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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 20-F

(Mark One)

[ ]  Registration statement pursuant to Section 12(b) or 12(g) of the Securities
     Exchange Act of 1934

                                       or

[x]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the fiscal year ended December 31, 2003

                                       or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     Commission file number: 0-30910

                         O2 MICRO INTERNATIONAL LIMITED
             (Exact Name of Registrant as Specified in Its Charter)

                               The Cayman Islands

                 (Jurisdiction of Incorporation or Organization)

                 Grand Pavilion Commercial Centre, West Bay Road
                         P.O. Box 32331 SMB, George Town
                          Grand Cayman, Cayman Islands
                    (Address of Principal Executive Offices)

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

                                                  Name of Each Exchange On Which
            Title of Each Class                             Registered
            -------------------                   ------------------------------
Ordinary Shares, par value $0.001 per share           Nasdaq National Market
                                                   Cayman Islands Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

                                      None
                                (Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:

                                      None
                                (Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.

                           39,032,616 Ordinary Shares

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

     Yes [x]   No [ ]

Indicate by check mark which financial statement item the registrant has elected
to follow:

     Item 17 [ ]   Item 18 [x]

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                                TABLE OF CONTENTS

                                     PART I

Item 1.    Identity of Directors, Senior Management and Advisors...............3

Item 2.    Offer Statistics and Expected Timetable.............................3

Item 3.    Key Information.....................................................3

Item 4.    Information on the Company.........................................12

Item 5.    Operating and Financial Review and Prospects.......................20

Item 6.    Directors, Senior Management and Employees.........................26

Item 7.    Major Shareholders and Related Party Transactions..................31

Item 8.    Financial Information..............................................32

Item 9.    The Offer and Listing..............................................32

Item 10.   Additional Information.............................................33

Item 11.   Quantitative and Qualitative Disclosures About Market Risk.........42

Item 12.   Description of Securities Other Than Equity Securities.............44

                                     PART II

Item 13.   Defaults, Dividend Arrearages and Delinquencies....................44

Item 14.   Material Modifications to the Rights of Security Holders
              and Use of Proceeds.............................................44

                                    PART III

Item 15.   Controls and Procedures............................................44

Item 16.   Reserved...........................................................45

Item 16A   Audit Committee Financial Expert...................................45

Item 16B   Code of Ethics.....................................................45

Item 16C   Principal Accountant Fees and Services.............................45

Item 16D   Exemption from the Listing Standards for Audit Committee...........45

Item 16E   Purchased Equity Securities by the Issuer and Affiliated Persons...46

                                     PART IV

Item 17.   Financial Statements...............................................46

Item 18.   Financial Statements...............................................46

Item 19.   Exhibits...........................................................46

Index to Consolidated Financial Statements...................................F-1

Signatures

                                       2

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                       Certain Definitions and Conventions

     In this annual report on Form 20-F (the "Annual Report"), references to "$"
and "dollars" are to United States dollars. Percentages and certain amounts
contained herein have been rounded for ease of presentation. Any discrepancies
in any table between totals and the sums of amounts listed are due to rounding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Annual Report contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our future results of
operations and business prospects. These forward-looking statements are based
upon our current assumptions and beliefs in light of the information currently
available to us. Actual results may differ materially from those expressed or
implied in these forward-looking statements for a variety of reasons, including
those discussed under "Key Information - Risk Factors", "Operating and Financial
Review and Prospects" and elsewhere in this Annual Report. You are cautioned not
to place undue reliance on these forward-looking statements which apply only as
of the date of this Annual Report. We assume no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.

                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

        Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

        Not applicable.

ITEM 3. KEY INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data for the years ended December 31,
2001, 2002 and 2003, and the selected consolidated financial data as of December
31, 2002 and 2003, set forth below, are derived from our audited consolidated
financial statements included herein, and should be read in conjunction with,
and are qualified in their entirety by reference to, these consolidated
financial statements, including the notes to these consolidated financial
statements and "Item 5. Operating and Financial Review and Prospects" included
elsewhere in this annual report on Form 20-F. The selected consolidated
financial data for the years ended December 31, 1999 and 2000 and the selected
consolidated financial data as of December 31, 1999, 2000 and 2001, set forth
below, are derived from our audited consolidated financial statements and
related notes which do not appear in this annual report on Form 20-F. Our
consolidated financial statements are prepared and presented in accordance with
generally accepted accounting principles in the United States.

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                     -----------------------------------------------
                                       1999      2000      2001      2002      2003
                                     -------   -------   -------   -------   -------
                                          (in thousands, except per share data)
<S>                                  <C>       <C>       <C>       <C>       <C>
Consolidated Statement of
   Operations Data:
</TABLE>

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<TABLE>
<S>                                  <C>       <C>       <C>       <C>       <C>
Net sales ........................   $23,728   $40,356   $45,819   $70,187   $88,599
Cost of sales ....................     9,797    15,687    16,465    28,143    38,314
                                     -------   -------   -------   -------   -------
Gross profit .....................    13,931    24,669    29,354    42,044    50,285
Operating expenses:
   Research and development ......     5,521     9,682    14,320    18,935    19,219
   Selling, general and
      administrative .............     6,973     8,714     9,909    12,325    17,476
   Stock-based compensation ......       773       458       166        44        --
                                     -------   -------   -------   -------   -------
      Total operating expenses ...    13,267    18,854    24,395    31,304    36,695
                                     -------   -------   -------   -------   -------
Income from operations ...........       664     5,815     4,959    10,740    13,590
Non-operating income - net .......       187     1,056     1,827     1,662     1,437
                                     -------   -------   -------   -------   -------
Income before income tax                 851     6,871     6,786    12,402    15,027
Income tax expense ...............        13       227     1,152     1,673     1,826
                                     -------   -------   -------   -------   -------
Net income .......................       838     6,644     5,634    10,729    13,201
                                     =======   =======   =======   =======   =======
Earnings per share:
      Basic ......................      0.09      0.34      0.17      0.28      0.34
      Diluted ....................      0.03      0.21      0.16      0.27      0.33
Shares used to compute basic
   earnings per share: ...........     9,736    19,419    34,020    38,300    38,374
                                     =======   =======   =======   =======   =======
Shares used to compute diluted
   earnings per share: ...........    29,723    32,260    35,576    39,591    39,736
                                     =======   =======   =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                           December 31,
                                        --------------------------------------------------
                                          1999      2000      2001       2002       2003
                                        -------   -------   --------   --------   --------
                                                          (in thousands)
<S>                                     <C>       <C>       <C>        <C>        <C>
Consolidated Balance Sheet Data:
Cash and short term investments .....   $ 5,946   $37,448   $118,950   $112,009   $120,412
Working capital .....................     6,796    44,072    122,990    120,793    130,510
Total assets ........................    12,791    54,607    136,419    145,836    169,293
Long-term debt, excluding current
   portion ..........................         2        13          7         --         --
Net assets ..........................     8,300    47,928    128,424    135,148    154,727
</TABLE>

CAPITALIZATION AND INDEBTEDNESS

Not applicable.

REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

RISK FACTORS

If the markets for notebook computers or other computing, communications or
consumer electronics products do not grow substantially or even decrease, our
net sales will be harmed.

     Our business focuses on designing, developing and marketing high
performance integrated circuits for manufacturers of products for the computer,
consumer electronics, industrial and communications markets. Because many of the
leading suppliers of these products have an intermediary manufacture their
products or those portions of their products containing our components, we
currently derive substantially all of our product revenues from sales to these
intermediaries. We also have targeted and are designing products for other
computer, consumer electronics, industrial and communications applications such
as mobile phones, global positioning systems, portable intelligent devices and
portable DVD players. We cannot be certain that the

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markets for these products will continue to grow as rapidly as they have in the
past or that a significant slowdown in these markets will not occur. We believe
that an important factor driving growth in these markets has been the growing
popularity of mobile computing and the emergence of the Internet and wireless
communications networks. If mobile computing does not continue to grow in
popularity and the demand for notebook computers declines, or does not grow as
quickly as we expect, our intermediaries or original equipment manufacturer
customers will experience lower demand for notebook computers that use our
products, and our net sales will suffer. If the growth in the use of the
Internet and wireless communications networks declines, or does not grow as
quickly as we anticipate, our customers may experience lower demand for the
electronic devices that use our products, and our sales will suffer.

     In addition, we have experienced, and may experience in the future,
shortages of liquid crystal displays and semiconductors caused by industry
market trends or by natural disasters, such as earthquakes, that are outside of
our control. These shortages may increase the costs of components used in mobile
devices and therefore constrain their more widespread market acceptance.

     Finally, the semiconductor industry has historically been highly cyclical
and, at various times, has experienced significant downturns and wide
fluctuations in supply and demand. This has caused significant variances in
product demand, production capacity and rapid erosion of average selling prices.
Industry-wide fluctuations in the future could result in pricing pressure on our
products as well as lower demand for our products. If such fluctuations were to
occur, it could materially adversely affect our operating margins and net sales.

Fluctuations in our quarterly operating results due to factors such as changes
in the demand for electronic devices that can utilize our products could depress
our stock price.

     We believe that quarter-to-quarter comparisons of our financial results are
not necessarily meaningful indicators of our future operating results, and they
should not be relied upon as an indication of our future performance. If our
quarterly operating results fail to meet the expectations of securities
analysts, the trading price of our ordinary shares could be negatively affected.
Our quarterly operating results have varied substantially in the past and may
vary substantially in the future depending upon a number of factors described
below and elsewhere in this Risk Factors section, including many that are beyond
our control. These factors include: changes in demand for devices that use our
products; market conditions in the semiconductor industry and the economy as a
whole; the timing and cancellation of customer orders; the level of orders
received that can be shipped in a quarter; the availability of third party
semiconductor foundry, assembly and test capacity; fluctuations in manufacturing
yields; delays in introductions of new products; changes in the mix of sales of
higher margin products and lower margin products; seasonal changes in demand
during the year-end holiday season for devices that use our products; and the
amount of legal and other expenses incurred in a particular quarter. In
addition, the trading price of our ordinary shares may be affected by factors
such as: significant price and volume fluctuations in the stock and financial
markets in the U.S. and other countries, as well as relatively thin trading
volume of our stock on the Nasdaq National Market.

If orders for our products are deferred or cancelled, our quarterly net sales,
operating margins and net income could be substantially reduced.

     Orders for our products can be cancelled or deferred with little notice
from and without significant penalty to our customers. A significant portion of
our net sales in any quarter depends on orders booked and shipped in that
quarter. If a large amount of orders placed is cancelled or deferred, our net
sales in that quarter could be substantially reduced. Since we do not have
significant non-cancelable backlog, we typically plan our production and
inventory expenses based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially. In particular, in response
to anticipated lengthy lead times, which in the past have been as much as ten
weeks or more, to obtain inventory and materials from our suppliers, we place
orders with these suppliers in advance of anticipated customer demand, which can
result in excess inventory expenses if the expected orders fail to materialize.
We also expect to increase our expenses

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for personnel and new product development. It is difficult for us to reduce our
production, inventory, personnel and new product development expenses quickly in
response to any shortfalls in net sales resulting from lower than expected,
cancelled or deferred orders. As a result, any significant downturn in orders
would not only harm our net sales, it would likely have a disproportionately
adverse effect on our operating margins and net income.

A substantial portion of our net sales is generated by a small number of large
customers. If any of these customers delays or reduces its orders, our net sales
and earnings will be harmed.

     Historically, a relatively small number of customers have accounted for a
significant portion of our net sales in any particular period. We have no
long-term volume purchase commitments from any of our significant customers. We
cannot be certain that our current customers will continue to place orders with
us, that orders by existing customers will continue at the levels of previous
periods or that we will be able to obtain orders from new customers. In
addition, some of our customers, acting as intermediary manufacturers, supply
products to end-market purchasers, and any of these end-market purchasers could
choose to reduce or eliminate orders for our customers' products. This would in
turn lower our customers' orders for our products.

     In 2003, one customer accounted for 10% or more of our net revenues
(13.5%). In 2002, two customers accounted for 10% or more of our net revenues
(18.6% and 15.9%, respectively). In 2001, two customers accounted for 10% or
more of our net revenues (20.9% and 11.0%, respectively). The variations in
sales to these customers as a percentage of our total revenue have been caused
by a number of factors, some of which were outside our control. We anticipate
that sales of our products to a relatively small number of customers will
continue to account for a significant portion of our net sales. The reduction,
delay or cancellation of orders from one or more of our significant customers
would have a disproportionately negative impact on our results of operations.

If we cannot compete effectively against new and existing competitors, our net
sales and operating margins could be harmed.

     Our ability to compete successfully in the market for semiconductor or
integrated circuit products depends on factors both within and outside our
control, including: our success in designing and subcontracting the manufacture
of new products that implement new technologies and satisfy our customers'
needs; the performance of our products across a variety of parameters such as
power savings, reliability and cost efficiency; the price of our products and
those of our competitors; our ability to control production costs; and the
features of our competitors' products.

     We believe our principal competitors include Linear Technology, Maxim
Integrated Products and Texas Instruments. In addition to these competitors,
other integrated circuit companies may decide to enter the market with mixed
signal integrated products that compete with ours or incorporate functions
similar to those provided by our products. We also face competition from
in-house integrated circuit design and manufacturing groups at some of our
existing and potential customers, such as Toshiba Corporation.

     Many of our competitors, such as Texas Instruments, have greater name
recognition, their own manufacturing capabilities, significantly greater
financial and technical resources, and the sales, marketing and distribution
strengths that are normally associated with large multinational companies. These
competitors may also have pre-existing relationships with our customers or
potential customers. These competitors may be able to introduce new technologies
more quickly, address customer requirements more rapidly and devote greater
resources to the promotion and sale of their products than we do. Further, in
the event of a manufacturing capacity shortage, these competitors may be able to
manufacture products themselves or obtain third-party manufacturing capability
when we are unable to do so.

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<PAGE>

Our limited operating history makes it difficult to evaluate our future
prospects, and we cannot assure you that we will not incur future losses.

     We were incorporated in March 1995. Accordingly, we have a limited
operating history, and our past results cannot be relied upon to predict our
future performance. We incurred net losses in each year prior to the year ended
December 31, 1999. While we experienced significant quarter to quarter sales
growth in the years ended December 31, 2001, 2002 and 2003, in the first quarter
ending March 31, 2004, we experienced a decrease in sales compared to the
previous quarter. Our net sales are subject to fluctuation from quarter to
quarter, our previous overall growth may not continue, and we may not be able to
sustain or increase profitability in the future. We anticipate that our expenses
will increase substantially in the foreseeable future as we continue to develop
and protect our technology and expand our product offerings. These efforts may
prove more expensive than we currently anticipate, and we may not succeed in
increasing our net sales sufficiently to offset our increased expenses. If we
fail to increase our net sales to keep pace with our increased expenses, we may
again experience net losses in future periods, which would cause the value of
our stock to decline.

We depend on third parties to manufacture, assemble and test our products and,
if they are unable to do so, our ability to ship products and our net sales and
gross margins will be harmed.

     We do not own or operate the integrated circuit fabrication facilities that
manufacture the products we design. Three foundries, United Microelectronics
Corporation, or UMC, Taiwan Semiconductor Manufacturer Company Limited, or TSMC,
and X-FAB Semiconductor Foundries AG, or X-FAB, manufactured most of the
semiconductor devices that we sold in 2003. These suppliers manufacture
integrated circuit semiconductors for us according to purchase orders. We do not
have a guaranteed level of production capacity at any of our suppliers, and any
one or more could raise prices without notice. We provide the suppliers with
rolling forecasts of our production requirements; however, the ability of each
supplier to provide wafers to us is limited by the supplier's available
capacity. Our suppliers could choose to prioritize capacity for other customers,
particularly larger customers, reduce or eliminate deliveries to us on short
notice or increase the prices they charge us. Accordingly, we cannot be certain
that our suppliers will allocate sufficient capacity, if any, to satisfy our
requirements particularly during any industry-wide capacity shortages. In
addition, if any of our suppliers were to become unable to continue
manufacturing our products in the required volumes at acceptable quality, yields
and costs or in a timely manner, our business and operating results would be
seriously harmed.

     There are other significant risks associated with our reliance on outside
suppliers, including: the disruption in our ability to ship products caused by
the length of time, as much as six to twelve months, required for us to qualify
alternative suppliers for existing or new products; the reduction or elimination
of deliveries to us by our foundries caused by a sudden demand for an increased
amount of semiconductor devices or a sudden reduction or elimination of
manufacturing capacity by any existing manufacturers of semiconductor devices;
the unavailability of, or delays in obtaining access to, key process
technologies used by these suppliers; and the susceptibility of our third-party
suppliers to production interruptions resulting from natural disasters, such as
the interruptions experienced in Taiwan in the past due to earthquake activity.
Any of these events could cause our foundries to either reduce or eliminate
deliveries to us, and a disruption in our ability to ship products to our
customers could negatively affect our business and results of operations.

     We also rely on independent subcontractors to assemble and test
substantially all of our semiconductor products. We do not have long-term
agreements with any of these subcontractors and typically obtain services from
them on a purchase order basis. Our reliance on these subcontractors involves
risks such as reduced control over delivery schedules, quality assurance and
costs. These risks could result in product shortages or increase our costs of
manufacturing, assembling or testing our products. If these subcontractors are
unable or unwilling to continue to provide assembly and test services and
deliver products at acceptable quality, yields and costs or in a timely manner,
our business would be seriously harmed. We would also have

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to identify and qualify substitute subcontractors, which would be time consuming
and costly and could result in unforeseen operational difficulties.

If we do not develop and introduce new products timely, our net sales and gross
margins will be harmed.

     Our success depends upon our ability to develop and introduce new products
selected for design into products for the computer, consumer electronics,
industrial and communications markets. If we are unable to develop new products
in a timely manner, our net sales will suffer. In addition, because our gross
margins typically decline over the life cycle of our products as a result of
competitive pressures and voluntary pricing arrangements, any failure to develop
new products in a timely manner will likely cause our gross margins to decline.
The development of our new products is highly complex, and from time to time we
have experienced delays in the introduction of new products of as much as eight
to twelve weeks or more. Successful product development and introduction of new
products depend on a number of factors, including the following: accurate new
product definition; timely completion of new product designs; achievement of
manufacturing yields; timely and cost-effective production of new products; and
delays in the introduction of new third-party supplied products used as key
components in devices that incorporate our products.

If we cannot adapt our product offerings to respond to rapid technological
changes, our net sales will be harmed.

     The markets for computer, consumer electronics, industrial and
communications products, and the components used in these products, are
characterized by rapidly changing technology and very frequent new product
introductions by our direct customers and our competitors. For example, the
microprocessor, display and battery technologies with which our products
interoperate change very rapidly, and the product life cycles for products in
the computer, consumer electronics, industrial and communications markets that
use our power management and security technologies are often less than one year.
If we do not respond in a timely manner to technological changes and new product
introductions by our direct customers and competitors by developing new products
and enhancing our existing products, we will be unable to maintain and grow our
product sales. In addition, the emergence of significantly more efficient or
cost-effective battery, display or microprocessor technologies could lessen the
need for the power management or power saving functionality of our products,
which would harm our net sales.

Sales of our products could decline if we fail to support evolving industry
standards.

     Our net sales are derived from sales of semiconductor products that are
components of electronic devices built to industry standards and widely accepted
specifications. For example, the hardware specification for the voltage of most
notebook computers is currently either 3.3 or 5.0 volts and the software used to
control the power management functions of many notebook computers conforms to
the Advanced Configuration Power Interface specification. Our products must be
designed to conform to these standards and specifications in order to achieve
market acceptance. Technology standards and specifications continually evolve,
and we may not be able to successfully design and manufacture new products in a
timely manner that conform to these new standards. Additionally, new products we
develop to conform to new specifications may not be accepted in the market.

Defects in our products could result in significant costs and could impair our
ability to sell our products.

     Detection of any significant defects in our products may result in, among
other things, loss of or delay in, market acceptance and sales of our products,
diversion of development resources, injury to our reputation and increased
service and warranty costs. Because our products are complex, they may contain
defects that can be detected at any point in a product's life cycle. These
defects could harm our reputation, which could result in significant costs to us
and could impair our ability to sell our products. The costs we may incur in
correcting any product defects may be substantial and could decrease our profit
margins. While we continually test our products for defects and work with
customers through our customer support services to identify and

                                       8

<PAGE>

correct problems, defects in our products may be found in the future. Testing
for defects is complicated in part because it is difficult to simulate the
highly complex environments in which our customers use our products. In the
past, we have discovered defects in our products and have experienced delays in
the shipment of our products. These delays have principally related to new
product update releases. To date, none of these delays has materially affected
our business. However, product defects or delays in the future could be
material, and could adversely affect our ability to sell our products.

We have substantial operations outside of the United States that expose us to
risks specific to our international operations that could harm our net sales and
net income.

     As of December 31, 2003, a substantial portion of our operations,
approximately 70% of our employees, and all of the third parties we use to
manufacture, assemble and test most of our products were located in Japan, the
People's Republic of China, Singapore and Taiwan. In addition, sales outside the
United States as a percentage of net sales were 99.9% in the year ended December
31, 2001 and almost 100% in the years ended December 31, 2002 and December 31,
2003. We expect our non-U.S. operations to grow and non-U.S. sales to continue
to account for a substantial percentage of our net sales.

     We are subject to risks specific to our international business operations,
including: the risk of supply disruption, production disruption or other
disruption arising from the outbreak of Severe Acute Respiratory Syndrome; the
risk of potential conflict and further instability in the relationship between
Taiwan and the People's Republic of China; risks related to international
political instability and to the recent global economic turbulence and adverse
economic circumstances in Asia, such as in Japan and Korea; unpredictable
consequences on the economic conditions in the U.S. and the rest of the world
arising from terrorist attacks, such as the attacks of September 11, 2001 in the
U.S. and other military or security operations, particularly with regard to the
conflicts in the Middle East involving Iraq; unexpected changes in regulatory
requirements or legal uncertainties regarding tax regimes, such as the change to
the tax code of Taiwan in 2001 that resulted in a higher income tax rate on our
retained earnings; tariffs and other trade barriers, including current and
future import and export restrictions; difficulties in staffing and managing
international operations, such as Singapore, the People's Republic of China and
Taiwan; risks that changes in foreign currency exchange rates will make our
products comparatively more expensive; limited ability to enforce agreements and
other rights in foreign countries; changes in labor conditions; longer payment
cycles and greater difficulty in collecting accounts receivables; burdens and
costs of compliance with a variety of foreign laws; limitation on imports or
exports and expropriation of private enterprises; and reversal of the current
policies (including favorable tax and lending policies) encouraging foreign
investment or foreign trade by our host countries. In addition, the geographical
distances between Asia, America, the Cayman Islands and Europe also create a
number of logistical and communication challenges. Although we have not
experienced any serious harm in connection with our international operations, we
cannot assure you that such problems will not arise in the future.

     Our reporting currency is the U.S. dollar. However, a significant portion
of our operating expenses is denominated in currencies other than the U.S.
dollar, primarily the New Taiwan dollar and the Chinese Renminbi. As a result,
appreciation or depreciation of other currencies in relation to the U.S. dollar
could result in material transaction or translation gains or losses that could
reduce our operating results. We do not currently engage in currency hedging
activities.

Our ability to manage growth will affect our ability to achieve and maintain
profitability.

     Our ability to maintain profitability will depend in part on our ability to
implement and expand operational, customer support and financial control systems
and to train and manage our employees. We may not be able to augment or improve
existing systems and controls or implement new systems and controls in response
to future growth, if any. In addition, we will need to expand our facilities to
accommodate the growth in our personnel. Any failure to manage growth could
divert management attention from executing our business plan and hurt our
ability to expand our business successfully. Our historical growth has placed,
and any further growth is likely to continue to place, a significant strain on
our resources. In order to grow

                                       9

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successfully, we will need to maintain close coordination among our executive,
engineering, accounting, finance, marketing, sales, operations and customer
support organizations, particularly in light of the internationally dispersed
nature of our operations.

