##### Table of Contents





SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2009.

or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to
            .

Commission File Number 000-02642





COGO GROUP, INC.

(Exact name of registrant as specified in its charter)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Maryland                                                      |  | 52-0466460                         
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification No.)

Room 1001, Tower C, Skyworth Building

High-Tech Industrial Park

Nanshan, Shenzhen 518057, PRC

(Address of Principal Executive Offices
including zip code)

011-86-755-267-43210

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes  x    No   ̈

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈                                                |  | Accelerated Filer         |  | x
|                        |  |                                                  | 
|Non-Accelerated Filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act).     Yes   ̈    No  x

There were 40,079,336 shares of the Registrants Common Stock issued and outstanding on November 2, 2009, of which 3,944,411 are treasury shares.









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##### Table of Contents

Cogo Group, Inc.

Index to Form 10-Q



|                                                                                                                                       |  |   
|-------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Part I. Financial Information                                                                                                          |  | 3 
|Item 1. Unaudited Condensed Consolidated Financial Statements                                                                          |  | 3 
|Unaudited Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008                                         |  | 3 
|Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended September 30,
 2009 and 2008 |  | 4 
|Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30,
 2009 and 2008  |  | 5 
|Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 
30, 2009 and 2008                       |  | 6 
|Unaudited Condensed Consolidated Statements of Changes in Equity for the nine months ended September 
30, 2009                         |  | 7 
|Notes to Unaudited Condensed Consolidated Financial Statements                                                                         |  | 8 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                          |  | 16
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                     |  | 25
|Item 4. Controls and Procedures                                                                                                        |  | 26
|Part II. Other Information                                                                                                             |  | 26
|Item 1. Legal Proceedings                                                                                                              |  | 26
|Item 1A. Risk Factors                                                                                                                  |  | 27
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                    |  | 27
|Item 3. Defaults Upon Senior Securities                                                                                                |  | 27
|Item 4. Submission of Matters to a Vote of Security Holders                                                                            |  | 27
|Item 5. Other Information                                                                                                              |  | 27
|Item 6. Exhibits                                                                                                                       |  | 27
|SIGNATURES                                                                                                                             |  | 28



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed
Consolidated Balance Sheets



|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | - |  | ----------------- | - |  | --------- | -
|                                                                                                                                             |  | September 30, 2009 |   |  | December 31, 2008 |  
|                                                                                                                                             |  | USD000            |   |  | RMB000           |   |  | RMB000   |  
|Assets                                                                                                                                       |  |                    |   |  |                   |   |  |           |  
|Current assets:                                                                                                                              |  |                    |   |  |                   |   |  |           |  
|Cash                                                                                                                                         |  | 101,485            |   |  | 692,753           |   |  | 686,379   |  
|Pledged bank deposits                                                                                                                        |  | 17,000             |   |  | 116,045           |   |  | 115,983   |  
|Accounts receivable, net                                                                                                                     |  | 85,063             |   |  | 580,657           |   |  | 497,992   |  
|Bills receivable                                                                                                                             |  | 1,561              |   |  | 10,658            |   |  | 13,555    |  
|Inventories                                                                                                                                  |  | 20,444             |   |  | 139,557           |   |  | 95,855    |  
|Prepaid expenses and other receivables                                                                                                       |  | 3,009              |   |  | 20,543            |   |  | 20,211    |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total current assets                                                                                                                         |  | 228,562            |   |  | 1,560,213         |   |  | 1,429,975 |  
|Property and equipment, net                                                                                                                  |  | 2,238              |   |  | 15,274            |   |  | 17,993    |  
|Goodwill and intangible assets, less accumulated amortization, RMB65,393 thousand (USD9,580 thousand) in 2009 and RMB42,819
thousand in 2008 |  | 46,674             |   |  | 318,609           |   |  | 237,234   |  
|Other assets                                                                                                                                 |  | 61                 |   |  | 416               |   |  | 1,608     |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total assets                                                                                                                                 |  | 277,535            |   |  | 1,894,512         |   |  | 1,686,810 |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Liabilities and equity                                                                                                                       |  |                    |   |  |                   |   |  |           |  
|Current liabilities:                                                                                                                         |  |                    |   |  |                   |   |  |           |  
|Accounts payable                                                                                                                             |  | 13,049             |   |  | 89,080            |   |  | 107,512   |  
|Bank borrowings                                                                                                                              |  | 14,003             |   |  | 95,585            |   |  |          |  
|Income taxes payable                                                                                                                         |  | 1,739              |   |  | 11,872            |   |  | 8,225     |  
|Accrued expenses and other liabilities                                                                                                       |  | 22,665             |   |  | 154,714           |   |  | 141,925   |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total current liabilities                                                                                                                    |  | 51,456             |   |  | 351,251           |   |  | 257,662   |  
|Deferred tax liabilities                                                                                                                     |  | 2,936              |   |  | 20,044            |   |  | 19,693    |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total liabilities                                                                                                                            |  | 54,392             |   |  | 371,295           |   |  | 277,355   |  
|Equity                                                                                                                                       |  |                    |   |  |                   |   |  |           |  
|Common stock:                                                                                                                                |  |                    |   |  |                   |   |  |           |  
|Par value: USD 0.01                                                                                                                          |  |                    |   |  |                   |   |  |           |  
|Authorized: 200,000,000 Shares                                                                                                               |  |                    |   |  |                   |   |  |           |  
|Issued: 40,079,336 shares                                                                                                                    |  |                    |   |  |                   |   |  |           |  
|Outstanding: 36,134,925 shares in 2009                                                                                                       |  |                    |   |  |                   |   |  |           |  
|35,231,661 shares in 2008                                                                                                                    |  | 477                |   |  | 3,258             |   |  | 3,196     |  
|Additional paid in capital                                                                                                                   |  | 176,758            |   |  | 1,206,585         |   |  | 1,146,840 |  
|Retained earnings                                                                                                                            |  | 84,252             |   |  | 575,121           |   |  | 524,240   |  
|Accumulated other comprehensive loss                                                                                                         |  | (15,721            | ) |  | (107,318          | ) |  | (107,645  | )
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|                                                                                                                                             |  | 245,766            |   |  | 1,677,646         |   |  | 1,566,631 |  
|Less cost of common stock in treasury, 3,944,411 shares in 2009 and 2008                                                                     |  | (23,833            | ) |  | (162,687          | ) |  | (162,687  | )
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total Cogo Group, Inc. equity                                                                                                                |  | 221,933            |   |  | 1,514,959         |   |  | 1,403,944 |  
|Noncontrolling interest                                                                                                                      |  | 1,210              |   |  | 8,258             |   |  | 5,511     |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total equity                                                                                                                                 |  | 223,143            |   |  | 1,523,217         |   |  | 1,409,455 |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  
|Total liabilities and equity                                                                                                                 |  | 277,535            |   |  | 1,894,512         |   |  | 1,686,810 |  
|                                                                                                                                             |  |                    |   |  |                   |   |  |           |  

See accompanying notes to unaudited condensed consolidated financial statements.



3



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##### Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income



|                                                        |  |                                  |   |  |            |   |  |            |  
|------------------------------------------------------- |  | -------------------------------- | - |  | ---------- | - |  | ---------- | -
|                                                        |  | Three Months ended September 30, |  
|                                                        |  | 2009                             |   |  | 2009       |   |  | 2008       |  
|                                                        |  | USD000                          |   |  | RMB000    |   |  | RMB000    |  
|Net Revenue                                             |  |                                  |   |  |            |   |  |            |  
|Product sales                                           |  | 80,728                           |   |  | 551,063    |   |  | 503,128    |  
|Services revenue                                        |  | 1,314                            |   |  | 8,970      |   |  | 4,717      |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|                                                        |  | 82,042                           |   |  | 560,033    |   |  | 507,845    |  
|Cost of sales                                           |  |                                  |   |  |            |   |  |            |  
|Cost of goods sold                                      |  | (69,147                          | ) |  | (472,010   | ) |  | (433,954   | )
|Cost of services                                        |  | (1,054                           | ) |  | (7,194     | ) |  | (3,674     | )
|                                                        |  |                                  |   |  |            |   |  |            |  
|                                                        |  | (70,201                          | ) |  | (479,204   | ) |  | (437,628   | )
|Gross profit                                            |  | 11,841                           |   |  | 80,829     |   |  | 70,217     |  
|Selling, general and administrative expenses            |  | (6,949                           | ) |  | (47,437    | ) |  | (47,065    | )
|Research and development expenses                       |  | (2,308                           | ) |  | (15,756    | ) |  | (14,550    | )
|Impairment loss on goodwill and intangible assets       |  |                                 |   |  |           |   |  | (7,653     | )
|Other operating income, net                             |  | 51                               |   |  | 349        |   |  | 8          |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|Income from operations                                  |  | 2,635                            |   |  | 17,985     |   |  | 957        |  
|Interest expense                                        |  | (84                              | ) |  | (572       | ) |  | (191       | )
|Interest income                                         |  | 544                              |   |  | 3,716      |   |  | 7,366      |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|Earnings before income taxes                            |  | 3,095                            |   |  | 21,129     |   |  | 8,132      |  
|Income tax benefit (expense)                            |  | (400                             | ) |  | (2,731     | ) |  | 1,936      |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|Income before extraordinary item                        |  | 2,695                            |   |  | 18,398     |   |  | 10,068     |  
|Extraordinary item, net of nil tax                      |  | 987                              |   |  | 6,737      |   |  |           |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|Net income                                              |  | 3,682                            |   |  | 25,135     |   |  | 10,068     |  
|Less net income attributable to noncontrolling interest |  | (319                             | ) |  | (2,175     | ) |  | (717       | )
|                                                        |  |                                  |   |  |            |   |  |            |  
|Net income attributable to Cogo Group, Inc.             |  | 3,363                            |   |  | 22,960     |   |  | 9,351      |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|                                                        |  |                                  |  
|                                                        |  | USD                              |   |  | RMB        |   |  | RMB        |  
|Earnings per share attributable to Cogo Group, Inc.     |  |                                  |   |  |            |   |  |            |  
|Income before extraordinary item                        |  | 0.06                             |   |  | 0.44       |   |  | 0.24       |  
|Extraordinary item                                      |  | 0.03                             |   |  | 0.18       |   |  |           |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|- Basic                                                 |  | 0.09                             |   |  | 0.62       |   |  | 0.24       |  
|                                                        |  |                                  |  
|Income before extraordinary item                        |  | 0.06                             |   |  | 0.43       |   |  | 0.24       |  
|Extraordinary item                                      |  | 0.03                             |   |  | 0.18       |   |  |           |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|- Diluted                                               |  | 0.09                             |   |  | 0.61       |   |  | 0.24       |  
|                                                        |  |                                  |  
|Weighted average number of common shares outstanding    |  |                                  |   |  |            |   |  |            |  
|- Basic                                                 |  | 36,809,304                       |   |  | 36,809,304 |   |  | 38,869,625 |  
|- Diluted                                               |  | 37,745,926                       |   |  | 37,745,926 |   |  | 39,233,125 |  
|                                                        |  |                                  |  
|Amounts attributable to Cogo Group, Inc.                |  |                                  |   |  |            |   |  |            |  
|Income before extraordinary item                        |  | 2,376                            |   |  | 16,223     |   |  | 9,351      |  
|Extraordinary item                                      |  | 987                              |   |  | 6,737      |   |  |           |  
|                                                        |  |                                  |   |  |            |   |  |            |  
|Net income attributable to Cogo Group, Inc.             |  | 3,363                            |   |  | 22,960     |   |  | 9,351      |  
|                                                        |  |                                  |   |  |            |   |  |            |  



|                                                                   |  |                                  |   |  |         |   |  |         |  
|------------------------------------------------------------------ |  | -------------------------------- | - |  | ------- | - |  | ------- | -
|Comprehensive income:                                              |  |                                  |   |  |         |   |  |         |  
|                                                                   | 
|                                                                   |  | Three Months ended September 30, |  
|                                                                   |  | 2009                             |   |  | 2009    |   |  | 2008    |  
|                                                                   |  | USD000                          |   |  | RMB000 |   |  | RMB000 |  
|Net income                                                         |  | 3,682                            |   |  | 25,135  |   |  | 10,068  |  
|Other comprehensive income                                         |  |                                  |   |  |         |   |  |         |  
|Foreign currency translation adjustments                           |  | (24                              | ) |  | (165    | ) |  | (5,298  | )
|                                                                   |  |                                  |   |  |         |   |  |         |  
|                                                                   |  |                                  |  
|Comprehensive income                                               |  | 3,658                            |   |  | 24,970  |   |  | 4,770   |  
|Less: comprehensive income attributable to noncontrolling interest |  | (318                             | ) |  | (2,171  | ) |  | (689    | )
|                                                                   |  |                                  |   |  |         |   |  |         |  
|Comprehensive income attributable to Cogo Group, Inc.              |  | 3,340                            |   |  | 22,799  |   |  | 4,081   |  
|                                                                   |  |                                  |   |  |         |   |  |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



