentnon-employee director of the Company elected at each annual general meeting of shareholders, and might grant options to key employees, consultants or advisors of the Company or any of its subsidiaries to subscribe for its shares in accordance with the terms of this stock option plan.plan based on past performance and/or expected contributions to the Company. The maximum number of shares to be issued pursuant to the exercise of options granted was 1,000,0003,000,000 shares. The options granted under this plan vest immediately and generally have a term of three years, subject to the discretion of the board of directors but cannot exceed ten years.      Effective January 1,F-22 11. Shareholders’ Equity — continued (b) Stock options — continued In 2003, the Company no longer plans to issuesuspended issuing options to management and employees. Rather,employees except for the Board of Directorsnon-employee directors and approved an incentive bonus program to reward management and employees with a cash bonus instead; however, in lieu of2004, the Company had decided to resume issuing stock options.options to employees in addition to giving cash bonuses. A summary of stock option activity during the three years ended December 31, 20022004 is as follows:                 Number Option Price Per Share with the of Options Weighted Average Option Price in Parenthesis Outstanding at January 1, 2000     263,500     $10.50 & $15.75 ($10.53)   Granted     350,220     $13.875, $14.81, $16.125 & $16.375 ($14.18)   Exercised     (149,500 )   $10.50   Cancelled     (28,220 )   $16.125           Outstanding at December 31, 2000     436,000     $10.50, $13.875, $14.81, $15.75 & $16.375 ($13.11)   Granted     438,253     $13.94, $14.50 & $7.0 ($12.34)   Exercised     (116,000 )   $10.50, $13.875 & $15.75 ($10.63)   Cancelled     (50,853 )   $13.875, $13.94, $14.81 ($14.02)           Outstanding at December 31, 2001     707,400     $7.00, $13.875, $13.94, $14.50 & $16.375 ($12.97)   Granted     300,000     $19.85   Exercised     (524,400 )   $7.00, $13.875, $13.94 & $19.85 ($12.73)   Cancelled     —                 Outstanding at December 31, 2002     483,000     $13.875, $13.94, $14.50, $16.375 & $19.85 ($17.52)                                 Number of     Weighted average       options     option price per share     Outstanding at January 1, 2002     2,122,200     $ 4.32   Granted     900,000     $ 6.62   Exercised     (1,573,200 )   $ 4.24                 Outstanding at December 31, 2002     1,449,000     $ 5.84   Granted     75,000     $ 18.50   Exercised prior to 10 for 1 stock dividend     (1,422,500 )   $ 5.97   Effect of 10 for 1 stock dividend on stock option     10,150           Exercised after 10 for 1 stock dividend     (3,100 )   $ 6.02                 Outstanding at December 31, 2003     108,550     $ 12.34   Granted     645,000     $ 19.40   Exercised     (16,500 )   $ 4.39                 Outstanding at December 31, 2004     737,050     $ 18.70                      Of the 350,220 options granted by the Company in 2000, 5,000 and 10,000During 2002, 6,000 advisors’ options with an exercise price of $13.875, expiring on January 31, 2003, and exercisable from January 1, 2001 and May 31, 2001, respectively, were granted to its advisors. The compensation expense for these advisors’ options, using the Black-Scholes option-pricing model, was $117 and has been charged to the consolidated statement of income in 2000. No advisors’ options were granted during 2001. During 2002, 2,000 advisors options with an exercise price of $19.85$6.62 exercisable from April 30, 2002 and expiring on April 30, 2005 were granted to an advisor.advisor and all were exercised during 2003. The Company recorded compensation expense of $10 for the 2002 advisoradvisors’ options based on the Black-Scholes option-pricing model. No advisors’ options were granted during 2003 and 2004. F-24 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) Details of the options granted by the Company in 2000, 20012002, 2003 and 20022004 are as follows:                     Number of Options Granted Exercise Price Exercisable Period In 2000                   172,000   $ 13.875       January 1, 2001 to January 31, 2003     130,000   $ 13.875       May 31, 2001 to January 31, 2003     5,000   $ 14.810       January 1, 2001 to July 31, 2003     28,220   $ 16.125       January 1, 2001 to April 5, 2003     15,000   $ 16.375       June 9, 2001 to June 8, 2003   In 2001                   277,853   $ 13.94       March 16, 2001 to March 16, 2004     55,000   $ 14.50       June 22, 2001 to June 22, 2004     105,400   $ 7.00       June 27, 2001 to June 22, 2002   In 2002                   300,000   $ 19.85       April 30, 2002 to April 30, 2005                     Number of   Exercise         options granted   price     Exercisable period     In 2002                                   900,000   $ 6.02 *   April 30, 2002 to April 30, 2005                   In 2003                                   75,000   $ 16.82 *   July 8, 2003 to July 8, 2006                   In 2004                                   645,000   $ 19.40     July 30, 2004 to July 30, 2006      Stock option costs of $839 charged to the selling, general and administrative expenses in 2001 represented the difference between the market price and exercisable price of $7 for 105,400 options granted during 2001. The following summarizes information about stock options outstanding at December 31, 2002.2004. All stock options are exercisable as of December 31, 2002.                   Weighted Average Remaining Contractual Exercise Prices Number of Options Life in Months $13.875     20,000       1.0   $16.375     15,000       5.2   $13.940     112,000       14.5   $14.500     55,000       17.7   $19.850     281,000       27.9                       483,000       21.8                 2004.                               Weighted average     Number     remaining contractual Exercise prices   of options     life in months $  6.02*     26,050       4.0   $16.82*     66,000       18.3   $19.40     645,000       19.0                         737,050       18.4                   *   Subsequent to November 7, 2003, the exercise price has been adjusted to reflect the 10 for 1 stock dividend effect. F-23 11. Shareholders’ Equity — continued (b) Stock options — continued The weighted average remaining contractual life of the stock options outstanding at December 31, 2000, 20012002, 2003 and 20022004 was 19,22, 23 and 18 and 22 months, respectively. The weighted average fair value of options granted during 2000, 20012002, 2003 and 20022004 was $5.67, $5.14$1.66, $7.76 and $4.97,$6.94, respectively, using the Black-Scholes option-pricing model based on the following assumptions:                           Year Ended December 31, 2000 2001 2002 Risk-free interest rate     6.13 – 6.67%       5%       4.5%   Expected life     3 years       1 – 3 years       3 years   Expected volatility     47.3 – 65.0%       45.0%       36.0%   Expected dividend per quarter     $0.09       $0.10       $0.12   (b) Advisors’ Warrants      On December 2, 1997, the Company issued 130,000 units to its advisors. The holder of each unit is entitled to purchase from the Company at the purchase price of $20.40 per unit one common share and one F-25 Nam Tai Electronics, Inc. and Subsidiaries                           Year ended December, 31   2002     2003     2004   Risk-free interest rate     4.5 %     2.56 %     2.75 % Expected life   3 years   3 years   2 years Expected volatility     36.0 %     64.24 %     68.62 % Expected dividend per quarter   $ 0.04     $ 0.05     $ 0.12   Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) (c) Public warrants warrant exercisable to purchase one common share at $20.40 per share for the period from November 30, 1998 to November 24, 2000. In 2000, 58,030 advisors’ warrants were exercised, 61,970 advisors’ warrants had expired and the expiry date of exercisable period for the remaining 10,000 advisors’ warrants was extended to November 24, 2002. As a result, 58,030 common shares and 58,030 warrants were issued during the year ended December 31, 2000. The compensation expense for the extension of the expiry date of the 10,000 advisors’ warrants, using the Black-Scholes option-pricing model, was $43 and has been charged to the consolidated statement of income in 2000. The remaining 10,000 of these advisors’ warrants expired on November 24, 2002.      On October 5, 1998, the Company issued 300,000 warrants to an advisor as consideration of advisory services under a service contract for a period of 3 years. The holder of each warrant is entitled to purchase from the Company one common share at $10.25 per share for the period from October 5, 1999 to October 4, 2001. These warrants have been accounted for using variable accounting and the related compensation expense of $263 and $263, has been charged to the consolidated statement of income for the years ended December 31, 2000 and 2001, respectively. In 2001, all 300,000 of these advisors’ warrants were exercised. The fair values of the advisors’ warrants were calculated using the Black-Scholes option-pricing model based on the following assumptions:                   $20.4 $10.25 Advisors’ Warrants Advisors’ Warrants Risk-free interest rate     6.50%       6.50%   Expected life     November 24, 2002       October 4, 2001   Expected volatility     50%       50%   Expected dividend per quarter     $0.09       $0.09   (c) Public Warrants On October 10, 1997, the Company distributed to each holder of its common shares nontransferable rights (the “Rights”) to subscribe for one unit for every three common shares owned at that date (referred to as the “Rights Offering”). The subscription price was $17.00$5.67 per unit. Each unit consisted of one common share and one redeemable common share purchase warrant. Each warrant is exercisable to purchase one common share at a price of $20.40$6.80 per share at any time from the date of their issuance until November 24, 2000. The common shares and the warrants included in the units will be separately transferable immediately on issuance of the common shares. The warrants are redeemable by the Company at any time at $0.05$0.02 per warrant if the average closing sale price of the common shares for 20 consecutive trading days within the 30-day period preceding the date the notice is given equals or exceeds $25.50$8.50 per share. The terms of the Rights Offering include an over subscription privilege available to shareholders subject to certain conditions and a Standby Purchase Commitment made by the Standby Underwriters to the Rights Offering, subject to the terms and conditions of a Standby Underwriting Agreement made between the Company and the Standby Underwriters, and which includes purchase by the Standby Underwriters of units not subscribed for by shareholders of the Company. Pursuant to the Rights Offering, 3,000,0009,000,000 units were offered with a subscription expiry date of November 24, 1997. During the period of the Rights Offering, shareholders of the Company exercised Rights to purchase a total of 2,267,9176,803,751 units at $17.00$5.67 per unit and the Standby Underwriters purchased a total of 729,2122,187,636 units at a price of $16.75,$5.58, being the lower of the subscription price per unit and the closing bid price per common share as reported on the Nasdaq on the subscription expiry date, as provided for under the Standby Underwriting F-26 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) Agreement. The gross proceeds raised amounted to $50,769 and the net proceeds raised after deduction of expenses associated with the Rights Offering amounted to $47,700. On April 1, 2000, the Company amended the terms of the warrant by extending the expiry date of the warrants from November 24, 2000 to November 24, 2002. The extensionextending of the expiry date of the warrants created a new measurement date for the warrants, however, the resulting amount was immaterial. During 2002, 1,460,6554,381,965 warrants were exercised. On November 24, 2002, all of the remaining warrants expired. (d) Advisors’ warrants On December 2, 1997, the Company issued 390,000 units to its advisors and 30,000 remained outstanding in 2002. These advisors’ warrants expired on November 24, 2002. The 58,030174,090 warrants issued pursuant to the exercise of advisors’ warrants above bear the same rights as public warrants. (d) Share Buy-Back Program (e) Share buy — back program The Company repurchased shares under its buy-back programsprogram as follows. All shares arewere purchased at the prevailing market price at the date of the buy back.                   