We will need to recruit and retain qualified personnel to grow our business
successfully.

     Our future success will depend on our ability to attract and retain
experienced sales, research and development, marketing, customer support and
management personnel. If we do not attract and retain these personnel, this
could harm our ability to grow our business, sell our products, enter new
markets and increase our share of existing markets. There can be no assurance
that we will be successful in hiring for these positions in the near future. Our
sales strategy requires that we hire additional direct sales persons or
independent sales representatives internationally and in the United States.
Moreover, our independent sales representatives and direct sales personnel must
market our products effectively and be qualified to provide timely and
cost-effective customer support and service. If they are unable to do so or we
are unable to expand these organizations, this could harm our ability to
increase our net sales and limit our ability to sell our products or expand our
market share. Competition for qualified personnel in digital, analog and mixed
signal semiconductor design is intense. In the past, we have experienced
difficulty in recruiting qualified personnel, especially technical and sales
personnel. Moreover, we intend to expand the scope of our international
operations, which will require us to attract experienced management, research
and development, marketing, sales and customer support personnel for our
international offices. We expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or retaining such personnel. In
addition, new employees generally require substantial training in our design
methodology, design flow and technology, which in turn requires significant
resources and management attention. There is a risk that, even if we invest
significant resources in attempting to attract, train and retain qualified
personnel, we will not be successful in our efforts. In this case, our costs of
doing business would increase without the expected increase in net sales.

     Our success will depend to a significant extent on the continued service of
our executive officers, including Sterling Du, our chief executive officer and
chairman of the board of directors, and other key employees, including key
sales, consulting, technical, marketing and legal personnel. If we lose the
services of one or more of our executives or key employees, our business and
ability to implement our business objectives successfully could be harmed,
particularly if one or more of our executives or key employees decided to join a
competitor or otherwise compete directly or indirectly with us.

Our transfer pricing procedures may be challenged, which may subject us to
higher taxes and adversely affect our earnings.

     Transfer pricing refers to the prices that one member of a group of related
corporations charges to another member of the group for goods, services or the
use of intellectual property. If two or more affiliated corporations are located
in different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated
corporations dealing with each other at arm's length. If one or more of the
countries in which our affiliated corporations are located believes that
transfer prices were manipulated by our affiliate corporations in a way that
distorts the true taxable income of the corporations, the laws of countries
where our affiliated corporations are located could require us to redetermine
transfer prices and thereby reallocate the income of our affiliate corporations
in order to clearly reflect such income. Any reallocation of income from one of
our corporations in a lower tax jurisdiction to an affiliated corporation in a
higher tax jurisdiction would result in a higher overall tax liability to us.
Moreover, if the country from which the income is being reallocated does not
agree to the reallocation, the same income could be subject to taxation by both
countries.

     We have adopted transfer pricing agreements with our subsidiaries located
in the United States, the People's Republic of China, Taiwan, Japan and
Singapore to regulate intercompany transfers. A transfer pricing agreement is a
contract for the transfer of goods, services or intellectual property from one
corporation to a related corporation that sets forth the prices that the related
parties believe are at arm's length. We have

                                       10

<PAGE>

entered into these types of agreements because a portion of our assets, such as
intellectual property developed in our U.S. and foreign subsidiaries, is
transferred among our affiliated corporations. In such agreements, we have
determined transfer prices that we believe are the same as the prices that would
be charged by unrelated parties dealing with each other at arm's length. In this
regard, we are subject to risks not faced by other companies with international
operations that do not create inter-company transfers. If the United States
Internal Revenue Service or the taxing authorities of any other jurisdiction
were to successfully challenge these agreements or require changes in our
transfer pricing practices, we could become subject to higher taxes and our
earnings would be adversely affected. We believe that we operate in compliance
with all applicable transfer pricing laws in these jurisdictions. However, there
can be no assurance that we will continue to be found to be operating in
compliance with transfer pricing laws, or that such laws will not be modified,
which, as a result, may require changes to our transfer pricing practices or
operating procedures. Any determination of income reallocation or modification
of transfer pricing laws can result in an income tax assessment of the portion
of income deemed to be derived from the taxing jurisdiction that so reallocates
the income or modifies its transfer pricing laws.

If we fail to protect our intellectual property rights, competitors may be able
to use our technology or trademarks, and this could weaken our competitive
position, increase our costs and reduce our net sales.

     Our success is heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights and prevent competitors from using our technology in their
products. These laws and procedures provide only limited protection. Our patents
may not provide sufficiently broad protection or they may not prove to be
enforceable in actions against alleged infringers.

     Our ability to sell our products and prevent competitors from
misappropriating our proprietary technology and trade names is dependent upon
protecting our intellectual property. Despite precautions that we take, it may
be possible for unauthorized third parties to copy aspects of our current or
future products or to obtain and use information that we regard as proprietary.
In particular, we may provide our customers with access to our proprietary
information underlying our products. Additionally, our competitors may
independently develop similar or superior technology. Policing unauthorized use
of software, circuit design or semiconductor design is difficult and some
foreign laws do not protect our proprietary rights to the same extent as United
States laws. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of resources and could harm our business,
future operating results and financial condition. See "Information on the
Company--Business Overview--Intellectual Property".

Third parties have asserted and in the future could assert that our products
infringe their intellectual property rights. These claims could harm our ability
to sell our products and expose us to litigation.

     As is typical in the semiconductor industry, we have from time to time
received communications from third parties asserting patents that cover certain
of our technologies or products and alleging infringement of certain
intellectual property rights. We may receive similar communications in the
future. In the event any third party were to make a valid claim against us or
our customers, we could be enjoined from selling selected products such as our
inverter, power or AudioDJ products or could be required to pay royalties to
third parties. Third-party infringement claims, with or without merit, have been
and could continue to be time consuming, result in substantial diversion of our
resources and potentially significant litigation costs, including costs related
to any damages we may owe, cause product shipment delays or require us to enter
into license agreements. Such license agreements may not be available on
acceptable terms, or at all. Any one of such events could seriously harm our
business and our operating results. We expect that semiconductor companies will
increasingly be subject to infringement claims as the number of products and
competitors in the semiconductor industry grows. See "Information on the
Company--Business Overview--Intellectual Property".

                                       11

<PAGE>

Provisions in our charter documents may discourage potential acquisition bids
for us and prevent changes in our management that our shareholders may favor.

     Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
shareholders favor. These provisions could have the effect of discouraging
others from making tender offers for our shares. As a result, these provisions
may prevent the market price of our ordinary shares from reflecting the effects
of actual or rumored takeover attempts and may prevent shareholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
shareholders may favor. Our charter documents do not permit shareholders to act
by written consent, do not permit shareholders to call a general meeting and
provide for a classified board of directors, which means shareholders can only
elect, or remove, a limited number of our directors in any given year.
Furthermore, our board of directors have the authority to issue up to 5,000,000
preference shares in one or more series. Our board of directors can fix the
price, rights, preferences, privileges and restrictions of such preference
shares without any further vote or action by our shareholders. The issuance of
preference shares may delay or prevent a change in control transaction without
further action by our shareholders or make removal of management more difficult.

Because we are a Cayman Islands company, it could be difficult for investors to
effect service of process on and recover against us or our directors and
officers and our shareholders may face difficulties in protecting their
interests.

     We are a Cayman Islands company, and many of our officers and directors are
residents of various jurisdictions outside the United States. A substantial
portion of our assets and the assets of our officers and directors, at any one
time, are and may be located in jurisdictions outside the United States.
Although we have irrevocably agreed that we may be served with process in Santa
Clara, California with respect to actions arising out of or in connection with
violations of United States federal securities laws relating to offers and sales
of ordinary shares, it could be difficult for investors to effect service of
process within the United States on our directors and officers who reside
outside the United States or to recover against us or our directors and officers
on judgments of United States courts predicated upon the civil liability
provisions of the United States federal securities laws.

     Our corporate affairs are governed by our charter documents, consisting of
our memorandum and articles of association, and by the Companies Law of the
Cayman Islands. The rights of our shareholders and fiduciary responsibilities of
our directors are governed by Cayman Islands law and are not as clearly
established as under statutes or judicial precedent in existence in
jurisdictions in the United States. While there is some case law in the Cayman
Islands on these matters, it is not as developed as, for example, English law
and United States law. However, we believe that English case law, although not
binding in the courts of the Cayman Islands, would be regarded as persuasive.
Due to this relative vagueness of Cayman Islands law, our public shareholders
may have more difficulty in protecting their interests in the face of actions by
our management, directors or controlling shareholders than would shareholders of
a corporation incorporated in a jurisdiction in the United States.

ITEM 4. INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

     Our legal name is O2 Micro International Limited. We are incorporated in
Cayman Islands. Our registered office is located at M&C Corporate Services
Limited, P.O. Box 309, Ugland House, South Church Street, George Town, Grand
Cayman, Cayman Islands. Our principal executive offices are located at Grand
Pavilion Commercial Centre, West Bay Road, P.O. Box 32331 SMB, George Town,
Grand Cayman, Cayman Islands. Our telephone number is (345) 945-1110. We have a
subsidiary, O2Micro, Inc., which was incorporated as a California corporation in
March 1995. In March 1997, O2 Micro International Limited was incorporated as a
Cayman Islands company. In March 1997, we exchanged our ordinary shares and
preference

                                       12

<PAGE>

shares for common stock and preferred stock of O2 Micro, Inc. After the
exchange, we held all of the outstanding capital stock of O2 Micro, Inc., our
wholly owned subsidiary in the United States.

     Our agent for service of process in the U.S. for the purpose of our
securities filings is our chief executive officer, Sterling Du, c/o O2Micro,
Inc., 3118 Patrick Henry Drive, Santa Clara, CA 95054.

     Since January 1, 2001, our principal capital expenditures were investments
in and loans to various private companies of approximately $7.4 million in the
aggregate, $9.1 million in the purchase of capital equipment and $12.4 million
deposited for Taiwan court bonds in connection with preliminary injunction
actions in Taiwan. In May 2004, we purchased the 37,180 square foot building in
Santa Clara, California housing our California operations. The purchase price
was approximately $4.6 million.

BUSINESS OVERVIEW

     We design, develop and market high performance integrated circuits for
power management, power saving applications and computer security applications.
Our integrated circuits use mixed signal designs, which combine analog and
digital circuits on a single chip, reducing the number of semiconductors needed
and decreasing the size, weight, power requirements and cost of the end product.
We focus our product design efforts on integrated circuits for the markets of
computer, consumer electronics, industrial and communications products, which
typically require both digital and analog circuits. Products in these markets
include notebook computers, liquid crystal displays, mobile phones, portable
intelligent devices, global positioning systems and portable DVD players. Our
system-level expertise, proprietary design methodologies and extensive
experience with power management systems allow us to develop products quickly so
that our customers can achieve rapid time to market with new devices. Our
products are used in electronic devices currently sold by large computer and
consumer electronics companies.

Industry Background

     The emergence of wireless communications networks and the Internet,
combined with the rapid development of technologies to enable less expensive,
smaller and more powerful electronic devices, has created large markets for
mobile products that provide electronic connectivity independent of physical
location. One of the most significant challenges in these markets remains the
efficient management of power. Moreover, as users demand smaller mobile devices
with greater functionality, the limitations of power source technology become
increasingly problematic because meeting these demands typically requires larger
and heavier power sources. Despite the importance of power source technology,
major advances in battery storage capacity have been limited. As a result,
manufacturers are turning to innovative new semiconductor technologies to manage
the available power source capacity more efficiently.

     Power management requires a combination of two distinct technological
disciplines: digital integrated circuit design and analog integrated circuit
design. Digital circuits, such as microprocessor and memory semiconductors,
provide most of the functionality of fundamental computer technologies. However,
digital circuits generally cannot handle significant amounts of current or
multiple voltage levels. In contrast, analog circuits use and manipulate
continuously varying voltage and current levels. Battery power systems, which
have relatively high and continuously varying power levels, are inherently
analog systems.

     Digital integrated circuit technology can be used to manage power systems
more intelligently and efficiently and to help address the need for longer
battery life in mobile applications. However, since power systems are analog by
nature, mixed signal circuits, or circuits that incorporate both digital and
analog technologies, are necessary in order to harness the intelligence provided
by digital technology. Designing mixed signal circuits poses a number of
difficulties: analog circuits are more sensitive than digital circuits to the
physical layout and electrical characteristics of the circuit; analog circuit
designers must have a very high

                                       13

<PAGE>

level of circuit design expertise; and basic differences in the technologies
used in digital and analog circuit design make combining the technologies
problematic.

     In addition, mixed signal circuits are comprised of both digital and analog
components, and the trend toward more complex devices has increased the number
of components substantially. Integrating the functions of those components on a
single chip, known as a system-on-a-chip, can enable manufacturers to make
products smaller, lighter, simpler to produce and more reliable. Thus, as mobile
computing and communications devices grow in complexity and functionality, there
is an increasing need for higher levels of systems integration. In addition,
variances in battery designs among manufacturers make it more difficult to
design intelligent systems that are optimized for particular power systems.

     Most analog integrated circuit companies offer broad product lines of
analog and, in some cases, mixed signal integrated circuit products. Their
products are typically designed to function in a wide range of applications, and
thus are not optimized for specific power system applications. Their products
also usually must be combined with other discrete circuit components, creating
larger and heavier products that are more difficult to manufacture and can be
less reliable. In addition, many of these companies lack the digital circuit
design and system-level expertise and focus necessary to design new products
quickly to meet the rapidly changing needs of mobile computing and
communications device manufacturers. Finally, many of these companies' existing
integrated circuit products are not currently designed to take full advantage of
recently developed standards-based battery design parameters, which can enable
the use of simpler and more efficient power management systems.

     Most mobile computing, communications and other consumer electronics
product manufacturers need mixed signal and analog integrated circuit products
specifically designed to optimize the power system usage in their devices so
that they can offer new devices with richer functionality and longer battery
lives. These integrated circuit products should also be highly integrated and
standards-based to help manufacturers, create products that are smaller,
lighter, easier to use, more reliable and more cost-efficient to design and
produce. In addition, in mobile device markets where product life cycles can be
less than one year, these solutions need to be developed using advanced design
methodologies to allow manufacturers to achieve rapid time to market with their
new products.

Products

     O2Micro designs, develops, and markets innovative power management and
security components for manufacturers of products for the computer, consumer
electronics, industrial and communications markets. The company's integrated
circuit products are produced with digital, analog, and mixed signal integrated
circuit manufacturing processes.

     Our products control and monitor battery charging and discharging, select
and switch between power sources, manage and provide power for lighting of
liquid crystal displays, control and provide power for notebook CD players, and
link external notebook plug-in cards and smart cards used in e-commerce
transactions.

     O2Micro's products include:

     .    Battery chargers and controllers for notebook computers and other
          applications. Our products control and monitor battery charging and
          discharging for various battery chemistry compositions and capacities.
          They incorporate a variety of built-in features such as temperature
          monitors, voltage monitors, current monitors, voltage limiting
          devices, current limiting devices, and the selection and switching
          between power sources.

     .    Intelligent Inverter for the control of backlight CCFL in LCD displays
          in notebook computers, LCD monitors, LCD televisions, Global
          Positioning Systems (GPS), and other mobile applications.

     .    Audio DJ for the playing of music on a computer using the computer CD
          ROM drive.

                                       14

<PAGE>

     .    Super DJ for playing of MP3 music on a computer hard drive or CD ROM
          drive.

     .    Standard CardBus for PCMCIA interface.

     .    SmartCardBus for secure on line e-commerce utilizing PCMCIA interface.

     .    4-in-1 memory card bus reader, for the direct detection and reading of
          standard modem cards, smart card, four standard flash memory media
          cards: Memory Stick, SD Memory Card, MultiMediaCard (MMC), and Smart
          Media.

Marketing, Sales, and Customer Support

     Our marketing strategy is focused on the sale of proprietary mixed signal
products to customers in the computer, consumer electronics, industrial and
communications markets. These markets tend to be dominated by a limited number
of major brand name companies. As a result, we focus our resources on the major
suppliers in each market.

     We sell primarily standard products to our customers and work with them on
new product development. We market these products through a combination of
direct sales people, independent sales representatives and distributors in Asia,
Europe and North America.

     Our marketing efforts include market analysis, participation in industry
trade shows and technical conferences, sales training, publication of technical
articles, maintenance of our web site and advertising. In addition, we maintain
customer support staff in United States, Taiwan, China and Japan for post order
servicing and applications support.

Customers

     We focus on the major suppliers of products to the mobile computing,
display, communications and other consumer electronics markets. Many of these
major suppliers use third party providers, such as electronic manufacturing
services (EMS) providers or other intermediaries, to produce their products or
portions of their products containing our components. Hence, the majority of our
sales occur with these third party service providers.

     The table below sets forth, for the periods indicated, the dollar amount of
our net sales derived from Asia, United States and other regions:

                                                   Years Ended December 31
                                                 ---------------------------
                                                        (In Thousands)
Location of customers                              2001      2002      2003
---------------------                            -------   -------   -------
Asia                                             $45,780   $70,149   $88,548
United States                                         39        31        51
Other regions                                         --         7        --
                                                 -------   -------   -------
                                                 $45,819   $70,187   $88,599
                                                 =======   =======   =======

Manufacturing

     We subcontract the manufacture of our products to wafer foundries, assembly
and test companies. This "fabless" approach allows us to focus on our product
development strengths, minimize fixed costs and capital expenditures, and access
diverse manufacturing technologies.

                                       15

<PAGE>

     We use established mainstream processes for the manufacture of our
products. The value added by our products is provided by differentiated
functionality rather than leading edge processes. This approach reduces our
technical risks and minimizes the risks related to production capacity
constraints.

     Currently, the majority of our products are manufactured using 0.25 to 0.80
micron CMOS semiconductor processes. Our major wafer foundry providers include
UMC, TSMC and X-FAB. We maintain second source capacity on selected products. We
utilize several assembly and test service providers in Taiwan and other parts of
Asia on a monthly or quarterly purchase order basis.

Competition

     We compete in the market for mixed signal integrated circuit products based
on such factors as product performance, power efficiency, new technologies,
functional innovation, reliability, price and availability.

     We believe our principal competitors include Linear Technology, Maxim
Integrated Products and Texas Instruments. There is also competition from
internal integrated circuit design and manufacturing capabilities of some of our
existing and potential customers, such as Toshiba. In addition to these
competitors, other integrated circuit companies may decide to enter the market
with mixed signal integrated products that compete with our products or
incorporate functions similar to those provided by our products.

Intellectual Property

     Our success depends significantly upon our ability to protect our
intellectual property. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or obtain and
use information that we regard as proprietary. Competitors may recruit our
employees who have access to our proprietary technologies, processes and
operations.

     We rely in part on patents to protect our intellectual property. As of
December 31, 2003, we had approximately 30 patents issued in the United States
and approximately 22 patents issued in other countries. In addition, we had
approximately 79 patent applications pending in the United States Patent and
Trademark Office. We also had approximately 122 patent applications pending in
various countries other than the United States. These patents may never be
issued. Even if these patents are issued, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove to be unenforceable. To protect our proprietary rights, we
also rely on a combination of copyrights, trademarks, trade secret laws,
contractual provisions, licenses and maskwork protection under the Federal
Semiconductor Chip Protection Act of 1984. We also enter into confidentiality
agreements with our employees, consultants, outsourced manufacturers and
customers and seek to control access to, and distribution of, our other
proprietary information.

     We may from time to time grant rights to third parties for our patents and
other intellectual property. In March 2003, we granted a limited non-exclusive
license to Ricoh Company, Ltd. for our patents entitled "Integrated PC Card Host
Controller for the Detection and Operation of a Plurality of Expansion Cards"
(U.S. Patent No. 6,470,284 and Taiwan Patent No. 155891) and their foreign
counterparts.

     The laws of some foreign countries do not protect our proprietary rights to
as great an extent as do the laws of the United States, and many companies have
encountered substantial infringement problems in these countries, some of which
are countries in which we have sold and continue to sell a significant portion
of our products. There is a risk that our means of protecting our proprietary
rights may not be adequate. For example, our competitors may independently
develop similar technology, duplicate our products or design around our patents
or our other intellectual property rights. If we fail to adequately protect our
intellectual property, it would be easier for our competitors to sell competing
products.

     We have initiated and are pursuing certain patent infringement actions in
Taiwan. In January 2003, the Shihlin District Court in Taiwan issued a
preliminary injunction prohibiting Monolithic Power Systems,

                                       16

<PAGE>

Inc. or MPS from designing, manufacturing, selling, importing or displaying its
MP1011A and MP1015 products. In March 2003, the Taipei District Court in Taiwan
issued a preliminary injunction prohibiting Beyond Innovation Technology Co.,
Ltd. ("Bitek") from making, selling, using, or importing for the purposes of
making, selling and using, their BIT3105, BIT3105-P & BIT3106 "high efficiency
ZVS CCFL controller" related products, irrespective of their various types of
package. In August 2003, the Taipei District Court issued a preliminary
injunction prohibiting Bitek from designing, making, selling, displaying and
importing and all other disposing acts related to its parts, which infringe on
our Taiwan Patent Number 152318, including without limitation BIT3107. As of May
31, 2004, we have deposited $12.4 million with the Taiwan courts for court bonds
in connection with those preliminary injunction actions and related provisional
attachment actions as well as other preliminary injunction actions and
provisional attachment actions. The court bonds provide security for the
enjoined party to claim damages against in the event we do not ultimately
prevail in the underlying infringement action associated with the particular
preliminary injunction action or provisional attachment action.

     We have also been in litigation against MPS in the U.S. MPS has alleged
that our OZ960, OZ961, OZ969 and OZ970 products infringe on one of their patents
and a continuation of that patent. Litigation on such claim is pending in the
United States District Court in the Northern District of California. We have
answered MPS' claims, denying all of their substantive allegations. In addition,
given the results of the claims constructions adopted by the Court on November
26, 2001 and December 27, 2002, we believe that we have meritorious defenses
against MPS' allegations. On May 28, 2004, the Court granted our motion for
summary judgment that MPS lacked evidence of damages. As the judgment currently
stands, MPS will not be able to recover damages at trial but may only attempt to
seek injunctive relief and attorneys' fees. Trial on these claims is currently
scheduled for August 2004.

     Given the inherent uncertainties in litigation, there cannot be any
assurance that we will prevail in any of the pending litigations, and we cannot
predict the outcome of any such litigation. If any party was to prevail in its
claims against us, our operating results could be materially adversely affected.
In any litigation arising from claims that we infringe on the intellectual
property rights of others, an adverse result could involve an injunction to
prevent the sales of a material portion of our products, a reduction or the
elimination of the value of related inventories, and the assessment of a
substantial monetary award for damages related to past sales, any of which could
have a material adverse effect on our result of operations and financial
condition.

Critical Accounting Policies--

Revenue Recognition and Accounts Receivable Allowances

     We recognize revenue to direct customers in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB
104). SAB 104 requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an agreement exists, (2) delivery has
occurred or services have been rendered, (3) the fee is fixed and determinable,
and (4) collectibility is reasonably assured. Determination of criteria (4) is
based on the management's judgments regarding the collectibility of those fees.

     In certain limited instances, we sell products through distributors. We
have limited control over these distributors' selling of products to third
parties. Accordingly we recognize revenues on sales to distributors when the
distributors sell the products to third parties. We defer recognition of such
sales until the product is sold by the distributors to their end customers.
Products held by distributors are included in our inventory balance. Accounts
receivable from distributors are recognized and inventory is relieved upon
shipment as title to inventories generally transfers upon shipment at which
point we have a legally enforceable right to collection under normal terms.