4



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##### Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income



|                                                        |  |                                 |   |  |            |   |  |            |  
|------------------------------------------------------- |  | ------------------------------- | - |  | ---------- | - |  | ---------- | -
|                                                        |  | Nine Months ended September 30, |  
|                                                        |  | 2009                            |   |  | 2009       |   |  | 2008       |  
|                                                        |  | USD000                         |   |  | RMB000    |   |  | RMB000    |  
|Net Revenue                                             |  |                                 |   |  |            |   |  |            |  
|Product sales                                           |  | 215,923                         |   |  | 1,473,934  |   |  | 1,375,860  |  
|Services revenue                                        |  | 3,081                           |   |  | 21,030     |   |  | 21,947     |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|                                                        |  | 219,004                         |   |  | 1,494,964  |   |  | 1,397,807  |  
|Cost of sales                                           |  |                                 |   |  |            |   |  |            |  
|Cost of goods sold                                      |  | (185,178                        | ) |  | (1,264,065 | ) |  | (1,147,019 | )
|Cost of services                                        |  | (2,491                          | ) |  | (17,004    | ) |  | (14,005    | )
|                                                        |  |                                 |   |  |            |   |  |            |  
|                                                        |  | (187,669                        | ) |  | (1,281,069 | ) |  | (1,161,024 | )
|Gross profit                                            |  | 31,335                          |   |  | 213,895    |   |  | 236,783    |  
|Selling, general and administrative expenses            |  | (18,056                         | ) |  | (123,252   | ) |  | (120,207   | )
|Research and development expenses                       |  | (7,014                          | ) |  | (47,876    | ) |  | (34,983    | )
|Impairment loss on goodwill and intangible assets       |  |                                |   |  |           |   |  | (7,653     | )
|Other operating income, net                             |  | 98                              |   |  | 668        |   |  | 78         |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|Income from operations                                  |  | 6,363                           |   |  | 43,435     |   |  | 74,018     |  
|Interest expense                                        |  | (158                            | ) |  | (1,081     | ) |  | (1,018     | )
|Interest income                                         |  | 1,566                           |   |  | 10,688     |   |  | 21,974     |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|Earnings before income taxes                            |  | 7,771                           |   |  | 53,042     |   |  | 94,974     |  
|Income tax expense                                      |  | (902                            | ) |  | (6,153     | ) |  | (3,528     | )
|                                                        |  |                                 |   |  |            |   |  |            |  
|Income before extraordinary item                        |  | 6,869                           |   |  | 46,889     |   |  | 91,446     |  
|Extraordinary item, net of nil tax                      |  | 987                             |   |  | 6,737      |   |  |           |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|Net income                                              |  | 7,856                           |   |  | 53,626     |   |  | 91,446     |  
|Less net income attributable to noncontrolling interest |  | (402                            | ) |  | (2,745     | ) |  | (717       | )
|                                                        |  |                                 |   |  |            |   |  |            |  
|Net income attributable to Cogo Group, Inc.             |  | 7,454                           |   |  | 50,881     |   |  | 90,729     |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|                                                        |  |                                 |  
|                                                        |  | USD                             |   |  | RMB        |   |  | RMB        |  
|Earnings per share attributable to Cogo Group, Inc.     |  |                                 |   |  |            |   |  |            |  
|Income before extraordinary item                        |  | 0.18                            |   |  | 1.22       |   |  | 2.32       |  
|Extraordinary item                                      |  | 0.03                            |   |  | 0.18       |   |  |           |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|- Basic                                                 |  | 0.21                            |   |  | 1.40       |   |  | 2.32       |  
|                                                        |  |                                 |  
|Income before extraordinary item                        |  | 0.17                            |   |  | 1.17       |   |  | 2.27       |  
|Extraordinary item                                      |  | 0.03                            |   |  | 0.18       |   |  |           |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|- Diluted                                               |  | 0.20                            |   |  | 1.35       |   |  | 2.27       |  
|                                                        |  |                                 |  
|Weighted average number of common shares outstanding    |  |                                 |   |  |            |   |  |            |  
|- Basic                                                 |  | 36,357,237                      |   |  | 36,357,237 |   |  | 39,181,116 |  
|- Diluted                                               |  | 37,566,258                      |   |  | 37,566,258 |   |  | 39,935,533 |  
|                                                        |  |                                 |  
|Amounts attributable to Cogo Group, Inc.                |  |                                 |   |  |            |   |  |            |  
|Income before extraordinary item                        |  | 6,467                           |   |  | 44,144     |   |  | 90,729     |  
|Extraordinary item                                      |  | 987                             |   |  | 6,737      |   |  |           |  
|                                                        |  |                                 |   |  |            |   |  |            |  
|Net income attributable to Cogo Group, Inc.             |  | 7,454                           |   |  | 50,881     |   |  | 90,729     |  
|                                                        |  |                                 |   |  |            |   |  |            |  



|                                                                   |  |                                 |   |  |         |   |  |         |  
|------------------------------------------------------------------ |  | ------------------------------- | - |  | ------- | - |  | ------- | -
|Comprehensive income:                                              |  |                                 |   |  |         |   |  |         |  
|                                                                   | 
|                                                                   |  | Nine Months ended September 30, |  
|                                                                   |  | 2009                            |   |  | 2009    |   |  | 2008    |  
|                                                                   |  | USD000                         |   |  | RMB000 |   |  | RMB000 |  
|Net income                                                         |  | 7,856                           |   |  | 53,626  |   |  | 91,446  |  
|Other comprehensive income                                         |  |                                 |   |  |         |   |  |         |  
|Foreign currency translation adjustments                           |  | 48                              |   |  | 329     |   |  | (47,346 | )
|                                                                   |  |                                 |   |  |         |   |  |         |  
|                                                                   |  |                                 |  
|Comprehensive income                                               |  | 7,904                           |   |  | 53,955  |   |  | 44,100  |  
|Less: comprehensive income attributable to noncontrolling interest |  | (402                            | ) |  | (2,747  | ) |  | (689    | )
|                                                                   |  |                                 |   |  |         |   |  |         |  
|Comprehensive income attributable to Cogo Group, Inc.              |  | 7,502                           |   |  | 51,208  |   |  | 43,411  |  
|                                                                   |  |                                 |   |  |         |   |  |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



5



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##### Table of Contents

COGO GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows



|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------- | - |  | ------- | - |  | -------- | -
|                                                                                                           |  | Nine Months ended September 30, |  
|                                                                                                           |  | 2009                            |   |  | 2009    |   |  | 2008     |  
|                                                                                                           |  | USD000                         |   |  | RMB000 |   |  | RMB000  |  
|Cash flows from operating activities:                                                                      |  |                                 |   |  |         |   |  |          |  
|Net income                                                                                                 |  | 7,856                           |   |  | 53,626  |   |  | 91,446   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                          |  |                                 |   |  |         |   |  |          |  
|Depreciation expense                                                                                       |  | 636                             |   |  | 4,339   |   |  | 6,454    |  
|Amortization of intangible assets                                                                          |  | 3,307                           |   |  | 22,574  |   |  | 24,831   |  
|Impairment loss on goodwill and intangible assets                                                          |  |                                |   |  |        |   |  | 7,653    |  
|Deferred income taxes                                                                                      |  | (522                            | ) |  | (3,564  | ) |  |         |  
|Loss on disposal of property and equipment                                                                 |  | 25                              |   |  | 168     |   |  | 50       |  
|Share-based compensation                                                                                   |  | 6,459                           |   |  | 44,092  |   |  | 30,464   |  
|Extraordinary item                                                                                         |  | (987                            | ) |  | (6,737  | ) |  |         |  
|Change in current assets and liabilities, net of effects from acquisition of Mega Smart:                   |  |                                 |   |  |         |   |  |          |  
|Accounts receivable, net                                                                                   |  | (12,083                         | ) |  | (82,485 | ) |  | (93,145  | )
|Bills receivable                                                                                           |  | 424                             |   |  | 2,897   |   |  | 4,332    |  
|Inventories                                                                                                |  | (6,401                          | ) |  | (43,693 | ) |  | (6,158   | )
|Prepaid expenses and other receivables                                                                     |  | 128                             |   |  | 877     |   |  | (6,616   | )
|Accounts payable                                                                                           |  | (2,702                          | ) |  | (18,443 | ) |  | 40,309   |  
|Amount due to a related party                                                                              |  |                                |   |  |        |   |  | (1,343   | )
|Income taxes payable                                                                                       |  | 534                             |   |  | 3,647   |   |  | 5,158    |  
|Accrued expenses and other liabilities                                                                     |  | (231                            | ) |  | (1,580  | ) |  | (20,173  | )
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Net cash provided by (used in) operating activities                                                        |  | (3,557                          | ) |  | (24,282 | ) |  | 77,251   |  
|Cash flows used in investing activities:                                                                   |  |                                 |   |  |         |   |  |          |  
|Increase in pledged bank deposits                                                                          |  |                                |   |  |        |   |  | 518      |  
|Payment for acquisitions of subsidiaries                                                                   |  | (9,570                          | ) |  | (65,327 | ) |  | (38,275  | )
|Payment for property and equipment                                                                         |  | (264                            | ) |  | (1,802  | ) |  | (6,294   | )
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Net cash used in investing activities                                                                      |  | (9,834                          | ) |  | (67,129 | ) |  | (44,051  | )
|Cash flows provided by (used in) financing activities:                                                     |  |                                 |   |  |         |   |  |          |  
|Proceeds from bank borrowings                                                                              |  | 14,011                          |   |  | 95,644  |   |  |         |  
|Proceeds from exercise of stock options                                                                    |  | 300                             |   |  | 2,049   |   |  |         |  
|Purchase of treasury stock                                                                                 |  |                                |   |  |        |   |  | (116,441 | )
|Repayment of bank borrowings                                                                               |  |                                |   |  |        |   |  | (8,692   | )
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Net cash provided by (used in) financing activities                                                        |  | 14,311                          |   |  | 97,693  |   |  | (125,133 | )
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Effect of exchange rate changes on cash                                                                    |  | 14                              |   |  | 92      |   |  | (32,823  | )
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Net increase (decrease) in cash                                                                            |  | 934                             |   |  | 6,374   |   |  | (124,756 | )
|Cash at beginning of the period                                                                            |  | 100,551                         |   |  | 686,379 |   |  | 919,650  |  
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Cash at end of the period                                                                                  |  | 101,485                         |   |  | 692,753 |   |  | 794,894  |  
|                                                                                                           |  |                                 |   |  |         |   |  |          |  
|Supplementary cash flow information:                                                                       |  |                                 |   |  |         |   |  |          |  
|Interest paid                                                                                              |  | (158                            | ) |  | (1,081  | ) |  | (1,018   | )
|Income tax paid                                                                                            |  | (889                            | ) |  | (6,069  | ) |  | (4,381   | )
|Non-cash investing activities:                                                                             |  |                                 |   |  |         |   |  |          |  
|Shares issued for Comtech Broadband acquisition consideration payable, included in other liabilities       |  | 2,002                           |   |  | 13,666  |   |  | 20,949   |  
|Acquisition of Mega Smart include in accrued expenses and other liabilities (note 15)                      |  | 17,933                          |   |  | 122,415 |   |  |         |  
|Acquisition of Long Rise included in accrued expenses and other liabilities                                |  |                                |   |  |        |   |  | 60,921   |  
|Reduction of intangible assets upon reversal of contingent consideration payable in respect of Keen Awards |  | 3,926                           |   |  | 26,803  |   |  |         |  

See accompanying notes to unaudited condensed consolidated financial statements.