Year Shares Repurchased Average Purchase Price 2000     5,600     $ 13.00   2001     227,900     $ 14.71   2002     197,600     $ 17.86   back and were settled out of the Company’s retained earnings.                   Year   Shares repurchased     Average purchase price   2002     592,800     $ 5.95   (e) Share RedemptionNo shares were repurchased during the year ended December 31, 2003 and 2004. F-24 11. Shareholders’ Equity — continued (f) Share redemptions On January 22, 1999, pursuant to its Articles of Association, the Company redeemed and cancelled 138,500canceled 415,500 shares of the Company registered in the name of Tele-Art Inc. at a price of $11.19$3.73 per share for $1,549.$1,549 (see note 19(b)18(b)). On August 12, 2002, pursuant to its Articles of Association, the Company redeemed and cancelled an additional 169,727509,181 shares of the Company beneficially owned by Tele-Art Inc. at a price of $18.41$6.14 per share for $3,125 (see note 19(b)18(b)). 13.No shares were redeemed during the year ended December 31, 2003 and 2004. 12. Earnings Per Share The calculations of basic earnings per share and diluted earnings per share are computed as follows:                           Weighted Average Per Share Year Ended December 31, 2000 Income Shares Amount Basic earnings per share   $ 24,001       9,114,175     $ 2.63   Effect of dilutive securities:                         — Stock options     —       140,676           — Warrants     —       120,265   ��                           Diluted earnings per share   $ 24,001       9,375,116     $ 2.56                            Warrants to purchase 3,055,159 common shares at $20.40 were outstanding at December 31, 2000 but were not included in the computation of diluted earnings per share because the exercise price of the warrants was greater than the average market price of the common shares during the relevant period. F-27 Nam Tai Electronics, Inc. and Subsidiaries                                       Weighted                     average number     Per share   Year ended December 31, 2002   Income     of shares *     amount         Basic earnings per share   $ 20,023       34,885,366     $ 0.57                             Effect of dilutive securities                         - Stock options     —       476,837           - Warrants     —       67,914                                           Diluted earnings per share   $ 20,023       35,430,117     $ 0.57         Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data)                           Weighted Average Per Share Year Ended December 31, 2001 Income Shares Amount Basic earnings per share   $ 9,045       10,274,377     $ 0.88   Effect of dilutive securities:                         — Stock options     —       56,660           — Warrants     —       62,374                               Diluted earnings per share   $ 9,045       10,393,411     $ 0.87                       Stock options to purchase 15,000 shares of common shares at $16.375, warrants to purchase 3,055,159 common shares at $20.40, and 10,000 advisors’ warrants were outstanding at December 31, 2001 but were not included in the computation of diluted earnings per share because the exercise price of the stock options and warrants was greater than the average market price of the common shares during the relevant period. The holder of each advisors’ warrant is entitled to purchase from the Company at the purchase price of $20.40 per unit one common share and one warrant exercisable to purchase one common share at $20.40 per share.                           Weighted Average Per Share Year Ended December 31, 2002 Income Shares Amount Basic earnings per share   $ 20,023       10,571,323     $ 1.89   Effect of dilutive securities:                         — Stock options     —       144,496           — Warrants     —       20,580                               Diluted earnings per share   $ 20,023       10,736,399     $ 1.86                       All options and warrants to purchase shares of common stock were included in the computation of 2002 diluted earnings per share as the exercise prices were less than the average market price wasof the common stock.                                       Weighted                     average number     Per share   Year ended December 31, 2003   Income     of shares *     amount         Continuing operations                         Basic earnings per share   $ 41,823       40,336,439     $ 1.04                             Effect of dilutive securities                         - Stock options     —       502,701                                           Diluted earnings per share   $ 41,823       40,839,140     $ 1.02                                   Discontinued operation                         Basic earnings per share   $ 1,979       40,336,439     $ 0.05                             Effect of dilutive securities                         - Stock options     —       502,701                                           Diluted earnings per share   $ 1,979       40,839,140     $ 0.05                                   Net income                         Basic earnings per share   $ 43,802       40,336,439     $ 1.09                             Effect of dilutive securities                         - Stock options     —       502,701                                           Diluted earnings per share   $ 43,802       40,839,140     $ 1.07         All options and warrants to purchase shares of common stock were included in the computation of 2003 diluted earnings per share as the exercise prices were less than the average market price of the common stock. F-28F-25 Nam Tai Electronics, Inc. and Subsidiaries12. Earnings Per Share — continued                                       Weighted                     average number     Per share   Year ended December 31, 2004   Income     of shares     amount         Basic earnings per share   $ 66,885       42,496,122     $ 1.57                             Effect of dilutive securities                         - Stock options     —       52,123       —                                   Diluted earnings per share   $ 66,885       42,548,245     $ 1.57         NotesAll options to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousandspurchase shares of US dollars, except share andcommon stock were included in the computation of 2004 diluted earnings per share data) as the exercise prices were less than the average market price of the common stock. 14.* Adjusted for 1 for 3 stock split and 10 for 1 stock dividend. 13. Other (Expenses) Income (Expense) — Net Other (expenses) income (expense) — net consists of:                           Year Ended December 31, 2000 2001 2002 Interest income   $ 3,300     $ 1,195     $ 799   Miscellaneous expense     (623 )     (294 )     (771 ) Non-trade receivable write-off     —       (500 )     —   Gain on disposal of investment in an affiliated company     1,346       —       —   Realized gain on disposal of investments, net     9,435       —       —   Currency option premium written off     (304 )     —       —   Foreign exchange (loss) gain     51       530       (345 ) Bank charges     (328 )     (333 )     (307 ) Release of unamortized goodwill of affiliated companies — Mate Fair (see note 9(a))     —       —       (520 ) Realized gain on disposal of marketable securities     —       —       642   Unrealized gain on marketable securities     433       1,568       —   Dividend income received from marketable securities and investment     188       525       917   Gain on disposal of intangible asset (see note 17)     —       —       60   Gain on disposal of a subsidiary (see note 3(b)(iii))     —       —       17   Gain on disposal of land     355       18       —   Redemption of shares in legal settlement, net of expenses — Tele Art case (see note 19(b))     —       —       3,333   Provision for Tele-Art case (see note 19(b))     —       —       (5,192 ) Loss on restructuring of JIC Group, including release of unamortized goodwill of $1,483 (see note 3(b)(iv))     —       —       (2,655 ) Legal expenses on restructuring of JIC Group     —       —       (1,411 ) Finance charge on early repayment of the bank loan (see note 11)     —       —       (610 )                         $ 13,853     $ 2,709     $ (6,043 )                                               Year ended December 31,   2002     2003     2004         Miscellaneous expense   $ (771 )   $ (886 )   $ (947 ) Non-trade receivable recovered     —       500       —   Foreign exchange (loss) gain     (345 )     (62 )     189   Bank charges     (307 )     (274 )     (206 ) Finance charge on early repayment of a bank loan     (610 )     —       —   Release of unamortized goodwill of an affiliated company                         - Mate Fair (see note 3(b)(v))     (520 )     —       —   Realized gain on disposal of marketable securities     642       —       —   Dividend income received from marketable securities and investment     917       3,714       18,295   Gain on disposal of intangible asset (see note 16)     60       —       —   Gain on disposal of other assets     —       —       19   Gain on disposal of land     —       9       —   Loss on disposal of investment     —       —       (67 ) Loss on disposal of convertible notes (see note 9 (a))     —       (102 )     —   Redemption of shares in legal settlement, net of expenses                         - Tele Art case (see note 18(b))     3,333       —       —   Provision for loss on Tele-Art Case for 1999 and 2002 share redemptions (see note 18(b))     (5,192 )     —       —   Loss on reverse merger of JIC Group, including release of unamortized goodwill of $1,483 (see note 3(b)(ii))     (2,655 )     —       —   Legal expense related to reverse merger of JIC Group     (1,411 )     —       —             $ (6,859 )   $ 2,899     $ 17,283         15.F-26 14. Staff Retirement Plans      Prior to December 2000, theThe Company maintained staff contributory retirement plans (defined contribution pension plans) which covered certain of its employees. From December 2000 onwards, the Company terminated its existing staff contributory retirement plans and enrolled all of its eligible employees in Hong Kong intooperates a Mandatory Provident Fund (“MPF”) scheme.scheme for all qualifying employees in Hong Kong and a retirement benefit scheme (“RBS”) for all qualifying employees in Macao. The MPF is aand RBS are defined contribution schemeschemes and the assets of the schemeschemes are managed by the trustees independent to the Company.      TheBoth the MPF isand RBS are available to all employees aged 18 to 64 and with at least 60 days of service under the employment of the Company in Hong Kong.Kong and Macao. Contributions are made by the Company at 5% based on the staff’s relevant income. The maximum relevant income for contribution purpose per employee is $3 per month. Staff members are entitled to 100% of the Company’s contributions together with accrued returns irrespective of their length of service with the Company, but the benefits are required by law to be preserved until the retirement age of 65.65 for employees in Hong Kong while the benefit can be withdrawn by the employees in Macao at the end of employment contracts. F-29According to the relevant laws and regulations in the PRC, the Company is required to contribute 8% to 9% of the stipulated salary set by the local government of Shenzhen, the PRC, to the retirement benefit schemes to fund the retirement benefits of their employees. The principal obligation of the Company with respect to these retirement benefit schemes is to make the required contributions under the scheme. No forfeited contributions may be used by the employer to reduce the existing level of contributions. Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) The cost of the Company’s contribution to the contributorystaff retirement plans (including the MPF)in Hong Kong, Macao and PRC amounted to $174, $151$617, $982 and $127$1,190 for the years ended December 31, 2000, 20012002, 2003 and 2002,2004, respectively. 