                                       17

<PAGE>

     We make estimates of potential future product returns and sales allowances
related to current period revenue. We analyze historical returns, changes in
current demand, and acceptance of products when evaluating the adequacy of sales
returns and allowances. Estimates may differ from actual product returns and
allowances. These differences may materially impact our reported revenue and
amounts ultimately collected on accounts receivable. In addition, we monitor
collectability of accounts receivable primarily through review of the accounts
receivable aging. When facts and circumstances indicate the collection of
specific amounts or from specific customers is at risk, we access the impact on
amounts recorded for bad debts and, if necessary, will record a charge in the
period such determination is made. To date, we have not experienced material
write-offs of accounts receivable due to uncollectability.

Inventories

     Our inventories are stated at the lower of standard cost or market value.
Cost is determined on a currently adjusted standard basis, which approximates
actual cost on a first-in first-out basis. Because of the cyclicality of the
market, inventory levels, obsolescence of technology and the product life
cycles, we write down inventories to net realizable value based on backlog,
forecasted product demand and historical sales levels. Backlog is subject to
revisions, cancellations and rescheduling. Actual demand and market conditions
may be lower than those projected by us. This difference could have a material
adverse effect on our gross margin should inventory write downs beyond those
initially recorded become necessary.

Long-Lived Assets

     We evaluate the recoverability of property, plant and equipment in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets."
We perform periodic reviews to determine whether facts and circumstances exist
that would indicate that the carrying amounts of property, plant and equipment
might not be fully recoverable. If facts and circumstances indicate that the
carrying amount of property, plant and equipment might not be fully recoverable,
we compare projected undiscounted net cash flows associated with the related
assets over their estimated remaining useful life against their respective
carrying amounts. In the event that the projected undiscounted cash flows are
not sufficient to recover the carrying value of the assets, the assets are
written down to their estimated fair values based on the expected discounted
future cash flows attributable to the assets. Evaluation of impairment of
property, plant and equipment requires estimates in the forecast of future
operating results that are used in the preparation of the expected future
undiscounted cash flows. Actual future operating results and remaining economic
lives of the property, plant and equipment could differ from the estimates used
in assessing the recoverability of these assets. These differences could result
in additional impairment charges, which could have a material adverse impact on
the results of operations.

Income Taxes

     Our income taxes are accounted in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". The
provision for income tax represents income tax paid and payable for the current
year plus the changes in the deferred income tax assets and liabilities during
the years. Deferred income tax assets are primarily the tax effects of the
operating loss carryforwards and temporary differences. On a periodic basis we
evaluate the deferred tax assets balance for realizability. To the extent we
believe it is more likely than not that some portion of deferred tax assets will
not be recognized, we will increase the valuation allowance against the deferred
tax assets. Realization of the deferred tax assets is dependent primarily upon
future taxable income, changes in tax laws and other factors. These changes, if
any, may require possible material adjustment to the deferred tax assets,
resulting in a reduction in net income in the period when such determinations
are made.

Legal Contingencies

                                       18

<PAGE>

     We are currently involved in various claims and legal proceedings. We
periodically assess each matter in order to determine if a contingent liability
in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5),
"Accounting for Contingencies," should be recorded. In making the determination,
we, depending on the nature of the matter, consult with external counsel and
technical experts. Based on the information obtained combined with our judgment
regarding all the facts and circumstances of each matter, we determine whether
it is probable that a contingent loss may be incurred and whether the amount of
such loss can be estimated. Should a loss be probable and estimable, we record a
contingent loss in accordance with SFAS 5. In determining the amount of a
contingent loss, we take into consideration advice received from experts in the
specific matter, current status of legal proceedings, prior case history and
other factors. Should the judgments and estimates be incorrect, we may need to
record additional contingent losses that could materially adversely impact our
results of operations.

ORGANIZATIONAL STRUCTURE

     We are incorporated under the laws of the Cayman Islands and we are a
holding company for the various subsidiaries that conduct our business on a
worldwide basis. Our significant subsidiaries, all of which are wholly-owned,
are:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
       Significant Subsidiary              Country of Incorporation    Date of Incorporation
--------------------------------------------------------------------------------------------
<S>                                       <C>                              <C>
         O//2//Micro, Inc.                          U.S.A.                   March 1995
--------------------------------------------------------------------------------------------
   O//2//Micro Electronics, Inc.                    Taiwan                   March 1999
--------------------------------------------------------------------------------------------
O//2//Micro International Japan Limited              Japan                  August 1999
--------------------------------------------------------------------------------------------
   O//2//Micro PTE Limited-Singapore               Singapore               September 1999
--------------------------------------------------------------------------------------------
      O//2//Micro (Wuhan) Co. Ltd.        People's Republic of China        January 2001
--------------------------------------------------------------------------------------------
     O//2//Micro (Beijing) Co. Ltd.       People's Republic of China       February 2001
--------------------------------------------------------------------------------------------
    O//2//Micro (Shanghai) Co., Ltd.      People's Republic of China         April 2001
--------------------------------------------------------------------------------------------
</TABLE>

PROPERTY, PLANT AND EQUIPMENT

     The table below describes our headquarters and the facilities where the
above subsidiaries are located as of December 31, 2003:

                                            Approx. Available
Location                                       Square Feet      Lease Expiration
--------------------------------            -----------------   ----------------
California, USA.................                  18,240         not applicable
Taipei, Taiwan..................                  11,315              2004
Hsin-Chu, Taiwan................                  16,123              2005
Singapore.......................                   7,078              2005
Shanghai, China.................                   8,113              2004
Beijing, China..................                   7,866              2004
Wuhan, China....................                   6,348              2004

                                       19

<PAGE>

Grand Cayman, Cayman Islands.....................................   1,000   2004
Tokyo, Japan.....................................................     874   2004

          We use our Cayman Islands facility for performing invoicing and
receiving amounts payable. Research and development, marketing, applications and
administrative staff are located in California. We also have sales offices in
Pfluggerville, Texas and Houston, Texas. Marketing, sales, applications,
worldwide production support, final inspection and shipping, and general and
administrative staff are located in Hsin-Chu and Taipei, Taiwan. We have an
office in Tokyo, Japan housing marketing, sales and applications staff, and
offices in Singapore, Beijing, Shanghai and Wuhan for research and development
activities. We believe our current leased facilities are adequate for our needs
for the foreseeable future, and that any additional space required will be
available to us on commercially reasonable terms.

          In May 2004, we purchased the 37,180 square foot building in Santa
Clara, California housing our California operations. The purchase price was
approximately $4.6 million.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

     We design, develop and market high performance mixed signal integrated
circuits for power management, power saving applications and computer security
applications. Our net sales have been derived primarily from the sale of mixed
signal integrated circuit products to customers in the mobile computing,
display, communications and other consumer electronics products markets.

     Our net sales have grown from $45.8 million in 2001 to $70.2 in 2002 and
$88.6 million in 2003. This increase in net sales was due primarily to
introduction of our new products, higher unit shipments of our existing products
and expansion of our customer base and the number of intermediaries we supply
to. We continued to diversify our customer base and market focus entering
additional market segments in the consumer electronics, industrial and
communications markets. Our overall gross margin has fluctuated in the past and
is likely to fluctuate in the future due to the stages of our products in their
life cycles, variations in our product mix, the timing of our product
introductions and specific product manufacturing costs. New products typically
have higher gross margins than products that are more mature. Gross margins on
specific products we sell will typically decline over the life of these products
due to competitive pressures and volume pricing agreements.

     Operating expenses grew from $24.4 million in 2001 to $31.3 million in 2002
and $36.7 million in 2003. Our operating expenses increased as we continued our
new product development efforts, expanded our operations and hired additional
personnel. Our net income was $5.6 million in 2001, $10.7 million in 2002 and
$13.2 million in 2003. We have been profitable in each quarter since the quarter
ended September 30, 1999. We believe this profitability was the result of our
strategy to make investments to develop new products and grow net sales, while
maintaining a high level of fiscal control, product quality and customer
satisfaction. Our profitability resulted in retained earnings of $18.1 million
at December 31, 2003.

     We utilize a fabless semiconductor business model, which means we focus on
designing, developing and marketing products, while having these products
manufactured by large independent semiconductor foundries. Because we are a
fabless semiconductor company, we do not need to invest significant capital to
manufacture semiconductor devices, and can take advantage of some of the
cost-efficiencies of third-party foundries. We place purchase orders for
specific quantities of packaged semiconductor devices or wafers at set prices.
We also use third parties to test and assemble our products, which reduces the
capital we need to invest in these activities.

     We sell our products through a combination of direct sales offices, sales
representatives and distributors. Additionally, we have sales representatives in
China, Singapore, Taiwan, and the United

                                       20

<PAGE>

Kingdom, as well as one distributor in Japan. In the year ended December 31,
2003, we continued to experience increased sales activity in China.

     Revenue from product sales to customers, other than distributors, is
recognized at the time of shipment, including revenue that has been realized and
earned. Sales through distributors are recognized when the distributors make a
sale. Under certain conditions, customers may return defective products.
Allowances for sales returns are provided on the basis of past experience; these
provisions are deducted from sales.

Operating Results

     The following table summarizes historical results of operations as a
percentage of net sales for the periods shown.

                                                         Year Ended December 31,
                                                         -----------------------
                                                          2001    2002    2003
                                                          -----   -----   -----
Consolidated Statement of Operations Data:
Net sales ............................................    100.0%  100.0%  100.0%
Cost of sales ........................................     35.9    40.1    43.2
                                                          -----   -----   -----
Gross margin .........................................     64.1    59.9    56.8
Operating expenses:
   Research and development ..........................     31.3    27.0    21.7
   Selling, general and administrative ...............     21.6    17.5    19.7
   Stock-based compensation ..........................      0.4     0.1      --
                                                          -----   -----   -----
      Total operating expenses .......................     53.3    44.6    41.4
                                                          -----   -----   -----
Income from operations ...............................     10.8    15.3    15.4
Non-operating income-net .............................      4.0     2.4     1.6
Income tax expenses ..................................      2.5     2.4     2.1
                                                          -----   -----   -----
Net income ...........................................     12.3%   15.3%   14.9%
                                                          =====   =====   =====

Years Ended December 31, 2003 and 2002

     Net Sales. Net sales consist of product revenues generated principally by
sales of our integrated circuit products. Net sales for the year ended December
31, 2003 were $88.6 million, an increase of $18.4 million or 26.2% from $70.2
million for the year ended December 31, 2002. This increase in net sales
resulted from increased unit shipments of our existing products as well as
shipments of new products and expansion of our customer base and the number of
intermediaries we supply to. In 2003, we introduced Cardbus Power Switch
(OZ2216) and Cardbus Security (OZH31B) products. We also enhanced the features
of certain products in every existing product group in 2003.

     Gross Profit. Gross profit represents net sales less cost of sales. Cost of
sales primarily consists of the cost of purchasing packaged integrated circuit
products manufactured and assembled for us by independent foundries and
packaging vendors and other costs associated with the procurement, storage and
shipment of these products. Gross profit for the year ended December 31, 2003
was $50.3 million, an increase of $8.2 million or 19.6% from $42.0 million for
the year ended December 31, 2002. This increase in absolute dollars was due to
increased sales. Gross profit as a percentage of net sales for the year ended
December 31, 2003 decreased to 56.8% from 59.9% for the year ended December 31,
2002 due to increased sales of lower margin products. We expect that our gross
profit as a percentage of net sales will continue to fluctuate in the future as
a result of the stages of our products in their life cycles, variations in our
product mix, the timing of our product introductions and specific product
manufacturing costs.

                                       21

<PAGE>

     Research and Development Expenses. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities and, to a lesser extent of, expenses
for outside engineering consultants. Research and development expenses for the
year ended December 31, 2003 were $19.2 million, an increase of $284,000 or 1.5%
from $18.9 million for the year ended December 31, 2002. This increase primarily
reflected the addition of research and development personnel. As a percentage of
net sales, research and development expenses were 21.7% for the year ended
December 31, 2003, a decrease from 27.0% for the year ended December 31, 2002.
Research and development expenses as a percentage of net sales will fluctuate
from quarter to quarter depending on the amount of net sales and the success of
new product development efforts, which we view as critical to our future growth.
At any point in time, we have many research and development projects underway,
and we believe that none of these projects is material on an individual basis.
We expect to continue the development of innovative technologies and processes
for new products and we believe that a continued commitment to research and
development is essential in order to maintain product leadership with our
existing products and to provide innovative new product offerings. Therefore, we
expect to continue to make significant research and development investments in
the future.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of employee-related expenses, sales
commissions to agents, professional fees, legal fees, travel and other
promotional expenses. Selling, general and administrative expenses for the year
ended December 31, 2003 were $17.5 million, an increase of $5.2 million or 41.8%
from $12.3 million for the year ended December 31, 2002. This increase in
absolute dollars was primarily due to increase of legal expenses relating to
intellectual property protection efforts, additional personnel, additional
traveling and increased sales commissions relating to higher sales. As a
percentage of net sales, selling, general and administrative expenses were 19.7%
for the year ended December 31, 2003, an increase from 17.6% for the year ended
December 31, 2002. We expect that selling, general and administrative expenses
and legal expenses associated with on-going patent infringement litigation
matters in particular, will continue to increase in absolute dollars for the
foreseeable future.

     Stock-based Compensation. For accounting purposes, we recognize deferred
stock-based compensation whenever we grant options or warrants to purchase our
ordinary shares to employees with exercise prices that are less than the deemed
fair market value of the underlying shares at the grant date and whenever we
grant options or warrants to consultants. Amortization of deferred stock-based
compensation recorded in the year ended December 31, 2003 was $0, a decrease of
$44,000 or 100.0% from $44,000 for the year ended December 31, 2002.

     Non-operating Income-net. Non-operating income-net reflects interest earned
on average cash balances, less interest on borrowings, impairment loss on
investment in shares of stock and foreign exchange transaction gains and losses.
Non-operating income-net was $1.4 million for the year ended December 31, 2003
decreasing from $1.7 million for the year ended December 31, 2002, reflecting
less interest earned in our cash and short-term investment.

     Income Taxes. Income tax expenses were $1.8 million for the year ended
December 31, 2003, compared to income tax expenses of $1.7 million for the year
ended December 31, 2002. This increase in the amount of our income tax expenses
was primarily due to increase in our net income. The effective tax rate was
12.2% for the year ended December 31, 2003, compared to 13.5% for the year ended
December 31, 2002.

Years Ended December 31, 2002 and 2001

     Net Sales. Net sales consist of product revenues generated principally by
sales of our integrated circuit products. Net sales for the year ended December
31, 2002 were $70.2 million, an increase of $24.4 million or 53.2% from $45.8
million for the year ended December 31, 2001. This increase in net sales
resulted from increased unit shipments of our existing products as well as
shipments of new products. In 2002, we introduced our 4-in-1 MemoryCardBus
products.

                                       22

<PAGE>

     Gross Profit. Gross profit represents net sales less cost of sales. Cost of
sales primarily consists of the cost of purchasing packaged integrated circuit
products manufactured and assembled for us by independent foundries and
packaging vendors and other costs associated with the procurement, storage and
shipment of these products. Gross profit for the year ended December 31, 2002
was $42.0 million, an increase of $12.7 million or 43.2% from $29.4 million for
the year ended December 31, 2001. This increase in absolute dollars was due to
increased sales. Gross profit as a percentage of net sales for the year ended
December 31, 2002 decreased to 59.9% from 64.1% for the year ended December 31,
2001 due to increased sales of lower margin products. We expect that our gross
profit as a percentage of net sales will continue to fluctuate in the future as
a result of the stages of our products in their life cycles, variations in our
product mix, the timing of our product introductions and specific product
manufacturing costs.

     Research and Development Expenses. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities and, to a lesser extent of, expenses
for outside engineering consultants. Research and development expenses for the
year ended December 31, 2002 were $18.9 million, an increase of $4.6 million or
32.2% from $14.3 million for the year ended December 31, 2001. This increase
primarily reflected the addition of research and development personnel
associated with the expansion of our design activities in Singapore and the
People's Republic of China. As a percentage of net sales, research and
development expenses were 27.0% for the year ended December 31, 2002, a decrease
from 31.3% for the year ended December 31, 2001. We expect that research and
development expenses will continue to increase in absolute dollars in the
foreseeable future.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of employee-related expenses, sales
commissions to agents, professional fees, legal fees and trade show and other
promotional expenses. Selling, general and administrative expenses for the year
ended December 31, 2002 were $12.3 million, an increase of $2.4 million or 24.4%
from $9.9 million for the year ended December 31, 2001. This increase in
absolute dollars was primarily due to additional personnel, increased sales
commissions relating to higher sales, increased corporate insurance premiums,
increased travel costs, increased product marketing costs and increased legal
expenses relating to intellectual property protection efforts. As a percentage
of net sales, selling, general and administrative expenses were 17.5% for the
year ended December 31, 2002, a decrease from 21.6% for the year ended December
31, 2001. We expect that selling, general and administrative expenses, and legal
expenses associated with on-going patent infringement litigation matters in
particular, will continue to increase in absolute dollars for the foreseeable
future.

     Stock-based Compensation. For accounting purposes, we recognize deferred
stock-based compensation whenever we grant options or warrants to purchase our
ordinary shares to employees with exercise prices that are less than the deemed
fair market value of the underlying shares at the grant date and whenever we
grant options or warrants to consultants. Amortization of deferred stock-based
compensation recorded in the year ended December 31, 2002 was $44,000, a
decrease of $122,000 or 73.5% from $166,000 for the year ended December 31,
2001.

     Non-operating Income-net. Non-operating income-net reflects interest earned
on average cash balances, less interest on borrowings, impairment loss on
investment in shares of stock and foreign exchange transaction gains and losses.
Non-operating income-net was $1.7 million for the year ended December 31, 2002
decreasing from $1.8 million for the year ended December 31, 2001, reflecting
recognition of an additional impairment loss on investment in shares of stock.

     Income Taxes. Income tax expenses were $1.7 million for the year ended
December 31, 2002, compared to income tax expenses of $1.2 million for the year
ended December 31, 2001. This increase in the amount of our income tax expenses
was primarily due to increase in our net income. The effective tax rate was
13.5% for the year ended December 31, 2002, compared to 17.0% for the year ended
December 31, 2001.

                                       23

<PAGE>

Liquidity and Capital Resources

     Since our inception, we have financed our operations primarily through
private sale of securities and through our initial public offering in August
2000 and our public offering in November 2001 as well as cash provided by
operating activities in recent years. Cash and short-term investments were
$120.4 million at December 31, 2003 as compared to $112.0 million at December
31, 2002. Our operating activities provided cash in the amount of $14.8 million
in the year ended December 31, 2003, $9.5 million in the year ended December 31,
2002 and $9.5 million in the year ended December 31, 2001. In May 2004, we
purchased the building in Santa Clara, California housing our California
operations. The purchase price was approximately $4.6 million which we paid in
cash.

     Non-cash charges consist of depreciation of fixed assets, impairment of
investment in shares of stock, changes of deferred income tax assets and
amortization of stock-based compensation from stock options and warrants. The
working capital components that have a significant impact on our cash flows are
accounts receivable, inventory, notes, accounts payable, prepaid expenses and
other current assets, income tax payable and accrued liabilities.

     These net cash inflows for operations resulted from net income offset by
increases in inventory and accounts receivable due to increased sales and also
resulted from increases in notes and accounts payable, income tax payable and
accrued liabilities.

     Our investing activities used cash of $23.5 million in the year ended
December 31, 2003, $34.7 million in the year ended December 31, 2002 and $22.8
million in the year ended December 31, 2001. Investing activities in the year
ended December 31, 2003 primarily represented the increase of short-term
investments and the increase of restricted assets. Investing activities in the
year ended December 31, 2002 primarily represented short-term investments,
investment in shares of stock and purchases of capital equipment. Investing
activities in the year ended December 31, 2001 primarily represented increase of
short-term investments and purchases of capital equipment. In the year ended
December 31, 2003, there were net purchases of $11.0 million in short-term
investments and $10.0 million increase of restricted assets. In the year ended
December 31, 2002, there were net purchases of $22.3 million on short-term
investments, $6.0 million investment in shares of stocks and $4.3 million
purchase of capital equipment. In the year ended December 31, 2001, there were
net purchases of $20.1 million in short-term investments and $2.3 million in
purchases of fixed assets. In the year ended December 31, 2003, we converted
$1.75 million in loans to preference shares in 360 Degree Web and purchased
$147,000 of stock in Etrend Hightech.

     Net cash provided by financing activities was $5.9 million in the year
ended December 31, 2003, primarily due to exercise of stock options and issuance
of shares under our Employee Stock Purchase Plan and offset by repurchase of our
stock under share repurchase program. Net cash provided by financing activities
was $4.4 million in the year ended December 31, 2002, primarily due to
repurchase of our stock under our share repurchase program offset by proceeds
from exercise of stock options, exercise of warrants and issuance of shares
under Employee Stock Purchase Plan. Net cash provided by financing activities
was $75.0 million in the year ended December 31, 2001, primarily due to the
issuance of ordinary shares in our public offering in November 2001.

     We believe our cash balances will be sufficient to meet our capital
requirements for at least the next 12 months. Our future capital requirements
will depend on many factors, including the inventory levels we maintain, the
level of investments we make in new technology and improvements to existing
technology, the levels of promotion and advertising required to launch new
products and attain competitive position in the marketplace, and the market
acceptance of our products. Thereafter, we may need to raise additional funds
through public or private financing. No assurance can be given that additional
funds will be available or that we can obtain additional funds on terms
favorable to us.

                                       24

<PAGE>

Research and Development, Patents and Licenses, etc.

     We believe that the continued introduction of new products in our target
markets is essential to our growth. As of December 31, 2003, we had
approximately 171 full-time employees world-wide engaged in research and
development efforts. Our total expenditures for research and development were
$19.2 million for the year ended December 31, 2003, $18.9 million for the year
ended December 31, 2002, and $14.3 million for the year ended December 31, 2001.
We believe that our research and development staffing will increase in the next
12 months due to the expansion of our existing design centers and the opening of
additional design centers.

     We employ designers who have the necessary engineering and systems
qualifications and are experienced in system architecture, analog, digital,
mixed signal and software design and development. We also utilize independent
contractors from time to time for specific research and development projects.
Our internal research and development personnel thoroughly review the external
development processes and the design of these products as part of our quality
assurance process. All development is carried out using ISO 9001 certified
design processes, and our design tools are continuously enhanced to improve
design, fabrication and verification of our products.

     We work with our customers to monitor the performance of our product
designs and to provide support at each stage of customer product development.
Due to the complexity of our products, we maintain a significant direct
applications support staff for customer technical support in our key markets -
Japan, Taiwan, China and the United States. These direct applications
engineering personnel assist with capturing business and supporting existing
products at key customers. Additionally, we work closely with our customers to
develop highly efficient power management products for specific mobile
applications.

Trend Information

     See "Risk Factors" and "Operating and Financial Review and Prospects"
above.

Off-Balance Sheet Arrangements

     There are no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.