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COGO GROUP, INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Changes in Equity



|                                                                                                        |  |                               |  |                          |                        |                  |              |                                   |  |          |               |  |          |   |  |         |  |          
|------------------------------------------------------------------------------------------------------- |  | ----------------------------- |  | ------------------------ | ---------------------- | ---------------- | ------------ | --------------------------------- |  | -------- | ------------- |  | -------- | - |  | ------- |  | ---------
|                                                                                                        |  | Cogo Group, Inc. Stockholders |  |                          | Noncontrollinginterest |                  | Total equity
|                                                                                                        |  | Common Stock                  |  | Additionalpaid incapital |                        | Retainedearnings |              | Accumulatedothercomprehensiveloss |  |          | Treasurystock |  |          |  
|                                                                                                        |  | No. of Shares                 |  | RMB000                  |                        | RMB000          |              | RMB000                           |  | RMB000  |               |  | RMB000  |   |  | RMB000 |  | RMB000  
|Balance as of January 1, 2009                                                                           |  | 35,231,661                    |  | 3,196                    |                        | 1,146,840        |              | 524,240                           |  | (107,645 | )             |  | (162,687 | ) |  | 5,511   |  | 1,409,455
|Net income                                                                                              |  |                              |  |                         |                        |                 |              | 50,881                            |  |         |               |  |         |   |  | 2,745   |  | 53,626   
|Foreign currency translation adjustments                                                                |  |                              |  |                         |                        |                 |              |                                  |  | 327      |               |  |         |   |  | 2       |  | 329      
|Issuance of common stock to share- based compensation plan                                              |  | 785,059                       |  | 53                       |                        | 1,996            |              |                                  |  |         |               |  |         |   |  |        |  | 2,049    
|Share-based compensation                                                                                |  |                              |  |                         |                        | 44,092           |              |                                  |  |         |               |  |         |   |  |        |  | 44,092   
|Issuance of common stock in connection with consideration paid for the acquisition of Comtech Broadband |  | 118,205                       |  | 9                        |                        | 13,657           |              |                                  |  |         |               |  |         |   |  |        |  | 13,666   
|                                                                                                        |  |                               |  |                          |                        |                  |              |                                   |  |          |               |  |          |   |  |         |  |          
|Balance as of September 30, 2009                                                                        |  | 36,134,925                    |  | 3,258                    |                        | 1,206,585        |              | 575,121                           |  | (107,318 | )             |  | (162,687 | ) |  | 8,258   |  | 1,523,217
|                                                                                                        |  |                               |  |                          |                        |                  |              |                                   |  |          |               |  |          |   |  |         |  |          
|Balance as of September 30, 2009 (in USD)                                                               |  |                               |  | 477                      |                        | 176,758          |              | 84,252                            |  | (15,721  | )             |  | (23,833  | ) |  | 1,210   |  | 223,143  
|                                                                                                        |  |                               |  |                          |                        |                  |              |                                   |  |          |               |  |          |   |  |         |  |          

See accompanying notes to unaudited condensed consolidated financial statements.



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COGO GROUP, INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1  Basis Of Presentation

The unaudited condensed consolidated financial
statements of Cogo Group, Inc., (the Company) and its subsidiaries (the Group), include, in the opinion of management, all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present
fairly the Groups consolidated financial position, results of operations and cash flows for all periods presented.

Certain information
and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2008.

The Group has experienced, and expects to continue to experience, seasonal fluctuations in net revenue, which have historically been lowest in the first quarter of the year due to the Chinese New Year
holiday season period and are typically highest in the fourth quarter of the year due to the desire by original equipment manufacturers (OEMs) to spend remaining allocated annual budgets. Consequently, the Groups financial
position, operating results, cash flows and trends in these unaudited condensed consolidated financial statements are not necessarily indicative of future results that may be expected for any other interim period or for the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.

The accompanying unaudited condensed consolidated financial statements are expressed in Renminbi (RMB), the national
currency of the Peoples Republic of China (the PRC). For the convenience of the reader, the September 30, 2009 RMB amounts, included in the accompanying unaudited condensed consolidated financial statements have been
translated into United States dollars (USD) at the rate of USD1.00 = RMB6.8262. No representation is made that the RMB could have been, or could be, converted into USD at that rate or at any particular rate or at all.

Note 2  Summary Of Significant Accounting Policies

In the third quarter of 2009, the Group adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The ASC is the single official source of
authoritative, nongovernmental GAAP, other than guidance issued by the SEC. The adoption of the ASC did not have any impact on the financial statements included herein.

ASC 855, Subsequent Events

In May 2009, the FASB issued SFAS No. 165,
Subsequent Events, which was primarily codified into ASC 855  Subsequent Events. ASC 855 sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements
and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Group has evaluated the period beginning October 1, 2009 through to November 9, 2009, the date unaudited
condensed consolidated financial statements were issued, and concluded there were no events or transactions occurring during this period beginning October 1, 2009 through to November 9, 2009 that required recognition or disclosure in the
unaudited condensed consolidated financial statements.

ASC 825, Financial Instruments

In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, which was primarily codified into ASC 825 - Financial Instruments in the ASC. This FSP amends SFAS



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##### Table of Contents

No. 107, Disclosures about Fair Value of Financial Instruments, and requires disclosures about fair value of financial instruments for interim reporting periods as well as
in annual financial statements. Additionally, this FSP amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. These disclosures
are required for interim reporting periods ending after June 15, 2009. The additional disclosure requirements under ASC 825 are included in note 14 of the unaudited condensed consolidated financial statements.

Accounting Standards Update (ASU) 2009-05, an update to ASC 820, Fair Value Measurements and Disclosures

In August 2009, the FASB issued ASU 2009-05, an update to ASC 820, Fair Value Measurements and Disclosures. This update provides amendments to reduce
potential ambiguity in financial reporting when measuring the fair value of liabilities. Among other provisions, this update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or more of the valuation techniques described in ASU 2009-05. ASU 2009-05 is effective in the current financial period. The Company has evaluated that there are no significant
impacts to the unaudited condensed consolidated financial statements.

ASU 2009-13, Revenue Recognition (ASC 605) 
Multiple-Deliverable Revenue Arrangements and ASU 2009-14, Software (ASC 985)  Certain Revenue Arrangements That Include Software Elements

In September 2009, the FASB reached a consensus on ASU 2009-13, Revenue Recognition (ASC 605)  Multiple-Deliverable Revenue Arrangements and ASU 2009-14, Software(ASC 985)
 Certain Revenue Arrangements That Include Software Elements. ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement
when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: i) vendor-specific objective evidence (VSOE) or ii) third-party evidence (TPE), before an
entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements
in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling
prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entitys estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the
software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a products essential functionality. These new updates are effective for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these ASUs will have on the unaudited
condensed consolidated financial statements.

Note 3  Accounts Receivable, Net



|                                      |  |               |   |  |                  |   |  |         |  
|------------------------------------- |  | ------------- | - |  | ---------------- | - |  | ------- | -
|                                      |  | September 30, |   |  | December 31,2008 |  
|                                      |  | 2009          |   |  | 2009             |   | 
|                                      |  | USD000       |   |  | RMB000          |   |  | RMB000 |  
|Accounts receivable                   |  | 95,487        |   |  | 651,813          |   |  | 535,306 |  
|Less: allowance for doubtful accounts |  | (10,424       | ) |  | (71,156          | ) |  | (37,314 | )
|                                      |  |               |   |  |                  |   |  |         |  
|Accounts receivable, net              |  | 85,063        |   |  | 580,657          |   |  | 497,992 |  
|                                      |  |               |   |  |                  |   |  |         |  

An analysis of the allowance for doubtful accounts is as follows:



|                                |         |                                  |         |        |                                |         |        |         |       
|------------------------------- | ------- | -------------------------------- | ------- | ------ | ------------------------------ | ------- | ------ | ------- | ------
|                                |         | Three Months ended September 30, |         |        | Nine Months endedSeptember 30,
|                                |         | 2009                             |         | 2008   |                                |         | 2009   |         | 2008  
|                                | RMB000 |                                  | RMB000 |        |                                | RMB000 |        | RMB000
|Beginning balance               |         | 54,650                           |         | 37,834 |                                |         | 37,314 |         | 30,467
|Allowance for doubtful accounts |         | 16,506                           |         | (493   | )                              |         | 33,842 |         | 6,874 
|                                |         |                                  |         |        |                                |         |        |         |       
|Ending balance                  |         | 71,156                           |         | 37,341 |                                |         | 71,156 |         | 37,341
|                                |         |                                  |         |        |                                |         |        |         |       



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Note 4  Bills Receivable

To reduce the Groups credit risk, the Group requires certain customers to pay for the sale of the Groups products by bills receivable. Bills receivable represents short-term notes receivable
issued by a financial institution that entitles the Group to receive the full face amount from the financial institution at maturity, which generally ranges from 3 to 6 months from the date of issuance. Historically, the Group has experienced no
losses on bills receivable.

In certain circumstances, The Group has arranged to transfer with recourse certain of its bills receivable to
banks. Under this discounting arrangement, the bank pays a discounted amount to the Group and collects the amounts owed from the customers banks. The discount typically ranges from 2.2% to 3.5% of the balance transferred, which is recorded as
interest expense.

For the three months ended September 30, 2009 and 2008, the Group received proceeds from the sale of bills receivable
amounting to RMB20,641 thousand (USD3,024 thousand), and RMB12,191 thousand, respectively. In addition, the Group recorded discounts amounting to RMB159 thousand (USD23 thousand), and RMB118 thousand in respect of the bills receivable sold for the
three months ended September 30, 2009 and 2008, respectively, which have been included in interest expense.

For the nine months ended
September 30, 2009 and 2008, the Group received proceeds from the sale of bills receivable amounting to RMB49,708 thousand (USD7,282 thousand) and RMB54,299 thousand, respectively. In addition, the Group recorded discounts amounting to RMB260
thousand (USD38 thousand) and RMB695 thousand in respect of the bills receivable sold for the nine months ended September 30, 2009 and 2008, respectively, which have been included in interest expense.

For bills receivable sold to banks that the Group has surrendered control, the Group derecognized the discounted bills receivable pursuant to the provisions
of ASC 860, Transfers and Servicing (formerly SFAS No. 140). As of September 30, 2009 and December 31, 2008, the Group has derecognized discounted bills receivable amounting to RMB28,833 thousand (USD4,224 thousand) and
RMB20,859 thousand, respectively in accordance with ASC 860.

Note 5  Inventories

Inventories by major categories are as follows:



|                  |  |               |  |                  |  |        
|----------------- |  | ------------- |  | ---------------- |  | -------
|                  |  | September 30, |  | December 31,2008
|                  |  | 2009          |  | 2009             | 
|                  |  | USD000       |  | RMB000          |  | RMB000
|Raw materials     |  | 764           |  | 5,215            |  | 6,364  
|Finished goods    |  | 19,680        |  | 134,342          |  | 89,491 
|                  |  |               |  |                  |  |        
|Total inventories |  | 20,444        |  | 139,557          |  | 95,855 
|                  |  |               |  |                  |  |        

Inventories amounting to RMB3,065 thousand (USD449 thousand) and RMB1,200 thousand were written off
during the nine months ended September 30, 2009 and 2008, respectively. Inventories amounting to RMB365 thousand (USD53 thousand) and RMB1,200 thousand were written off during the three months ended September 30, 2009 and 2008,
respectively.

Note 6  Property And Equipment, Net

Property and equipment consists of the following:



|                                |  |               |   |  |                  |   |  |         |  
|------------------------------- |  | ------------- | - |  | ---------------- | - |  | ------- | -
|                                |  | September 30, |   |  | December 31,2008 |  
|                                |  | 2009          |   |  | 2009             |   | 
|                                |  | USD000       |   |  | RMB000          |   |  | RMB000 |  
|Property and equipment, at cost |  | 5,474         |   |  | 37,366           |   |  | 36,783  |  
|Less: accumulated depreciation  |  | (3,236        | ) |  | (22,092          | ) |  | (18,790 | )
|                                |  |               |   |  |                  |   |  |         |  
|Property and equipment, net     |  | 2,238         |   |  | 15,274           |   |  | 17,993  |  
|                                |  |               |   |  |                  |   |  |         |  



Note 7  Goodwill
and Intangible Assets

The changes in the carrying amount of goodwill and intangible assets for the period ended September 30, 2009
is as follows:



|                                                       |  |          |  |                  |   |  |         |  
|------------------------------------------------------ |  | -------- |  | ---------------- | - |  | ------- | -
|                                                       |  | Goodwill |  | Intangibleassets |   |  | Total   |  
|                                                       |  | RMB000  |  | RMB000          |   |  | RMB000 |  
|Balance as of January 1, 2009                          |  | 116,632  |  | 120,602          |   |  | 237,234 |  
|Acquisition of Mega Smart (note 15)                    |  | 80,226   |  | 50,526           |   |  | 130,752 |  
|Reduction in intangible assets of Keen Awards (note 9) |  |         |  | (26,803          | ) |  | (26,803 | )
|Amortization of intangible assets                      |  |         |  | (22,574          | ) |  | (22,574 | )
|                                                       |  |          |  |                  |   |  |         |  
|Balance as of September 30, 2009                       |  | 196,858  |  | 121,751          |   |  | 318,609 |  
|                                                       |  |          |  |                  |   |  |         |  
|Balance as of September 30, 2009 (in USD)              |  | 28,838   |  | 17,836           |   |  | 46,674  |  
|                                                       |  |          |  |                  |   |  |         |  

Note 8  Bank Borrowings And Banking Facilities

On October 7, 2005, the Group entered into a USD5,000 thousand credit facility with Standard Chartered Bank (Hong Kong) Limited (SCB). This
facility is secured by funds on deposit in an amount not less than USD2,000 thousand as of December 31, 2008 and September 30, 2009, and bears interest ranging from HIBOR + 1.5% to USD Prime per annum, depending on the borrowings made. The
SCB facility is repayable on demand and SCB may immediately terminate the facility without the Groups consent. Interest on this facility accrues until payment is demanded by SCB. As of September 30, 2009 and December 31, 2008, the
outstanding loan balance under the SCB facility was RMB23,146 thousand (USD3,391 thousand) and nil, respectively.

