management ’ s discussion and analysis of financial condition  and results of operations The Company generated net income of $25.6 million  (or $1.91 basic earnings per share and $1.65 diluted  earnings per share) in 2004, as compared to $10.1 mil- lion (or $0.79 basic earnings per share and $0.70 diluted  earnings per share) for 2003. This 153% increase is due  primarily to the 35.6% sales increase at gross profit  margins of 32.7% compared to gross profit margins of  26.7% in 2003. Net sales for 2003 increased $21.1 million to $136.9 mil- lion from $115.8 million for 2002. The 18.2% increase  was due primarily to a 19.5% increase in units sold as a  result of increased demand for the Company’s prod- ucts, as well as a more favorable pricing environment  compared to 2002. In 2003, ASPs for discrete products  increased 4% while ASPs for wafers fell 7%; conse- quently, overall ASPs decreased 1%. Gross profit for 2003 increased 36.8% to $36.5 million  from $26.7 million for 2002. Of the $9.8 million increase,  $5.0 million was due to the increase in gross profit  margin from 23.1% in 2002 to 26.7% in 2003, while $4.8  million was due to the 18.2% increase in net sales. Gross  profit increases in Asia were the primary contributor  to the gross profit increase in 2003. Gross profit margin  in the fourth quarter of 2003 increased to 29.5% due to  increased capacity utilization, continuing manufactur- ing efficiencies, relatively stable pricing, and a product  mix that continues to shift towards higher-value perfor- mance discretes and arrays. For 2003, SG&A increased $3.4 million to $19.6 mil- lion from $16.2 million for 2002. The 20.7% increase  in SG&A was due primarily to higher sales commis- sions associated with the 18.2% increase in sales, and  higher labor benefits expenses. Also contributing to the  increased SG&A were higher corporate and adminis- trative expenses, including legal and accounting fees  associated with Sarbanes-Oxley compliance. SG&A, as  a percentage of sales, increased to 14.3% for 2003 from  14.0% in 2002. The effective tax rate in 2003 was 18.9% compared to  22.0% in 2002, due primarily to a higher proportion of  income earned by our Asian subsidiaries in lower tax ju- risdictions. The Company is benefiting from its Diodes- Hong Kong subsidiary, established in 2002, not only due  to its lower tax rates, but also as another entry point into  the Asia market. The Company recorded a provision  for income taxes in the amount of $2.5 million for the  year 2003, compared to $1.7 million for 2002. Included  in the tax provision in 2003 is $840,000 in deferred taxes  recorded for a portion of the 2003 earnings at Diodes- China, and $200,000 for a portion of the 2003 earnings at  Diodes-Hong Kong. Other expense for 2003 increased $72,000 compared  to last year, primarily due to the discontinuance of  income Diodes-FabTech was receiving from an external  company’s use of its testing facilities in 2002, a decrease  in high-technology grant income received at Diodes- China in 2003, and currency exchange losses primarily  in Asia in 2003, partly offset by a severance payment in  accordance with the terms of a separation agreement in  2002, as well as the reduction in the expense recorded  for the management incentive agreement at Diodes- FabTech in 2003. Net interest expense for 2003 decreased $323,000 to $860,000 from $1.2 million in 2002, due primarily to a decrease in the use of the Company’s credit facilities,  as well as lower interest rates. In 2003, the Company  paid down $5.8 million on its long-term debt, reducing  the balance, net of current portion from $12.6 million to $6.8 million. In 2003, operating profit margins were negatively  affected by a $1.0 million reserve for fixed asset impair- ment, primarily as a result of the re-engineering of  our wafer production lines. During the year, we took  advantage of opportunities to purchase more efficient  equipment at discounts. As a result, we retired un-depreciated equipment that was replaced. R&D expenses increased to $2.0 million, or 1.5% of sales, in 2003 from $1.5 million, or 1.3% of sales, in  2002. R&D expenses are primarily related to new product development at the silicon wafer level, and, to a lesser extent, at the packaging level. Year  2003  Compared to Year  2002 22 Diodes Incorporated and Subsidiaries