Tabular Disclosure of Contractual Obligations

     The table below describes our contractual obligations as of December 31,
2003:

<TABLE>
<CAPTION>
                                                              Payments due by period
                                              ------------------------------------------------------
                                                       Less than                           More than
          Contractual Obligations              Total     1 year    1-3 years   3-5 years    5 years
                                              ------   ---------   ---------   ---------   ---------
                                                                      (in thousands)
<S>                                           <C>        <C>          <C>         <C>         <C>
Long-Term Debt Obligations ................   $          $            $           $           $
Capital (Finance) Lease Obligations .......        2          2         --         --          --
Operating Lease Obligations ...............    1,575      1,359        216         --          --
Purchase Obligations ......................       --         --         --         --          --
Licenses, Maintenance and Support .........      928        928         --         --          --
</TABLE>

                                       25

<PAGE>

<TABLE>
<S>                                            <C>        <C>          <C>         <C>         <C>
Other Long-Term Liabilities Reflected on
   the Company's Balance Sheet under the
   GAAP of the primary financial
   statements .............................       --         --         --         --          --
Total .....................................    2,505      2,289        216         --          --
</TABLE>

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

     Our executive officers and directors and their ages as of December 31,
2003, were as follows:

<TABLE>
<CAPTION>
Name                                      Age   Position
----                                      ---   --------
<S>                                        <C>  <C>
Sterling Du............................    44   Chief Executive Officer, Class I Director and Chairman of the
                                                Board
Chuan Chiung "Perry" Kuo...............    44   Chief Financial Officer, Class I Director and Secretary
Ivan Chang                                 41   Vice-President, Finance
Johnny Chiang                              46   Vice-President, Logistics and Backend
James Keim.............................    59   Class II Director and Head of Marketing and Sales
Michael Austin.........................    68   Class III Director
Geok Ling Goh..........................    62   Class I Director and member of Audit Committee
Lawrence Lin...........................    53   Class II Director and member of Audit Committee
Keisuke Yawata.........................    69   Class III Director and member of Audit Committee
</TABLE>

     Sterling Du has served as our chief executive officer and chairman of our
board of directors since March 1997 and as a Class I Director since June 2001.
He also served as our chief financial officer from March 1997 to March 1999.
From May 1995 to March 1997, Mr. Du was president and chief executive officer of
O2Micro, Inc., our predecessor entity. From October 1993 to April 1995, Mr. Du
was vice president of engineering at GreenLogic, Inc., a semiconductor design
company, which he co-founded. Mr. Du received a B.S. in chemical engineering
from National Taiwan University and an M.S. in electrical engineering from the
University of California, Santa Barbara.

     Chuan Chiung "Perry" Kuo has served as our general manager of Taiwan
operations since January 1997, as chief financial officer and a director since
March 1999, as secretary since October 1999 and as a Class I director since June
2001. From February 1992 to December 1996, he was executive vice president of
Pac Net Group, a holding company with investments in chemicals, electronics and
real estate. From July 1983 to February 1992, he held various positions at
Formosan Rubber Group, a rubber manufacturer, including product design engineer,
plant manager, research and development director, and vice president. Mr. Kuo
received a B.S. in chemical engineering from National Taiwan University and an
M.B.A. from the Rotterdam School of Management, Erasmus University in The
Netherlands.

     Ivan Chang has served as our Vice-President, Finance since February 2003.
He also served as our Controller from July 1999 until February 2003. From August
1996 to July 1999, he was Finance Manager at Siemens Limited in Taiwan. Mr.
Chang received a B.S. in Accounting from Soochow University and an M.S. in
Accounting Information from University of Maryland, College Park.

     Johnny Chiang has served as our Vice-President, Logistics and Backend since
February 2003. He also served as our Director of Operations from March 1999 to
February 2003 and our Operations Manager from November 1997 to March 1999. Mr.
Chiang received a B.S. in Industrial Engineering from Chung Yung University.

                                       26

<PAGE>

     James Keim has served as a director since March 1999 and as Head of
Marketing and Sales since December 2001 and a Class II director since June 2001.
He also served as our chief operating officer from June 1998 to June 2001. From
March 1995 to June 1998, Mr. Keim was a principal in Global Marketing
Associates, an international consulting firm. Prior to March 1995, he had been
vice president of sales at Alliance Semiconductor Corporation, vice president of
marketing at Performance Semiconductor Corporation and worldwide linear
marketing manager at Fairchild Semiconductor Corporation. Mr. Keim received a
B.S. in engineering from Iowa State University, an M.S. in electrical
engineering and an M.B.A. from the University of Illinois.

     Michael Austin has served as a director since October 1997 and as a Class
III director since June 2001. Mr. Austin is a resident of the Cayman Islands and
is a Chartered Accountant. Mr. Austin was admitted as an Associate of the
Institute of Chartered Accountants in England and Wales in 1964 and as a Fellow
in 1969. Mr. Austin is also an Associate Member of The Chartered Institute of
Taxation, a Member of the Society of Trust and Estate Practitioners, and a
Notary Public of the Cayman Islands. Mr. Austin served as the managing partner
of the Cayman Islands office of KPMG Peat Marwick, an international accounting
firm, for 23 years. Since retiring in July, 1992 Mr. Austin has been a
consultant and currently serves as a non-executive director on several company
boards, including those of a number of mutual funds, trust and insurance
companies. He serves as a director of Scottish Re, a public company. Effective
January 1, 1997, Mr. Austin was appointed a director of the Cayman Islands
Monetary Authority and became Chairman in January 2003. He has also served on a
variety of other government committees and government related boards, including
the Cayman Islands Agricultural and Industrial Development Board, as Chairman;
the Stock Exchange Committee; and the Government/Private Sector Consultative
Committee. In 1990 Mr. Austin was awarded an M.B.E. by Her Majesty the Queen in
recognition of services to the public and business community.

     Geok Ling Goh has served as a director since January 2000, as a member of
the Audit Committee since August 2000 and as a Class I director since June 2001.
From October 1998 to October 1999, he was the managing director of Micron
Semiconductor Asia Pte Ltd. From June 1970 to October 1998, he held various
positions at Texas Instruments Singapore Pte Ltd, including Vice-President of
Marketing and in 1993, the first local managing director of Texas Instruments
Singapore Pte Ltd. He serves as the Chairman of Tuas Power and as a director on
the boards of Singapore Technologies Pte Ltd., Sembcorp Industries Ltd., PKTech
International Ltd, ASTI Holdings Limited, Venture Corporation Ltd., DBS Group
Holdings Ltd. and DBS Bank Ltd. He also serves as a council member of Nanyang
Technology University. He received a bachelor of engineering degree from Sydney
University.

     Lawrence Lin has served as a Class II director and member of the Audit
Committee since June 2003. He is a Certified Public Accountant in Taiwan. Mr.
Lin co-founded L&C Company, Certified Public Accountants, a member firm of
Urbach Hacker Young International, in 1990. Mr. Lin has been a partner of L&C
Company since 1990 and a Director of Urbach Hacker Young International from
October 1994 to October 1998. Prior to L&C Company, he had been a partner at T N
Soong & Co. Mr. Lin serves as Corporate Supervisor for a number of Taiwan
companies including Amason Technology Corporation, Cellink Company Limited, Tex
Year Industries Inc. and Uniflex Technology Inc. He received a bachelor of
science degree from Taipei Vocational Commercial School.

     Keisuke Yawata has served as a director since October 1999, as a member of
the Audit Committee since August 2000 and as a Class III director since June
2001. Mr. Yawata is a partner and director of Start-up101, a venture capital
firm, since 1999 and is the Chief Executive Officer of The Future International,
a consulting firm he founded in 1997. From 1995 to 1997, he was the president
and chief executive officer of Applied Materials Japan and a senior vice
president of Applied Materials, Inc. From 1985 to 1994, he was at LSI Logic KK,
serving as president and chief executive officer from 1985 to 1992, and as
chairman of the board from 1993 to 1994. From 1958 to 1984, he was employed by
NEC Corporation and its subsidiaries where he held various positions, the last
position being president and chief executive officer of NEC Electronics, Inc.
from 1981 to 1984. In addition, Mr. Yawata was a vice president of the
Semiconductor Industry Association Japan Chapter from 1989 to 1994. Mr. Yawata
serves as a director on the boards of Bee

                                       27

<PAGE>

Technology, DigiPub Japan, Sequence Design KK and NanoGeometry Research. He
received a B.S. in electrical engineering from Osaka University in Osaka, Japan
and an M.S. in electrical engineering from Syracuse University.

     There are no family relationships among any of our directors or executive
officers.

Compensation

     We paid an aggregate amount of compensation during 2003 to our directors
and officers as a group equal to approximately $2,072,054. All of our officers
and directors are eligible to participate in our employee benefit plans.

Share Ownership of Directors and Senior Management

     As of December 31, 2003, the aggregate number of ordinary shares
beneficially owned by our directors and officers was 3,172,079. This number
includes options to purchase an aggregate of 501,722 ordinary shares under our
1997 Stock Plan and 1999 Stock Plan exerciseable within 60 days of December 31,
2003.

Employee Benefit Plans

     1997 Stock Plan. Our 1997 stock plan was adopted by our board of directors
and approved by our shareholders in 1997. The 1997 stock plan provides for the
granting to our employees of incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code, and for the granting to
employees and independent contractors of nonstatutory stock options and stock
purchase rights. Our board of directors and our shareholders have authorized a
total of 3,700,000 ordinary shares for issuance pursuant to the 1997 stock plan,
as amended. As of December 31, 2003, options outstanding under the 1997 stock
plan were 570,207, of which 522,554 were exercisable. No more grants have been
made under this plan after the consummation of our initial public offering.

     1999 Stock Incentive Plan. Our 1999 stock plan was adopted by our board of
directors in October 1999 and was approved by our shareholders prior to the
consummation of our initial public offering in August 2000. The 1999 stock plan
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code and the granting of
nonstatutory stock options, stock appreciation rights, dividend equivalent
rights, restricted stock, performance units, performance shares and other
equity-based rights to our employees, directors and consultants. Initially, we
have reserved 3,000,000 ordinary shares for issuance under the 1999 stock plan.
Commencing January 1, 2001, the number of ordinary shares of stock reserved for
issuance under the 1999 stock plan will be increased annually by a number equal
to 4% of the fully-diluted number of ordinary shares outstanding as of December
31 of the immediately preceding calendar year or a lesser number determined by
the administrator. However, the maximum number of ordinary shares available for
issuance as incentive stock options will be increased by the least of 4% of the
fully-diluted number of ordinary shares outstanding on December 31 of the
immediately preceding calendar year, 1,500,000 ordinary shares or a smaller
number as determined by the administrator. In the year ended December 31, 2003,
the number of shares reserved under the 1999 stock plan was increased by
1,500,000 shares. Where an award agreement permits the exercise or purchase of
the award for a specified period of time following the recipient's termination
of service with us, or the recipient's disability or death, the award will
terminate to the extent not exercised or purchased on the last day of the
specified period or the last day of the original term of the award, whichever
occurs first. As of December 31, 2003, options outstanding under the 1999 stock
plan were 3,349,653, of which 878,038 were exercisable.

     1999 Employee Stock Purchase Plan. Our 1999 purchase plan was approved by
our board of directors in October 1999, was approved by our shareholders prior
to the consummation of our initial public offering in August 2000 and is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal

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<PAGE>

Revenue Code and to provide our employees with an opportunity to purchase
ordinary shares through payroll deductions. Initially an aggregate of 1,000,000
ordinary shares are reserved for issuance under the 1999 purchase plan and
available for purchase thereunder, subject to adjustment in the event of a stock
split, stock dividend or other similar change in our ordinary shares or our
capital structure. Commencing on January 1, 2001, the number of shares reserved
under this plan will be increased by a number equal to the least of 2% of the
fully-diluted number of ordinary shares outstanding on that date, 800,000 shares
or a smaller number determined by the administrator. All of our employees and
the employees of our subsidiaries (including officers) who have been employed by
us for at least ten days and whose customary employment is for more than five
months in any calendar year and more than 20 hours per week are eligible to
participate in the 1999 purchase plan. Employees subject to the rules or laws of
a foreign jurisdiction that prohibit or make impractical their participation in
the 1999 purchase plan are not eligible to participate in the 1999 purchase
plan. As of December 31, 2003, 297,097 shares had been issued under the 1999
purchase plan.

     The 1999 purchase plan designates offer periods, purchase periods and
exercise dates. Offer periods are generally overlapping periods of 24 months,
with new offering periods (other than the first offering period) commencing on
May 1 and November 1 of each year. The initial offer period commenced on
September 1, 2000 and ended on October 31, 2002. Purchase periods are generally
six-month periods, with the initial purchase period commencing on September 1,
2000 and ending on April 30, 2001. The exercise date is the last day of each
purchase period.

     On the first day of each offer period, a participating employee is granted
purchase rights, which are a form of option to be automatically exercised on the
forthcoming exercise dates within the offer period during which deductions are
to be made from the pay of participants in accordance with their authorizations
and credited to their accounts under the 1999 purchase plan. When a purchase
right is exercised, the participant's withheld salary is used to purchase
ordinary shares. The price per share at which ordinary shares are to be
purchased under the 1999 purchase plan during any offer period is the lesser of
85% of the fair market value of our ordinary shares on the date of the grant of
the option or 85% of the fair market value of our ordinary shares on the
applicable exercise date. The participant's purchase right is exercised in this
manner on all four exercise dates arising in the offer period unless, on the
first day of any purchase period, the fair market value of our ordinary shares
is lower than the fair market value of the ordinary shares on the first day of
the offer period. If so, the participant's participation in the original offer
period is terminated, and the participant is automatically enrolled in the new
offer period commencing on that day.

     Payroll deductions may range in whole percentage increments from 1% to 10%
of a participant's regular base pay, including commissions, overtime, bonuses,
annual awards and other incentive payments. Participants may not make direct
cash payments to their accounts. An employee may purchase a maximum of 2,000
ordinary shares under the 1999 purchase plan during a purchase period.
Additional limitations on the amount of ordinary shares that may be purchased
during any calendar year are imposed by the Internal Revenue Code.

Board Practices

Duties of Directors

     Under Cayman Islands law, our directors have a duty of loyalty to act
honestly in good faith with a view to promoting our best interests. Our
directors also have a duty of care to exercise the care, diligence and skills
that a reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with
our memorandum and articles of association and the class rights vested under our
memorandum and articles of association in the holders of the shares.

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<PAGE>

Terms of Directors and Officers

     Our memorandum and articles of association allow our shareholders by
ordinary resolution to appoint any person to be a director and in a like manner
to remove any director and appoint another person in his place. Further, our
directors have the power at any time to appoint any person to become one of our
directors, either to fill a vacancy or as an addition to the existing directors,
except that the total number of directors may not exceed the number fixed in
accordance with our memorandum and articles of association. We have currently
set the number of directors at not less than five or more than nine persons, but
a majority of our shareholders may by ordinary resolution increase or reduce the
limits on the number of directors. Prior to completion of our initial public
offering, our memorandum and articles of association were amended to provide for
our board of directors to be elected on a staggered basis which means
shareholders can only elect, or remove, a limited number of our directors in any
given year and can make it more difficult for a third party to acquire us
without the consent of our board of directors. At our first annual general
meeting after becoming eligible to have a classified board, our board of
directors were divided into three classes, designated Class I, Class II, and
Class III, as nearly equal in number as the then total number of directors
permits. At that annual general meeting, three Class I directors were elected
for a one-year term, two Class II directors for a two-year term and two Class
III directors for a three-year term. At each subsequent annual general meeting,
successors to the class of directors whose terms expires at that annual general
meeting will be elected for a three-year term. If the number of directors is
changed, any increase or decrease will be apportioned among the classes so as to
maintain the number of directors in each class as nearly as possible, and any
additional directors of any class elected to fill a vacancy resulting from an
increase in that class will hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. The term of executive
officers is determined by our board of directors. There are no provisions of
Cayman Islands law which require the term of executive officers to be for a
particular period.

Committees of the Board of Directors

     We have an audit committee and a compensation committee. Each of our audit
committee members qualifies as an "independent" director for purposes of the
rules and regulations of the Nasdaq National Market System. The Audit Committee
is established by the Board primarily for the purpose of overseeing the
accounting and financial reporting processes of the Company and audits of the
financial statements of the Company. The Committee's responsibilities include
(1) the appointment, retention, compensation and oversight of the work of our
independent auditors, and for review of its qualifications, and (2) review of
our system of internal controls. The Committee also maintains procedures for the
receipt, retention and treatment of complaints received by the Company regarding
accounting, internal controls, or auditing matters and for the confidential,
anonymous submission by employees of the company of concerns regarding
accounting or auditing matters. The Audit Committee meets at least four times
per year, and also meets separately with the representatives of management at
least annually. The Audit Committee held four meetings in 2003. Currently,
Messrs. Yawata, Goh and Lin serve on the audit committee.

     The compensation committee establishes remuneration levels for our
officers, performs the functions that are provided under our employee benefit
programs and administers the 1999 stock plan. Currently, Messrs. Lin, Austin and
Kuo serve on the compensation committee.

Compensation Committee Interlocks and Insider Participation

     No member of our compensation committee serves as a member of the board of
directors or the compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or our
compensation committee.

                                       30

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Employees

     As of December 31, 2003, we had 315 full-time employees, 96 of which were
based in the United States, 191 in Asia, 24 in Europe and four in Cayman
Islands. Our employees are not represented by any collective bargaining
agreements, and we have never experienced a work stoppage. We believe our
employee relations are good.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

     The following table sets forth information known to us with respect to the
beneficial ownership of our ordinary shares, as of December 31, 2003, by each
shareholder known by us to own beneficially more than 5% of our ordinary shares.

                                         Shares Beneficially Owned
                                         -------------------------
       Name of Beneficial Owner               Number    Percent
--------------------------------------      ---------   -------
Wasatch Advisors, Inc.                      6,761,671    17.3%
Fidelity Management & Research Company      5,050,690    12.9%
RS Investment Management Co. LLC            4,309,707    11.0%

     None of the major shareholders listed above have differing voting rights
with respect to the ordinary shares of the Company.

RELATED PARTY TRANSACTIONS

Loans

     In 2001, James Keim, one of our directors, accepted the assignment of Head
of Marketing and Sales in the Cayman Islands, and moved to the Cayman Islands in
December 2001. In connection with the move and to assist Mr. Keim to purchase a
residence in the Cayman Islands, we entered into a term loan agreement with Mr.
Keim in February 2002, under which we made an interest free, unsecured loan in
the amount of $400,000 to Mr. Keim. The loan is repayable in February 2007. As
of December 31, 2003, approximately $18,000 had been repaid.

     In February 2000, we loaned $750,000 to 360 DEG. Web Ltd (360 DEG. Web).
The loan accrued interest at a rate of USD-LIBOR + 1% and is to be paid
semiannually until the loan is fully repaid or until the loan is converted into
up to 2,083,333 shares of Series B preference shares of 360 DEG. Web. The
conversion price was $0.36 per share, convertible at any time before February 1,
2005 or before 360 DEG. Web offers its shares in an initial public offering. In
February 2002, we made an additional loan of $1.0 million to 360 DEG. Web on
terms similar to the February 2000 loan. The February 2002 loan is also
convertible, into a maximum of 1,000,000 Series C preference shares of 360 DEG.
Web at a conversion price of $1.00 per share. On January 3, 2003, we exercised
our option to convert both the February 2000 and February 2002 loans (aggregate
principal of $1,750,000) into 2,083,333 Series B preference shares at $0.36 per
share and 1,000,000 Series B2 preference shares at $1.00 per share. After the
conversion, we owned a 35.18% interest in 360 DEG. Web. We did not participate
in 360 DEG. Web's additional financing rounds during 2003, and our ownership was
diluted to 29.33% as of December 31, 2003. In March 2004, we sold 1,000,000
shares of our stock in 360 DEG. Web and recognized a gain of $340,000. Upon
completion of the transaction, our ownership was reduced to 19.8%. As of
December 31, 2003, one of our directors serves as a director of 360 DEG. Web.
From time to time, we may make additional loans to 360 DEG. Web on similar
terms.

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<PAGE>

ITEM 8. FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Consolidated Financial Statements

     Our financial statements set forth in the accompanying index to
Consolidated Financial Statements included in this Annual Report following Part
IV beginning on page F-1 are hereby incorporated in this Annual Report. Our
Consolidated Financial Statements are filed as part of this Annual Report.

DIVIDEND POLICY

     We have never declared or paid any cash dividends on our ordinary shares or
other securities and do not anticipate paying cash dividends in the foreseeable
future.

ITEM 9. THE OFFER AND LISTING

ORDINARY SHARE PRICES AND RELATED MATTERS

     Our ordinary shares are listed and traded on the Nasdaq National Market and
the Cayman Islands Stock Exchange. The following table sets forth for the
periods indicated the high and low last reported sales prices per ordinary share
since trading on August 23, 2000 as furnished by the Nasdaq National Market. The
initial public offering of our ordinary shares on August 23, 2000 was at the
price of $9.00 per share.

     (a)  Annual high and low market prices

                                                               High         Low
                                                              ------       -----
          August 23, 2000 through December 31, 2000           $28.63      $ 5.38
          January 1, 2001 through December 31, 2001           $24.05      $ 5.50
          January 1, 2002 through December 31, 2002           $25.28      $ 5.30
          January 1, 2003 through December 31, 2003           $25.29      $ 8.01

     (b)  Quarterly high and low market prices

          Fourth Quarter 2001                                 $24.05      $11.81
          First Quarter 2002                                  $25.28      $15.90
          Second Quarter 2002                                 $18.74      $ 8.99
          Third Quarter 2002                                  $13.00      $ 7.88
          Fourth Quarter 2002                                 $13.60      $ 5.30
          First Quarter 2003                                  $12.00      $ 8.01
          Second Quarter 2003                                 $17.05      $10.45
          Third Quarter 2003                                  $18.25      $13.45
          Fourth Quarter 2003                                 $25.29      $14.56
          First Quarter 2004                                  $24.98      $14.10

     (c)  Monthly high and low market prices

          October 2003                                        $21.31      $14.56
          November 2003                                       $25.29      $22.83
          December 2003                                       $25.05      $20.33

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<PAGE>

          January 2004                                        $24.98      $20.08
          February 2004                                       $22.15      $17.18
          March 2004                                          $18.64      $14.10
          April 2004                                          $18.30      $14.46
          May 2004                                            $17.31      $13.44

ITEM 10. ADDITIONAL INFORMATION

     The following are summaries of material provisions of our memorandum and
articles of association and the Companies Law (2003 Revision). The summary is
qualified in its entirety by reference to our memorandum and articles of
association (see Item 19-Exhibit 1).

Registered Office

     The Company has been assigned registration number CR-72204 by the registrar
of companies in the Cayman Islands. The registered office is located at the
offices of M&C Corporate Services Limited, P.O. Box 309, Ugland House, South
Church Street, George Town, Grand Cayman, Cayman Islands. The telephone number
at that location is (345) 949-8066.

Objects and Purposes

     Paragraph 3 of the memorandum of association provides that the objects and
purposes of the Company are unlimited and the Company may perform all corporate
activities not prohibited by any law as provided by the Companies Law.

Directors

     Article 107 of the articles of association of the Company provides that a
director will not be disqualified by his office from contracting with the
Company notwithstanding such director's interest and that such an interested
director will not be liable to the Company for any profit realized through such
contract or arrangement, provided, if the director's interest in such contract
or arrangement is material, the interested director declares such interest at
the earliest meeting of the board. Article 117 provides that directors'
compensation shall from time to time be determined by the Company in general
meeting or by the board in accordance with the articles of association. Article
126 provides that the directors may exercise all the powers of the Company to
borrow money and to mortgage or charge its undertaking, property and uncalled
capital or any part thereof and to issue debentures, debenture stock and other
securities whether outright or as security for any debt, liability or obligation
of the Company or of any third party.

Ordinary Shares

     General. The Company's articles of association authorize the issuance of
95,000,000 ordinary shares with a par value of US $0.001. All the outstanding
ordinary shares are fully paid and nonassessable and accordingly no further
capital may be called for by the Company from any holder of the ordinary shares
outstanding. Certificates representing the ordinary shares are issued in
registered form. The ordinary shares are not entitled to any sinking fund or
pre-emptive or redemption rights. Under Cayman Islands Law, non-residents may
freely hold, vote and transfer ordinary shares in the same manner as Cayman
Islands residents, subject to the provisions of the Companies Law and the
articles of association. No Cayman Islands laws or regulations restrict the
export or import of capital or affect the payment of dividends to non-residents
holders of the ordinary shares.