On October 7, 2005,
the Group entered into a USD9,000 thousand credit facility with the Bank of China (Hong Kong) Limited (BOC). On January 17, 2008 and October 10, 2008, the facility with the BOC increased to USD14,000 thousand and USD41,000
thousand, respectively. The facility is secured by funds on deposit in an amount not less than USD15,000 thousand and bears interest from LIBOR +2.25% per annum, depending on the different kinds of borrowings made and is used to settle foreign
exchange obligations to the extent needed. The BOC facility is repayable on demand and the BOC may increase, reduce and/or cancel the facility by providing written notice to the Group. Interest on this facility accrues until payment is demanded by
the BOC. As of September 30, 2009 and December 31, 2008, the outstanding loan balances under the BOC facility were RMB72,439 thousand (USD10,612 thousand) and nil, respectively.



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Note 9  Accrued Expenses And Other Liabilities

Accrued expenses and other liabilities, and other non-current liabilities consist of the following:



|                                           |         |               |         |                  |         |        
|------------------------------------------ | ------- | ------------- | ------- | ---------------- | ------- | -------
|                                           |         | September 30, |         | December 31,2008
|                                           | 2009    |               | 2009    |                 
|                                           | USD000 |               | RMB000 |                  | RMB000
|Legal and professional fees                |         | 638           |         | 4,351            |         | 2,600  
|Accrued staff related costs                |         | 117           |         | 803              |         | 4,713  
|Payables for acquisitions (note 9a and 15) |         | 21,293        |         | 145,350          |         | 131,037
|Other accruals                             |         | 617           |         | 4,210            |         | 3,575  
|                                           |         |               |         |                  |         |        
|Accrued expenses and other liabilities     |         | 22,665        |         | 154,714          |         | 141,925
|                                           |         |               |         |                  |         |        



|Note 9a | The balance at September 30, 2009 represents amounts payable in relation to the Groups acquisitions of Comtech Broadband Corporation Limited (Comtech
Broadband), Long Rise Holdings Limited (Long Rise) and Mega Smart amounting to RMB10,342 thousand (USD1,515 thousand), RMB56,992 thousand (USD8,349 thousand) and RMB78,016 thousand (USD11,429 thousand) respectively.
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The amounts payable in relation to the acquisition of Comtech Broadband and Long Rise did not include a fixed
payment schedule, and as a result, are payable on demand. However, the Company expects RMB10,342 thousand (USD1,515 thousand) for the acquisition of Comtech Broadband to be paid by 2010, and that the amounts payable for the acquisition of Long Rise
of approximately RMB 45,000 thousand (USD6,523 thousand) will be paid by 2010 and the remaining balance of approximately RMB 11,992 thousand (USD1,822 thousand) will be paid by 2011.

On July 31, 2009, the contingency in respect of the acquisition for Keen Awards was resolved and the Company determined that no further
consideration was payable. Therefore, because the amount of contingent consideration recognized, as if it were a liability, exceeded the amount settled, the excess of RMB29,118 thousand (USD4,265 thousand) was first allocated to reduce the assets
acquired being the intangibles asset of RMB26,803 (USD3,926 thousand) net of deferred taxation in respect of intangible assets of Keen Awards of RMB4,422 thousand (USD 648 thousand) and remaining amount of RMB6,737 thousand (USD987 thousand) was
recognized as an extraordinary gain in the consolidated statements of income and comprehensive income.



11



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##### Table of Contents

Note 10  Share-Based Compensation

During the three months ended September 30, 2009 and 2008, the Company recognized share-based compensation expense for awards issued under the 2004
Incentive Plan and the 2006 Incentive Plan of RMB14,954 thousand (USD2,191 thousand) and RMB10,226 thousand, respectively. During the nine months ended September 30, 2009 and 2008, the Company recognized share-based compensation expense for
awards issued under the 2004 Incentive Plan and the 2006 Incentive Plan of RMB44,092 thousand (USD6,459 thousand) and RMB30,464 thousand, respectively.

A summary of non-vested share units activity is as follows:



|                                 |  |                     |   |                     |                                       |  |            |   |  |                                      
|-------------------------------- |  | ------------------- | - | ------------------- | ------------------------------------- |  | ---------- | - |  | -------------------------------------
|                                 |  | 2004 Incentive Plan |   | 2006 Incentive Plan
|                                 |  | Shares              |   |                     | Weighted averagegrant-date fair value |  | Shares     |   |  | Weighted averagegrant-date fair value
|                                 |  |                     |   |                     | USD000                               |  |            |   |  | USD000                              
|Balance as of January 1, 2009    |  | 464                 |   |                     | 9.14                                  |  | 2,281,437  |   |  | 5.56                                 
|Granted on January 14, 2009      |  |                    |   |                     |                                      |  | 500,000    |   |  | 5.50                                 
|Vested                           |  | (464                | ) |                     | 9.14                                  |  | (1,072,954 | ) |  | 5.42                                 
|                                 |  |                     |   |                     |                                       |  |            |   |  |                                      
|Balance as of September 30, 2009 |  |                    |   |                     |                                      |  | 1,708,483  |   |  | 5.64                                 
|                                 |  |                     |   |                     |                                       |  |            |   |  |                                      

Under the Companys 1995 Stock Option Plan for Outside Directors (the Directors
Plan), the Company issued options to purchase 115,000 shares of the Companys common stock. The options granted under the Directors Plan had a weighted average exercise price per option of USD3.00 and expired on July 1, 2009.
During the three and nine months ended September 30, 2009, 85,000 and 100,000 options under the Directors Plan were exercised, respectively. No options were exercised during the three and nine months ended September 30, 2008. As of
September 30, 2009, no options were outstanding under the Directors Plan.

The Company granted fully exercisable stock warrants to
purchase up to 925,417 shares of its common stock. The stock warrants had a weighted average exercise price per stock warrant of USD3.00 each and expired on July 1, 2009. No warrants were exercised during the three and nine months ended
September 30, 2009 and 2008. 19,999 and nil stock warrants were expired during the three and nine months ended September 30, 2009. No stock warrants expired during the three and nine months ended September 30, 2008. As of
September 30, 2009, no stock warrants were outstanding.

No options and stock warrants were issued during the three months and nine
months ended September 30, 2009 and 2008.

A detailed description of the Companys share-based compensation awards is included in
the Companys Form 10-K for the year ended December 31, 2008.

Note 11  Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:



|                                                                                           |         |                                 |         |                                |         |            |         |           
|------------------------------------------------------------------------------------------ | ------- | ------------------------------- | ------- | ------------------------------ | ------- | ---------- | ------- | ----------
|                                                                                           |         | Three Months endedSeptember 30, |         | Nine Months endedSeptember 30,
|                                                                                           | 2009    |                                 | 2008    |                                | 2009    |            | 2008   
|                                                                                           | RMB000 |                                 | RMB000 |                                | RMB000 |            | RMB000
|Numerator for basic and diluted earnings per share:                                        |         |                                 |         |                                |         |            |         |           
|Income before extraordinary item                                                           |         | 16,223                          |         | 9,351                          |         | 44,144     |         | 90,729    
|Extraordinary item                                                                         |         | 6,737                           |         |                               |         | 6,737      |         |          
|                                                                                           |         |                                 |         |                                |         |            |         |           
|Net income attributable to Cogo Group, Inc.                                                |         | 22,960                          |         | 9,351                          |         | 50,881     |         | 90,729    
|                                                                                           |         |                                 |         |                                |         |            |         |           
|Denominator:                                                                               |         |                                 |         |                                |         |            |         |           
|Basic weighted average shares                                                              |         | 36,809,304                      |         | 38,869,625                     |         | 36,357,237 |         | 39,181,116
|Effect of dilutive non-vested equity share units, performance shares, options and warrants |         | 936,622                         |         | 363,500                        |         | 1,209,021  |         | 754,417   
|                                                                                           |         |                                 |         |                                |         |            |         |           
|Diluted weighted average shares                                                            |         | 37,745,926                      |         | 39,233,125                     |         | 37,566,258 |         | 39,935,533
|                                                                                           |         |                                 |         |                                |         |            |         |           
|                                                                                           |         |                                 |         |                               
|                                                                                           |         | RMB                             |         | RMB                            |         | RMB        |         | RMB       
|Income before extraordinary item                                                           |         | 0.44                            |         | 0.24                           |         | 1.22       |         | 2.32      
|Extraordinary item                                                                         |         | 0.18                            |         |                               |         | 0.18       |         |          
|                                                                                           |         |                                 |         |                                |         |            |         |           
|Basic earnings per share                                                                   |         | 0.62                            |         | 0.24                           |         | 1.40       |         | 2.32      
|                                                                                           |         |                                 |         |                                |         |            |         |           
|                                                                                           |         |                                 |         |                               
|Income before extraordinary item                                                           |         | 0.43                            |         | 0.24                           |         | 1,17       |         | 2.27      
|Extraordinary item                                                                         |         | 0.18                            |         |                               |         | 0.18       |         |          
|                                                                                           |         |                                 |         |                                |         |            |         |           
|Diluted earnings per share                                                                 |         | 0.61                            |         | 0.24                           |         | 1.35       |         | 2.27      
|                                                                                           |         |                                 |         |                                |         |            |         |           

Non-vested equity share units, performance shares, and options and warrants amounting to
approximately 614 thousand shares and 934 thousand shares are excluded from the Companys dilutive computation as their effect would be anti-dilutive for the three months ended September 30, 2009 and 2008. For the nine months
ended September 30, 2009 and 2008, approximately 709 thousand shares and 1,304 thousand shares are excluded from the Companys dilutive computation as their effect would be anti-dilutive.



12



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##### Table of Contents

Note 12  Operating Segment Information

Segment information is as follows:



|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|--------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | --------- | - |  | --------- | -
|                                        |  | Three Months ended September 30, |   |  | Nine Months ended September 30, |  
|                                        |  | 2009                             |   |  | 2008                            |   |  | 2009      |   |  | 2008      |  
|                                        |  | RMB000                          |   |  | RMB000                         |   |  | RMB000   |   |  | RMB000   |  
|Net revenue                             |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Product sales                           |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Segment revenue from external customers |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Digital media                           |  | 337,110                          |   |  | 330,366                         |   |  | 917,098   |   |  | 933,619   |  
|Telecommunications equipment            |  | 138,335                          |   |  | 151,841                         |   |  | 375,675   |   |  | 401,121   |  
|Industrial business                     |  | 75,618                           |   |  | 20,921                          |   |  | 181,161   |   |  | 41,120    |  
|Inter-segment revenue                   |  |                                 |   |  | 8,409                           |   |  |          |   |  | 8,409     |  
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|                                        |  | 551,063                          |   |  | 511,537                         |   |  | 1,473,934 |   |  | 1,384,269 |  
|Inter-company elimination               |  |                                 |   |  | (8,409                          | ) |  |          |   |  | (8,409    | )
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|                                        |  | 551,063                          |   |  | 503,128                         |   |  | 1,473,934 |   |  | 1,375,860 |  
|Service revenue                         |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Segment revenue from external customers |  | 8,970                            |   |  | 4,717                           |   |  | 21,030    |   |  | 21,947    |  
|Inter-segment revenue                   |  |                                 |   |  | 40,804                          |   |  | 5,125     |   |  | 83,466    |  
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|                                        |  | 8,970                            |   |  | 45,521                          |   |  | 26,155    |   |  | 105,413   |  
|Inter-company elimination               |  |                                 |   |  | (40,804                         | ) |  | (5,125    | ) |  | (83,466   | )
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|                                        |  | 8,970                            |   |  | 4,717                           |   |  | 21,030    |   |  | 21,947    |  
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Total net revenue                       |  | 560,033                          |   |  | 507,845                         |   |  | 1,494,964 |   |  | 1,397,807 |  
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Income from operations                  |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Product sales                           |  | 27,779                           |   |  | 17,318                          |   |  | 70,760    |   |  | 106,596   |  
|Services revenue                        |  | 855                              |   |  | (3,211                          | ) |  | 1,651     |   |  | 5,434     |  
|Unallocated (note i)                    |  | (10,649                          | ) |  | (13,150                         | ) |  | (28,976   | ) |  | (38,012   | )
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Total income from operations            |  | 17,985                           |   |  | 957                             |   |  | 43,435    |   |  | 74,018    |  
|Interest expense                        |  | (572                             | ) |  | (191                            | ) |  | (1,081    | ) |  | (1,018    | )
|Interest income                         |  | 3,716                            |   |  | 7,366                           |   |  | 10,688    |   |  | 21,974    |  
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  
|Earnings before income taxes            |  | 21,129                           |   |  | 8,132                           |   |  | 53,042    |   |  | 94,974    |  
|                                        |  |                                  |   |  |                                 |   |  |           |   |  |           |  



|                      |  |                   |  |                 
|--------------------- |  | ----------------- |  | ----------------
|                      |  | September 30,2009 |  | December 31,2008
|                      |  | RMB000           |  | RMB000         
|Total assets          |  |                   |  |                 
|Product sales         |  | 1,817,586         |  | 1,607,409       
|Service revenue       |  | 72,920            |  | 75,846          
|Unallocated (note ii) |  | 4,006             |  | 3,555           
|                      |  |                   |  |                 
|                      |  | 1,894,512         |  | 1,686,810       
|                      |  |                   |  |                 