16.15. Income Taxes Benefit (Expense) The components of income before income taxes and minority interestsinterest are as follows:                           Year Ended December 31, 2000 2001 2002 PRC, excluding Hong Kong   $ 6,384     $ 9,002     $ 18,823   Hong Kong     17,572       500       2,137                           $ 23,956     $ 9,502     $ 20,960                                                 Year ended December 31,   2002     2003     2004   PRC, excluding Hong Kong and Macao   $ 18,823     $ 39,778     $ 37,546   Hong Kong, Macao and other jurisdictions     (8,604 )     3,013       43,034             $ 10,219     $ 42,791     $ 80,580         Under the current BVI law, the Company’s income is not subject to taxation. Subsidiaries primarily operating in Hong Kong and the PRC are subject to income taxes as described below.below, and the subsidiary operating in Macao is exempted from income taxes. Under the current Cayman Islands law, ZPTL, NTEEP, JIC Technology and Namtek Software are not subject to profit tax in the Cayman Islands as they have no business operations in the Cayman Islands. However, they may be subject to Hong Kong income taxes as described below if they are registered in Hong Kong The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16% for 2002 and 17.5% for 2003 and 2004 to the estimated taxable income earned in or derived from Hong Kong during the period.period, if applicable. Deferred tax, where applicable, is provided under the liability method at the rate of 16%, for 2002 and 17.5% for 2003, and 2004, being the effective Hong Kong statutory income tax rate applicable to the ensuing financial year, on the difference between the financial statement and income tax bases of measuring assets and liabilities. The basic corporate tax rate for Foreign Investment Enterprises (“FIEs”) in the PRC, such as NTSZ,Namtai Electronic (Shenzhen) Co., Ltd. (“NTSZ”), Zastron Electronic (Shenzhen) Co., Ltd. (“Zastron”), Shenzhen Namtek BPC, Jieda,Company Limited (“Shenzhen Namtek”) and Jetup and Jieyao (the(collectively the “PRC Subsidiaries”subsidiaries”) is currently 33% (30% state tax and 3% local tax). However, because all the PRC subsidiaries are located in Shenzhen and are involved in production operations, they qualify for a special reduced state tax rate of 15%. In addition, the local tax authorities in Shenzhen are not currently assessing any local tax. F-27 15. Income Taxes — continued Since the PRC subsidiaries have agreed to operate for a minimum of 10 years in the PRC, a two-year tax holiday from the first profit making year is available, following which in the third through fifth years there is a 50% reduction to 7.5%. In any event, for FIEs such as NTSZ, Zastron and Namtek which export 70% or more of the production value of their products, a reduction in the tax rate is available; in all cases apart from the years in which a tax holiday and tax incentive is available, there is an overall minimum tax rate of 10%. The following details the tax concessions received for the Company’s PRC subsidiaries:   •   For the years ended December 31, 1990 and 1991, NTSZ qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of NTSZ for the years ended December 31, 1992 to 1994, and 10% in 1995 to 1998. On January 8, 1999, NTSZ received the recognition of “High and New Technology Enterprise” which entitles it to various tax benefits including a lower income tax rate of 7.5% until 2003. In July 2002, the Shenzhen local tax authority issued a notice to shorten the tax incentive period from 5 years to 3 years expiring in 2001. Nevertheless NTSZ was advised by the Shenzhen local tax authority that it would continue to provide a rebate of corporate tax paid for 2 years for 2002 and 2003. During 2003, NTSZ reinvested thereceived $110 rebate of corporate tax paid for 2002, a tax refund of $122 from reinvestment of profits for 1999 2000to 2001 and 2001.a refund of $441 for being an export-oriented enterprise in 2002. In 2004, NTSZ has claimed and received a tax refund of $1,018$821 from reinvestment of profits for 2002 and a refund of $399 for being an export-oriented enterprise in 2003. •   In 2003 Zastron received a refund of $56 from reinvestment of profits for 1999 and a refund of $124 for being an export-oriented enterprise in 2002. On May 13, 2004, Zastron received the Shenzhenrecognition of “High and New Technology Enterprise” and was entitled to enjoy a reduced corporate tax authority in October 2002rate of 7.5% for taxes paid inthree years commencing 2004. In 2004 Zastron received a refund of $243 from reinvestment of profits for 1999 to 2001.2002 and a refund of $793 for being an export-oriented enterprise in 2003.     •   For the years ended December 31, 1992 and 1993, Zastron qualified for a tax holiday; tax was payable at the rate of 7.5% on the assessable profits of Zastron for the years ended December 31, 1994 to 1996 and 10% for the years ended December 31, 1997 to 2002. In 2002 Zastron claimed a refund of $56 F-30 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) from reinvestment of profits for 1999 and 2000. During 2002, Zastron received a refund of $20 for being an export-oriented enterprise for 2000 and 2001. •  In 1996 and 1997, Jieda qualified for a tax holiday. For the years ended December 31, 1998 to 2000, tax was payable at the rate of 7.5% on the assessable profit. For the years ended December 31, 2001 and 2002, the income tax of Jieda Electronics (Shenzhen) Co., Ltd. (“Jieda”), a then wholly owned subsidiary of JIC Technology, was payable at the rate of 15% on the assessable profit. During 2003, Jieda merged with Jetup.     •   In 1996 and 1997, Namtek also qualified for a tax holiday. For the years ended December 31, 1998 to 2000, tax was payable at the rate of 7.5% on the assessable profit. In February 2001, Shenzhen Namtek received the recognition of “Advanced Technology Enterprise” which entitles it to various tax benefits including a lower income tax rate of 7.5% until 2003. In 2002,2003, Shenzhen Namtek claimedreceived a refund of $41$27 from the reinvestment of profits for 1998 to 2000. In 2004, Shenzhen Namtek is entitled to a 5% tax refund for being an export-oriented enterprise in 2004.     •   Jetup enjoyed its tax holiday since 1997 and tax was payable at the rate of 7.5% on its assessable profit for the years ended December 31, 1999 to 2001. The Shenzhen local tax authority has granted Jetup the status of “High and New Technology Enterprise” and allowed it to enjoy a 50% reduction in corporatelower income tax rate to 7.5% for 3 years from 2002 to 2004. The Shenzhen local tax authority has in June 2002 agreed toDuring 2003, Jetup received a refund to Jetup the corporate tax paid in 2000 of $5, and in 2001 of $279, due to Jetup’s$175 from reinvestment of profit for 2002. •   Income tax of Jieyao Electronics (Shenzhen) Co., Ltd. (“Jieyao”), a then wholly owned subsidiary of JIC Technology was payable at the profitsrate of 7.5% on the assessable profit for 2000 and 2001, respectively.the years ended December 31, 2002 to 2003. During 2003, Jieyao was disposed of to a third party (see note 3(b)(iii)).     •   For the years ended December 31, 1999 and 2000, Jieyao2002, BPC qualified for a tax holiday; taxholiday. During 2002, BPC was payable at the ratedisposed of 7.5% on the assessable profit of Jieyao for the years ended December 31, 2001 to 2003. •  For the year ended December 31, 2001, BPC qualified for its first year tax holiday. In addition, the Company has received notification from the PRC tax authority that BPC also qualified for a second year tax holiday in 2002.TBCL (see note 3(b)(i)).      Notwithstanding the foregoing, anA FIE whose foreign investor directly reinvests by way of capital injection its share of profits obtained from that FIE or another FIE owned by the same foreign investor in establishing or expanding an export-oriented or technologically advanced enterprise in the PRC for a minimum period of five years may obtain a refund of the taxes already paid on those profits. NTSZ, Zastron, Namtek and JetupThe PRC subsidiaries qualified for such refunds of taxes as a result of reinvesting their profit earned in previous years.years by their respective holding companies. As a result, the Company recorded tax expense net of the benefit related to the refunds. At December 31, 20012003 and 2002,2004, taxes recoverable under such arrangements were $1,271$4,889 and $789,$6,520, respectively, which are included in income taxes recoverable and expected to be received during 2003.2004 and 2005, respectively. However, during 20022003 the Shenzhen government did not refund approximately $501$13 in taxes the Company paid in 19991998 to 2001.2000. Therefore, the Company reversed the related receivable into current tax expense in 2002.2003. In accordance with its normal practice, the Hong Kong tax authorities selected the Company and one of its wholly owned subsidiaries for a tax audit. In March 2003, in relation to fiscal year 1996, the Hong Kong tax authorities have made certain estimated assessments for public revenue protection purposes to prevent the assessments, if any, from becoming time barred. The Hong Kong tax authorities have not provided concrete grounds for the assessments. The Company and the subsidiary concerned have objected to these estimated assessments. The outcome of the objection is uncertain at this stage as the Hong Kong tax authorities are still reviewing the Company’s and its subsidiary’s Hong Kong tax position. At the time, it is not possible to estimate the outcome of the tax audit, the amount that may have to be paid, if any, or the impact that the results of the 1996 tax audit will have to subsequent tax years. However, management is of the view that there will be no material tax adjustment as a result of the tax audit. In March 2004, this wholly owned subsidiary received a tax demand note from the Hong Kong tax authorities for additional tax assessment for the fiscal year 1997. The subsidiary requested for an unconditional hold-over of such assessment and was denied by the Hong Kong tax authorities. In June 2004, this subsidiary applied to the High Court of Hong Kong for a judicial review and the hearing is scheduled to be held on April 25 and 26, 2005. Management is of the view that they will obtain favorable judgment and hence, no material tax adjustment is expected. F-28 15. Income Taxes — continued The current and deferred components of the income tax benefit (expense)expense appearing in the consolidated statements of income are as follows:                           Year Ended December 31, 2000 2001 2002 Current tax   $ (77 )   $ (110 )   $ (812 ) Deferred tax     110       (117 )     39                           $ 33     $ (227 )   $ (773 )                                               Year ended December 31,   2002     2003     2004   Current tax   $ (812 )   $ (433 )   $ (957 ) Deferred tax     39       34       78             $ (773 )   $ (399 )   $ (879 )            DeferredThe Company’s deferred tax assets and liabilities consistas of December 31, 2003 and 2004 are attributable to the following:                   December 31,   2003     2004         Property, plant and equipment   $ (78 )   $ —   Net operating losses     —       5,863             �� (78 )     5,863   Valuation allowance     —       (5,863 )           $ (78 )   $ —         The realization of the recorded deferred tax allowances over depreciation and are $151 and $112assets is dependent on generating sufficient taxable income prior to the expiration of net operating loss carryforwards. As the management does not believe that it is more likely than not that all of the deferred tax asset will be realized, a full valuation allowance has been established at December 31, 2001 and 2002, respectively.2004. At December 31, 2000, a subsidiary of2002 and 2003, the Company did not have any net operating loss carryforwards. At December 31, 2004, the Company had tax loss carryforwards for Hong Kong tax purposes, subject to the agreementnet operating losses of the Hong Kong Inland Revenue Department, amounting to approxi-$5,863 which may be carried forward indefinitely. F-31 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) mately $104. This tax loss carryforward was used in its entirety during 2001. At December 31, 2001 and 2002, the Company does not have any tax loss carryforwards. A reconciliation of the income tax benefit (expense)expense to the amount computed by applying the current tax rate to the income before income taxes in the consolidated statements of income is as follows:                             Year Ended December 31, 2000 2001 2002 Income before income taxes and minority interests   $ 23,956     $ 9,502     $ 20,960   PRC tax rate     15 %     15 %     15 % Income tax expense at PRC tax rate on income before income tax     (3,593 )     (1,425 )     (3,144 ) Effect of difference between Hong Kong and PRC tax rates applied to Hong Kong income     (7 )     (7 )     42   Effect of income (loss) for which no income tax benefit/expense is receivable/payable     2,527       (35 )     950   Tax holidays and tax incentives     491       786       542   Effect of PRC tax concessions, giving rise to no PRC tax liability     508       564       2,153   Tax benefit (expense) arising from items which are not assessable (deductible) for tax purposes:                           Gain on disposal of land in Hong Kong     53       6       —     Offshore and exempted interest income     76       21       12     Non deductible legal and professional fees     —       —       (234 )   Non deductible other items     (252 )     (159 )     (466 ) Under provision of income tax expense in prior year:                           Taxes due by NTSZ for 10% reserve fund     —       —       (308 )   Taxes due by Namtek due to dividends paid and profits not reinvested     —       —       (193 ) Other     230       22       (127 )                         $ 33     $ (227 )   $ (773 )                                               YEAR ENDED DECEMBER 31,   2002     2003     2004         Income before income taxes and minority interests   $ 10,219     $ 42,791     $ 80,580   PRC tax rate     15 %     15 %     15 % Income tax expense at PRC tax rate on income before income tax   $ (1,533 )   $ (6,419 )   $ (12,087 ) Effect of difference between Hong Kong and PRC tax rates applied to Hong Kong income     42       72       205   Effect of (loss) income for which no income tax benefit/ expense is receivable/payable     (661 )     796       7,660   Tax holidays and tax incentives     542       2,122       2,220   Effect of PRC tax concessions, giving rise to no PRC tax liability     2,153       3,435       2,774   Tax losses not recognised     —       —       (1,026 ) Tax benefit (expense) arising from items which are not assessable (deductible) for tax purposes:                         Gain on disposal of land in Hong Kong     —       1       —   Exempted interest income     12       16       24   Non-deductible legal and professional fees     (234 )     (301 )     (282 ) Non-deductible and non-taxable other items     (466 )     (105 )     17   Overprovision for income tax expense in prior year     —       103       —   Underprovision of income tax expense in prior years     (501 )     —       (268 ) Other     (127 )     (119 )     (116 )           $ (773 )   $ (399 )   $ (879 )       No income tax arose in the United States of America in any of the periods presented. Tax that would otherwise have been payable without tax holidays and tax concessions amounts to approximately $999, $1,350$2,695, $5,557 and $2,695$4,994 in the years ended December 31, 2000, 20012002, 2003 and 2002,2004, respectively (representing a decrease in the basic earnings and diluted earnings per share of $0.11, $0.13$0.08, $0.14 and $0.25,$0.12 in the years ended December 31, 2000, 20012002, 2003 and 2002,2004, respectively). 17.F-29 16. Related Party Balance and Transactions      AsFor the period from January 1, 2002 though April 2002, the Company recognized net sales of December 31, 2001, the balance due to a related party represents the balance due to$7,849 and purchased raw materials of $7,751 from TBCL, a minority shareholder of BPC, and its related companies. Effective April 30, 2002, the Company sold its 86.67% joint venture interest in BPC to a TBCL related company (see note 3(b)(iii)). As of December 31, 2002, the Company had no balances due to a related party.      Since the establishment of BPC in 2000, the Company recognized net sales of $6,232, $21,072 and $7,849, purchased raw materials of $22,370, $23,065 and $7,751, acquired property, plant and equipment of $814, $50 and NIL, from TBCL and its related companies for the years ended December 31, 2000, 2001 and the period from January 1, 2002 through April 2002 respectively. In addition, the Company acquiredhad paid $1,000 to TBCL for acquisition of a license for $1,000 from TBCL during the year ended December 31, 2000. During 2002, the license1999, which was disposed of during 2002 for F-32 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) a consideration of $800 together with the disposal of interest in BPC, plus the foreign exchange gain of $9, resulting in a gain of $60. 18.As of December 31, 2003 and 2004, the balance due from a related party represented the balance due from JCT, a subsidiary of Alpha Star. For the years ended December 31, 2003 and 2004, the Company recognized net sales of $20,782 and $34,181 and purchased raw materials of $5,456 and $12,398 from JCT and its related companies, respectively. During the year ended December 31, 2004, the Company disposed of certain other assets to a director of the Company at a consideration of $231, which represented the then carrying value of the assets. No significant gain or loss arose from such transaction. 17. Financial Instruments The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of its cash equivalents and trade receivables and marketable securities.receivables. The Company’s cash and cash equivalents are high-quality deposits placed with banking institutions with high credit ratings. This investment policy limits the Company’s exposure to concentrations of credit risk. The trade receivable balances largely represent amounts due from the Company’s principal customers who are generally international organizations with high credit ratings. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts from a customer. As a consequence, concentrations of credit risk are limited. There was no allowance for doubtful debt for 2000. Allowance for doubtful debts was $31$119 and $122$157 in 20012003 and 2002,2004, respectively. There were no other movements in the provision for doubtful accounts.      All of theThe Company’s significant financial instruments at December 31, 2001 and 2002 are reported in current assets or current liabilities in the consolidated balance sheet at carrying amounts whichapproximate their fair values due to the short maturity of these instruments. The Company’s financial instruments reported as non-current liabilities, such as its long term debt, approximate their fair value due to the short maturityvariable nature of these instruments.the interest calculations.      The Company’s fair value of convertible notes was not significantly different from the carrying value at December 31, 2002. 19.18. Commitments and Contingencies (a) Lease Commitments (a) Lease commitments The Company leases premises under various operating leases, certain of which contain contingent escalation clauses.clauses whereby the percentage increase is subject to periodic review and agreement between the Company and the lessor. Rental expense under operating leases was $812$909, $617 and $975 in 2000, $1,501 in 2001the years ended December 2002, 2003 and $909 in 2002.2004, respectively. At December 31, 2002,2004, the Company was obligated under operating leases, which relate to land and buildings, requiring minimum rentals as follows for the yearsfollows: Year ending December 31, :           2003   $ 779   2004     727   2005     745   2006     731   2007     565   2008 and thereafter     388               $ 3,935                     - 2005   $ 1,243   - 2006     1,116   - 2007     1,169   - 2008     1,215   - 2009     1,215   - 2010 and thereafter     3,178               $ 9,136           (b) Significant Legal ProceedingsF-30 18. Commitments and Contingencies- continued (b) Significant legal proceedings In June 1997, the Company filed a petition in the British Virgin IslandsBVI for the winding up of Tele-Art Inc. on account of an unpaid judgment debt owing to the Company. The High Court of Justice granted an order to wind up Tele-Art Inc. in July 1998 and the Eastern Caribbean Court of Appeal upheld the decision on January 25, 1999. On January 22, 1999, pursuant to its Articles of Association, the Company redeemed and cancelled 138,500415,500 shares * of the Company registered in the name of Tele-Art Inc. at a price of $11.19$3.73 per F-33 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) share to offset substantially all of the judgment debt of $799, plus interest and legal costs totalling $1,673, including dividends that the Company had withheld and credited against the judgment debt. Following the completion of the redemption, the Company received notice that the liquidator had obtained an ex-parte injunction preventing the Company from redeeming Nam Tai shares beneficially owned by Tele-Art, Inc.Tele-Art. On February 4, 1999, the liquidator of Tele-Art Inc. filed a further summons in the BVI on its behalf seeking, among other matters:   •   A declaration as to the respective priorities of the debts of Tele-Art Inc. to the Bank of China, Nam Tai, and other creditors and their respective rights to have their debts discharged out of the proceeds of the Tele-Art, Inc.’sTele-Art’s Nam Tai shares;     •   An order setting aside the redemption of 138,500415,500 shares, and ordering delivery of all shares in possession or control of Nam Tai to the liquidator; and     •   Payment of all dividends in respect of Tele-Art, Inc.’sTele-Art’s Nam Tai shares. On March 26, 2001, the Company filed a summons seeking to remove the liquidatorsliquidator, David Hague, for failing to act diligently in the performance of his duties and for knowingly misleading the court. On September 3, 2002, the liquidatorDavid Hague submitted a letter of resignation prior to the scheduled removal hearing. As of February 21, 2003,A new liquidators have not been appointed.liquidator was subsequently appointed in July 2003. On July 5, 2002, upon application by the Company, the court ordered the removal of the liquidator’s ex-parte injunction and ordered an inquiry into damages. On April 16, 2004, the Company filed its amended points of claim of defense. There are currently applications before the Court of Appeal in the British Virgin Islands to determine the progress of this matter as the Company has sought to enter judgment against David Hague who has applied to strike out the Company’s claim for damages. On August 9, 2002, the court delivered a decision awarding the Company a judgment in favor of the Company and against Tele-Art Inc. for approximately $34,000. On August 12, 2002, the Company redeemed and cancelled, pursuant to its Articles of Association, the remaining 169,727509,181 ** shares beneficially owned by Tele-Art Inc. at a price of $18.41$6.14 per share. Including the dividends which the Company had withheld and credited against the judgment, this offset a further $3,519 in judgment debts owed to the Company by Tele-Art, Inc.Tele-Art. The Company recorded the $3,333 redemption, net of expenses, as other income in the third quarter of 2002. On January 21, 2003, a judgment was delivered on the liquidators’ February 4, 1999 summons declaring that the redemption and set off of dividends on the 138,500415,500 shares be set aside and that all Tele-Art Inc. property withheld by Nam Tai be delivered to Tele-Art Inc. in liquidation. The orders granted in the judgment were substantially different from the relief sought in the February 12,4, 1999 application. On February 4, 2003, the Company filed an application for a stay of execution and leave to appeal the decision listing eight grounds of appeal, which was granted on June 23, 2003. The case was heard on January 12, 2004 and the judgment was delivered on April 26, 2004. It was held that the redemption of 415,500 shares by the Company was proper and efficacious. However, the Company must return the redemption proceeds and dividends payable received to the liquidator for whichdistribution to creditors. David Hague, who filed the original application is pending.      