     Dividends. The holders of our ordinary shares are entitled to receive the
dividends that are declared by the board of directors. Dividends may be paid
only out of profits, which include net earnings and retained

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<PAGE>

earnings undistributed in prior years, and out of share premium, a concept
analogous to paid-in-surplus in the United States, subject to a statutory
solvency test.

     Voting Rights. Each ordinary share is entitled to one vote on all matters
upon which the ordinary shares are entitled to vote, including the election of
directors. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of the meeting or any
shareholder present in person or by proxy, before or on the declaration of the
result of the show of hands.

     A quorum required for a meeting of shareholders consists of at least a
number of shareholders present in person or by proxy and entitled to vote
representing the holders of not less than a majority of our issued voting share
capital. Shareholders' meetings are held annually and may be convened by the
board of directors on its own initiative. Advanced notice of at least ten days
is required for the convening of shareholders' meetings.

     Any ordinary resolution to be made by the shareholders requires the
affirmative vote of a simple majority of the votes attaching to the ordinary
shares and preference shares, if any, cast in a general meeting, while a special
resolution requires the affirmative vote of two-thirds of the votes cast
attaching to the ordinary shares and preference shares, if any. Holders of
ordinary shares, which are currently the only shares, carrying the right to vote
at our general meetings, have the power, among other things, to elect directors,
appoint auditors and make changes in the amount of our authorized share capital.

     Material issues that require a special resolution of the shareholders under
the Companies Law include resolutions to alter the memorandum of association
with respect to any objects, powers or other matters specified therein, any
alteration of the articles of association, any reduction of capital, any change
of name, the appointment of an inspector for examining into the affairs of the
company, requiring the company to be wound up by a court, any voluntary winding
up, delegating to creditors the power of appointing liquidators, making binding
arrangements between the company and its creditors, sanctioning the transfer of
the business or property of the company being wound up to another company
whether established in the Cayman Islands or in any other jurisdiction and
sanctioning the re-registration of an ordinary non-resident company as an
exempted company.

     Liquidation. If we are to be liquidated, the liquidator may, with the
approval of the shareholders, divide among the shareholders in cash or in kind
the whole or any part of our assets, in a manner proportionate to their
shareholdings, and may vest the whole or any part of those assets in trustees of
those trusts for the benefit of the shareholders that the liquidator, with the
approval of the shareholders, thinks fit, provided that a shareholder may not be
compelled to accept any shares or other assets that would subject that
shareholder to liability.

Preference Shares

     The articles of association authorizes the issuance of 5,000,000 preference
shares with a par value of $0.001 per share. Pursuant to our articles of
association, the board of directors has the authority, without further action by
the shareholders, to issue preference shares in one or more series. It also has
the authority to fix the designations, powers, preferences, privileges and
relative participating, optional or special rights and the qualifications,
limitations or restrictions of those shares, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the ordinary
shares. The board of directors, without shareholder approval, can issue
preference shares with voting, conversion or other rights that could harm the
voting power and other rights of the holders of ordinary shares. Subject to the
directors' duty of acting in our best interest, preference shares can be issued
quickly with terms calculated to delay or prevent a change in control or make
removal of management more difficult. Additionally, the issuance of preference
shares may have the effect of decreasing the market price of the ordinary
shares, and may harm the voting and other rights of the holders of ordinary
shares.

                                       34

<PAGE>

Anti-takeover Effects of Provisions in Our Charter Documents

     Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
shareholders favor. These provisions could have the effect of discouraging
others from making tender offers for our shares. As a result, these provisions
may prevent the market price of our ordinary shares from reflecting the effects
of actual or rumored takeover attempts and may prevent shareholders from
reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
shareholders may favor. Our charter documents do not permit shareholders to act
by written consent, do not permit shareholders to call a general meeting and
provide for a classified board of directors, which means shareholders can only
elect, or remove, a limited number of our directors in any given year.
Furthermore, as discussed above, our board of directors have the authority to
issue up to 5,000,000 preference shares in one or more series. Our board of
directors can fix the price, rights, preferences, privileges and restrictions of
such preference shares without any further vote or action by our shareholders.
The issuance of preference shares may delay or prevent a change in control
transaction without further action by our shareholders or make removal of
management more difficult.

Differences in Corporate Law

     The Companies Law of the Cayman Islands is modeled after that of England
but does not follow recent United Kingdom statutory enactments and differs from
laws applicable to United States corporations and their shareholders. The
following paragraphs are a summary of the significant differences between the
provisions of the Companies Law applicable to us and the laws applicable to
companies incorporated in the United States and to their shareholders.

     Mergers and Similar Arrangements. Cayman Islands law does not provide for
mergers as that expression is understood under United States corporate law.
However, there are statutory provisions that facilitate the reconstruction and
amalgamation of companies, provided that the arrangement in question is approved
by a majority in number of each class of shareholders and creditors with whom
the arrangement is to be made, and who must in addition represent three-fourths
in value of each class of shareholders or creditors, as the case may be, that
are present and voting either in person or by proxy at a meeting or meetings
convened for that purpose. The convening of the meetings and subsequently the
arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a
dissenting shareholder would have the right to express to the court the view
that the transaction ought not to be approved, the court can be expected to
approve the arrangement if it satisfies itself that:

     .    the parties have complied with the statutory provisions regarding
          majority vote;

     .    the shareholders have been fairly represented at the meeting in
          question;

     .    the arrangement is one that a businessman would reasonably approve;
          and

     .    the arrangement is not one that would more properly be sanctioned
          under some other provision of the Companies Law.

     When a take-over offer is made and accepted by holders of 90% of the shares
within four months, the offeror may, within a two-month period require the
holders of the remaining shares to transfer these shares on the terms of the
offer. An objection can be made to the Grand Court of the Cayman Islands but
this is unlikely to succeed unless there is evidence of fraud, bad faith or
collusion.

     If the arrangement and reconstruction is approved, the dissenting
shareholder would have no rights comparable to appraisal rights, which would
otherwise ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.

                                       35

<PAGE>

     Shareholders' Suits. Maples and Calder has advised us that no significant
or major reported class action or derivative action has been brought in a Cayman
Islands court. In principle, we will normally be the proper plaintiff and a
derivative action may not be brought by a minority shareholder. However, based
on English authorities, which would in all likelihood be of persuasive authority
in the Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:

     .    a company is acting or proposing to act illegally or outside of its
          powers;

     .    the act complained of, although not outside of its powers, could be
          effected only if authorized by more than a simple majority vote;

     .    the individual rights of the plaintiff shareholders have been
          infringed or are about to be infringed; or

     .    those who control the company are perpetrating a "fraud on the
          minority."

Indemnification

     Cayman Islands law does not limit the extent to which a company's articles
of association may provide for indemnification of officers and directors, except
to the extent that a provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Our articles of association
provide for indemnification of officers and directors for losses, damages, costs
and expenses incurred in their capacities as such, except if they acted in a
willfully negligent manner or defaulted in any action against them.

     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or persons controlling us pursuant
to these provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.

Enforceability of Civil Liabilities

     We are a Cayman Islands company. We incorporated in the Cayman Islands
because of the following benefits associated with being a Cayman Islands
company:

     .    political and economic stability;

     .    an effective judicial system;

     .    unlike some jurisdictions which impose taxes on worldwide income, no
          taxation of companies based upon profits, income, gains or
          appreciation;

     .    the absence of exchange control or currency restrictions; and

     .    the availability of professional and support services.

     However, the Cayman Islands has a less developed body of securities laws
than the United States and provides less protection for investors. For example,
the remedies of shareholders and fiduciary responsibilities of our directors are
governed by Cayman Islands law and are not as clearly established as under
statutes or judicial precedent in existence in jurisdictions in the United
States. While there is some case law in the Cayman Islands on these matters, it
is not as developed as, for example, English law. However, we believe that
English case law, although not binding in the courts of the Cayman Islands,
would be regarded as persuasive. Based on English case law, we believe under
Cayman Islands law, our directors have a duty of

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<PAGE>

loyalty to act honestly in good faith with a view to promoting our best
interests. Our directors also have a duty of care to exercise the care,
diligence and skills that a reasonably prudent person would exercise in
comparable circumstances. In fulfilling their duty of care to us, our directors
must ensure compliance with our memorandum and articles of association and the
class rights vested under our memorandum and articles of association in the
holders of the shares.

     A substantial majority of our assets are located outside the United States.
In addition, a majority of our directors and officers are nationals and/or
residents of countries other than the United States, and all or a substantial
portion of our assets and the assets of our directors and officers are located
outside the United States. As a result, it may be difficult to effect service of
process within the United States upon us or our directors and officers or to
enforce against us or against them judgments obtained in United States courts,
including judgments predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof.

     Maples and Calder, our counsel as to Cayman Islands law, has advised us
that there is uncertainty regarding whether the courts of the Cayman Islands
would (1) recognize or enforce judgments of United States courts obtained
against us or our officers and directors predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof or
(2) be competent to hear original actions brought in their jurisdiction against
us or our officers and directors predicated upon the securities laws of the
United States or any state thereof.

     There is no statutory enforcement in the Cayman Islands of judgments
obtained in the United States. Instead, such a judgment must be enforced by
action at common law. Maples and Calder have advised us that a final and
conclusive judgment in a federal or state court of the United States under a sum
of money is payable, other than a sum payable in respect of taxes, fines,
penalties or similar charges, may be subject to enforcement proceedings as a
debt in the Courts of the Cayman Islands under the common law doctrine of
obligation.

Material Contracts

     Other than the contacts listed under Item 19--Exhibits, in the past two
years we have not entered into any material contracts other than contracts
entered into in the ordinary course of business.

Exchange Control

     Our articles of association authorizes us to issue an aggregate of
95,000,000 ordinary shares with a par value of $0.001 per share. Of those
95,000,000 authorized ordinary shares, 39,032,616 shares were issued and
outstanding as of December 31, 2003, all of which are fully paid or credited as
fully paid. We may not call for any further capital from any holder of ordinary
shares outstanding. Under Cayman Islands law, non-residents of the Cayman
Islands may freely hold, vote and transfer ordinary shares in the same manner as
Cayman Islands residents, subject to the provisions of the Companies Law and our
articles of association. No Cayman Islands laws or regulations restrict the
export or import of capital, or affect the payment of dividends to non-resident
holders of ordinary shares.

TAXATION

Cayman Islands Taxation

     The Cayman Islands currently levy no taxes on individuals or corporations
based upon profits, income, gains or appreciation and there is no taxation in
the nature of inheritance tax or estate duty. There are no other taxes likely to
be material to us levied by the Government of the Cayman Islands except for
stamp duties that may be applicable on instruments executed in, or after
execution brought within, the jurisdiction of

                                       37

<PAGE>

the Cayman Islands. The Cayman Islands are not party to any double tax treaties.
There are no exchange control regulations or currency restrictions in the Cayman
Islands.

     No stamp duties are payable on the issue or transfer of shares. An
agreement to transfer shares may be subject to stamp duty if the agreement is
executed in the Cayman Islands or, if executed outside the Cayman Islands,
subsequently brought into the Cayman Islands. The Stamp Duty Law (2003 Revision)
does not provide who is liable to pay stamp duty on any document but, in
practice, the person who seeks to rely on the document in any civil court
proceedings will be required to pay stamp duty in order to have the document
admitted in evidence.

United States Federal Income Taxation

     The following discussion addresses the material United States federal
income tax consequences of the ownership of ordinary shares held as a capital
asset by a "U.S. Investor." This summary is based on the Internal Revenue Code
of 1986, as amended (the "Code"), final, temporary and proposed Treasury
Regulations thereunder, and administrative and judicial interpretations thereof,
all as in effect as of the date hereof, and all of which are subject to change
at any time (possibly on a retroactive basis) by legislative, judicial or
administrative action, and to differing interpretations. There can be no
assurance that the Internal Revenue Service (the "IRS") will not take a contrary
view. This summary does not discuss state or local tax consequences of the
ownership of ordinary shares.

     A "U.S. Investor" means a person who is any of the following:

     .    a citizen or resident of the United States;

     .    a corporation or partnership created or organized in or under the laws
          of the United States or any political subdivision thereof;

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

     .    a trust that is subject to the supervision of a court within the
          United States and the control of one or more U.S. persons;

     .    a trust that has a valid election in effect under applicable U.S.
          Treasury regulations to be treated as a U.S. person; or

     .    a person that is otherwise subject to U.S. federal income taxation on
          its net income.

     This summary does not address the United States federal income tax
treatment of investors having a special legal status, including without
limitation the following types of investors, who may be subject to tax rules
that differ significantly from those summarized below:

     .    life insurance companies;

     .    tax-exempt investors;

     .    banks and financial institutions;

     .    dealers in securities;

     .    traders in securities that elect to use a mark-to-market method of
          accounting for their securities holdings;

                                       38

<PAGE>

     .    persons liable for alternative minimum tax;

     .    U.S. investors who or that actually or constructively hold 10% or more
          of our voting shares;

     .    investors who hold our ordinary shares as part of straddles, hedging
          or integrated or conversion transactions; or

     .    persons whose "functional currency" is not the U.S. dollar.

     This summary is not a comprehensive description of all of the tax
considerations that may be relevant with respect to your ownership of ordinary
shares. You are advised to consult your own tax adviser with respect to your
particular circumstances and with respect to the effects of federal, state,
local or foreign tax laws to which you may be subject.

     Dividends. Subject to the discussion in "Passive Foreign Investment Company
Status" below, in the event that a U.S. Investor receives a distribution on the
ordinary shares, other than a pro rata distribution of ordinary shares or rights
with respect to the ordinary shares, that U.S. Investor will be required to
include the distribution in gross income as a taxable dividend to the extent
that a distribution is paid from our current or accumulated earnings and profits
as determined for United States federal income tax purposes. Distributions in
excess of our current and accumulated earnings and profits will first be
treated, for United States federal income tax purposes, as a nontaxable return
on capital to the extent of the U.S. Investor's basis in the ordinary shares and
thereafter as gain from the sale or exchange of a capital asset. Dividends paid
by us will not be eligible for the corporate dividends received deduction. The
amount of any distribution of property other than cash will be the fair market
value of that property on the date of distribution. The Jobs and Growth Tax
Reconciliation Act of 2003 provides, for taxable years beginning after December
31, 2002 and before January 1, 2009, that "qualified dividend income" paid to an
individual shareholder will be subject to tax at the rates applicable to
long-term capital gains (which are currently taxed at the maximum rate of 15%)
if various statutory requirements, including a specified holding period, are
satisfied. In order for dividends to constitute "qualified dividend income," the
shareholder generally must have held the ordinary shares for more than 60 days
during the 120-day period beginning 60 days before the ex-dividend date;
however, because the holding period rules are intricate and because an owner's
holding period is reduced for periods during which the risk of loss is
diminished, U.S. Investors should consult their own advisors concerning the
calculation of their holding periods. Moreover, a dividend will not be treated
as a qualified dividend income to the extent that the taxpayer is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property.
We believe that any dividends paid by us would generally constitute "qualified
dividend income" if the shareholder satisfies the holding period requirements
and is not subject to such an obligation to make related payments, so long as we
are not classified as a passive foreign investment company for our taxable year
in which the dividend is paid or the preceding taxable year (see " -Passive
Foreign Investment Company Status" below).

     Dividends will constitute foreign source income for foreign tax credit
limitation purposes. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. For this
purpose, dividends distributed by us with respect to the ordinary shares will be
"passive income" or in certain circumstances "financial services income" to a
U.S. Investor. Special rules apply to individuals whose foreign source income
during the taxable year consists entirely of "qualified passive income" and
whose creditable foreign taxes paid or accrued during the taxable year do not
exceed $300 ($600 in the case of a joint return). Further, in particular
circumstances, a U.S. Investor that (i) has held the ordinary shares for less
than a specified minimum period during which it is not protected from risk of
loss, (ii) is obligated to make payments related to the dividends, or (iii)
holds the ordinary shares in arrangements in which the U.S. Investor's expected
economic profit, after non-U.S. taxes, is insubstantial, will not be allowed a
foreign tax credit for foreign taxes imposed on dividends paid on the ordinary
shares.

                                       39

<PAGE>

     Distributions to a U.S. Investor of new ordinary shares or rights to
subscribe for new ordinary shares that are received as part of a pro rata
distribution to all our shareholders will not be subject to United States
federal income tax. The basis of the new ordinary shares or rights so received
will be determined by allocating the U.S. investor's basis in the old ordinary
shares between the old ordinary shares and the new ordinary shares or rights
received, based on their relative fair market values on the date of
distribution. However, the basis of the new ordinary shares or rights will be
zero if the fair market value of the new ordinary shares or rights is less than
15% of the fair market value of the old ordinary shares at the time of
distribution and the U.S. Investor does not make an election to determine the
basis of the rights by allocation as described above. A U.S. Investor's holding
period in the new ordinary shares or rights will generally include the holding
period of the old ordinary shares on which the distribution was made.

     Dispositions of Shares. Subject to the discussion in "Passive Foreign
Investment Company Status" below, gain or loss realized by a U.S. Investor on
the sale or other disposition of the ordinary shares will be subject to United
States federal income tax as capital gain or loss in an amount equal to the
difference between the amount realized on the disposition and that U.S.
Investor's basis in the ordinary shares. The capital gain or loss will be
long-term capital gain or loss if the U.S. Investor has held the ordinary shares
for more than one year at the time of the sale or exchange. If you are an
individual, you will be eligible for reduced rates of taxation (currently, at a
maximum rate of 15% for sales occurring in taxable years beginning before
January 1, 2009) on long-term capital gain. You may deduct any loss resulting
from the sale or exchange of the ordinary shares only against other capital
gains, except that if you are an individual, up to $3,000 of capital loss in
excess of your capital gains may be deducted against ordinary income. Excess
losses may be carried forward. Gain or loss realized by a U.S. Investor will be
treated as U.S. source gain or loss for U.S. foreign tax credit purposes, except
that loss will be treated as foreign source loss to the extent you received
dividends that were includible in the financial services income basket during
the 24-month period prior to the sale.

     Passive Foreign Investment Company Status. We believe that we are not a
passive foreign investment company and do not expect to become a passive foreign
investment company in the future. We will be classified as a passive foreign
investment company if, after the application of "look through" rules, either (a)
75% or more of the gross income of the company in a taxable year is passive
income, or (b) the average percentage of assets by value of the company in a
taxable year that produce or are held for the production of passive income
(which includes cash) is at least 50%, the income or assets test. Whether or not
we are a passive foreign investment company will be determined annually based
upon the composition of our income and assets including goodwill, from time to
time. In determining that we are not a passive foreign investment company, we
are relying on our projected expenditure plans for the current year and future
years and the current valuation of our assets, including goodwill. In
calculating goodwill, we have valued our total assets based on our total market
value determined using the then market price of our shares and have made a
number of assumptions regarding the amount of this value allocable to goodwill.
Because the determination of goodwill will be based on the price of our shares,
it is subject to change. We believe our valuation approach is reasonable.
However, it is possible that the Internal Revenue Service will challenge the
valuation of our goodwill, which may result in our being classified as a passive
foreign investment company. In addition, the composition of our income and
assets will be affected by the extent to which we spend the cash we have raised,
which is a passive asset for purposes of the passive foreign investment company
asset test discussed above, on acquisitions and capital expenditures. We intend
to use the cash we have raised in the past and conduct our business activities
in an effort to reduce the risk of our classification as a passive foreign
investment company. Because the passive foreign investment company determination
is made at the end of each taxable year, we cannot determine in advance whether
we will be considered a passive foreign investment company for the 2004 taxable
year or for any future taxable year. If we determine that we have become a
passive foreign investment company, we will notify all U.S. investors who have
been record shareholders during any period in which we determine that we are a
passive foreign investment company, within 60 days of the end of our taxable
year for which we make such determination.

     Special U.S. tax rules apply to U.S. Investors of interests in a passive
foreign investment company. Subject to the discussion of the market-to-market
election and qualified electing fund election below, if we

                                       40

<PAGE>

were a passive foreign investment company for any taxable year during which a
U.S. Investor held ordinary shares, that U.S. Investor would be subject to
special tax rules regardless of whether we meet the income or assets test for
any other year with respect to:

     .    any "excess distribution" by us to the U.S. Investor, which means any
          distributions received by the U.S. Investor on the ordinary shares in
          a taxable year that are greater than 125% of the average annual
          distributions received by the U.S. Investor in the three preceding
          taxable years, or, if shorter, the U.S. Investor's holding period for
          the ordinary shares; and

     .    any gain realized on the sale or other disposition, including a
          pledge, of ordinary shares.

     Under these special tax rules:

     .    the excess distribution or gain would be allocated ratably over the
          U.S. Investor's holding period for the ordinary shares;

     .    the amount allocated to the current taxable year and any taxable year
          prior to the first taxable year in which we are a passive foreign
          investment company would be treated as ordinary income;

     .    the amount allocated to each of the other years would be taxed as
          ordinary income at the highest tax rate in effect for that year; and

     .    the interest charge applicable to underpayments of tax would be
          imposed with respect to the resulting tax attributable to each prior
          year in which we were a passive foreign investment company to recover
          the deemed benefit from the deferred payment of the tax attributable
          to each prior year.

     In addition, dividends that a U.S. Investor receives from us will not be
eligible for the special tax rates applicable to "qualified dividend income"
(see "-- United States Federal Income Taxation --- Dividends") if we are a
passive foreign investment company either in the taxable year of the
distribution or the preceding taxable year, but will instead be taxable at rates
applicable to ordinary income.

     If we are a passive foreign investment company in any year, a U.S. Investor
would be required to file an annual return on Internal Revenue Service Form 8621
regarding distributions received with respect to the ordinary shares and any
gain realized on the disposition of the ordinary shares.

     A U.S. Investor in a passive foreign investment company is allowed to make
a mark-to-market election with respect to the stock of the passive foreign
investment company, provided that the stock of the passive foreign investment
company is "marketable" within the meaning of the Code. The ordinary shares will
be "marketable" as long as the underlying ordinary shares remain listed on
Nasdaq. If the election is made, a U.S. Investor would be required to mark the
stock to market each taxable year and recognize ordinary gain for any increase
in market value for that taxable year and would be allowed to recognize an
ordinary loss for any decrease in that market value to the extent that prior
gains exceed prior losses. The adjusted basis in the stock of the passive
foreign investment company would be adjusted to reflect that gain or loss. The
mark-to-market election will be effective for the taxable year for which the
election is made and all subsequent taxable years, unless the ordinary shares
cease to be marketable or the Internal Revenue Service consents to the
revocation of the election.

     Alternatively, for each year we meet the income or assets test, a U.S.
Investor can make an election to include in income annually its pro rata share
of our earnings and net capital gains. This election is referred to as a
qualified electing fund election. To make a qualified electing fund election,
you will need to have an annual information statement from us documenting the
earnings and capital gain for the year. If we were to become a passive foreign
investment company, we would furnish the passive foreign investment company

                                       41

<PAGE>

annual information statement to any shareholder or former shareholder who
requested it. In general, a U.S. Investor must make a qualified electing fund
election on or before the due date for filing its income tax return for the
first year to which the qualified electing fund election will apply. U.S.
Investors are permitted to make retroactive elections in particular
circumstances, including if the U.S. Investor had a reasonable belief that the
foreign corporation was not a passive foreign investment company and filed a
protective election. As discussed above, we will notify investors if we
determine that we have become a passive foreign investment company. This notice
will provide U.S. Investors on a calendar tax year with sufficient time to make
the qualified electing fund election. U.S. Investors (in particular those with a
tax year other than the calendar year) should consult their own tax advisors as
to the consequences of making a protective qualified electing fund election or
other consequences of the qualified electing fund election.

     If we are a passive foreign investment company in any year, you should
consult with your tax adviser regarding whether to make a mark-to-market or
qualified electing fund election.