Note i: Unallocated income from operations includes items such as corporate staff and overheads.

Note ii: Unallocated assets mainly includes cash for corporate use.



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##### Table of Contents

Note 13  Comprehensive Income

The following table reconciles equity attributable to noncontrolling interest:



|                                                   |  |                                 |   |  |                                |   |  |         |  |         |  
|-------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ------- |  | ------- | -
|                                                   |  | Three Months endedSeptember 30, |   |  | Nine Months endedSeptember 30, |  
|                                                   |  | 2009                            |   |  | 2008                           |   |  | 2009    |  | 2008    |  
|                                                   |  | RMB000                         |   |  | RMB000                        |   |  | RMB000 |  | RMB000 |  
|Beginning balance                                  |  | 6,087                           |   |  |                               |   |  | 5,511   |  |        |  
|Acquisition of noncontrolling interest             |  |                                |   |  | 4,255                          |   |  |        |  | 4,255   |  
|Net income attributable to noncontrolling interest |  | 2,175                           |   |  | 717                            |   |  | 2,745   |  | 717     |  
|Foreign currency translation adjustments           |  | (4                              | ) |  | (28                            | ) |  | 2       |  | (28     | )
|                                                   |  |                                 |   |  |                                |   |  |         |  |         |  
|Ending balance                                     |  | 8,258                           |   |  | 4,944                          |   |  | 8,258   |  | 4,944   |  
|                                                   |  |                                 |   |  |                                |   |  |         |  |         |  

Note 14  Fair Value Measurement

The fair values of pledged bank deposits, accounts receivable, accounts payable, bank borrowings and accrued expenses and other liabilities approximated the
respective carrying amounts because of the short maturity of these instruments. The Group adopted ASC 820-10 (SFAS No. 157, Fair Value Measurements), for the nonfinancial assets and liabilities that are remeasured at fair value on a
nonrecurring basis, prospectively effective January 1, 2009. The nonfinancial assets and liabilities that are remeasured at fair value on a nonrecurring basis did not impact our financial position or results of operations; however, it could
have an impact in future periods. In addition, the Group may have additional disclosure requirements in the event we incur impairment of our assets in future periods.



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##### Table of Contents

Note 15  Acquisition

Mega Smart

On May 30, 2009, the acquisition date, the Group acquired 100% of the
outstanding shares which in turn effectively obtained control of Mega Smart and its subsidiary for a consideration of USD18,000 thousand (RMB122,872 thousand). The purchase consideration will be paid in thirteen installments. The first installment
is USD6,000 thousand (RMB40,957 thousand), which is payable within three months of May 30, 2009. The subsequent amount of USD12,000 thousand (RMB81,915 thousand) is payable over twelve equal monthly installments of USD1,000 thousand (RMB6,826
thousand) one month following the first installment. In light of the installment schedule, the Group adopted the interest rate published by the Peoples Bank of China over the payment period and calculated the fair value of the purchase
consideration as RMB122,415 thousand.

The principal activities of Mega Smart and its subsidiary are the development of the industrial
applications component business in China.

The acquisition of Mega Smart was accounted for by the Group as a purchase business combination.
The acquisition of Mega Smart resulted in the recognition of goodwill of RMB80,226 thousand and the recording of net identifiable assets of RMB42,189 thousand at the date of acquisition. Recognized intangible assets relate to supplier relationships,
customer relationships, non-compete agreements and proprietary technology which have a weighted-average useful life of 7.5 years from the date of acquisition. Goodwill and the amortization of these intangible assets are not deductible for tax
purposes.

The acquisition is expected to support the expansion of the Companys industrial applications component business in China.
Goodwill is attributed by (1) synergy to expand Mega Smarts operation and business on the established platform, industry knowledge and experience of the Group; (2) assembled workforce including engineers and management; and
(3) the expected outlook in the PRC industrial application market with the PRC government stimulus package. The combination of these factors are the drivers behind the excess of purchase price paid over the value of assets and liabilities
acquired.

Management has increased the fair value of the acquired proprietary technology by RMB4,097 thousand as of May 30, 2009 (the
acquisition date) due to the refinement of the valuation for the three months ended September 30, 2009. The impact of all changes were charged to goodwill and resulted in the reduction of goodwill by RMB3,421 thousand and deferred
tax liabilities by RMB676 thousand for the three and nine months ended September 30, 2009.

The impact of the refinement to the purchase
price allocation is as follows:



|                         |  |         |  
|------------------------ |  | ------- | -
|                         |  | RMB000 |  
|Intangible assets        |  |         |  
|- supplier relationships |  | 8,876   |  
|- customer relationships |  | 24,580  |  
|- non-compete agreements |  | 10,925  |  
|- proprietary technology |  | 6,145   |  
|Goodwill                 |  | 80,226  |  
|Deferred tax liabilities |  | (8,337  | )
|                         |  |         |  
|Net asset acquired       |  | 122,415 |  
|                         |  |         |  

The amounts of revenue and earnings for Mega Smart since the acquisition date included in the
consolidated statements of income and comprehensive income from May 30, 2009 to September 30, 2009 are RMB35,942 thousand and RMB1,622 thousand, respectively.

Unaudited pro forma financial information

The following unaudited proforma financial
information represents the combined results of operations of the Group as if the acquisition of Mega Smart had occurred as of the beginning of January 1, 2008. The unaudited proforma information is not necessarily indicative of what the
Companys consolidated results of operations actually would have been had it completed the acquisition at the beginning of each year. In addition, the unaudited proforma financial information does not attempt to project the future results of
operations of the Group.



|                                                   |         |                                  |         |                                 |         |           |         |          
|-------------------------------------------------- | ------- | -------------------------------- | ------- | ------------------------------- | ------- | --------- | ------- | ---------
|                                                   |         | Three Months ended September 30, |         | Nine Months ended September 30,
|                                                   | 2009    |                                  | 2008    |                                 | 2009    |           | 2008   
|                                                   | RMB000 |                                  | RMB000 |                                 | RMB000 |           | RMB000
|Net revenue                                        |         |                                  |         |                                 |         |           |         |          
|Product sales                                      |         | 551,063                          |         | 519,415                         |         | 1,514,864 |         | 1,424,722
|Services revenue                                   |         | 8,970                            |         | 4,717                           |         | 21,030    |         | 21,947   
|                                                   |         |                                  |         |                                 |         |           |         |          
|                                                   |         | 560,033                          |         | 524,132                         |         | 1,535,894 |         | 1,446,669
|Income from operations                             |         | 17,985                           |         | 1,240                           |         | 46,129    |         | 74,867   
|Net income attributable to Cogo Group, Inc         |         | 22,960                           |         | 9,587                           |         | 53,132    |         | 91,437   
|Earnings per share attributable to Cogo Group, Inc |         |                                  |         |                                 |         |           |         |          
|Basic                                              |         | 0.62                             |         | 0.25                            |         | 1.46      |         | 2.33     
|Diluted                                            |         | 0.61                             |         | 0.24                            |         | 1.41      |         | 2.29     



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This commentary should be read in conjunction with Cogo Group, Inc. (the Company) and its
subsidiaries (together, we, us, our or the Group) unaudited condensed consolidated financial statements for the period ended September 30, 2009 and 2008 as well as the Groups
consolidated financial statements and related notes thereto and managements discussion and analysis of financial condition and results of operations in the Groups Form 10-K for the year ended December 31, 2008.

Portions of the discussion and analysis below contain certain statements that are not descriptions of historical facts, but are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our plans and objectives for future expansion,
including into our new digital consumer electronic and storage solution products; expectations for the domestic wireless handset, telecommunications equipment, consumer electronic and storage solution end-markets in the Peoples Republic of
China (the PRC); anticipated margins for our solutions; general and cyclical economic and business conditions, and, in particular, those in the PRCs wireless handset, telecommunications equipment and consumer electronics
industries; our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers; changes in the favorable tax incentives enjoyed by our PRC operating companies; and other statements containing forward
looking terminology such as may, expects, believes, anticipates, intends, projects, looking forward or similar terms, variations of such terms or the negative of
such terms. Such information is based upon various assumptions made by, and expectations of, our management that were reasonable when made but may prove to be incorrect. All of such assumptions are inherently subject to uncertainties and
contingencies beyond our control and upon assumptions with respect to future business decisions which are subject to change. Accordingly, there can be no assurance that actual results will meet expectations and actual results may vary (perhaps
materially) from certain of the results anticipated herein. For a further description of these and other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and
our subsequent SEC filings.

Overview

We provide customized module design solutions for a diverse set of applications and end markets, serving as a gateway for our technology component suppliers to access leading electronics manufacturers in
China. Our customized module design solutions allow our customers to take advantage of technology components from reputable suppliers in an efficient and cost-effective manner, thus reducing their time-to-market and lowering their overall costs. Our
close collaboration with our customers product development teams provides us with a unique understanding of their needs, enabling us to customize our suppliers technology components with module designs that meet our customers
needs. In addition, in 2006, we began to earn income through the provision of engineering service to existing and new customers.

We are
focused on the digital media, telecommunications equipment and industrial business end-markets in China. In the digital media end-market, we provide mobile handset module solutions for functionalities such as LCD, camera, power supply and Bluetooth
and solutions for digital set-top boxes and GPS applications; in the telecom equipment end-market, we provide solutions for PSTN switching, optical transmitters, electrical signal processing and optical signal amplification; in the industrial
business end-markets, which commenced since the beginning of 2008 and further expanded in 2009 with the acquisition of Mega Smart Group Limited (Mega Smart), we provide industrial solutions for the green energy and auto-electronics
sectors. Over the course of our operating history, we have worked with over 1,200 customers, including a majority of the most established manufacturers in the digital media, telecommunications equipment and industrial business end-markets in China
such as ZTE, T&W and TCL. In addition to these original equipment manufacturers, or OEMs, our other customers include industry participants that support these OEMs, such as subsystem designers and contract manufacturers. In developing customized
module design solutions for use in our customers products, we collaborate closely with over 30 suppliers of technology components, including many large multinational companies such as Broadcom, Sandisk and Matsushita. In addition, in October
2006, we became one of the first China-based companies to license software technology and have access to selected source codes directly from Microsoft.

We have two reportable operating segments: product sales consisting of revenues generated by providing customized module design solutions focusing primarily in the digital media, telecommunications
equipment and industrial business end-markets, and services revenue, generated by providing technology and services, network system integration and related training and maintenance services.

Principal Factors Affecting Our Results of Operations

The major factors affecting our results of operations and financial condition include:

Revenue mix. Our net revenue and gross profit are affected by our product mix. Over the last year, digital media related sales, which have generally higher profit margins than our mobile handset module related sales and our telecom
equipment module related sales, have constituted a significantly greater portion of our total net revenue as compared to previous years.