The Companyin 1999, has been advised by its legal representatives that it has real prospectsobtained leave to appeal to the Privy Council, the final court of success on appeal, against the January 21, 2003 decision of the Court of Appeal. It is not expected that this appeal will be heard before 2006. The court also found that Bank of China to be a secured creditor but the court did not determine the amount owed by Tele-Art, Inc. to Bank of China. We dispute that finding, and plansamong other matters, have argued that the proof of debt by Bank of China was incomplete and invalid. F-31 18. Commitments and Contingencies- continued (b) Significant legal proceedings- continued The Bank of China is claiming to vigorously fightbe a secured creditor. Bank of China claims that as of December 6, 2004, the debt from Tele-Art Limited, a former wholly-owned subsidiary of Tele-Art, Inc., that is guaranteed by Tele-Art, Inc. was $2,819 with interest accruing daily. However, pursuant to the third liquidator report of October 13, 2004, the liquidator took the view that Bank of China’s proof of debt was incomplete. The liquidator has requested the Court’s approval to take further action and demand that Bank of China provide further information for his consideration. The Company is of the view that the amount of debt owed by Tele-Art Limited to Bank of China may not exceed $1.4 million. Pursuant to the same liquidator report, apart from Nam Tai, the liquidator admitted the proof of debts of two other unsecured creditors with the total amount to approximately $33. David Hague is claiming to have incurred $382 in costs for work as the liquidator. These costs, however, are subject to the approval of the Court and as such an outcome.are still pending as they have not yet been approved. The liquidator filed a summons for the approval of its third report on October 13, 2004 and this was heard on December 14, 2004. The Court,inter alia, ordered that the liquidator continue the administration of the liquidation of Tele-Art, Inc. substantially in accordance with his proposals contained in the third report as well as the second report. However,In 2002, due to the uncertainty of the final outcome of the litigation as a result of the January 21, 2003 judgment and in accordance with SFAS No. 5,“Accounting for Contingencies”Contingencies", the Company has maderecorded a 2002 provision for $5,192 for both share redemption plus all dividends declared and withheld by the Company,as a component of accrued expenses as of December 31, 2002, pending a final determination of this matter by the courts. courts, represented the then best estimate of the net monetary expense the Company would have if its appeal was unsuccessful and its two judgment debts in the total amount of $38,000 (including interest, costs, and related expenses) was determined as having the lowest priorities in recovering from the estate of Tele-Art. According to the information provided by the liquidator on November 7, 2003, apart from Nam Tai, a total of 3 other creditors of Tele-Art, including the Bank of China, submitted their proof of debt to the liquidator for a total claim of approximately $3,390. Together with the outstanding legal charge as at December 31, 2003, the total potential obligation to the Company was estimated to be approximately $3,890, and accordingly, the 2002 provision for $5,192 had been reduced to $3,890 in the fourth quarter of 2003. As a result of the April 26, 2004 judgment, the Company is in negotiations with the liquidator on the distribution of the redemption proceeds among the unsecured creditors. If the Company’s appealproposal is successfulaccepted by the liquidator and approved by the court, and all legal matters related to Tele Art,Tele-Art, Inc. are finalized, including the final determination of the position of the Bank of China, then any remaining portion of the $5,192$3,890 provision will be reversed into income in the related period.      IfHowever, the Company’s appeal is not successful, and the 308,227 share redemption is set aside, the Company believes that these shares would be sold by Tele-Art, Inc.’s liquidator, once appointed, in the open market at the market price prevailing at the time of sale. For example, if these shares had been sold at the February 21, 2003 closing price of $26.50, the proceeds the liquidator would have realized before commissions, plus F-34 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) withheld dividends of $518, would have been approximately $8,686 for the estate of Tele-Art, Inc. (in liquidation). Nam Tai has two judgments debts against Tele-Art Inc. in the aggregate amount, including interest, costs, and related expenses, of approximately $38,000. Furthermore, per the last liquidator report that was filed with the court there appear to be no proven unsecured creditors of Tele-Art, Inc. and the estimated liabilities for all other unsecured creditors are approximately $80. The Bank of China is claiming to be a secured creditor in the amount of $2,200, and the January 21, 2003 judgment found that the Bank of China is secured and Nam Tai is unsecured. Nam Tai disputes that finding, and among other matters, has argued that the Bank of China has not yet submitted any proof of an outstanding debt. The now resigned liquidator is claiming to have incurred approximately $385 in costs for work as liquidator. Accordingly, if the Company is not successful on its appeal of the January 21, 2003 judgment, the Company will seek to recover its $38,000 in judgment debts (including interest, costs, and related expenses) from the estate of Tele-Art, Inc. Accordingly, any amounts recovered from the estate of Tele-Art, Inc., which in management’s opinion could exceed the $5,192 provision based on the current market price of Nam Tai’s shares and current information regarding Tele-Art Inc. creditors, would be recognized as other income upon recovery. The actual amount of the recovery, if any, is uncertain, and is dependent on a number of factors including the value of Nam Tai’s shares when sold in the market, and the final determination of other creditors’ positions.the Bank of China’s position. The Company plans to continue to pursue vigorously all legal alternatives available to seek to recover the maximum amount of the outstanding debt from Tele-Art, Inc. (in liquidation) as well as to pursue other parties that may have assisted in any transfers of the assets from Tele-Art, Inc. In furtherance of this objective, the Company commenced proceedings in 2002 against David Hague and PriceWaterhouseCoopers for, inter alia, negligence and breach of statutory duty in their conduct of the liquidation. This matter is still in its initial stages as the defendants are seeking leave to appeal against the dismissal of their challenge to the jurisdiction of the BVI courts in this matter. The Company may incur substantial additional costs in pursuing its recovery and such costs may not be recoverable. 20.(* Subsequent to November 7, 2003, the number of shares has been adjusted to 457,050 to reflect the 10 for 1 stock dividend effect.) (** Subsequent to November 7, 2003, the number of shares has been adjusted to 560,099 to reflect the 10 for 1 stock dividend effect.) Shareholders’ Class Actions On March 11, 2003, the Company were served with a complaint in an action captioned Michael Rocco v. Nam Tai, et al., 03 Civ. 1148 (S.D.N.Y.), or the Rocco Action. In addition to Nam Tai, certain directors are named as defendants. On or about April 9, 2003, a second complaint was filed in an action captioned A.J. & Celine Steigler v. Nam Tai, et al., 03 Civ. 2462 (S.D.N.Y.), or the Steigler Action, and together with the Rocco Action, the Actions. The Actions have been consolidated since July 2003 and purports to represent a putative class of persons who purchased the common stock of Nam Tai from July 29, 2002 through February 18, 2003. Plaintiffs in the Actions assert claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and allege that misrepresentations and/or omissions were made during the alleged class periods concerning the recovery of an inventory write-down and a charge to goodwill related to Nam Tai’s LPT segment. The Company has filed a motion to dismiss the lawsuit was denied on September 27, 2004. The putative class action has not been certified as a class action by the court but we expect the plaintiffs to seek such certification in the near future. The court has set May 23, 2005 to near the certification motion. Nam Tai believes it has meritorious defenses and intends to defend the case vigorously. F-32 19. Segment Information      Prior to October 2000, the Company operated in a single segment of the CEP industry. As a result of the acquisition of the JIC Group in late 2000, the Company added a second segment, LPT, principally relating to the operation of the JIC Group. The Company operates in three segments: CECP, TCA and manages theseLCDP. In 2002 and 2003, LCDP also comprised the transformers operations. These segments are operated and managed as strategic business units. The chief operating decision maker evaluates the net income of each segment in assessing performance and allocating resources between segments. F-35 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) The following table provides operating financial information for the twothree reportable segments. The information presented below for the year Year ended December 31, 2000 has been restated to reflect two operating segments.                                                                           2000 2001 2002 CEP LPT Total CEP LPT Total CEP LPT Total Net sales   $ 203,404     $ 10,284     $ 213,688     $ 198,048     $ 35,958     $ 234,006     $ 200,755     $ 35,261     $ 236,016   Cost of sales     (173,878 )     (8,218 )     (182,096 )     (174,863 )     (29,111 )     (203,974 )     (167,440 )     (30,516 )     (197,956 )                                                         Gross profit     29,526       2,066       31,592       23,185       6,847       30,032       33,315       4,745       38,060   Selling, general and administrative expenses     (15,196 )     (2,450 )     (17,646 )     (16,521 )     (5,453 )     (21,974 )     (14,940 )     (3,043 )     (17,983 ) Research and development expenses     (3,489 )     —       (3,489 )     (2,746 )     (208 )     (2,954 )     (2,162 )     (524 )     (2,686 ) Impairment of goodwill     —       —       —       —       —       —       (339 )     —       (339 ) Interest expense     (149 )     (16 )     (165 )     (170 )     (8 )     (178 )     (705 )     (85 )     (790 ) Equity in (loss) income of affiliated companies     (189 )     —       (189 )     1,867       —       1,867       10,741       —       10,741   Other income (expense)     13,772       81       13,853       885       1,824       2,709       (4,879 )     (1,164 )     (6,043 )                                                         Income (loss) before income taxes and minority interests     24,275       (319 )     23,956       6,500       3,002       9,502       21,031       (71 )     20,960   Income taxes benefit (expense)     (144 )     177       33       (137 )     (90 )     (227 )     (710 )     (63 )     (773 )                                                         Income (loss) before minority interests     24,131       (142 )     23,989       6,363       2,912       9,275       20,321       (134 )     20,187   Minority interests     12       —       12       (230 )     —       (230 )     (107 )     (57 )     (164 )                                                         Net income (loss)   $ 24,143     $ (142 )   $ 24,001     $ 6,133     $ 2,912     $ 9,045     $ 20,214     $ (191 )   $ 20,023                                                           Depreciation and amortization   $ 7,059     $ 639     $ 7,698     $ 8,454     $ 2,717     $ 11,171     $ 8,739     $ 1,880     $ 10,619   Stock option costs   $ 117     $ —     $ 117     $ —     $ 839     $ 839     $ —     $ —     $ —   Capital expenditures   $ 3,141     $ 438     $ 3,579     $ 34,060     $ 1,953     $ 36,013     $ 5,962     $ 