Information Report and Backup Withholding. In general, information reporting
requirements will apply to dividends in respect of our ordinary shares or the
proceeds received on the sale, exchange or redemption of our ordinary shares
paid within the United States (and, in certain cases, outside the United States)
to U.S. Investor other than certain exempt recipients, such as corporations, and
a 28% backup withholding tax may apply to such amounts if the U.S. Investor
fails to provide an accurate taxpayer identification number or to report
interest and dividends required to be shown on its U.S. federal income tax
returns. The amount of any backup withholding from a payment to a U.S. Investor
will be allowed as credit against the U.S. Investor's U.S. federal income tax
liability provided that the appropriate returns are filed.

DOCUMENTS ON DISPLAY

     We file annual report on Form 20-F and furnish current reports on Form 6-K
with the SEC. You may read and copy this information at the SEC's Public
Reference Room at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at 233 Broadway, New York,
New York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can also request copies of the documents, upon
payment of a duplicating fee, by writing to the Public Reference Section of the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the Public Reference Room. Certain of our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk is the risk of loss related to adverse changes in market
prices, including interest rates and foreign exchange rates, of financial
instruments. In the normal course of business, our financial position is
routinely subject to a variety of risks, including market risk associated with
interest rate movements and currency rate movements on non-U.S. dollar
denominated assets and liabilities, as well as collectibility of accounts
receivable.

     We regularly assess these financial instruments and their ability to
address market risk and have established policies and business practices to
protect against the adverse effects of these and other potential exposures.

Interest Rate Risk

     Our major market risk exposure is changing interest rates. Our exposure to
market risk for changes in interest rates relates primarily to our investments
in government and corporate bonds.

     We maintain an investment portfolio consisting mainly of fixed income
securities. These securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market

                                       42

<PAGE>

rates were to increase immediately and uniformly by 10.0% from the levels at
December 31, 2003, the fair value of the portfolio would decline by an
immaterial amount. We presently intend to treat our fixed income investments as
available for sale, and therefore we do not expect our operating results or cash
flows to be affected to any significant degree by the effect of a sudden
short-term change in market interest rate exposures. We did not purchase or hold
any derivative financial instruments for trading purposes.

     The table below provides information about our financial instruments whose
maturity dates are greater than three months as of December 31, 2003.

<TABLE>
<CAPTION>
                                             Expected Maturity Dates
                          ------------------------------------------------------------
                                                           2008 and               Fair
                           2004    2005    2006    2007   thereafter    Total    Value
                          ------   ----   -----   -----   ----------   ------   ------
                                                 (in thousands)
<S>                       <C>       <C>   <C>     <C>        <C>       <C>      <C>
US Treasury Bills:
   Fixed rate (US$) ...   33,958    --               --         --     33,958   33,958
Government Bonds:
   Fixed rate (US$) ...                   2,346   4,993      1,575      8,914    8,914
Time Deposit
   Fixed rate (US$) ...   11,622              3                        11,625   11,625
Corporate Bonds
   Fixed rate (US$) ...    8,185    --       --      --         --      8,185    8,185
</TABLE>

Foreign currency risk

     Fluctuations in exchange rates may adversely affect our financial results.
The functional currencies for our foreign subsidiaries are the local currency.
As a result, certain of our assets and liabilities, including certain bank
accounts, accounts receivable, restricted assets, short-term investments and
accounts payable, exist in non-US dollar-denominated currencies, which are
sensitive to foreign currency exchange rate fluctuations. As of December 31,
2003, we held approximately $11.9 million in government bonds, certificates of
deposits and bank demand accounts denominated in New Taiwan Dollars.

     We have not engaged in hedging techniques designed to mitigate foreign
currency exposures and we may experience economic loss as a result of foreign
currency exchange fluctuations. We will monitor the currency exchange
fluctuations periodically. For the year ended December 31, 2003, we experienced
gains of $287,000 due to foreign currency exchange fluctuations, which are
reflected in the results of operations.

Recent Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board ("FASB") released
Interpretation No. 46, "Consolidation of Variable Interest Entities"("FIN 46")
which requires that all primary beneficiaries of Variable Interest Entities
("VIE") consolidate that entity. FIN 46 is effective immediately for VIEs
created after January 31, 2003 and to VIEs in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003 to VIEs in which an enterprise holds a variable
interest it acquired before February 1, 2003. In December 2003, the FASB
published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of
the interpretation and to defer the effective date of implementation for certain
entities. Under the guidance of FIN 46R, entities that do not have interests in
structures that are commonly referred to as special purpose entities (SPE's)

                                       43

<PAGE>

are required to apply the provisions of the interpretation in financials
statements for periods ending after March 14, 2004. The Company does not have
interests in special purpose entities and will apply the provisions of FIN 46R
with its first quarter 2004 financial statements.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
statement establishes standards for how an issuer classifies and measures
certain financial instruments. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The statement requires that certain financial instruments that, under
previous guidance, could be accounted for as equity, be classified as
liabilities, or assets in some circumstances. This statement does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety. The statement also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities whose shares are
mandatorily redeemable. The adoption of SFAS No. 150 did not impact the
Company's consolidated financial statements.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

          Not applicable.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

          There are no defaults, dividend arrearages or delinquencies that are
required to be disclosed.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS.

RIGHTS OF SECURITY HOLDERS

          There are no material modifications to the rights of security holders
that are required to be disclosed.

USE OF PROCEEDS

          As of December 31, 2003, the net proceeds from our initial public
offering in August 2000 and our public offering in November 2001 were primarily
used for general working capital and investment in interest income producing
financial instruments. None of the net proceeds from our initial public offering
were paid, directly or indirectly, to any of our directors, officers or general
partners or any of their associates, or to any person owning ten percent or more
of any class of our equity securities, or any of our affiliates.

                                    PART III

ITEM 15. CONTROLS AND PROCEDURES

          We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed pursuant
to the Securities Exchange Act of 1934 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 the management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the

                                       44

<PAGE>

desired control objectives. In addition, the design of any control system is
based in part upon certain assumptions about the likelihood of future events.
Due to these and other inherent limitations of any controls and procedures,
there can be no assurance that any such design will succeed in achieving its
stated goals under all potential future conditions.

          Within 90 days prior to the date of this annual report on Form 20-F,
we carried out an evaluation, under the supervision and with the participation
of the management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, the Chief Executive Officer and
the Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective.

          There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date we completed our evaluation.

ITEM 16. Not applicable.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     The Board of Directors has determined that Mr. Lawrence Lin is an "audit
committee financial expert" as defined in Item 16A of Form 20-F.

ITEM 16B. CODE OF ETHICS

     We have adopted the O2 Micro International Limited Code of Business Conduct
and Ethics ("Code of Conduct"), a code of business conduct and ethics that
applies to our employees, officers and non-employee directors, including our
principal executive officer, principal financial officer, principal accounting
officer or controller and persons performing similar functions. It is publicly
available on our website at www.o2micro.com. If we make any substantive
amendments or grant any waiver from a provision of the Code of Conduct to our
directors or executive officers, we will disclose the nature of such amendment
or waiver on that website or in a report on Form 6-K or in the next annual
report on Form 20-F.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Deloitte & Touche has served as the Company's independent auditors for each
of the fiscal years in the two-year period ended December 31, 2003. The
appointment of the independent auditor is subject to approval and ratification
by the Company's shareholders at the annual general meeting of shareholders. The
following table presents the aggregate fees for professional services and other
services rendered by Deloitte & Touche in each of the years ended December 31,
2002 and 2003.

                         Year ended          Year ended
                     December 31, 2002   December 31, 2003
                     -----------------   -----------------
Audit Fees                 258,496             272,835
Audit-related Fees          19,741              26,944
Tax Fees                    15,961               4,215
All Other Fees                  --                  --

Total                     $294,198            $303,994

ITEM 16D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

     Not applicable.

                                       45

<PAGE>

ITEM 16E. PURCHASED EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                               Total Number of
                                                             Shares Purchased as      Maximum Number of
                                                              Part of Publicly      Shares that May Yet
                     Total Number of   Average Price Paid   Announced Plans or       Be Purchased Under
Period              Shares Purchased      per Share            Programs (1)        the Plans or Programs
--------------------------------------------------------------------------------------------------------
<S>                      <C>                  <C>                  <C>                   <C>
February 11, 2003        77,500               8.32                 77,500                2,201,800
February 13, 2003
--------------------------------------------------------------------------------------------------------
</TABLE>

(1) In May 2002, we announced a share repurchase program to repurchase up to
3,000,000 shares of our Ordinary Shares. There is no expiration date for the
share repurchase program.

                                     PART IV

ITEM 17. FINANCIAL STATEMENTS

          The Company's Consolidated Financial Statements have been prepared in
accordance with Item 18 hereof.

ITEM 18. FINANCIAL STATEMENTS

     The Company's financial statements set forth in the accompanying Index to
Consolidated Financial Statements included in this annual report on Form 20-F
following Part IV beginning on page F-1 are hereby incorporated herein by this
reference. Such consolidated financial statements are filed as part of this
annual report on Form 20-F.

     Independent Auditors' Report

     Consolidated Balance Sheets as of December 31, 2002 and 2003

     Consolidated Statements of Operations and Comprehensive Income for the
     years ended December 31, 2001, 2002 and 2003

     Consolidated Statements of Shareholders' Equity for the years ended
     December 31, 2001, 2002 and 2003

     Consolidated Statements of Cash Flows for the years ended December 31,
     2001, 2002 and 2003

     Notes to Consolidated Financial Statements

ITEM 19. EXHIBITS

1.     Memorandum and Articles of Association of the registrant (incorporated by
       reference from Exhibits 3.1 and 3.2 to the Registration Statement on Form
       F-1 (File No. 333-12386) filed by the registrant)

                                       46

<PAGE>

4.1    Standard NNN Lease dated July 29, 1999 by and between Limir Realty Corp.
       #17 as landlord and O2Micro, Inc. as tenant (incorporated by reference
       from Exhibit 10.5 to the Registration Statement on Form F-1 (File No.
       333-12386) filed by the registrant)

4.2    Lease dated October 16, 1997 by and between Hung Kuo Development Corp. as
       landlord and O2Micro, Inc. as tenant (incorporated by reference from
       Exhibit 10.6 to the Registration Statement on Form F-1 (File No.
       333-12386) filed by the registrant)

4.3    Agreement dated October 1, 1999 by and between PSA Corporation Limited as
       landlord and O2Micro, Inc. as tenant (incorporated by reference from
       Exhibit 10.8 to the Registration Statement on Form F-1 (File No.
       333-12386) filed by the registrant)

8.1    List of registrant's subsidiaries

12.1   Certification of Chief Executive Officer of the Company, pursuant to
       Section 302 of the Sarbanes-Oxley Act.

12.2   Certification of Chief Financial Officer of the Company, pursuant to
       Section 302 of the Sarbanes-Oxley Act.

13.    Certification pursuant to 18U.S.C. Section 1350, as adopted pursuant to
       Section 906 of the Sarbanes-Oxley Act.

14.1   Consent of Deloitte & Touche, independent auditors

14.2   Consent of Deloitte & Touche, independent auditors


                                       47

<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

                                             O2 MICRO INTERNATIONAL LIMITED


Date: June 10, 2004                          By: /s/ STERLING DU
                                                 -------------------------------
                                             Name: Sterling Du
                                             Title: Chief Executive Officer

<PAGE>

                         O//2//MICRO INTERNATIONAL LIMITED

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Independent Auditors' Report.................................................F-3
Consolidated Balance Sheets..................................................F-5
Consolidated Statements of Operations and Comprehensive Income...............F-6
Consolidated Statements of Shareholders' Equity..............................F-8
Consolidated Statements of Cash Flows........................................F-9
Notes to Consolidated Financial Statements..................................F-11

                                       F-1

<PAGE>

O//2//Micro International Limited and Subsidiaries

Consolidated Financial Statements as of
December 31, 2002 and 2003
Together with Independent Auditors' Report

                                      F-2

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and the Shareholders
O//2//Micro International Limited

We have audited the accompanying consolidated balance sheets of O//2//Micro
International Limited and subsidiaries as of December 31, 2002 and 2003 and the
related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for each of the years ended December 31,
2002 and 2003 (expressed in United States dollars). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The financial statements of the Company for the year ended December 31,
2001 were audited by other auditors whose report expressed an unqualified
opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O//2//Micro
International Limited and subsidiaries as of December 31, 2002 and 2003 and the
results of their operations and their cash flows for each of the years ended
December 31, 2002 and 2003, in conformity with accounting principles generally
accepted in the United States of America.

Deloitte & Touche
Grand Cayman, Cayman Islands

January 30, 2004

                                       F-3

<PAGE>

                          Independent Auditors' Report

The Board of Directors and the Shareholders
O//2//Micro International Limited

We have audited the accompanying consolidated balance sheet of O//2//Micro
International Limited and subsidiaries as of December 31, 2001 and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for the year ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of O//2//Micro
International Limited and its subsidiaries as of December 31, 2001 and the
results of their operations and their cash flows for the year ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.

Deloitte & Touche
(TN Soong & Co and Deloitte & Touche (Taiwan)
established Deloitte & Touche effective June 1, 2003)

January 24, 2002

                                       F-4

<PAGE>

O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In Thousand U.S. Dollars, Except Per Share Amounts)
--------------------------------------------------------------------------------

                                                                 December 31
                                                            --------------------
                                                              2002        2003
                                                            --------   ---------
ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                $ 69,334   $ 66,489
   Restricted cash                                             2,019      1,892
   Short-term investments                                     42,675     53,923
   Accounts receivable--net                                    7,595      9,794
   Inventories                                                 6,967      9,613
   Prepaid expenses and other current assets                   2,891      3,365
                                                            --------   --------
         Total current assets                                131,481    145,076
                                                            --------   --------

LONG-TERM INVESTMENTS                                          7,735      7,865
                                                            --------   --------
FIXED ASSETS--Net                                              5,611      4,880
                                                            --------   --------
OTHER ASSETS
   Restricted assets--net                                         --     10,044
                                                            --------   --------
   Others                                                      1,009      1,428
                                                            --------   --------
TOTAL ASSETS                                                $145,836   $169,293
                                                            ========   ========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Notes and accounts payable                               $  5,202   $  6,334
   Income tax payable                                          1,957      2,852
   Accrued expenses and other current liabilities              3,529      5,380
                                                            --------   --------
         Total current liabilities                            10,688     14,566
                                                            --------   --------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
   Preference shares at $0.001 par value per share
      Authorized--5,000,000 shares                                --         --
   Ordinary shares at $0.001 par value per share
      Authorized--95,000,000 shares
      Issued--38,857,094 shares including 720,700 shares
         of treasury stocks as of December 31, 2002 and
         39,032,616 shares as of December 31, 2003                39         39
   Treasury stock                                             (6,823)        --
   Additional paid-in capital                                133,016    137,076
   Accumulated other comprehensive loss                         (692)      (521)
   Retained earnings                                           9,608     18,133
                                                            --------   --------
         Total shareholders' equity                          135,148    154,727
                                                            --------   --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                  $145,836   $169,293
                                                            ========   ========

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

                                      F-5

<PAGE>

O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousand U.S. Dollars, Except Per Share Amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               Years Ended December 31
                                                             ---------------------------
                                                               2001      2002      2003
                                                             -------   -------   -------
<S>                                                          <C>       <C>       <C>
NET SALES                                                    $45,819   $70,187   $88,599

COST OF SALES                                                 16,465    28,143    38,314
                                                             -------   -------   -------
GROSS PROFIT                                                  29,354    42,044    50,285
                                                             -------   -------   -------
OPERATING EXPENSES
   Research and development (exclusive of amortization
      of deferred stock compensation of $91, $30 and $0
      in 2001, 2002 and 2003, respectively)                   14,320    18,935    19,219
   Selling, general and administrative (exclusive of
      amortization of deferred stock compensation of $75,
      $14 and $0 in 2001, 2002 and 2003, respectively)         9,909    12,325    17,476
   Stock-based compensation                                      166        44        --
                                                             -------   -------   -------
      Total operating expenses                                24,395    31,304    36,695
                                                             -------   -------   -------
INCOME FROM OPERATIONS                                         4,959    10,740    13,590
                                                             -------   -------   -------
NON-OPERATING INCOME(EXPENSES)
   Interest income                                             1,814     1,802     1,283
   Impairment loss on long-term investments                       --      (483)      (17)
   Interest expenses                                             (11)       (4)       (1)
   Foreign exchange gain--net                                     59         4       287
   Other--net                                                    (35)      343      (115)
                                                             -------   -------   -------
      Total non-operating income                               1,827     1,662     1,437
                                                             -------   -------   -------

INCOME BEFORE INCOME TAX                                       6,786    12,402    15,027

INCOME TAX EXPENSE                                             1,152     1,673     1,826
                                                             -------   -------   -------
NET INCOME                                                     5,634    10,729    13,201
                                                             -------   -------   -------
OTHER COMPREHENSIVE INCOME (LOSS)
   Translation adjustments on subsidiaries                      (489)      132       (90)
   Unrealized gain (loss) on available-for-sale securities        15      (127)      261
                                                             -------   -------   -------
      Total other comprehensive income (loss)                   (474)        5       171
                                                             -------   -------   -------
COMPREHENSIVE INCOME                                         $ 5,160   $10,734   $13,372
                                                             =======   =======   =======
</TABLE>

                                                                     (Continued)

                                       F-6

<PAGE>

<TABLE>
<CAPTION>
                                                               Years Ended December 31
                                                             ---------------------------
                                                               2001      2002      2003
                                                             -------   -------   -------
<S>                                                          <C>       <C>       <C>
EARNINGS PER SHARE:
   Basic                                                     $  0.17   $  0.28   $  0.34
                                                             =======   =======   =======
   Diluted                                                   $  0.16   $  0.27   $  0.33
                                                             =======   =======   =======

SHARES USED IN EARNINGS PER SHARE
   CALCULATION:
   Basic (in thousands)                                       34,020    38,300    38,374
                                                             =======   =======   =======
   Diluted (in thousands)                                     35,576    39,591    39,736
                                                             =======   =======   =======
</TABLE>

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

                                                                     (Concluded)

                                       F-7

<PAGE>

O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousand U.S. Dollars, Except Per Share Amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           Additional Paid-in Capital
                                                     Ordinary Shares     -----------------------------
                                                   -------------------   Ordinary    Stock               Treasury
                                                     Shares     Amount    shares    options     Total      Stock    Warrants
                                                   ----------   ------   --------   -------   --------   --------   --------
<S>                                                <C>           <C>     <C>        <C>       <C>        <C>          <C>
BALANCE, JANUARY 1, 2001                           32,788,238    $33     $ 53,148   $1,923    $ 55,071   $    --      $ 51

Issuance of:
   Shares issued for exercise of stock options        656,215      1        1,780     (796)        984        --        --
   Shares issued for 1999 ESPP Plan                    90,058     --          690       --         690        --        --
   Shares, net of $601 in offering costs            4,600,000      4       73,450       --      73,450        --        --
Cancellation of stock options                              --     --           --      (39)        (39)       --        --
Options granted to nonemployees                            --     --           --       41          41        --        --
Amortization of deferred stock compensation                --     --           --       --          --        --        --
Net income for 2001                                        --     --           --       --          --        --        --
Translation adjustments on subsidiaries                    --     --           --       --          --        --        --
Unrealized gain on available-for-sale securities           --     --           --       --          --        --        --
                                                   ----------    ---     --------   ------    --------   -------      ----
BALANCE, DECEMBER 31, 2001                         38,134,511     38      129,068    1,129     130,197        --        51

Issuance of:
   Shares issued for exercise of stock options        325,279      1        1,187     (275)        912        --        --
   Shares issued for 1999 ESPP Plan                    97,304     --          737       --         737        --        --
   Shares issued for exercise of warrants             300,000     --          801       --         801        --       (51)
Acquisition of treasury stocks--720,700 shares             --     --           --       --          --    (6,823)       --
Cancellation of stock options                              --     --           --       (2)         (2)       --        --
Options granted to nonemployees                            --     --           --      371         371        --        --
Amortization of deferred stock compensation                --     --           --       --          --        --        --
Net income for 2002                                        --     --           --       --          --        --        --
Translation adjustments on subsidiaries                    --     --           --       --          --        --        --
Unrealized loss on available-for-sale securities           --     --           --       --          --        --        --
                                                   ----------    ---     --------   ------    --------   -------      ----
BALANCE, DECEMBER 31, 2002                         38,857,094     39      131,793    1,223     133,016    (6,823)       --

Issuance of:
   Shares issued for exercise of stock options        863,987      1        6,135     (503)      5,632        --        --
   Shares issued for 1999 ESPP Plan                   109,735     --          942       --         942        --        --
   Cancellation of stock options                           --     --           --      (23)        (23)       --        --
Acquisition of treasury stock--77,500 shares               --     --           --       --          --      (647)       --
Retirement of treasury stock                         (798,200)    (1)      (2,793)      --      (2,793)    7,470        --
Options granted to nonemployees                            --     --           --      302         302        --        --
Net income for 2003                                        --     --           --       --          --        --        --
Translation adjustments on subsidiaries                    --     --           --       --          --        --        --
Unrealized loss on available-for-sale securities           --     --           --       --          --        --        --
                                                   ----------    ---     --------   ------    --------   -------       ---
BALANCE, DECEMBER 31, 2003                         39,032,616    $39     $136,077   $  999    $137,076   $    --       $--
                                                   ==========    ===     ========   ======    ========   =======       ===

<CAPTION>
                                                                          Accumulated Other
                                                                     Comprehensive Income (Loss)
                                                                  ---------------------------------     Retained
                                                                  Unrealized     Cumulative             Earnings         Total
                                                     Deferred      investment   translation           (Accumulated   Shareholders'
                                                   Compensation    gain/loss     adjustment   Total     Deficit)         Equity
                                                   ------------   -----------   -----------   -----   ------------   -------------
<S>                                                   <C>            <C>           <C>        <C>        <C>           <C>
BALANCE, JANUARY 1, 2001                               ($249)        $  --         ($223)     ($223)     ($6,755)      $ 47,928

Issuance of:
   Shares issued for exercise of stock options            --            --            --         --           --            985
   Shares issued for 1999 ESPP Plan                       --            --            --         --           --            690
   Shares, net of $601 in offering costs                  --            --            --         --           --         73,454
Cancellation of stock options                              6            --            --         --           --            (33)
Options granted to nonemployees                           --            --            --         --           --             41
Amortization of deferred stock compensation              199            --            --         --           --            199
Net income for 2001                                       --            --            --         --        5,634          5,634
Translation adjustments on subsidiaries                   --            --          (489)      (489)          --           (489)
Unrealized gain on available-for-sale securities          --            15            --         15           --             15
                                                      ------         -----         -----      -----      -------       --------
BALANCE, DECEMBER 31, 2001                               (44)           15          (712)      (697)      (1,121)       128,424

Issuance of:
   Shares issued for exercise of stock options            --            --            --         --           --            913
   Shares issued for 1999 ESPP Plan                       --            --            --         --           --            737
   Shares issued for exercise of warrants                 --            --            --         --           --            750
Acquisition of treasury stocks--720,700 shares            --            --            --         --           --         (6,823)
Cancellation of stock options                             --            --            --         --           --             (2)
Options granted to nonemployees                           --            --            --         --           --            371
Amortization of deferred stock compensation               44            --            --         --           --             44
Net income for 2002                                       --            --            --         --       10,729         10,729
Translation adjustments on subsidiaries                   --            --           132        132           --            132
Unrealized loss on available-for-sale securities          --          (127)           --       (127)          --           (127)
                                                         ---         -----         -----      -----      -------       --------
BALANCE, DECEMBER 31, 2002                                --          (112)         (580)      (692)       9,608        135,148