Growth in end-market industries. The rapid growth of the domestic telecom equipment, industrial business and digital media end-markets have been important growth drivers for Chinas electronics manufacturing industries. Specific
markets that we expect to experience continued growth are the data communications market, consisting of asymmetric digital subscriber line (ADSL) modems and Voice over Internet Protocol (VoIP) equipment; the routers and network security equipment
markets; the optical transmission systems market; the fixed line telecom network market, as well as the digital media market particularly relating to digital TV and GPS



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applications. Increased domestic consumer spending power has contributed to rapid growth in these markets. This growth in domestic consumer spending power in turn has driven, and we believe will
continue to drive, growth in the electronics manufacturing businesses supporting hardware OEMs, including those engaged in the customized design of module solutions such as ourselves. However, these industries and the respective domestic
manufacturers that operate in these industries may not continue to grow their sales at historical levels, if at all. The stagnation or reduction in overall demand for telecom equipment, industrial business and digital media products could materially
affect our results of operations.

Increase in exports. We believe that the development of a highly-skilled, low-cost manufacturing
base has also enabled Chinas domestic telecom equipment and digital consumer electronics manufacturers to be competitive in the global marketplace. As an example, ZTE, a major manufacturer of digital media and telecom equipment in China, as
well as other telecom equipment and mobile handset manufacturers, have begun to expand overseas. We believe that growth in the export market will likely have a positive effect on our results of operations and financial condition, as it should
increase the demand for our solutions, particularly among our digital media clients.

Growth by entering new end-markets, strengthening
in-house capabilities and leveraging our customer base. In 2008, we began targeting the industrial business end-market and we provide industrial solutions for the green energy and auto-electronics sectors. We have since then grown our revenues
generated from this market from constituting 4.5% of our 2008 revenue to 12.1% of our first nine months of 2009 revenue. We anticipate that sales related to the industrial business end-markets will generally have higher profit margins than our
digital media and telecom equipment modules related sales, though such higher margins may decline over time as this industry matures. We will also look for opportunities to expand into new end markets that we believe represent significant growth
opportunities.

Our success in the industrial business end-market will depend, in significant part, on our ability to leverage our existing
customer base. We expect to continue to incur additional research and development expenses, through hiring additional engineering personnel to develop new solutions and expanding our intellectual property and technological capabilities, to meet the
needs of our customers that have expanded into or are expected to expand into the industrial business end-market.

General economic and
market conditions. Due to the tough market conditions, the level of consumer and information technology spending has declined and reduced the demand for our mobile handsets since the third quarter of 2008. Furthermore, our profit margins have
declined because we strategically lowered our pricing in order to grow the business in a slowing economic environment. Our other businesses, such as telecommunications and digital medial products, continue to show solid growth, driven by stable
infrastructure investments in the PRC.

Net Revenue

Product Sales

For our product sales segment, we do not charge our customers an
independent design fee. Instead, our business model is to generate revenue by reselling a limited number of specific components required in our module reference design. Costs incurred for the design of modules are expensed as incurred and recorded
as research and development expense. The difference between the purchase price we pay our suppliers for these components and our sales price to the customer for these components compensates us for our design, technical support and distribution
services. Our net revenue is net of a 17% value-added tax, or VAT.

Our broad and diversified customer base includes many of the major mobile
handset, telecom equipment, industrial business and digital consumer electronics manufacturers in China. In addition, our customers include industry participants supporting these OEMs, such as subsystem designers and contract manufacturers in China,
as well as international manufacturers who have begun to manufacture end-products in China for the domestic and international market.

Our net
revenues are subject to seasonal fluctuation and periods of increased demand. All product module sales are typically highest in the fourth quarter of the year due to the desire by OEMs to spend remaining budgets allocated for a given period, usually
on an annual basis. Net revenues have historically been lowest in the first quarter of the year due to the Chinese New Year holiday and the general reduction in sales following the holiday season. The digital media industry also experiences cyclical
fluctuations, as well as fluctuations in how quickly certain new digital media products and technologies are adopted by the market. These sales patterns may not be indicative of future sales performance.



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##### Table of Contents

Services Revenue

We provide software design technology and engineering services, and related training and maintenance services to our customers. We generate revenue when our services are rendered and acknowledged by our
customers.

Cost of Sales

Our cost of sales comprises cost of goods sold and cost of services.

Cost of Goods Sold

Cost of goods sold primarily consists of the purchase of components from suppliers. It is directly attributable to product revenue, and is recognized when
revenue is generated from the sale of components. We develop our customized module design solutions based on specific technology components purchased from suppliers in our target end-markets. Our list of over 30 key suppliers includes Broadcom
(integrated circuit and Bluetooth), Sandisk (flash memory), Maxim (integrated circuits), Matsushita (switches), and Freescale (microcontrollers). We typically issue purchase orders to our suppliers only after we receive customer orders, enabling us
to maintain low inventory levels and, in turn, minimize risks typically associated with holding inventory. If we lose a key supplier, or a supplier reduces the quantity of products it sells to us, does not maintain a sufficient inventory level of
products required by us or is otherwise unable to meet our demands for its components, we may have to expend significant time, effort and other resources to locate a suitable alternative supplier and secure replacement components. Even if we are
able to find a replacement supplier, we may be required to redevelop the customized module design solution to effectively incorporate the replacement components.

Cost of Services

Cost of services consists of direct staff costs and other direct related
costs for providing engineering and technology services including training and materials.

Operating Expenses

Selling, General and Administrative Expenses

Our selling expenses include expenditures to promote our new module solutions and gain a larger customer base, personnel expenses and travel and entertainment costs related to sales and marketing activities, and freight charges. We expense
all these expenditures as they are incurred. Selling expenses are expected to continue to grow in the future as we diversify by developing and acquiring new design capabilities and expanding into new end-markets.

General and administrative expenses include compensation and benefits for our general and administrative staff, professional fees, amortization of
intangible assets, including intangible assets identified resulted from the acquisition of Mega Smart, foreign exchange gain/loss, and general travel and entertainment costs. We expense all general and administrative expenses as they are incurred.
We expect that general and administrative expenses will continue to increase for the foreseeable future as a result of our expected continued growth and the continuing costs of complying with U.S. rules and regulations necessary to maintain our
listing in the United States.

Research and Development (R&D) Expenses

R&D expenses consist primarily of salaries and related costs of the employees engaged in research, design and development activities; the costs for
design and testing of modules; the cost of parts for prototypes; equipment depreciation; and third party development expenses. We expense R&D expenses as they are incurred. As of September 30, 2009, we had approximately 246 engineers and
other technical employees engaged in R&D-related activities to develop new customized module design solutions targeted at the mobile handset, telecommunications equipment, industrial business and digital media industries. As a result of
additional costs incurred in developing new customized module design solutions, and an increasing headcount in our R&D department, we expect that our R&D expenses, including those relating to the planned hiring of additional R&D
personnel, will increase in the future as we seek to expand our business by developing new customized module design solutions and penetrating new end-markets, and as we seek to grow our engineering services business.



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##### Table of Contents

Taxation

The Company and the subsidiaries file separate income tax returns.

USA

The Company is a holding company incorporated in the State of Maryland, and is subject to United States federal and state income taxes. The Company did not
generate taxable income in the United States in the nine months ended September 30, 2009 and 2008.

Cayman Islands and British Virgin
Islands

Under the current laws of the Cayman Islands and British Virgin Islands, our subsidiaries that are incorporated in the Cayman
Islands and the British Virgin Islands are not subject to tax on income or capital gains. In addition, upon payments of dividends by these companies, no Cayman Islands and British Virgin Islands withholding tax will be imposed.

PRC

On March 16, 2007, the National
Peoples Congress passed the new Corporate Income Tax law (the new CIT law) which sets the income tax rate to 25% for all companies. The new CIT law was effective as of January 1, 2008. The new CIT law provides a five-year
transition period from its effective date for those companies which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax
holidays. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively. For the Shenzhen Subsidiaries that were entitled to a tax holiday such as the two-year tax exemption followed by a
three-year 50% tax reduction shall be entitled to the tax holiday.

Based on the above, the Shenzhen Subsidiaries are subject to the following
tax rates:



| |  |  | Shenzhen Comtech International Limited and Comtech Communications Technology (Shenzhen) Limited was subject to a tax rate of 18% in 2008, and a tax
rate of 20% in 2009
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comtech Software Technology (Shenzhen) Company Limited was subject to a tax rates of 9% for 2008, and a tax rate of 20% in 2009
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comloca Technology (Shenzhen) Company Limited and Shenzhen Huameng Software Company Limited was under a tax holiday in 2008 and is under a tax holiday
in 2009
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Viewtran Technology (Shenzhen) Co., Limited (Viewtran) and Epcot Multimedia Technology (SZ) Co., Limited were under tax holidays in 2008,
and are subject to a tax rate of 10% in 2009
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, beginning on January 1, 2008, Shanghai E&T System
Company Limited, Shanghai Comtech Electronic Technology Ltd., Keen Awards Beijing Limited, RYE Microelectronics (Shenzhen) Co. Limited and Mega Smart (Shenzhen) Limited are subject to the corporate income tax rate of 25% under the new CIT law.

Hong Kong

Our subsidiaries
incorporated in Hong Kong are subject to Hong Kong Profits Tax. The profits tax rate for these companies for 2008 and 2009 was 16.5%.

As a
result of the PRC tax incentives above, our operations have been subject to relatively low tax liabilities. Our effective tax rate was 11.6% and 3.7% in the nine months ended September 30, 2009 and 2008, respectively. Included in the income tax
expense for nine months ended September 30, 2009 was a deferred income tax benefit of RMB3,563 thousand (USD522 thousand) as a result of the amortization of intangible assets of RMB22,574 thousand (USD3,307 thousand).



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##### Table of Contents

Noncontrolling Interest

Noncontrolling interest (previously referred to as minority interest) consists of an interest of 30% of the outstanding equity interest in Long Rise Holdings Limited (Long Rise) that is held
by a third party. For the three and nine months ended September 30, 2009, approximately 9.9% and 2.4% of our total net revenue was generated through this subsidiary, respectively.

Three months ended September 30, 2009 compared to three months ended September 30, 2008

Overview

The following table sets forth information regarding the breakdown of revenues and income from operations between
our product sales segment and service revenue segment:



|                             |         |                                 |         |        
|---------------------------- | ------- | ------------------------------- | ------- | -------
|                             |         | Three Months endedSeptember 30,
|                             |         | 2009                            |         | 2008   
|                             | RMB000 |                                 | RMB000
|Net revenue                  |         |                                 |         |        
|Product sales                |         |                                 |         |        
|Digital media                |         | 337,110                         |         | 330,366
|Telecommunications equipment |         | 138,335                         |         | 151,841
|Industrial business          |         | 75,618                          |         | 20,921 
|Services revenue             |         | 8,970                           |         | 4,717  
|                             |         |                                 |         |        
|Total net revenue            |         | 560,033                         |         | 507,845
|                             |         |                                 |         |        

Net Revenue.Total net revenue increased by RMB52,188 thousand (USD7,645 thousand), or 10.3%
in the three months ended September 30, 2009 when compared to the corresponding period in 2008. The increase was mainly contributed by the continued expansion in the industrial business end-market.

Product Sales

Details of product sales by
market type are as follows:



|                             |  |                                  |  |                 |      |      |        |  |                 |  |      |          |  |       |   
|---------------------------- |  | -------------------------------- |  | --------------- | ---- | ---- | ------ |  | --------------- |  | ---- | -------- |  | ----- | --
|                             |  | Three Months ended September 30, | 
|                             |  | 2009                             |  |                 | 2008 |      |        |  |                
|                             |  | Amount                           |  | % of NetRevenue |      |      | Amount |  | % of NetRevenue |  |      | % Change | 
|                             |  | USD000                          |  | RMB000         |      |      |        |  | RMB000         |  |      |          |  |       |   
|Digital media                |  | 49,385                           |  | 337,110         |      | 60.2 | %      |  | 330,366         |  | 65.1 | %        |  | 2.0   | % 
|Telecommunications equipment |  | 20,265                           |  | 138,335         |      | 24.7 | %      |  | 151,841         |  | 29.9 | %        |  | (8.9  | )%
|Industrial business          |  | 11,078                           |  | 75,618          |      | 13.5 | %      |  | 20,921          |  | 4.1  | %        |  | 261.4 | % 
|                             |  |                                  |  |                 |      |      |        |  |                 |  |      |          |  |       |   
|Total product sales          |  | 80,728                           |  | 551,063         |      | 98.4 | %      |  | 503,128         |  | 99.1 | %        |  | 9.5   | % 
|                             |  |                                  |  |                 |      |      |        |  |                 |  |      |          |  |       |   

Product sales for the three months ended September 30, 2009 was RMB551,063 thousand (USD80,728
thousand), or RMB47,935 thousand or 9.5% higher than the corresponding period in 2008. Digital media sales increased by RMB6,744 thousand (USD988 thousand), or 2.0%; telecommunications equipment related sales decreased by RMB13,506 thousand
(USD1,979 thousand), or 8.9%; and industrial business related sales increased by RMB54,697 thousand (USD8,013 thousand), or 261.4%. The increase in product sales was mainly attributable to the Groups continued effort and strategic focus in the
expansion of the industrial business end-market, offset by a decrease in telecommunications equipment revenue as a result of a reduction in selling price.