12,523     $ 18,485   Identifiable assets   $ 164,963     $ 43,407     $ 208,370     $ 188,262     $ 36,311     $ 224,573     $ 225,754     $ 49,332     $ 275,086                                                           2002                                       CECP     TCA     LCDP     Total   Net sales — third parties   $ 94,032     $ 98,874     $ 35,261     $ 228,167   Net sales — related parties     —       7,849       —       7,849         Total net sales     94,032       106,723       35,261       236,016   Cost of sales     (75,746 )     (91,694 )     (30,516 )     (197,956 )       Gross profit     18,286       15,029       4,745       38,060   Selling, general and administrative expenses     (8,727 )     (6,213 )     (3,043 )     (17,983 ) Research and development expenses     (1,215 )     (947 )     (524 )     (2,686 ) Impairment of goodwill     —       (339 )     —       (339 ) Other income (expenses), net     1,780       (7,464 )     (1,175 )     (6,859 ) Gain on partial disposal of subsidiaries     —       17       —       17   Interest income     4       784       11       799   Interest expense     (1 )     (704 )     (85 )     (790 )       Income (loss) before income taxes and minority interests     10,127       163       (71 )     10,219   Income taxes expense     (345 )     (365 )     (63 )     (773 )       Income before minority interests and equity in income of affiliated companies     9,782       (202 )     (134 )     9,446   Minority interests     —       (107 )     (57 )     (164 ) Equity in income of affiliated companies     —       10,741       —       10,741         Net income (loss)   $ 9,782     $ 10,432     $ (191 )   $ 20,023         Year ended December 31, 2003                                       CECP     TCA     LCDP     Total   Net sales — third parties   $ 128,778     $ 215,422     $ 41,324     $ 385,524   Net sales — related parties     —       20,782       —       20,782         Total net sales     128,778       236,204       41,324       406,306   Cost of sales     (97,693 )     (207,733 )     (34,590 )     (340,016 )       Gross profit     31,085       28,471       6,734       66,290   Selling, general and administrative expenses     (8,157 )     (12,751 )     (3,958 )     (24,866 ) Research and development expenses     (1,963 )     (1,584 )     (490 )     (4,037 ) Other income (expenses), net     1,907       4,070       (3,078 )     2,899   Gain on partial disposal of subsidiaries     —       —       1,838       1,838   Interest income     5       777       6       788   Interest expense     —       (5 )     (116 )     (121 )       Income before income taxes and minority interests     22,877       18,978       936       42,791   Income taxes expense     (29 )     (366 )     (4 )     (399 )       Income before minority interests and equity in income of affiliated companies     22,848       18,612       932       42,392   Minority interests     —       (856 )     (211 )     (1,067 ) Equity in income of affiliated companies     —       498       —       498                                           Income after minority interests and equity in income of affiliated companies   $ 22,848     $ 18,254     $ 721     $ 41,823   Discontinued operation     —       —       1,979       1,979         Net income   $ 22,848     $ 18,254     $ 2,700     $ 43,802         F-33 19. Segment Information — continued Year ended December 31, 2004                                       CECP     TCA     LCDP     Total   Net sales — third parties   $ 163,584     $ 287,386     $ 48,710     $ 499,680   Net sales — related parties     —       34,181       —       34,181         Total net sales     163,584       321,567       48,710       533,861   Cost of sales     (130,140 )     (287,229 )     (40,016 )     (457,385 )       Gross profit     33,444       34,338       8,694       76,476   Selling, general and administrative expenses     (9,222 )     (13,619 )     (5,212 )     (28,053 ) Research and development expenses     (2,212 )     (1,884 )     (949 )     (5,045 ) Other income (expenses), net     1,698       15,546       39       17,283   Gain on partial disposal of subsidiaries     —       77,320       —       77,320   Interest income     138       954       18       1,110   Interest expense     (1 )     (23 )     (171 )     (195 ) Unrealised loss on marketable securities     —       (58,316 )     —       (58,316 )       Income before income taxes and minority interests     23,845       54,316       2,419       80,580   Income taxes expense     (405 )     (407 )     (67 )     (879 )       Income before minority interests and equity in loss of affiliated companies     23,440       53,909       2,352       79,701   Minority interests     (4,879 )     (877 )     (254 )     (6,010 ) Equity in loss of affiliated companies     —       (6,806 )     —       (6,806 )       Net income   $ 18,561     $ 46,226     $ 2,098     $ 66,885         Year ended December 31, 2002                                       CECP     TCA     LCDP     Total   Depreciation and amortization   $ 2,982     $ 5,757     $ 1,880     $ 10,619   Capital expenditures   $ 4,597     $ 1,365     $ 12,523     $ 18,485   Identifiable assets   $ 77,360     $ 148,394     $ 49,332     $ 275,086   Year ended December 31, 2003                                       CECP     TCA     LCDP     Total   Depreciation and amortization   $ 4,154     $ 5,479     $ 2,631     $ 12,264   Capital expenditures   $ 5,243     $ 11,341     $ 469     $ 17,053   Identifiable assets   $ 85,799     $ 162,366     $ 49,530     $ 297,695   Year ended December 31, 2004                                       CECP     TCA     LCDP     Total   Depreciation and amortization   $ 4,441     $ 7,121     $ 2,454     $ 14,016   Capital expenditures   $ 21,493     $ 14,891     $ 2,227     $ 38,611   Identifiable assets   $ 134,473     $ 274,664     $ 51,336     $ 460,473   There were no material inter-segment sales for the years ended December 31, 2000, 20012002, 2003 and 2002. During 2002, property,2004. Property, plant and equipment with a net book value of $312 was transferred from the CEPTCA segment to the LPT segment.LCDP segment during 2002. The Company charges 100% of its corporate level related expenses to its reportable segments as management fees. F-36F-34 Nam Tai Electronics, Inc. and Subsidiaries 19. Segment Information — continued Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) The followingA summary sets forth the percentage of net sales of each of the Company’s product lines forof each segment for the years ended December 31, 2002, 2003 and 2004, is as follows:                               Year Ended December 31, 2000 2001 2002 CEP:                           — Assembling                             — LCD consumer products     46 %     32 %     40 %     — Telecom components assembly     48 %     52 %     44 %   — Software development services     1 %     1 %     1 %                           95 %     85 %     85 % LPT:                           — Parts & components                             — LCD panels     3 %     11 %     10 %     — Transformers     2 %     4 %     5 %                           5 %     15 %     15 %                           100 %     100 %     100 %                                               Year ended December 31,   2002     2003     2004         Product line                                                   CECP:                         - Assembling                         - Consumer electronics and communication products     40 %     32 %     31 %                                 TCA:                         - Assembling                         - Telecom components assembly     44 %     57 %     59 % - Software development services     1 %     1 %     1 %             45 %     58 %     60 %                                 LCDP:                         - Parts and components                         - LCD panels     10 %     9 %     9 % - Transformers     5 %     1 %     0 %             15 %     10 %     9 %             100 %     100 %     100 %       A summary of net sales, net income from operations and identifiablelong-lived assets by geographical areageographic areas is as follows:                             Year Ended December 31, 2000 2001 2002 Net sales from operations within:                           — Hong Kong:                              Unaffiliated customers   $ 202,364     $ 206,902     $ 223,709        Intercompany sales     —       —       979                             202,364       206,902       224,688     — PRC, excluding Hong Kong:                              Affiliated customers (see note 17)     6,232       21,072       7,849        Unaffiliated customers     5,092       6,032       4,458        Intercompany sales     180,065       160,503       179,411                             191,389       187,607       191,718                         — Intercompany eliminations     (180,065 )     (160,503 )     (180,390 )                     Total net sales   $ 213,688     $ 234,006     $ 236,016                       Net income within:                           — PRC, excluding Hong Kong   $ 6,549     $ 4,848     $ 17,930     — Hong Kong     17,452       4,197       2,093                           $ 24,001     $ 9,045     $ 20,023                       F-37By geographical area:                           Year ended December 31,   2002     2003     2004         Net sales from operations within:                         - Hong Kong and Macao:                         Unaffiliated customers   $ 223,709     $ 295,113     $ 48,710   Related party     —       14,770       —   Intercompany sales     979       404       563               224,688       310,287       49,273         - PRC, excluding Hong Kong and Macao:                         Unaffiliated customers     4,458       90,411       450,970   Related parties     7,849       6,012       34,181   Intercompany sales     179,411       263,971       4,393               191,718       360,394       489,544         - Intercompany eliminations     (180,390 )     (264,375 )     (4,956 )       Total net sales   $ 236,016     $ 406,306     $ 533,861                                   Net income within:                         - PRC, excluding Hong Kong and Macao   $ 17,930     $ 38,627     $ 30,981   - Hong Kong and Macao     2,093       5,175       35,904         Total net income   $ 20,023     $ 43,802     $ 66,885         F-35 Nam Tai Electronics, Inc. and Subsidiaries19. Segment Information — continued                           Year ended December 31,   2002     2003     2004         Net sales to customers by geographical area:                         - Hong Kong   $ 57,157     $ 36,433     $ 160,959   - Europe (excluding Estonia)     42,943       84,954       96,304   - United States     33,054       55,543       58,696   - PRC (excluding Hong Kong)     28,518       101,211       132,603   - Japan     25,276       68,498       33,880   - Estonia     19,660       20,474       3,106   - North America (excluding United States)     6,640       347       5,352   - Korea     17,390       24,499       21,520   - Other     5,378       14,347       21,441         Total net sales   $ 236,016     $ 406,306     $ 533,861                                   As at December 31,   2002     2003     2004         Long-lived assets by geographic area:                         - PRC, excluding Hong Kong and Macao   $ 54,481     $ 59,399     $ 84,453   - Hong Kong and Macao     21,433       18,248       12,988         Total long-lived assets   $ 75,914     $ 77,647     $ 97,441         Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data)                             December 31, 2000 2001 2002 Identifiable assets within:                           — PRC, excluding Hong Kong   $ 71,242     $ 60,866     $ 88,942     — Hong Kong     137,128       163,707       186,144                       Total assets   $ 208,370     $ 224,573     $ 275,086                       Intercompany sales arise from the transfer of finished goods between subsidiaries operating in different areas. These sales are generally at estimated market price.prices consistent with what the Company would charge third parties for similar goods. At December 31, 2000 and 2001, the identifiable assets in Hong Kong included the investment in affiliated companies of $2,054 and $3,921, respectively.                             