Issuance of:
   Shares issued for exercise of stock options            --            --            --         --           --          5,633
   Shares issued for 1999 ESPP Plan                       --            --            --         --           --            942
   Cancellation of stock options                          --            --            --         --           --            (23)
Acquisition of treasury stock--77,500 shares              --            --            --         --           --           (647)
Retirement of treasury stock                              --            --            --         --       (4,676)            --
Options granted to nonemployees                           --            --            --         --           --            302
Net income for 2003                                       --            --            --         --       13,201         13,201
Translation adjustments on subsidiaries                   --            --           (90)       (90)          --            (90)
Unrealized loss on available-for-sale securities          --           261            --        261           --            261
                                                      ------         -----         -----      -----      -------       --------
BALANCE, DECEMBER 31, 2003                            $   --         $ 149         ($670)     ($521)     $18,133       $154,727
                                                      ======         =====         =====      =====      =======       ========
</TABLE>

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

                                       F-8

<PAGE>

O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand U.S. Dollars)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                Years Ended December 31
                                                           --------------------------------
                                                             2001        2002        2003
                                                           --------   ---------   ---------
<S>                                                        <C>        <C>         <C>
OPERATING ACTIVITIES
   Net income                                              $  5,634   $  10,729   $  13,201
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation and amortization                           1,180       1,937       2,623
      Amortization of deferred stock compensation               166          44          --
      Amortization of stock options granted for services         19          74         335
      Loss (gain) on sale of short-term investments               2        (385)          5
      Deferred income tax assets                               (153)        198         386
      Impairment of long-term investments                        --         483          17
      Loss on sale of fixed assets                               --           7          68
      Changes in operating assets and liabilities:
         Accounts receivable--net                             1,720      (3,895)     (2,199)
         Inventories                                            111      (1,606)     (2,646)
         Prepaid expenses and other current assets             (571)       (765)       (474)
         Notes and accounts payable                            (197)      1,632       1,132
         Income taxes payable                                   770         737         895
         Accrued expenses and other current liabilities         831         333       1,413
                                                           --------   ---------   ---------
         Net cash provided by operating activities            9,512       9,523      14,756
                                                           --------   ---------   ---------
INVESTING ACTIVITIES
   Receivables from employee cash advance                      (185)       (262)       (104)
   Acquisition of:
      Fixed assets                                           (2,295)     (4,275)     (1,749)
      Patents                                                  (122)         --          --
      Long-term investments                                      --      (6,968)       (147)
      Short-term investments                                (21,636)   (188,231)   (116,138)
   (Increase) decrease in:
      Restricted assets                                          --          --     (10,044)
      Restricted cash                                            40        (860)        127
      Other assets                                              (68)        (46)       (612)
   Proceeds from:
      Sale of short-term investments                          1,513     165,970     105,146
      Sale of fixed assets                                       --           3           1
                                                           --------   ---------   ---------
         Net cash used in investing activities              (22,753)    (34,669)    (23,520)
                                                           --------   ---------   ---------
</TABLE>

                                                                     (Continued)

                                      F-9

<PAGE>

<TABLE>
<CAPTION>
                                                              Years Ended December 31
                                                           ----------------------------
                                                             2001      2002       2003
                                                           -------   --------   -------
<S>                                                        <C>       <C>        <C>
FINANCING ACTIVITIES
   Acquisitions of treasury stock                          $    --    ($6,823)    ($647)
   Proceeds from:
      Exercise of stock options                                985        913     5,633
      Issuance of ordinary shares                           73,454         --        --
      Issuance of shares for warrants exercised                 --        750        --
      Issuance of ordinary shares under ESPP Plan              690        737       942
   Payments of principal of capital leases                     (42)       (10)       (6)
   Decrease in guarantee deposits                              (51)        --        --
                                                           -------   --------   -------
         Net cash provided by (used in) financing
            activities                                      75,036     (4,433)    5,922
                                                           -------   --------   -------
EFFECTS OF CHANGES IN FOREIGN EXCHANG RATE                    (429)        99        (3)
                                                           -------   --------   -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS        61,366    (29,480)   (2,845)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR              37,448     98,814    69,334
                                                           -------   --------   -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                   $98,814   $ 69,334   $66,489
                                                           =======   ========   =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
   Cash paid for interest                                  $    11   $      4   $     1
   Cash paid for tax                                           474        744       600

NON-CASH INVESTING AND FINANCING ACTIVITIES
   Property and equipment acquired under capital leases          5         --        --
   Convertible loans converted to long-term investments         --         --     1,750
   Unrealized gain (loss) on short-term investments             15       (127)      261
</TABLE>

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

                                                                     (Concluded)

                                      F-10

<PAGE>

O//2//MICRO INTERNATIONAL LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars Unless Otherwise Noted)
--------------------------------------------------------------------------------

1.   GENERAL

     Business

     O//2//Micro, Inc. was incorporated in the state of California in the United
     States of America on March 29, 1995 to design, develop, and deliver
     semiconductor components primarily for mobile applications. In March 1997,
     O//2//Micro, Inc. reincorporated in the Cayman Islands under the name
     O//2//Micro International Limited (the "Company"). In connection with the
     reincorporation, all authorized and outstanding common stock, preferred
     stock and stock options of O//2//Micro, Inc. were exchanged for the
     Company's ordinary shares, preference shares and stock options with
     identical rights and preferences. O//2//Micro, Inc. became the Company's
     subsidiary after the shares exchange.

     The Company had incorporated various wholly-owned subsidiaries, namely,
     O//2//Micro Electronics, Inc. (O//2//Micro-Taiwan), O//2//Micro
     International Japan Limited (O//2//Micro-Japan), O//2//Micro PTE
     Limited-Singapore (O//2//Micro-Singapore), and other subsidiaries.
     O//2//Micro-Taiwan and O//2//Micro-Japan are engaged in trading while
     O//2//Micro-Singapore and other subsidiaries are engaged in research and
     development. The Company also established a Taiwanese branch office,
     O//2//Micro International Limited-Taiwan Branch (O//2//Micro-Taiwan Branch)
     to engage in marketing and customer support related services. Due to the
     duplicate function of O//2//Micro-Taiwan Branch and O//2//Micro-Taiwan, the
     Board of Directors determined to dissolve O//2//Micro-Taiwan Branch on
     October 31, 2002. The dissolution process of O//2//Micro-Taiwan Branch was
     not completed as of December 31, 2003.

2.   ACCOUNTING POLICIES

     Basis of Presentation

     The consolidated financial statements have been prepared in accordance with
     accounting principles generally accepted in the United States of America.
     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiaries. All intercompany accounts and
     transactions have been eliminated on consolidation.

     Use of Estimates

     The preparation of financial statements in conformity with accounting
     principles generally accepted in the United States of America requires
     management to make estimates and assumptions that affect certain reported
     amounts and disclosures. Accordingly, actual results could differ from
     those estimates.

                                      F-11

<PAGE>

     Concentration of Credit Risk

     Financial instruments that potentially subject the Company to a
     concentration of credit risk consist of cash, cash equivalents and accounts
     receivable. Cash is deposited with high credit quality financial
     institutions. For accounts receivable, the Company performs ongoing credit
     evaluations of its customers' financial condition and the Company maintains
     an allowance for doubtful accounts receivable based upon review of the
     expected collectibility of individual accounts.

     Fair Value of Financial Instruments

     The Company's financial instruments, including cash and cash equivalents,
     restricted cash, accounts receivable, notes and accounts payable, and
     capital lease obligations are carried at cost, which approximates the fair
     value due to the short-term maturity of those instruments. Fair values of
     short-term investments and long-term investments represent quoted market
     prices, if available. If no quoted market prices are available, fair values
     are estimated based on other factors.

     Cash and Cash Equivalents

     The Company considers all highly liquid investments with maturities of not
     more than three months when purchased to be cash equivalents.

     Restricted Assets

     The Company classifies deposits made for customs, collateral for obtaining
     foundry capacity, lines of credit, office leases and Taiwan court cases as
     restricted assets. The deposits are classified as current asset if
     refundable within a twelve-month period.

     Short-term Investments

     The Company maintains its excess cash in U.S. treasury bills and notes,
     government and corporate bonds issued by financial institutions with strong
     ratings. The specific identification method is used to determine the cost
     of securities sold, with realized gains and losses reflected in
     non-operating income and expenses. As of December 31, 2003, all of the
     Company's investments were classified as available-for-sale securities and
     are recorded at market value. Unrealized gains and losses on these
     investments are included with accumulated other comprehensive income, as a
     separate component of shareholders' equity, net of any related tax effect,
     unless unrealized losses are deemed other than temporary. Unrealized losses
     are recorded as a charge to income when deemed other than temporary.

     Inventories

     The Company outsources the wafer fabrication, assembly, and testing of its
     products. Inventories are stated at the lower of standard cost or market
     value. Cost is determined on a currently adjusted standard basis, which
     approximates actual cost on a first-in first-out basis.

                                      F-12

<PAGE>

     Long-term Investments

     Long-term investments over which the Company does not exercise significant
     influence are accounted for under the cost method of accounting. Management
     evaluates related information in addition to quoted market prices, if any,
     in determining the fair value of these investments and whether an other
     than temporary decline in value exists. Factors indicative of an other than
     temporary decline include recurring operating losses, credit defaults and
     subsequent rounds of financings at an amount below the cost basis of the
     investment. The list is not all inclusive and management periodically
     weighs all quantitative and qualitative factors in determining if any
     impairment loss exists.

     Fixed Assets

     Fixed assets are stated at cost less accumulated depreciation. Major
     additions, renewals and betterments are capitalized, while maintenance and
     repairs are expensed as incurred.

     Depreciation is provided on the straight-line method over estimated service
     lives that range as follows: equipment--3 to 10 years, furniture and
     fixtures--3 to 15 years, equipment under capital lease--2 to 5 years,
     leasehold improvements--2 to 6 years and transportation equipment--5 years.
     Depreciation expense recognized during the years ended December 31, 2001,
     2002 and 2003 was approximately $1,129,000, $1,884,000 and $2,325,000,
     respectively.

     Equipment covered by agreements qualifying as capital leases is stated at
     the lower of fair market value or the present value of the minimum lease
     payments at the inception of the lease, less depreciation.

     Asset Impairment

     The Company evaluates the recoverability of long-lived assets whenever
     events or changes in circumstances indicate the carrying value may not be
     recoverable. The carrying value of a long-lived asset is considered
     impaired when the anticipated undiscounted cash flows from such asset is
     separately identifiable and is less than the carrying value. If impairment
     occurs, a loss based on the excess of carrying value over the fair market
     value of the long-lived asset is recognized. Fair market value is
     determined by reference to quoted market prices, if available, or
     discounted cash flows, as appropriate.

     Other Assets--Others

     Other assets--others consist of refundable deposits, employee cash
     advances, deferred charges and patents. Costs incurred in connection with
     securing patents, including attorneys' fees, are capitalized and amortized
     over the estimated life of the related technology which is estimated to be
     five years.

     Treasury Stock

     In 2003, the Company determined it will retire ordinary shares repurchased
     under a share repurchase plan. Accordingly, the excess of the purchase
     price over par value was allocated between additional paid--in capital and
     retained earnings based on the average issuance price of the shares
     repurchased. Any future repurchases will be immediately retired.

                                      F-13

<PAGE>

     Revenue Recognition

     Revenue from product sales to customers, other than distributors, is
     recognized at the time of shipment and when title and right of ownership
     transfers to customers. The four criteria for revenue being realized and
     earned are the existence of evidence of sale, actual shipment, fixed or
     determinable selling price, and reasonable assurance of collectibility.

     Allowances for sales returns and discounts are provided at the time of the
     recognition of the related revenues on the basis of experience and these
     provisions are deducted from sales.

     In certain limited instances, the Company sells its products through
     distributors. The Company has limited control over these distributors'
     selling of products to third parties. Accordingly, the Company recognizes
     revenue on sales to distributors when the distributors sell the Company's
     products to third parties. Thus, products held by distributors are included
     in the Company's inventory balance.

     The Company provides its distributors with limited product rotation and
     price protection rights for products held in distributors' inventory. To
     date, the Company has given no price adjustments to or rotated products for
     its distributors.

     Research and Development

     Research and development costs consist of expenditures incurred during the
     course of planned research and investigation aimed at the discovery of new
     knowledge that will be useful in developing new products or processes, or
     at significantly enhancing existing products or production processes as
     well as expenditures incurred for the design and testing of product
     alternatives or construction of prototypes. All expenditures related to
     research and development activities of the Company are charged to operating
     expenses when incurred.

     Advertising Expenses

     The Company expenses all advertising and promotional costs as incurred.
     These costs were $1,464,000, $1,577,000 and $795,000 in the years ended
     December 31, 2001, 2002 and 2003, respectively. A portion of these costs
     were for advertising, which amounted to $138,000 in 2001, $138,000 in 2002
     and $153,000 in 2003.

     Income Taxes

     The Company is not subject to income or other taxes in the Cayman Islands.
     However, subsidiaries are subject to taxes of the jurisdiction where they
     are located.

     Under current Republic of China ("ROC") tax regulations, the current year's
     earnings, on a tax basis, that are not distributed in the following year
     are subject to a 10% additional income tax. This 10% additional income tax
     is recognized in the period during which the related income is generated.

                                      F-14

<PAGE>

     Income taxes are accounted for in accordance with Statement of Financial
     Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". The
     provision for income tax represents income tax paid and payable for the
     current year plus the changes in the deferred income tax assets and
     liabilities during the years. Deferred income tax assets are recognized for
     operating loss carryforwards, research and development credits, and
     temporary differences. The Company believes that uncertainty exists
     regarding the realizability of certain deferred income tax assets and,
     accordingly, has established a valuation allowance for those net deferred
     income tax assets to the extent the realizability is not deemed more likely
     than not.

     Stock-based Compensation

     The Company has elected to follow Accounting Principles Board Opinion
     ("APB") No. 25, "Accounting for Stock Issued to Employees" and complies
     with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
     Compensation" for its employee stock options. Under APB No. 25,
     compensation expense is measured based on the difference, if any, on the
     date of the grant, between the fair value of the Company's stock and the
     exercise price.

     Had the compensation cost for the Company's stock-based compensation plans
     been determined on the basis of the fair values under SFAS No. 123, the
     Company's fiscal 2001, 2002 and 2003 net income and net income per share
     would have been adjusted to the following pro forma amounts.

<TABLE>
<CAPTION>
                                                                         Years Ended December 31
                                                                       ---------------------------
                                                                         2001      2002      2003
                                                                       -------   -------   -------
<S>                                                                    <C>       <C>       <C>
     Net income as reported (in thousands)                             $ 5,634   $10,729   $13,201
     Add: Stock based compensation expense included in net
        income, including tax expense of $0 for 2001, 2002 and 2003,
        respectively                                                       166        44        --
     Deduct: Stock-based compensation costs under SFAS No. 123
        including tax expense of $0 for 2001, 2002 and 2003,
        respectively                                                    (2,297)   (5,121)   (4,525)
                                                                       -------   -------   -------
     Pro forma net income                                              $ 3,503   $ 5,652   $ 8,676
                                                                       =======   =======   =======
     Pro forma shares used in calculation--basic (in thousands)         34,020    38,300    38,374
                                                                       -------   -------   -------
     Pro forma earnings per share--basic                               $  0.10   $  0.15   $  0.23
                                                                       =======   =======   =======
     Earnings per share--basic as reported                             $  0.17   $  0.28   $  0.34
                                                                       =======   =======   =======

     Pro forma shares used in calculation--diluted (in thousands)       35,576    39,591    39,736
                                                                       =======   =======   =======
     Pro forma earnings per share--diluted                             $  0.10   $  0.14   $  0.22
                                                                       =======   =======   =======
     Earnings per share--diluted as reported                           $  0.16   $  0.27   $  0.33
                                                                       =======   =======   =======
</TABLE>

                                      F-15

<PAGE>

     Foreign Currency Transactions

     The functional currency is the local currency of the respective entities.
     Foreign currency transactions are recorded at the rate of exchange in
     effect when the transaction occurs. Gains or losses, resulting from the
     application of different foreign exchange rates when cash in foreign
     currency is converted into the entities' functional currency, or when
     foreign currency receivables and payables are settled, are credited or
     charged to income in the period of conversion or settlement. At year-end,
     the balances of foreign currency monetary assets and liabilities are
     restated based on prevailing exchange rates and any resulting gains or
     losses are credited or charged to income.

     Translation of Foreign Currency
        Financial Statements

     The reporting currency of the Company is the U.S. dollar. Accordingly, the
     financial statements of the foreign subsidiaries are translated into U.S.
     dollars at the following exchange rates: Assets and liabilities--current
     rate on balance sheet date; shareholders' equity--historical rate; income
     and expenses--weighted average rate during the year. The resulting
     translation adjustment is recorded as a separate component of shareholders'
     equity.

     Comprehensive Income (Loss)

     Comprehensive income represents net income plus the results of certain
     changes in shareholders' equity during a period from non-owner sources that
     are not reflected in the consolidated statement of operations.

     Legal Contingencies

     The Company is currently involved in various claims and legal proceedings.
     Periodically, the Company reviews the status of each significant matter and
     assesses the potential financial exposure. If the potential loss from any
     claim or legal proceeding is considered probable and the amount can be
     estimated, the Company accrues a liability for the estimated loss. Because
     of uncertainties related to these matters, accruals are based only on the
     best information available at the time. As additional information becomes
     available, the Company reassesses the potential liability related to the
     pending claims and litigation and revises these estimates as appropriate.
     Such revisions in the estimates of the potential liabilities could have a
     material impact on the results of operations and financial position.

     Recent Accounting Pronouncements
        Not Yet Adopted

     In January 2003, the Financial Accounting Standards Board ("FASB") released
     Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
     46") which requires that all primary beneficiaries of Variable Interest
     Entities ("VIE") consolidate that entity. FIN 46 is effective immediately
     for VIEs created after January 31, 2003 and to VIEs in which an enterprise
     obtains an interest after that date. It applies in the first fiscal year or
     interim period beginning after June 15, 2003 to VIEs in which an enterprise
     holds a variable interest it acquired before February 1, 2003. In December
     2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some
     of the provisions of the interpretation and to defer the effective date of
     implementation for certain entities. Under the guidance of FIN 46R,
     entities that do not have interests in structures that are commonly
     referred to as special purpose entities (SPE's) are required to apply the
     provisions of the interpretation in financial statements for periods ending
     after March 14, 2004. The Company does not have interests in special
     purpose entities and will apply the provisions of FIN 46R with its first
     quarter 2004 financial statements.

                                      F-16

<PAGE>

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
     Financial Instruments with Characteristics of both Liabilities and Equity".
     The statement establishes standards for how an issuer classifies and
     measures certain financial instruments. This statement is effective for
     financial instruments entered into or modified after May 31, 2003, and
     otherwise is effective at the beginning of the first interim period
     beginning after June 15, 2003. The statement requires that certain
     financial instruments that, under previous guidance, could be accounted for
     as equity, be classified as liabilities, or assets in some circumstances.
     This statement does not apply to features embedded in a financial
     instrument that is not a derivative in its entirety. The statement also
     requires disclosures about alternative ways of settling the instruments and
     the capital structure of entities whose shares are mandatorily redeemable.
     The adoption of SFAS No. 150 did not impact the Company's consolidated
     financial statements.

     Reclassifications

     Certain amounts reported in previous years have been reclassified to
     conform to the 2003 presentation.

3.   CASH AND CASH EQUIVALENTS

                                                                  December 31
                                                               -----------------
                                                                 2002      2003
                                                               -------   -------
                                                                 (In Thousands)

     Time deposits                                             $31,191   $34,951
     US treasury bills and corporate bonds                      25,997    17,122
     Savings and checking accounts                              12,140    14,409
     Petty cash                                                      6         7
                                                               -------   -------

                                                               $69,334   $66,489
                                                               =======   =======

4.   SHORT-TERM INVESTMENTS

     The following is a summary of available-for-sale securities:

                                                                  December 31
                                                               -----------------
                                                                 2002      2003
                                                               -------   -------
                                                                 (In Thousands)

     US treasury bills                                         $26,914   $33,958
     Time deposits                                              10,263    10,611
     Corporate bonds                                             2,247     8,185
     Foreign government bonds                                    3,227     1,144
     Others                                                         24        25
                                                               -------   -------

                                                               $42,675   $53,923
                                                               =======   =======

                                      F-17

<PAGE>

     Available-for-sale securities by contractual maturity are as follows:

                                                                  December 31
                                                               -----------------
                                                                 2002      2003
                                                               -------   -------
                                                                 (In Thousands)

     Due within one year                                       $40,606   $52,752
     Due after one year through two years                        2,069        --
     Due after two years                                            --     1,171
                                                               -------   -------

                                                               $42,675   $53,923
                                                               =======   =======

     The Company's gross realized gains and losses on the sale of investments
     for the year ended December 31, 2002 were $606,000 and $221,000,
     respectively, and for the year ended December 31, 2003 were $0 and $5,000,
     respectively. Gross unrealized gains and losses at December 31, 2002 were
     $64,000 and $176,000, respectively, and at December 31, 2003 were $196,000
     and $47,000, respectively. The Company did not provide the disclosure of
     fair value and unrealized losses by category of investment as required by
     EITF No 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
     Application to Certain Investments" as the amount of the unrealized losses
     for 2003 are deemed insignificant.

5.   ACCOUNTS RECEIVABLE--NET

                                                                  December 31
                                                               ----------------
                                                                2002      2003
                                                               ------   -------
                                                                (In Thousands)

     Accounts receivable                                       $7,973   $10,195
     Allowances for
        Doubtful receivables                                      (64)      (86)
        Sales returns and discounts                              (314)     (315)
                                                               ------   -------

                                                               $7,595   $ 9,794
                                                               ======   =======

     The changes in the allowances are summarized as follows:

                                                              2001   2002   2003
                                                              ----   ----   ----
                                                                (In Thousands)

     Allowances for doubtful receivables
        Balance, beginning of year                            $ 38   $ 55   $ 64
        Additions                                               17      9     22
                                                              ----   ----   ----

       Balance, end of year                                   $ 55   $ 64   $ 86
                                                              ====   ====   ====

     Allowances for sales returns and discounts
        Balance, beginning of the year                        $252   $314   $314
        Additions                                               62     --      1
                                                              ----   ----   ----

        Balance, end of the year                              $314   $314   $315
                                                              ====   ====   ====

                                      F-18

<PAGE>

6.   INVENTORIES

                                                                   December 31
                                                                 ---------------
                                                                  2002     2003
                                                                 ------   ------
                                                                  (In Thousands)

     Finished goods                                              $2,344   $2,042
     Work-in-process                                              2,846    3,608
     Raw materials                                                1,777    3,963
                                                                 ------   ------

                                                                 $6,967   $9,613
                                                                 ------   ------

7.   LONG-TERM INVESTMENTS

                                                                   December 31
                                                                 ---------------
                                                                  2002     2003
                                                                 ------   ------
                                                                  (In Thousands)

     Cost method
        X-FAB Semiconductor Foundries AG (X-FAB)                 $4,968   $4,968
        360 Degree Web Ltd. (360 Degree Web)                         --    1,750
        GEM Services, Inc. (GEM)                                    500      500
        Etrend Hightech Corporation (Etrend)                        500      647
        Silicon Genesis Corporation (SiGen)                          17       --
                                                                 ------   ------
                                                                  5,985    7,865
     Convertible loans to 360 Degree Web                          1,750       --
                                                                 ------   ------

                                                                 $7,735   $7,865
                                                                 ======   ======

     The Company invested in X-FAB's ordinary shares in July 2002. X-FAB is a
     European-American foundry group that specializes in mixed signal
     applications. As of December 31, 2003, the Company acquired 530,000 shares
     for $4,968,000 (4,982,000 EURO), which represents a 2.03% ownership of
     X-FAB.