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##### Table of Contents

Services Revenue. Services revenue is as follows:



|                 |  |                                  |  |                 |      |     |        |  |                 |  |     |          |  |      |  
|---------------- |  | -------------------------------- |  | --------------- | ---- | --- | ------ |  | --------------- |  | --- | -------- |  | ---- | -
|                 |  | Three Months ended September 30, | 
|                 |  | 2009                             |  |                 | 2008 |     |        |  |                
|                 |  | Amount                           |  | % of NetRevenue |      |     | Amount |  | % of NetRevenue |  |     | % Change | 
|                 |  | USD000                          |  | RMB000         |      |     |        |  | RMB000         |  |     |          |  |      |  
|Services revenue |  | 1,314                            |  | 8,970           |      | 1.6 | %      |  | 4,717           |  | 0.9 | %        |  | 90.2 | %
|                 |  |                                  |  |                 |      |     |        |  |                 |  |     |          |  |      |  

Services revenue was derived from the provision of technology and engineering services, network
system integration and related training and maintenance services. The increase of RMB4,253 thousand (USD623 thousand), or 90.2%, was mainly attributable to more sales generated from software design services for the quarter end September 30,
2009, as compared to same period of 2008 due to the continued increase in demand resulting from shortages of supply in the market since the first quarter of 2009.

Gross Profit. Gross profit was RMB80,829 thousand (USD11,841 thousand) in the three months ended September 30, 2009, an increase of RMB10,612 thousand (USD1,555 thousand), or 15.1% when
compared to RMB70,217 thousand in the corresponding period in 2008. Gross margin was 14.4% in the three months ended September 30, 2009, compared to 13.8% in the corresponding period in 2008. The increase in both gross profit and gross profit
margin was primarily attributable to the increased revenue in industrial business end-market, in which its gross margin was generally higher than that of digital media and telecommunications equipment end-markets.

Selling, General and Administrative and R&D Expenses. Selling, general and administrative and R&D expenses were RMB63,193 thousand (USD9,257
thousand) in the three months ended September 30, 2009, or 8.8% lower than the corresponding period in 2008. The expenses for the three months ended September 30, 2009 and 2008 are as follows:



|                                                  |  |                                  |  |                 |      |      |        |  |                 |  |      |          |  |        |   
|------------------------------------------------- |  | -------------------------------- |  | --------------- | ---- | ---- | ------ |  | --------------- |  | ---- | -------- |  | ------ | --
|                                                  |  | Three Months ended September 30, | 
|                                                  |  | 2009                             |  |                 | 2008 |      |        |  |                
|                                                  |  | Amount                           |  | % of NetRevenue |      |      | Amount |  | % of NetRevenue |  |      | % Change | 
|                                                  |  | USD000                          |  | RMB000         |      |      |        |  | RMB000         |  |      |          |  |        |   
|Selling expenses                                  |  | 3,813                            |  | 26,028          |      | 4.6  | %      |  | 10,712          |  | 2.1  | %        |  | 143.0  | % 
|General and administrative expenses               |  | 3,136                            |  | 21,409          |      | 3.8  | %      |  | 36,353          |  | 7.1  | %        |  | (41.1  | )%
|R&D expenses                                      |  | 2,308                            |  | 15,756          |      | 2.8  | %      |  | 14,550          |  | 2.9  | %        |  | 8.3    | % 
|Impairment loss on goodwill and intangible assets |  |                                 |  |                |      |     |        |  | 7,653           |  | 1.5  | %        |  | (100.0 | )%
|                                                  |  |                                  |  |                 |      |      |        |  |                 |  |      |          |  |        |   
|Total                                             |  | 9,257                            |  | 63,193          |      | 11.2 | %      |  | 69,268          |  | 13.6 | %        |  | (8.8   | )%
|                                                  |  |                                  |  |                 |      |      |        |  |                 |  |      |          |  |        |   

Selling, General and Administrative Expenses.The increase in selling expenses in the three
months ended September 30, 2009 of RMB15,316 thousand (USD2,244 thousand), or 143.0%, was mainly attributable to an additional charge of doubtful account of RMB16,506 thousand (USD2,418 thousand) for the three months ended September 30,
2009 as compared to no allowance for the same period of 2008. Included in the additional charge of doubtful account was RMB7,806 thousand (USD1,144 thousand) as a result of the scale down of one of the reporting units of the Component Sales segment.
The additional charge for doubtful account was due to certain receivable balances being overdue in which the assessment of recoverability is remote.

The decrease in general and administrative expenses of RMB14,944 thousand (USD2,189 thousand), or 41.1%, was primarily attributable to exchange gain of RMB5,621 thousand (USD823 thousand) mainly consisting of RMB5,751 thousand (USD842
thousand) unrealized gain resulted by the appreciation of Australian Dollars against RMB during the quarter, as compared to exchange loss of RMB11,680 thousand for the same period of 2008, and offset by an increase in other general administrative
expenses such as staff cost and office rental due to an increase in headcount as a result of our acquisition of Mega Smart in May 2009.

R&D Expenses. R&D expenses increased in the three months ended September 30, 2009 by RMB1,206 thousand (USD177 thousand), or 8.3%, as compared to the corresponding period in 2008. The increase was primarily attributable
to an increase in share-based compensation cost of RMB2,301 thousand (USD337 thousand) as a result of new stock awards granted to research staff in 2009.



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##### Table of Contents

Interest Expense.Interest expense increased in the three months ended September 30, 2009 by
RMB381 thousand (USD56 thousand) or 199.5%, as compared to the corresponding period in 2008. The increase in interest expense was attributable to an increase in average bank borrowings.

Interest Income. Interest income in the three months ended September 30, 2009 amounted to RMB3,716 thousand (USD544 thousand), compared to RMB7,366 thousand in the corresponding period in
2008. The decrease was mainly attributable to a decrease in average interest rates as compared to the corresponding period in 2008.

Income
Tax Expense/Benefit. The effective income tax rate for the three months ended September 30, 2009 and 2008 was 12.9% and (23.8)%, respectively. The fluctuation in the effective income tax rate was primarily due to the expiry of the tax
holiday for certain subsidiaries in Shenzhen. Included in the income tax expense for the three months ended September 30, 2009 was a deferred income tax benefit of RMB1,177 thousand (USD172 thousand) as a result of the amortization of
intangible assets of RMB7,453 thousand (USD1,092 thousand).

Extraordinary gain. Extraordinary gain represented the reversal of
consideration payable for the Keen Awards acquisition of RMB29,118 thousand (4,266 thousand), offset in part by the reduction of Keen Awards related intangible assets of RMB26,803 thousand (USD3,926 thousand) and the respective deferred taxation in
relation to the intangible assets of Keen Awards of RMB4,422 thousand (USD648 thousand).

Net Income; Earnings per share. As a
result of the above items, net income attributable to Cogo Group, Inc. for the three months ended September 30, 2009 was RMB22,960 thousand (USD3,363 thousand), as compared to RMB9,351 thousand in the corresponding period in 2008. We reported
basic per share earnings of RMB0.62 (USD0.09) and diluted earnings per share of RMB0.61 (USD0.09) for the three months ended September 30, 2009, as compared to basic earnings per share of RMB0.24 and diluted earnings per share of RMB0.24 for
the corresponding period in 2008.

Nine months ended September 30, 2009 compared to nine months ended September 30, 2008

Overview

The following
table sets forth information regarding the breakdown of revenues and income from operations between our product sales segment and service revenue segment:



|                             |         |                                |         |          
|---------------------------- | ------- | ------------------------------ | ------- | ---------
|                             |         | Nine Months endedSeptember 30,
|                             |         | 2009                           |         | 2008     
|                             | RMB000 |                                | RMB000
|Net revenue                  |         |                                |         |          
|Product sales                |         |                                |         |          
|Digital media                |         | 917,098                        |         | 933,619  
|Telecommunications equipment |         | 375,675                        |         | 401,121  
|Industrial business          |         | 181,161                        |         | 41,120   
|Services revenue             |         | 21,030                         |         | 21,947   
|                             |         |                                |         |          
|Total net revenue            |         | 1,494,964                      |         | 1,397,807
|                             |         |                                |         |          

Net Revenue.Total net revenue increased by RMB97,157 thousand (USD14,233 thousand), or 7.0%,
for the nine months ended September 30, 2009 when compared to the corresponding period in 2008. The increase was mainly due to the expansion in the industrial business end-market since 2008.

Product Sales.Product sales by market type for the nine months ended September 30, 2009 and 2008 were as follows:



|                             |  |                                 |  |                 |      |      |        |  |                 |  |      |          |  |       |   
|---------------------------- |  | ------------------------------- |  | --------------- | ---- | ---- | ------ |  | --------------- |  | ---- | -------- |  | ----- | --
|                             |  | Nine Months ended September 30, | 
|                             |  | 2009                            |  |                 | 2008 |      |        |  |                
|                             |  | Amount                          |  | % of NetRevenue |      |      | Amount |  | % of NetRevenue |  |      | % Change | 
|                             |  | USD000                         |  | RMB000         |      |      |        |  | RMB000         |  |      |          |  |       |   
|Digital media                |  | 134,350                         |  | 917,098         |      | 61.4 | %      |  | 933,619         |  | 66.8 | %        |  | (1.8  | )%
|Telecommunications equipment |  | 55,034                          |  | 375,675         |      | 25.1 | %      |  | 401,121         |  | 28.7 | %        |  | (6.3  | )%
|Industrial business          |  | 26,539                          |  | 181,161         |      | 12.1 | %      |  | 41,120          |  | 2.9  | %        |  | 340.6 | % 
|                             |  |                                 |  |                 |      |      |        |  |                 |  |      |          |  |       |   
|Total product sales          |  | 215,923                         |  | 1,473,934       |      | 98.6 | %      |  | 1,375,860       |  | 98.4 | %        |  | 7.1   | % 
|                             |  |                                 |  |                 |      |      |        |  |                 |  |      |          |  |       |   



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##### Table of Contents

Product sales for the nine months ended September 30, 2009 was RMB1,473,934 thousand (USD215,923
thousand), or RMB98,074 thousand or 7.1% higher than the corresponding period in 2008. Digital media sales decreased by RMB16,521 thousand (USD2,420 thousand), or 1.8%; telecommunications equipment related sales decreased by RMB25,446 thousand
(USD3,728 thousand) or 6.3%; and industrial business sales increased by RMB140,041 thousand (USD20,515 thousand), or 340.6%. The increase in product sales was mainly attributable to the Groups continued effort and strategic focus in the
expansion of the industrial business end-market, offset by a decrease in telecommunications equipment revenue as a result of a reduction in selling price.

Services Revenue. Services revenue for the nine months ended September 30, 2009 and 2008 was as follows:



|                 |  |                                 |  |                 |      |     |        |  |                 |  |     |          |  |      |   
|---------------- |  | ------------------------------- |  | --------------- | ---- | --- | ------ |  | --------------- |  | --- | -------- |  | ---- | --
|                 |  | Nine Months ended September 30, | 
|                 |  | 2009                            |  |                 | 2008 |     |        |  |                
|                 |  | Amount                          |  | % of NetRevenue |      |     | Amount |  | % of NetRevenue |  |     | % Change | 
|                 |  | USD000                         |  | RMB000         |      |     |        |  | RMB000         |  |     |          |  |      |   
|Services revenue |  | 3,081                           |  | 21,030          |      | 1.4 | %      |  | 21,947          |  | 1.6 | %        |  | (4.2 | )%

Services revenue was derived from the provision of technology and engineering services, software
design, network system integration and related training and maintenance services commencing from January 2006. The decrease of RMB917 thousand (USD134 thousand), or 4.2%, was mainly attributable to our increased focus on product sales since the
second quarter of 2008, which enhance the Groups overall product offerings.