Year Ended December 31, 2000 2001 2002 Net sales to customers by geographical area:                           — Hong Kong   $ 97,685     $ 64,391     $ 57,157     — Europe     20,032       22,437       62,603     — North America     52,244       54,994       39,694     — PRC     11,056       25,378       28,518     — Japan     19,388       22,767       25,276     — Other     13,283       44,039       22,768                         Total net sales   $ 213,688     $ 234,006     $ 236,016                       The Company’s sales to the customers which accounted for 10% or more of its sales are as follows:                             Year Ended December 31, 2000 2001 2002 By customers:                           A   $ 50,767     $ 69,996     $ 75,965     B     N/A       N/A       39,854     C     51,124       33,143       26,217     D     31,442       N/A       N/A     E     21,448       N/A       N/A                           $ 154,781     $ 103,139     $ 142,036                                                 Year ended December 31,   2002     2003     2004         A   $ N/A     $ N/A     $ 128,623   B     75,965       100,541       75,426   C     N/A       N/A       54,635   D     39,854       46,057       N/A   E     26,217       N/A       N/A   F     N/A       43,233       N/A             $ 142,036     $ 189,831     $ 258,684         21. Subsequent EventsF-36 (a)  In January 2003, the Company further expanded its business to include wireless communication technology and related products. The Company has made a strategic investment of $10,000 by purchasing a 25% shareholding in Alpha Star Investments Limited (“Alpha Star”), a BVI company, which is the ultimate holding company of the Hong Kong based JCT Wireless Technology Company Limited (“JCT”), a company engaged in the design, development and marketing of wireless communication terminals and wireless application software. The Company manufactures wireless communication terminals and related modules for JCT. As part of the investment, Alpha Star agreed to have the Company manufacture the RF modules for at least 50 percent of the orders it or any of its subsidiaries receives for RF modules provided the Company performs such manufacturing services at a price comparable to the market price. F-38 Nam Tai Electronics, Inc. and Subsidiaries Notes to Consolidated Financial Statements — (Continued) December 31, 2001 and 2002 (In thousands of US dollars, except share and per share data) (b)  On January 20, 2003, one of the Company’s subsidiaries, J.I.C. Technology Company Limited, entered into a subscription agreement with iMagic Infomedia Technology Limited (“iMagic”) pursuant to which the J.I.C. Technology Company Limited agreed to subscribe for 60 shares of par value of HK$1 each in iMagic, representing 5.36% of the total issued capital of iMagic, for cash consideration of $385. On the same date, J.I.C. Technology Company Limited also entered into a deed of put option with a director of iMagic under which the director of iMagic grants J.I.C. Technology Company Limited an option to require the director to purchase the shares from J.I.C. Technology Company Limited at the consideration of $385. The put option shall commence on December 31, 2004 and expire on January 30, 2005. iMagic is the parent company of PowerPhone Network Limited, a company that has deployed interactive multimedia voice and data terminals in Asia and the United States. (c)  In January 2003, the Company sold a 20% interest in Namtek Software Development Company Limited for $160 to the management of Namtek Software Development Company Limited. (d)  On February 21, 2003, several lawsuits were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of New York. To date, no complaint has been served on the Company or, to its knowledge, any officer or director. According to press releases made public by counsel claiming to have filed the complaints, these complaints are brought on behalf of a putative class of purchasers of our stock and raise various categories of claims including alleged violations of Section 10(b) of the Securities Exchange Act of 1934 by issuing false and misleading statements regarding our financial performance and failing to issue timely reports concerning adverse developments in certain material litigation. The Company believes that it has meritorious defenses to such allegations and if the complaints are served and the actions prosecuted the Company, intends to defend this action vigorously. The ultimate outcome of this litigation cannot presently be determined. F-39 Item 19     Exhibits. The following exhibits are filed as part of this annual report: Exhibit Number Description 1.1 Memorandum and Articles of Association, as amended (incorporated by reference to Exhibit 2.1 of the Company’s Form 20-F for the year ended December 31, 1998 filed with the SEC on March 31, 1999.) 4.1 Nam Tai’s Amended and Restated 1993 Stock Option Plan (incorporated by reference to the Amended and Restated 1993 Stock Option Plan of Nam Tai Electronics, Inc. as adopted August 18, 1993, amended December 15, 1993, January 12, 1996, and amended and restated April 26, 1999) included as part of Nam Tai’s definite Proxy Statement for its 1999 Annual Meeting of Shareholders filed with the SEC as part of Nam Tai’s Form 6-K on June 24, 1999). 4.2 Nam Tai’s 2001 Stock Option Plan (incorporated by reference to the 2001 Stock Option Plan included as part of Nam Tai’s Proxy Statement for its 2001 Annual Meeting of Shareholders filed with the SEC as part of Nam Tai’s Form 6-K on June 27, 2001) 4.3 Sale and Purchase Agreement for the 15th Floor of China Merchants Tower, Shun Tak Centre, Nos. 168-200 Connaught Road Central, Hong Kong between Shun Tak Centre Limited and Nam Tai Group Management Limited dated March 27th 2001 (incorporated by reference to Exhibit 4.6 of registrant’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). 4.4 Agreement on Proposal for the listing of JIC Group common shares on the Hong Kong Stock Exchange dated January 14, 2002 between Nam Tai Electronics, Inc., J.I.C. Technology Company Limited, Albatronics (Far East) Company Limited (in liquidation) and Messrs. Toohey and Chung, the Joint Liquidators (incorporated by reference to Exhibit 4.7 of registrant’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). 4.5 Letter dated September 24, 2001 between The Hong Kong and Shanghai Banking Corporation Limited and the Company for a seven-year term-loan of $15,000,000 (incorporated by reference to Exhibit 4.8 of the Company’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). 4.6 Form of Indemnification Agreement entered into between the Company and each of its Director’s as of the 9th day of July 2001 (incorporated by reference to Exhibit 4.9 of the Company’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). 4.7 Banking Facility Letter, as amended, dated March 27, 2002 between Shanghai Commercial Bank Ltd. and J.I.C. Enterprises (Hong Kong) Ltd. for a four-year term loan of $4,500,000. 4.8 Subscription Agreement dated January 6, 2003 between Alpha Star Investments Ltd and the Company for the purchase of 1,625,000 ordinary shares. 4.9 Shareholders Agreement dated January 8, 2003 among Alpha Star Investments and its investors, including the Company. 4.10 Share Transfer Agreement of TCL Holdings dated January 25, 2002 between Hui Zhou City Investment Holdings Co., Ltd and Namtai Electronic (Shenzhen) Co., Ltd. 4.11 Subscription Agreement dated September 6, 2002 between TCL International Holdings Ltd. and Nam Tai Electronics, Inc. for the purchase of Convertible Notes of TCL International Holdings. 4.12 Sale and Purchase Agreement dated April 24, 2002 between A&T Battery Corporation, Nam Tai Electronic & Electrical Products Limited and Toshiba Battery Co., Ltd. 4.13 Sale and Purchase Agreement of 5 bearer shares in Mate Fair Group Limited between Spin King Limited and Nam Tai Electronics, Inc. dated September 6, 2000. (5% Indirect Ownership in TCL Mobile). (incorporated by reference to Exhibit 4.5 of the Company’s Form 20-F for the year ended December 31, 2000 filed with the SEC on March 21, 2001). 4.14 Common Share Purchase Agreement between Leesha Holdings Limited and Nam Tai Electronics, Inc. dated September 19, 2000 for purchase of 500,000 Deswell Industries Inc. common shares (incorporated by reference to Exhibit A of the Schedule 13D of the Company in relation to Deswell Industries, Inc. filed with the SEC on October 6, 2000). 4.15 Sale and Purchase Agreement of entire issued share capital of J.I.C. Group between J.I.C. Holdings (B.V.I.) Ltd., Mr. Joseph Li Shi Yuen, Mr. Chui Kam Wai and Nam Tai Electronics, Inc. dated September 26, 2000, including service agreements with Messrs. Li and Chui (incorporated by reference to Exhibit A of the Schedule 13D of Joseph Li Shi Yuen, Chui Kam Wai and J.I.C. Holdings (B.V.I.) Limited filed with the SEC on November 7, 2000). 64 Exhibit Number Description 4.16 Contract for Use of Land dated March 25, 1996 between Shenzhen City Baoan Xinan Gu Su Estate Residents Committee and Namtai Electronic (Shenzhen) Co. Ltd. regarding the use for 50 years of land situated at Zhuao, Gu Su Industrial Estate, Xihan, Baoan (incorporated by reference to Exhibit 2.7 of the Company’s Form 20-F for the year ended December 31, 1996 filed with the SEC on April 2, 1997). 4.17 Contract to Transfer the Right of Utilization of Land in Shenzhen dated April 26, 1999 between Shenzhen National Land Planning Bureau and Namtai Electronic (Shenzhen) Co., Ltd. (incorporated by reference to Exhibit 2.1 of the Company’s Form 20-F for the year ended December 31, 1999 filed with the SEC on March 29, 2000. 8.1 Diagram of Company’s subsidiaries. See Pages 24 to 26 of this Report. 10.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 10.2 Letter from MCW. Todman & Co. dated February 10, 2003. 10.3 Letter from MCW. Todman & Co. dated February 17, 2003. 23.1 Consent of Grant Thornton. 23.2 Consent of Deloitte Touche Tohmatsu. 65 SIGNATURES      Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this annual report on its behalf. NAM TAI ELECTRONICS, INC. By:  /s/ JOSEPH LI Joseph Li Chief Executive Officer Date: February 28, 2002 CERTIFICATIONS I, Joseph Li, certify that:    1.     I have reviewed this annual report on Form 20-F of Nam Tai Electronics, Inc.;      2.     Based on my knowledge, this annual 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 annual report;      3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;      4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:      a.     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;      b.     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and      c.     presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;      5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):      a.     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and      b.     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and      6.     The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JOSEPH LI Joseph Li Chief Executive Officer Date:     February 28, 2003 I, M. K. Koo, certify that:      1.     I have reviewed this annual report on Form 20-F of Nam Tai Electronics, Inc.;      2.     Based on my knowledge, this annual 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 annual report;      3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;      4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:      a.     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;      b.     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and      c.     presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;      5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):      a.     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and      b.     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and      6.     The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ M. K. KOO _______________________________________ M. K. Koo Chief Financial Officer Date:     February 28, 2003 EXHIBIT INDEX           Exhibit Number Description NAM TAI ELECTRONICS, INC.   1.1   By: /s/ JOSEPH LI Joseph Li Chief Executive Officer Date: March 15, 2005 EXHIBIT INDEX Exhibit Number DESCRIPTION 1.1   Memorandum and Articles of Association, as amended (incorporated by reference to Exhibit 2.1 of the Company’s Form 20-F for the year ended December 31, 1998 filed with the SEC on March 31, 1999.)June 26, 2003.