     The Company invested in GEM's preferred shares in August 2002. GEM is a
     multinational semiconductor assembly and test company. As of December 31,
     2003, the Company acquired 333,334 shares for $500,000, which represents a
     1.26% ownership of GEM.

     The Company invested in Etrend's ordinary shares in December 2002 and July
     2003. Etrend is a wafer probing, packing and testing company. As of
     December 31, 2003, the Company acquired 2,189,288 shares for $647,000,
     which represents approximately 12.5% ownership of Etrend.

     The Company invested in SiGen preferred shares in December 2000. SiGen is
     an advanced nanotechnology company that develops silicon-on-insulator
     "SOI", strained-silicon products and other engineered multi-layer
     structures to the microelectronics and photonics industries for advanced
     electronic and opto-electronic device applications. As of December 31,
     2003, the Company acquired 71,840 shares for $500,000, which represents a
     0.25% ownership of SiGen. In 2002 and 2003, the Company reviewed
     qualitative factors of this investment and determined that the decline in
     value of SiGen was other-than-temporary and recognized an impairment loss
     of $483,000 and $17,000, respectively.

                                      F-19

<PAGE>

     On January 3, 2003, the Company exercised its option to convert its
     convertible loans of $1,750,000 in 360 Degree Web to 2,083,333 Series B
     preference shares of capital stock at $0.36 per share and 1,000,000 Series
     B2 preference shares of capital stock at $1.00 per share. 360 Degree Web
     designs, develops and markets intelligent security software solutions that
     provide secure computing environment for personal computer mobile devices
     and the internet. After the conversion, the Company had a 35.18% ownership
     in 360 Degree Web. The Company did not participate in 360 Degree Web's
     financing during 2003 and the ownership was diluted to 29.33% as of
     December 31, 2003. At December 31, 2003, one of the Company's directors
     serves as a director of 360 Degree Web. In addition, the Company does not
     actively participate in the decision-making process at 360 Degree Web.
     Management of 360 Degree Web owns more than 50% of the outstanding voting
     shares and 100% of the Series A voting preferred shares which has more
     characteristics of common stock than the other preferred shares. Therefore,
     the Company accounts for the investment under the cost method of
     accounting.

8.   FIXED ASSETS--NET

                                                                  December 31
                                                               -----------------
                                                                 2002      2003
                                                               -------   -------
                                                                 (In Thousands)
     Cost
        Equipment                                              $ 8,928   $10,457
        Furniture and fixtures                                     242       336
        Equipment under capital lease                              165       165
        Leasehold improvements                                     654       727
        Transportation equipment                                    56        56
        Prepayment for leasehold                                   239        43
                                                               -------   -------
                                                                10,284    11,784
                                                               -------   -------
     Accumulated depreciation
        Equipment                                                3,985     6,096
        Furniture and fixtures                                     117       131
        Equipment under capital lease                              155       162
        Leasehold improvements                                     398       486
        Transportation equipment                                    18        29
                                                               -------   -------
                                                                 4,673     6,904
                                                               -------   -------
                                                               $ 5,611   $ 4,880
                                                               -------   -------

9.   OTHER ASSETS

                                                                   December 31
                                                                ----------------
                                                                 2002      2003
                                                                ------   -------
                                                                 (In Thousands)
     Restricted assets                                          $   --   $10,044
                                                                ------   -------
     Long-term note receivables from employees                     447       551
     Deferred charges                                               39       473
     Refundable deposits                                           373       404
     Patent costs--net of accumulated amortization of $169 in
        2002 and $319 in 2003                                      150        --
                                                                ------   -------
                                                                 1,009     1,428
                                                                ------   -------
                                                                $1,009   $11,472
                                                                ======   =======

                                      F-20

<PAGE>

     As of December 31, 2003, restricted assets consisted of deposits made for
     Taiwan court cases in the form of Taiwan Government bonds, negotiated
     certificates of deposit and cash, amounting to $10,044,000.

     In 2001, James Keim, one of the Company's directors, accepted the
     assignment of Head of Marketing and Sales in the Cayman Islands, and moved
     to the Cayman Islands in December 2001. In connection with the move and to
     assist Mr. Keim to purchase a residence in the Cayman Islands, the Company
     entered into a term loan agreement with Mr. Keim in February 2002, under
     which the Company made an interest free, unsecured loan in the amount of
     $400,000 to Mr. Keim. The loan is repayable on February 2007. As of
     December 31, 2003, $18,000 had been repaid.

10.  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

                                                                   December 31
                                                                 ---------------
                                                                  2002      2003
                                                                 ------   ------
                                                                  (In Thousands)
     Legal and audit fees                                        $  314   $1,180
     Salaries and bonus                                             995    1,155
     Deferred income tax liabilities                                 --      444
     Accrued vacation                                               350      371
     ESPP payable                                                   172      301
     Commissions                                                    331      239
     Others accrued expenses                                      1,367    1,690
                                                                 ------   ------
                                                                 $3,529   $5,380
                                                                 ======   ======

11.  INCOME TAXES

     Income before income taxes consisted of:

                                                        Years Ended December 31
                                                      --------------------------
                                                       2001      2002      2003
                                                      ------   -------   -------
                                                            (In Thousands)
     Cayman                                           $2,635   $10,735   $12,159
     Other subsidiaries                                4,151     1,667     2,868
                                                      ------   -------   -------
                                                      $6,786   $12,402   $15,027
                                                      ======   =======   =======

     Income tax expense consisted of:

                                                         Years Ended December 31
                                                        ------------------------
                                                         2001     2002     2003
                                                        ------   ------   ------
                                                             (In Thousands)
     Current                                            $1,305   $1,475   $1,440
     Deferred                                             (153)     198      386
                                                        ------   ------   ------
     Income tax expense                                 $1,152   $1,673   $1,826
                                                        ======   ======   ======

                                      F-21

<PAGE>

     The Company and its subsidiaries file separate income tax returns.
     Reconciliation of the significant differences between the statutory income
     tax rate and the effective income tax rate on pretax income is as follows:

                                                       Years Ended December 31
                                                      ------------------------
                                                       2001      2002     2003
                                                      ------    -----    -----
     Cayman statutory rate                                 0%       0%       0%
     Foreign in excess of statutory rate               22.40%   12.40%   10.72%
     Research and development credits                 (14.10%)  (5.90%)  (4.39%)
     Adjustments to prior years' taxes                 (6.40%)   0.40%    0.09%
     Valuation allowance                               10.40%    5.70%    2.55%
     Others                                             4.70%    0.90%    3.18%
                                                      ------    -----    -----
     Effective tax rate                                17.00%   13.50%   12.15%
                                                      ======    =====    =====

     The deferred income tax assets and liabilities as of December 31, 2002 and
     2003 consisted of the following:

                                                                 December 31
                                                             ------------------
                                                               2002       2003
                                                             -------    -------
                                                                (In Thousands)
     Deferred income tax assets
        Net operating loss carryforwards                     $   567    $   390
        Research and development credits                       2,835      3,409
        Depreciation and amortization                             93        104
        Accrued vacation                                         122        118
        Others                                                    43        165
                                                             -------    -------
                                                               3,660      4,186
     Valuation allowance                                      (3,440)    (3,909)
                                                             -------    -------
     Total net deferred income tax assets                        220        277
                                                             -------    -------
     Deferred income tax liabilities
        Withholding tax liabilities                               --        359
        Unrealized capital allowance                              --         76
        Unrealized foreign exchange                                1          9
                                                             -------    -------
     Total deferred income tax liabilities                         1        444
                                                             -------    -------
     Net deferred income tax assets (liabilities)            $   219      ($167)
                                                             =======    =======
     Balance sheet caption reported in:
        Prepaid expenses and other current assets            $   219    $   277
        Accrued expenses and other current liabilities            --        444
                                                             -------    -------
                                                             $   219      ($167)
                                                             =======    =======

                                      F-22

<PAGE>

     As of December 31, 2003, O//2//Micro, Inc. had U.S. federal and state net
     operating loss carryforwards of approximately $290,000 and $4,994,000, and
     federal and state research and development credit carryforwards of
     approximately $2,123,000 and $1,949,000, respectively. The U.S. federal net
     operating loss carryforwards will expire from 2011 through 2012 if not
     utilized. The state net operating loss carryforwards will expire in 2004
     and 2005 if not utilized. The U.S. federal research and development credit
     will expire from 2012 through 2023 if not utilized, while the state
     research and development credit will never expire. Utilization of the net
     operating loss carryforwards may be subject to significant annual
     limitation due to the ownership change limitations provided by the U.S.
     Internal Revenue Code of 1986 and similar provisions in the State of
     California's tax regulations. The annual limitation may result in the
     expiration of net operating losses before utilization.

12.  SHAREHOLDERS' EQUITY

     Employee Benefit Plans

     Savings plan

     The Company has a savings plan that qualifies under Section 401(k) of the
     U.S. Internal Revenue Code. Participating employees may defer up to 15% of
     pretax salary, but not more than statutory limits. The Company may make
     voluntary contributions to the savings plan but has made no contributions
     since the inception of the savings plan.

     1999 employee stock purchase plan ("1999 purchase plan")

     In 1999, the Company's Board of Directors adopted the 1999 Purchase Plan,
     which was approved by the shareholders in October 1999. A total of
     1,000,000 ordinary shares have been reserved for issuance under the 1999
     Purchase Plan, plus annual increases on January 1 of each year, commencing
     in 2001, up to 800,000 shares as approved by the Board of Directors. The
     1999 Purchase Plan is subject to adjustment in the event of a stock split,
     stock dividend or other similar changes in ordinary shares or capital
     structure.

     The 1999 Purchase Plan permits eligible employees to purchase ordinary
     shares through payroll deductions, which may range from 1% to 10% of an
     employee's regular base pay at a price equal to the lesser of 85% of the
     fair market value of the Company's ordinary shares on the date of grant of
     the option to purchase or 85% of the fair market value of the Company's
     ordinary shares on the applicable exercise date. Employees may elect to
     discontinue their participation in the purchase plan at any time during the
     enrollment period. Participation ends automatically on termination of
     employment with the Company. If not terminated earlier, the 1999 Purchase
     Plan will have a term of 10 years. During 2002 and 2003, 97,304 and 109,735
     ordinary shares, respectively, had been purchased under the 1999 Purchase
     Plan. As of December 31, 2003, 702,903 shares were available for issuance.

     Stock option plans

     In 1997, the Company's Board of Directors adopted the 1997 Stock Plan, and
     in 1999, adopted the 1999 Stock Incentive Plan (collectively, the "Plans").
     The Plans provide for the granting of stock options to employees, directors
     and consultants of the Company. Options granted under the Plans may be
     either incentive stock options ("ISO") within the meaning of Section 422 of
     the United States Internal Revenue Code, or nonstatutory stock options
     ("NSO"). ISOs may be granted only to Company employees and directors. NSOs
     may be granted to Company employees and consultants.

                                      F-23

<PAGE>

     Options under the Plans may be granted for periods of up to ten years and
     at prices no less than 85% of the estimated fair value of the shares (in
     the case of NSOs) on the date of grant as determined by the Board of
     Directors, provided, however, that (i) the exercise price of an ISO may not
     be less than 100% of the estimated fair value of the shares on the date of
     grant, and (ii) the exercise price of an ISO granted to a 10% shareholder
     may not be less than 110% of the estimated fair value of the shares on the
     date of grant. Options may be exercised following the termination of a
     grantee's continuous service only to the extent provided in the award
     agreement. Options generally expire no later than ten years after grant, or
     five years in the case of an ISO granted to a 10% shareholder. The options
     generally vest over a period of four years from the vesting commencement
     date. Options may be granted with different vesting terms from time to
     time.

     Under the 1997 Stock Plan, the Board of Directors reserved 3,700,000
     ordinary shares for issuance. After the completion of an initial public
     offering, no further options were granted under the 1997 Stock Plan. Under
     the 1999 Stock Incentive Plan, the maximum aggregate number of shares
     available for grant shall be 3,000,000 ordinary shares plus an annual
     increase on January 1 of each year, commencing in 2001, equal to the least
     of 1,500,000 shares (in the case of ISOs) or 4% of the outstanding ordinary
     shares on the last day of the preceding fiscal year or a smaller number
     determined by the administrator. As of December 31, 2003, the number of
     options outstanding and exercisable were 570,207 and 522,554 under the 1997
     Stock Plan, respectively, and 3,349,653 and 878,038 under the 1999 Stock
     Incentive Plan, respectively.

     A summary of the Company's stock option activity and related information is
     as follows:

                                                                        Weighted
                                                           Number of     Average
                                              Available   Outstanding   Exercise
                                              for Grant     Options       Price
                                             ----------   -----------   --------
     Balance, January 1, 2001                 3,034,006    2,323,365
        Granted                              (1,615,000)   1,615,000     $12.04
        Exercised                                    --     (656,215)    $ 1.50
        Canceled                                168,373     (168,373)    $ 6.45
                                             ----------    ---------
     Balance, December 31, 2001               1,587,379    3,113,777
        Additional shares authorized          1,500,000           --
        Granted                              (1,310,400)   1,310,400     $12.30
        Exercised                                    --     (325,113)    $ 2.96
        Canceled                                 54,894      (54,894)    $10.83
                                             ----------    ---------
     Balance, December 31, 2002               1,831,873    4,044,170
        Additional shares authorized          1,500,000           --
        Granted                                (913,300)     913,300     $13.88
        Exercised                                    --     (863,987)    $ 6.52
        Canceled                                173,623     (173,623)    $13.05
                                             ----------    ---------
     Balance, December 31, 2003               2,592,196    3,919,860
                                             ==========    =========

                                      F-24

<PAGE>

     The following table summarizes information about the stock options
     outstanding as of December 31, 2003:

<TABLE>
<CAPTION>
                                         Options Outstanding            Options Exercisable
                                ------------------------------------   ----------------------
                                               Weighted
                                                Average     Weighted                 Weighted
                                               Remaining     Average      Number     Average
                                   Number     Contractual   Exercise   Exercisable   Exercise
     Range of Exercise Prices   Outstanding      Life         Price     and Vested    Price
     ------------------------   -----------   -----------   --------   -----------   --------
     <S>                         <C>              <C>        <C>        <C>           <C>
     $0.03--$0.09                   69,292        3.46       $ 0.045       69,292     $ 0.05
     $0.18--$0.25                    2,396        4.80       $ 0.245        2,396     $ 0.25
     $0.50                          50,333        5.19       $ 0.500       50,333     $ 0.50
     $3.95--$5.88                  277,560        6.23       $ 4.777      234,749     $ 4.58
     $6.50--$9.60                1,115,723        7.87       $ 8.460      522,204     $ 8.37
     $10.06--$14.97              1,550,677        8.36       $12.900      316,156     $12.92
     $15.38--$24.18                853,879        8.68       $18.168      205,462     $17.81
                                 ---------                              ---------

                                 3,919,860        8.01       $ 11.81    1,400,592     $ 9.44
                                 =========                              =========
</TABLE>

     For purposes of measuring compensation expense under APB No. 25, the fair
     value of the shares on the date of grant was determined by the Board of
     Directors for grants prior to August 23, 2000. The fair value of subsequent
     option grants were based on the market price of ordinary shares on the day
     of grant.

     The Company calculated the minimum fair value of each option grant on the
     date of grant using the Black-Scholes option pricing model as prescribed by
     SFAS No. 123. The Black-Scholes option valuation model was developed for
     estimating the fair value of traded options that have no vesting
     restrictions and are fully transferable. In addition, option valuation
     models require the input of highly subjective assumptions, including the
     expected stock price volatility.

                                                      Years Ended December 31
                                                    ---------------------------
                                                     2001      2002      2003
                                                    -------   -------   -------
     Risk-free interest rate                              4%        3%        3%
     Expected life                                  5 years   5 years   5 years
     Volatility                                       83.08%   114.18%   155.62%
     Dividend                                            --        --        --

     The weighted average fair values under SFAS No. 123 for options granted
     during the years ended December 31, 2001, 2002 and 2003 was $4.93, $3.86
     and $4.03, respectively.

     Deferred compensation

     In connection with stock option grants since the Company's inception, the
     Company recognized accumulated deferred compensation totaling $3,056,000
     which was fully amortized as of December 31, 2002. Amortization expense
     recognized during the years ended December 31, 2001, 2002 and 2003 was
     approximately $166,000, $44,000 and $0, respectively.

                                      F-25

<PAGE>

     Shares reserved

     Ordinary shares reserved for future issuance was as follows at December 31,
     2003:

                                                                        Shares
                                                                       ---------
     Outstanding stock options                                         3,919,860
     Shares reserved for future stock option grants                    2,592,196
     Shares reserved for employee stock purchase plan                    702,903
                                                                       ---------

                                                                       7,214,959
                                                                       =========

13.  EARNINGS PER SHARE

     Basic earnings per share is calculated by dividing net income by the
     weighted average number of ordinary shares outstanding during the period.
     Diluted earnings per share is calculated by dividing net income by the
     weighted average number of ordinary and dilutive ordinary equivalent shares
     outstanding during the period, using either the "as if converted" method
     for convertible preference shares or the treasury stock method for options
     and warrants.

     A reconciliation of the numerator and denominator of basic and diluted
     earnings per share calculations is provided as follows:

<TABLE>
<CAPTION>
                                                               Years Ended December 31
                                                             ---------------------------
                                                              2001      2002      2003
                                                             -------   -------   -------
<S>                                                          <C>       <C>       <C>
     Net income (in thousands)                               $ 5,634   $10,729   $13,201
                                                             =======   =======   =======

     Weighted average thousand shares outstanding--basic      34,020    38,300    38,374
     Effect of dilutive securities:
        Options                                                1,317     1,194     1,362
        Warrants                                                 239        97        --
                                                             -------   -------   -------
     Weighted average thousand shares outstanding--diluted    35,576    39,591    39,736
                                                             =======   =======   =======

     Earnings per share--basic                               $  0.17   $  0.28   $  0.34
                                                             =======   =======   =======
     Earnings per share--diluted                             $  0.16   $  0.27   $  0.33
                                                             =======   =======   =======
</TABLE>

     Certain antidilutive outstanding options and warrants were excluded from
     the computation of diluted EPS since their exercise prices exceeded the
     average market price of the ordinary shares during the period. The
     antidilutive stock options excluded and their associated exercise prices
     per share were 1,023,100 shares and $12.54 to $24.05 as of December 31,
     2001, 1,141,900 shares and $14.10 to $24.18 as of December 31, 2002 and
     916,646 shares and $15.38 to $24.18 as of December 31, 2003.

                                      F-26

<PAGE>

14.  LEASE COMMITMENTS

     The Company leases office space and certain equipment under non-cancelable
     operating lease agreements that expire at various dates through January
     2006. The Company's office lease provides for periodic rent increases based
     on the general rate of inflation. The Company also leases certain equipment
     under a capital lease that expires in May 2004. There are provisions in the
     lease that provide for a bargain purchase option upon the expiration of the
     lease.

     As of December 31, 2003, minimum lease payments under all noncancelable
     leases were as follows:

                                                             Capital   Operating
                             Year                            Leases     Leases
                             ----                            -------   ---------
                                                               (In Thousands)

     2004                                                      $ 2       $1,359
     2005                                                       --          213
     2006                                                       --            3
     2007                                                       --           --
     2008                                                       --           --
                                                               ---       ------
     Total minimum lease payments                                2       $1,575
                                                                         ======
     Less--amount representing interest                          1
                                                               ---
     Present value of minimum lease payments                     1
     Less--current portion                                       1
                                                               ---

     Long-term obligations under capital lease                 $--
                                                               ===

     Capital lease obligations are secured by the related equipment and the
     total costs of the equipment under capital lease was $165,000, $165,000 and
     $165,000 for December 31, 2001, 2002 and 2003, respectively. Accumulated
     depreciation was $122,000, $155,000 and $162,000 at December 31, 2001, 2002
     and 2003, respectively.

15.  CONTINGENCIES

     a.   Monolithic Power Systems, Inc. ("MPS"), a privately held company in
          Los Gatos, California, USA has alleged in a counterclaim that certain
          products of the Company infringe on two of MPS' patents. Litigation on
          such claim is pending in the United States District Court in the
          Northern District of California. Trial is currently scheduled for
          August 2004.

          While the Company cannot make any assurance regarding the eventual
          resolution of this matter, the Company does not believe the final
          outcome will have a material adverse effect on its consolidated
          results of operations or financial condition.

          The Company, as a normal course of business, is a party to various
          litigation matters, legal proceedings and claims. These actions may be
          in various jurisdictions, and may involve patent protection and/or
          patent infringement. While the results of such litigations and claims
          cannot be predicted with certainty the final outcome of such matters
          is not expected to have a material adverse effect on its consolidated
          financial position or results of operations. No assurance can be
          given, however, that these matters will be resolved without the
          Company becoming obligated to make payments or to pay other costs to
          the opposing parties, with the potential for having an adverse effect
          on the Company's financial position or its results of operations.

                                      F-27

<PAGE>

16.  FINANCIAL INSTRUMENTS

     Information on the Company's financial instruments are as follows:

                                                       December 31
                                         ---------------------------------------
                                                2002                 2003
                                         ------------------   ------------------
                                         Carrying    Fair     Carrying    Fair
                                           Value     Value      Value     Value
                                         --------   -------   --------   -------
                                                      (In Thousands)
     Assets
        Cash and cash equivalents         $69,334   $69,334    $66,489   $66,489
        Restricted cash                     2,019     2,019      1,892     1,892
        Short-term investments             42,675    42,675     53,923    53,923
        Accounts receivable--net            7,595     7,595      9,794     9,794
        Restricted assets--net                 --        --     10,044    10,796
     Liabilities
        Notes and accounts payable          5,202     5,202      6,334     6,334

     Fair values of restricted assets made in the form of Taiwan Government
     bonds are based on market value; otherwise are carried at amounts which
     approximate fair value.

     Long-term investments are in privately-held companies where there is no
     readily determinable market value. The Company periodically evaluates these
     investments for impairment. If it is determined that an other than
     temporary decline has occurred in the carrying value, an impairment charge
     is recorded in the period of decline in value.

17.  SEGMENT INFORMATION

     The Company designs, develops and markets innovative power management and
     security components for mobile communication, computer, information
     appliance and LCD products. The Company's integrated circuit products are
     produced with digital, analog, and mixed signal integrated circuit
     manufacturing processes. The Company's Chief Operating Decision Maker
     ("CODM"), the Chief Executive Officer, reviews information on an
     enterprise-wide basis to assess performance and allocate resources so the
     Company has one reporting segment.

     Net revenues from unaffiliated customers by geographic region are based on
     the customer's bill-to location and were as follows:

                                                       Years Ended December 31
                                                     ---------------------------
                                                       2001     2002      2003
                                                     -------   -------   -------
                                                           (In Thousands)

     Asia                                            $45,780   $70,149   $88,548
     United States                                        39        31        51
     Europe                                               --         7        --
                                                     -------   -------   -------
                                                     $45,819   $70,187   $88,599
                                                     -------   -------   -------

                                      F-28

<PAGE>

     Long-lived assets consist of fixed assets and are based on the physical
     location of the assets at the end of each year.

                                                        Years Ended December 31
                                                        ------------------------
                                                         2001     2002     2003
                                                        ------   ------   ------
                                                            (In Thousands)

     Taiwan                                             $1,272   $2,759   $2,354
     U.S.A.                                              1,190    1,422    1,251
     Singapore                                             227      764      633
     People's Republic of China                            204      388      415
     Others                                                320      278      227
                                                        ------   ------   ------
                                                        $3,213   $5,611   $4,880
                                                        ======   ======   ======

     During the year ended December 31, 2003, one customer accounted for 13.5%
     of net revenues. During the year ended December 31, 2002, two customers
     accounted for 18.6% and 15.9% of net revenues. During the year ended
     December 31, 2001, two customers accounted for 20.9% and 11.0% of net
     revenues.

                                      F-29