Gross Profit. Gross profit was
RMB213,895 thousand (USD31,334 thousand) for the nine months ended September 30, 2009, a decrease of RMB22,888 thousand (USD3,353 thousand), or 9.7% when compared to RMB236,783 thousand in the corresponding period in 2008. Gross margin was
14.3% in the nine months ended September 30, 2009, compared to 16.9% for the corresponding period in 2008. The decrease in both gross profit and gross margin was primarily attributable to the intense market competition in the digital media
end-market resulted in the reduced selling price strategy adopted by the Group since late 2008.

Selling, General and
Administrative and R&D Expenses. Selling, general and administrative and R&D expenses were RMB171,128 thousand (USD25,070 thousand) in the nine months ended September 30, 2009, or 5.1% higher than those of the same period in prior
year. The expenses for the nine months ended September 30, 2009 and 2008 are as follows:



|                                                  |  |                                 |  |                 |      |      |        |  |                 |  |      |          |  |        |   
|------------------------------------------------- |  | ------------------------------- |  | --------------- | ---- | ---- | ------ |  | --------------- |  | ---- | -------- |  | ------ | --
|                                                  |  | Nine Months ended September 30, | 
|                                                  |  | 2009                            |  |                 | 2008 |      |        |  |                
|                                                  |  | Amount                          |  | % of NetRevenue |      |      | Amount |  | % of NetRevenue |  |      | % Change | 
|                                                  |  | USD000                         |  | RMB000         |      |      |        |  | RMB000         |  |      |          |  |        |   
|Selling expenses                                  |  | 8,696                           |  | 59,362          |      | 4.0  | %      |  | 34,417          |  | 2.5  | %        |  | 72.5   | % 
|General and administrative expenses               |  | 9,360                           |  | 63,890          |      | 4.3  | %      |  | 85,790          |  | 6.1  | %        |  | (25.5  | )%
|R&D expenses                                      |  | 7,014                           |  | 47,876          |      | 3.2  | %      |  | 34,983          |  | 2.5  | %        |  | 36.9   | % 
|Impairment loss on goodwill and intangible assets |  |                                |  |                |      |     |        |  | 7,653           |  | 0.5  | %        |  | (100.0 | )%
|                                                  |  |                                 |  |                 |      |      |        |  |                 |  |      |          |  |        |   
|Total                                             |  | 25,070                          |  | 171,128         |      | 11.5 | %      |  | 162,843         |  | 11.6 | %        |  | 5.1    | % 
|                                                  |  |                                 |  |                 |      |      |        |  |                 |  |      |          |  |        |   

Selling, General and Administrative Expenses.The increase in selling expenses in the nine
months ended September 30, 2009 of RMB24,945 thousand (USD3,654 thousand), or 72.5%, was mainly attributable to an additional charge of doubtful accounts of RMB26,118 thousand (USD3,826 thousand) for the nine months ended September 30,
2009, as compared to RMB6,878 thousand for the same period in 2008. The additional charge of doubtful account was due to certain receivable balances being overdue in which the assessment of recoverability is remote.



23



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##### Table of Contents

The decrease in general and administrative expenses of RMB21,900 thousand (USD3,208 thousand), or 25.5%, was
primarily attributable to exchange gain of RMB13,218 thousand (USD1,936 thousand), mainly consisting of RMB13,733 thousand (USD2,012 thousand) unrealized gain resulted by the appreciation of Australian Dollars against RMB during the nine months
ended September 30, 2009, as compared to exchange loss of RMB12,807 thousand for the same period of 2008, and offset by an increase in other general and administrative expenses such as staff cost and office rental due to an increase in
headcount as a result of our acquisition of Long Rise in July 2008 and Mega Smart in May 2009.

R&D Expenses. R&D expenses
increased in the nine months ended September 30, 2009 by RMB12,893 thousand (USD1,889 thousand), or 36.9%, as compared to the corresponding time period in 2008. The increase was primarily attributable to an increase in share-based compensation
cost of RMB14,029 thousand (USD2,055 thousand) as a result of new stock awards granted to R&D staff in 2009.

Interest Expense.Interest expense increased in the nine months ended September 30, 2009 by RMB63 thousand (USD9 thousand) or 6.2%, as compared to the corresponding period in 2008. The increase in interest expense was attributable to an increase in average
bank borrowings.

Interest Income. Interest income in the nine months ended September 30, 2009 amounted to RMB10,688 thousand
(USD1,566 thousand), compared to RMB 21,974 thousand in the corresponding period in 2008. The decrease was mainly attributable to a decrease in average interest rates as compared to the corresponding period in 2008.

Income Tax Expense. The effective tax rate for the nine months ended September 30, 2009 and 2008 was 11.6% and 3.7%, respectively. Included in
the income tax expense for the nine months ended September 30, 2009 was a deferred income tax benefit of RMB3,563 thousand (USD522 thousand) as a result of the amortization of intangible assets of RMB22,574 thousand (USD3,307 thousand).

Extraordinary gain. Extraordinary gain represented the reversal of consideration payable for the Keen Awards acquisition of RMB29,118
thousand (4,266 thousand), offset in part by the reduction of Keen Awards related intangible assets of RMB26,803 thousand (USD3,926 thousand) and the respective deferred taxation in relation to the intangible assets of Keen Awards of RMB4,422
thousand (USD 648 thousand).

Net Income; Earnings per share. As a result of the above items, net income for the nine months
ended September 30, 2009 was RMB50,881 thousand (USD7,454 Thousand), compared to net income of RMB90,729 thousand in the corresponding period in 2008. We reported basic per share earnings of RMB1.40 (USD0.21) for the nine months ended
September 30, 2009 diluted per share earnings of RMB1.35 (USD0.20), compared to basic per share earnings of RMB2.32 for the same period of 2008, and diluted per share earnings of RMB2.27.

Liquidity and Capital Resources

Cash
flows and working capital

Our accounts payable cycle typically averages approximately one month, whereas our accounts receivable cycle
typically averages approximately three months. Accordingly, working capital is needed to fund this time difference.

As of September 30,
2009, apart from the cash payable in relation to our acquisitions of subsidiaries, we had no material commitments for capital expenditures.

As of September 30, 2009, the Company had RMB692,753 thousand (USD101,485 thousand) in cash. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided
by operations and available borrowings under banks lines of credit and factoring facilities. At times, we evaluate possible acquisitions of, or investments in, businesses that are complementary to those of ours, which transactions may require
the use of cash. We believe that our cash, other liquid assets, operating cash flows and credit facility arrangements, taken together, provide adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require
additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity as well as from other sources.



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As of September 30, 2009, we had working capital of RMB1,208,962 thousand (USD177,106 thousand),
including RMB692,753 thousand (USD101,485 thousand) in cash, as compared with working capital of RMB1,172,313 thousand as of December 31, 2008.

Operating activities used cash of RMB24,282 thousand (USD3,557 thousand) for the nine months ended September 30, 2009, compared to cash generated of RMB77,251 thousand in the corresponding period in 2008. The increase in cash used in
operating activities for the nine months ended September 30, 2009 as compared to the corresponding period in 2008 is primarily due to the increase in cash paid to inventory purchases of RMB43,693 thousand (USD6,401 thousand) near the end of
September 2009 to meet expected demand in the coming months.

Investing activities used RMB67,129 thousand (USD9,834 thousand) during the nine
months ended September 30, 2009, mainly for the acquisition of subsidiaries of RMB65,327 thousand (USD9,570 thousand). The remaining major investing activity was the purchases of property and equipment of RMB1,802 thousand (USD264 thousand).

Financing activities provided cash of RMB97,693 thousand (USD14,311 thousand) for the nine months ended September 30, 2009, mainly for
proceeds from bank borrowings of RMB95,644 thousand (USD14,011 thousand) and proceeds from exercise of stock options of RMB2,049 thousand (USD300 thousand).

Indebtedness

Some of our customers enter into arrangements with their respective banks
for purposes of settling their bills. Under such arrangements, we are entitled to collect the amounts owed directly from the customers banks when the invoice becomes due. In certain circumstances, we have arranged to transfer with recourse
certain of our bills receivable to the bank. Under this discounting arrangement, the bank pays a discounted amount to us and collects the amounts owed from the customers banks. The discount typically ranges from 2.2% to 3.5% of the balance
transferred, which is recorded as interest expense. During the nine months ended September 30, 2009 and 2008, we had received proceeds from the sale of the bills receivable amounting to RMB49,708 thousand (USD7,282 thousand) and RMB54,299
thousand, respectively.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Our reporting
currency is RMB. Transactions in other currencies are recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are remeasured into RMB at rates of exchange in
effect at the balance sheet dates. Exchange gains and losses are recorded in our statements of operations as a component of current period earnings.

The PRC State Administration for Foreign Exchange (SAFE), under the authority of the Peoples Bank of China (the PBC), controls the conversion of RMB into foreign currencies. The principal regulation governing
foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended, or the Rules. Under the Rules, once various procedural requirements are met, RMB is convertible for current account transactions,
including trade and service-related foreign exchange transactions and dividend payments, but not for capital account transactions, including direct investment, loans or investments in securities outside China, without prior approval of the SAFE of
the PRC, or its local counterparts.

Since July 2005, the RMB has not been pegged to the USD. Although currently the RMB exchange rate versus
the USD is restricted to a rise or fall of no more than 0.3% per day and the PBC regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate
significantly in value against the USD in the medium to long term. Moreover, it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange
market. As of September 30, 2009, the exchange rate between RMB and USD was USD1.00 to RMB6.8262.

We conduct substantially all of our
operations through our PRC operating companies, and their financial performance and position are measured in terms of RMB. Our solutions are primarily procured, sold and delivered in the PRC for RMB. The majority of our net revenue are denominated
in RMB.

Any devaluation of the RMB against the USD would consequently have an adverse effect on our financial performance and asset values
when measured in terms of USD. On the other hand, the appreciation of the RMB could make our customers products more



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expensive to purchase because many of our customers are involved in the export of goods, which may have an adverse impact on their sales. A decrease in sales by our customers could have an
adverse effect on our operating results. In addition, from time to time we may have USD denominated borrowings, and therefore a decoupling of the RMB many affect our financial performance in the future.

We recognized a foreign currency translation loss of approximately RMB161 thousand (USD24 thousand) for the three months ended September 30, 2009 and a
gain of approximately RMB329 thousand (USD48 thousand) for the nine months ended September 30, 2009. We do not currently engage in hedging activities and, as such, we may in the future experience economic loss as a result of any foreign
currency exchange rate fluctuations.

Interest Rate Risk

We are exposed to interest rate risk arising from short-term variable rate borrowings from time to time. Our future interest expense will fluctuate in line with any change in our borrowing rates. We do
not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant market risks is not material. Our bank borrowings amounted to RMB95,585 thousand (USD14,003 thousand) as of September 30, 2009.
Based on the variable nature of the underlying interest rate, the bank borrowings approximated fair value at that date. If there was a hypothetical 1% change in interest rate, the net impact to earnings would be approximately RMB956 thousand (USD140
thousand). The potential change in earnings is calculated based on the change in the net interest expense over a one year period due to an immediate 1% change in rate.

Inflation

In recent years, China has not experienced significant inflation, and thus
inflation has not had a material impact on our results of operations.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys reports filed pursuant to the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered
by this report, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this report,
the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls or in other factors during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.

PART II  OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

There have been no material developments in the Companys legal proceedings from those previously disclosed in the Companys Form 10-K for the year ended December 31, 2008.



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Item 1A. RISK FACTORS

There have been no material changes in the Companys risk factors from those previously disclosed in the Companys Form 10- K for the year ended
December 31, 2008.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5.
OTHER INFORMATION

None.

Item 6. EXHIBITS

(b) Exhibits



|            |  |                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Document Description                                                                                                                                                                               
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.        
|            | 
|31.2        |  | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|            | 
|32.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).                                                                               
|            | 
|32.2        |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).                                                                           



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



|                 |  |                  |  |                                     
|---------------- |  | ---------------- |  | ------------------------------------
|                 |  | COGO GROUP, INC.
|                 |  |                 
|November 9, 2009 |  | By:              |  | /S/    JEFFREY
KANG                 
|                 |  |                  |  | Jeffrey Kang                        
|                 |  |                  |  | Chairman and Chief Executive Officer
|                 |  |                  |  | (Principal Executive Officer)       
|                 |  |                 
|November 9, 2009 |  | By:              |  | /S/    FRANK
ZHENG                  
|                 |  |                  |  | Frank Zheng                         
|                 |  |                  |  | Chief Financial Officer             
|                 |  |                  |  | (Principal Financial Officer)       



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