*   4.1   Nam Tai’s AmendedPurchase Agreement entered into between Citigroup Global Markets Limited and Restated 1993 Stock Option Plan (incorporated by reference to the Amended and Restated 1993 Stock Option Plan of Nam Tai Electronics, Inc. as adoptedon August 18, 1993, amended December 15, 1993, January 12, 1996, and amended and restated April 26, 1999) included as part22, 2003 for the sale of Nam Tai’s definite Proxy Statement for its 1999 Annual Meeting3% convertible notes of Shareholders filed with the SEC as partTCL International Holdings Ltd. at an aggregate price of Nam Tai’s Form 6-K on June 24, 1999)HK$39,555,068.49 (approximately $5.03 million).*   4.2 Agreement entered into between J.I.C. Technology Company Limited and Glory Gate Enterprises Limited on June 28, 2003 for the disposal of transformers operation to Glory Gate Enterprises Limited for approximately $2.4 million.*     4.3 Equity Interest Transfer Agreement between Nam Tai’s 2001 Stock Option Plan (incorporated by reference to the 2001 Stock Option Plan included as part ofTai Electronic & Electrical Products Limited HK and Nam Tai’s Proxy Statement for its 2001 Annual Meeting of Shareholders filed with the SEC as part of Nam Tai’s Form 6-K on June 27, 2001)Tai Electronic & Electrical Products Limited July 3, 2003.   4.3 4.4 Construction Agreement, with commencement date of September 23, 2003, entered into between Namtai Electronic (Shenzhen) Co. Ltd. and Takasago Thermal Engineering (Hong Kong) Co. Ltd. on October 28, 2003 for the construction of new factory premises.*     Sale4.5 An Investment Agreement and PurchaseShareholders Agreement for the 15th Floor of China Merchants Tower, Shun Tak Centre, Nos. 168-200 Connaught Road Central, Hong Kong between Shun Tak Centreentered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Group Management Limited dated March 27th 2001 (incorporated by reference to Exhibit 4.6Electronics, Inc. on December 9, 2003 for acquiring an 11.33% equity interest in Stepmind with a consideration of registrant’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002).approximately $5.3 million.*   4.4 4.6 A Supplemental Agreement entered into among Mr. André Jolivet, Mr. Alain Jolivet, Remote Reward SAS, AGF Private Equity, Mighty Wealth Group Limited and Nam Tai Electronics, Inc. on January 2, 2004 for consenting to the release of the second phase of payment and increasing capital investment in Stepmind should Stepmind fulfill certain conditions.*     Agreement on Proposal for the listing4.7 Land Title Rights Issued by Shenzhen Municipal Bureau of JIC Group common shares on the Hong Kong Stock Exchange dated January 14, 2002 between Nam Tai Electronics, Inc., J.I.C. Technology Company Limited, Albatronics (Far East) Company Limited (in liquidation)Planning and Messrs. Toohey and Chung, the Joint Liquidators (incorporated by reference to Exhibit 4.7 of registrant’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002).Land Resources February 16, 2004.   4.5 4.8   Letter dated September 24, 2001 between The Hong Kong and Shanghai Banking Corporation Limited and the Company for a seven-year term-loan of $15,000,000 (incorporated by reference to Exhibit 4.8 of the Company’s Form 20-F for the year ended December 31, 2001 filed with the SEC on March 18, 2002). 4.6 Form of IndemnificationAn Agreement entered into between the CompanyNam Tai Group Management limited and each of its Director’s as of the 9th day of July 2001 (incorporated by reference to Exhibit 4.9 of the Company’s Form 20-F for the year ended December 31, 2001 filed with the SECFrontier Profit Inc. on March 18, 2002).10, 2004 for selling Flat A, 22nd Floor, Tower 2 and Car Parking Space No. A86, The Leighton Hill, 28 Broadwood Road, Happy Valley, Hong Kong to Frontier Profit Inc.*   4.7   Banking Facility Letter, as amended, dated March 27, 2002 between Shanghai Commercial Bank Ltd. and J.I.C. Enterprises (Hong Kong) Ltd. for a four-year term loan of $4,500,000. 4.8 Subscription Agreement dated January 6, 2003 between Alpha Star Investments Ltd and the Company for the purchase of 1,625,000 ordinary shares. 4.9   Shareholders Agreement dated January 8, 2003 among Alpha Star InvestmentsA Memorandum of Understanding signed by Namtai Electronic (Shenzhen) Co., Ltd. and its investors, includingNam Tai Electronic & Electrical Products Limited (Hong Kong) on March 26, 2004 to confirm the Company. 4.10 Share Transfer Agreementrespective rights and liabilities of TCL Holdings dated January 25, 2002 between Hui Zhou City Investment Holdings Co., LtdNam Tai Electronic & Electrical Products Limited (Hong Kong) and Namtai Electronic (Shenzhen) Co., Ltd. under an internal restructuring.   4.11 4.10   SubscriptionA Sale and Purchaser Agreement dated September 6, 2002entered into between TCL International Holdings Ltd. and Nam Tai Electronics, Inc. forand Mr. Wong Toe Yeung on March 31, 2004 regarding purchasing the purchaseentire issued share capital of Convertible NotesJasper Ace Limited from Mr. Wong Toe Yeung with the consideration of TCL International Holdings.disposal 72.2% interest in Mate Fair Group Limited, cash of $25 million and 2,389,974 shares issued by Nam Tai Electronics, Inc.   4.12 4.11 A Trademark License Agreement entered into between Nam Tai Electronics, Inc. and Nam Tai Electronic & Electrical Products Limited on April 8, 2004 for the use of certain “Namtai” trademarks.     Sale4.12 A Deed of Indemnity entered into between Nam Tai Electronics, Inc, and PurchaseNam Tai Electronic & Electrical Products Limited on April 15, 2004 in favour of Nam Tai Electronic & Electrical Products Limited regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. 4.13 An Underwriting Agreement datedentered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited, Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as public offer underwriters on April 24, 200215, 2004 regarding the public offering of 20,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. 4.14 A Supplemental Agreement entered into between Nam Tai Electronics, Inc, and Mr. Wong Toe Yeung on July 27, 2004 to adjust the consideration for purchasing the entire issued share capital of Jasper Ace Limited by canceling 973,210 common shares of Nam Tai Electronics, Inc, issued to Top Scale Company Limited on April 21, 2004. 4.15 An Underwriting Agreement entered into among Nam Tai Electronics, Inc. as the selling shareholders and the Hongkong and Shanghai Banking Corporation Limited, BNP Paribas Peregrine Capital Limited, Nomura International (Hong Kong) Limited, Cazenove Asia Limited, BDS Asia Capital Limited and VC CEF Capital Limited as international placement underwriters on April 22, 2004 regarding the international placing of 180,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. 4.16 A&T Battery Corporation, Pricing Determination Agreement entered into among Nam Tai Electronics, Inc., Nam Tai Electronic & Electrical Products Limited and Toshiba Battery Co., Ltd. 4.13 Salethe Hongkong and Purchase AgreementShanghai Banking Corporation Limited on April 22, 2004 for determining the offering price of 5 bearerthe shares in Mate Fair Group Limited between Spin King Limited andof Nam Tai Electronics, Inc. dated September 6, 2000. (5% Indirect Ownership in TCL Mobile). (incorporated by referenceElectronic & Electrical Products Limited to Exhibit 4.5 of the Company’s Form 20-F for the year ended December 31, 2000 filed with the SEC on March 21, 2001).be HK$3.88 per share. 4.14 Common Share Purchase Agreement between Leesha Holdings Limited and Nam Tai Electronics, Inc. dated September 19, 2000 for purchase of 500,000 Deswell Industries Inc. common shares (incorporated by reference to Exhibit A of the Schedule 13D of the Company in relation to Deswell Industries, Inc. filed with the SEC on October 6, 2000). 4.15 Sale and Purchase Agreement of entire issued share capital of J.I.C. Group between J.I.C. Holdings (B.V.I.) Ltd., Mr. Joseph Li Shi Yuen, Mr. Chui Kam Wai and Nam Tai Electronics, Inc. dated September 26, 2000, including service agreements with Messrs. Li and Chui (incorporated by reference to Exhibit A of the Schedule 13D of Joseph Li Shi Yuen, Chui Kam Wai and J.I.C. Holdings (B.V.I.) Limited filed with the SEC on November 7, 2000).       Exhibit4.17 A Stock Borrowing Agreement entered into between Nam Tai Electronics, Inc. and the Hongkong and Shanghai Banking Corporation Limited on April 22, 2004 regarding the Global Offering of 200,000,000 shares of HK$0.01 each of Nam Tai Electronic & Electrical Products Limited. Number4.18 Description Amended 2001 Option Plan July 30, 2004   4.16 4.19 An Accession Agreement entered into between Welcome Success Technology Ltd. and Mr. Alain Jolivet on August 4, 2004 in relation to the transfer of entire interest in Stepmind to Remote Reward SAS and who became a party to the Shareholders Agreement which entered into among Nam Tai Electronics, Inc., AGF Innovation 3, AGF Innovation 4, AGF Innovation 5, Mighty Wealth Group Limited, Remote Reward SAS, Mr. Alain Jolivet and Mr. Andre Jolivet executed on November 278, 2003, December 9, 2003 and December 10, 2003.     Contract4.20 An Escrow Agreement entered into among Nam Tai Electronics, Inc., Welcome Success Technology Limited, Remote Reward SAS, Johnson Stokes & Master, Mr. Andre Jolivet and Mr. Alain Jolivet on August 18, 2004 in relation to the disposal of 1,457,720 shares in Stepmind to Remote Reward SAS with a consideration of Euros 4,253,301.98. 4.21 A subscription Agreement entered into among TCL Industries Holdings (HK) Limited, TCL International holdings Limited, Cheerful Asset Investments Limited, Jasper Ace Limited, Mate Fair Group Limited, and TCL Communication Technology Holdings Limited on August 19, 2004 for Usesubscribing 254,474,910 shares in TCL Communication Technology Holdings Limited in a consideration of Land dated March 25, 1996RMB131,283,020. 4.22 A Deed of Assignment of Trademarks entered into between Shenzhen City Baoan Xinan Gu Su Estate Residents CommitteeNam Tai Electronics, Inc. and Namtai Electronic (Shenzhen) Co. Ltd. regarding the useon September 20, 2004 for 50 years of land situated at Zhuao, Gu Su Industrial Estate, Xihan, Baoan (incorporated by referenceassigning “Namtai & device” trademarks to Exhibit 2.7 of the Company’s Form 20-F for the year ended December 31, 1996 filed with the SEC on April 2, 1997).Nam Tai Electronics, Inc.   4.17 4.23 A Banking Facilities Letter from the Hongkong and Shanghai Banking Corporation Limited to Nam Tai Group Management Limited on September 24, 2004 regarding the renewal of Overdraft Facility of HK$500,000, Treasury Facilities of US$30,000,000 and Corporate Card of HK$1,100,000.     Contract to4.24 A Share Transfer Agreement entered into between J.I.C. Enterprises (Hong Kong) Limited and J.I.C. Technology Company Limited on October 15, 2004 for the Rightdisposal of Utilizationthe entire issued share capital of Land in Shenzhen dated April 26, 1999 between Shenzhen National Land Planning Bureau and NamtaiJetup Electronic (Shenzhen) Co., Ltd. (incorporated by reference to Exhibit 2.1J.I.C. Technology Company Limited for a consideration of the Company’s Form 20-F for the year ended December 31, 1999 filed with the SEC on March 29, 2000.HK$105,878,396.   8.1   8.1   Diagram of Company’s subsidiaries. See PagesPage 24 to 26 of this Report.report.   10.1   Letter from MCW. Todman & Co. dated February 10, 2003. ** 10.2 Letter from MCW. Todman & Co. dated February 17, 2003. ** 12.1 Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 12.2 Certification pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 14.1 Code of Ethics. 23.1 Consent of Deloitte Touche Tohmatsu. 99.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   10.2 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     Letter from MCW. Todman & Co. dated February* Previously filed with the registrant’s Form 20-F filed with the SEC on March 10, 2003.2004.   10.3**   Letter from MCW. Todman & Co. datedPreviously filed with the registrant’s Form 20-F filed with the SEC on February 17,28, 2003. 23.1 Consent of Grant Thornton. 23.2 Consent of Deloitte Touche Tohmatsu.