| Title of Each Class                                                     | Name of Each Exchange On Which Registered                |
|-------------------------------------------------------------------------|----------------------------------------------------------|
| American Depositary SharesOrdinary Shares, par value $0.00002 per share | NASDAQ Global Select MarketCayman Islands Stock Exchange |

----

----

| PART I                                     |                                                                         |
|--------------------------------------------|------------------------------------------------------------------------------|
|                                       |                                                                         |
| Item 1.                                    | Identity of Directors, Senior Management and Advisors                        | [5] |
| Item 2.                                    | Offer Statistics and Expected Timetable                                      | [5] |
| Item 3.                                    | Key Information                                                              | [5] |
| Item 4.                                    | Information on the Company                                                   | [14] |
| Item 4A.                                   | Unresolved Staff Comments                                                    | [21] |
| Item 5.                                    | Operating and Financial Review and Prospects                                 | [21] |
| Item 6.                                    | Directors, Senior Management and Employees                                   | [29] |
| Item 7.                                    | Major Shareholders and Related Party Transactions                            | [34] |
| Item 8.                                    | Financial Information                                                        | [35] |
| Item 9.                                    | The Offer and Listing                                                        | [35] |
| Item 10.                                   | Additional Information                                                       | [36] |
| Item 11.                                   | Quantitative and Qualitative Disclosures About Market Risk                   | [43] |
| Item 12.                                   | Description of Securities Other Than Equity Securities                       | [44] |
|                                       |                                                                         |   |
| PART II                                    |                                                                         |
|                                       |                                                                         |   |
| Item 13.                                   | Defaults, Dividend Arrearages and Delinquencies                              | [46] |
| Item 14.                                   | Material Modifications to the Rights of Security Holders and Use of Proceeds | [46] |
| Item 15.                                   | Controls and Procedures                                                      | [46] |
| Item 16A                                   | Audit Committee Financial Expert                                             | [47] |
| Item 16B                                   | Code of Ethics                                                               | [47] |
| Item 16C                                   | Principal Accountant Fees and Services                                       | [48] |
| Item 16D                                   | Exemptions from the Listing Standards for Audit Committee                    | [48] |
| Item 16E                                   | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | [49] |
| Item 16F                                   | Change in Registrant’s Certifying Accountant                           | [49] |
| Item 16G                                   | Corporate Governance                                                         | [50] |
|                                       |                                                                         |   |
| PART III                                   |                                                                         |
|                                       |                                                                         |   |
| Item 17.                                   | Financial Statements                                                         | [51] |
| Item 18.                                   | Financial Statements                                                         | [51] |
| Item 19.                                   | Exhibits                                                                     | [51] |
| Index to Consolidated Financial Statements | [F-1]                                                                        |
|                                       |                                                                         |   |
| Signatures                                 |                                                                         |

----

----

ITEM 

ITEM 

ITEM 

|                                                               |   | Years Ended December 31               |    |
|--------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                               |   | 2006                                  |    |   | 2007 |   |   | 2008 |   |   | 2009 |   |   | 2010 |   |
|                                                               |   | (in thousands, except per share data) |    |
| Consolidated Statement of Operations Data:                         |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |   | $                                     | 124,269 |   |   | $ | 163,573 |   |   | $ | 135,438 |   |   | $ | 124,294 |   |   | $ | 137,789 |   |
| Cost of sales                                                      |   |                                  | 56,558  |   |   |   | 69,994 |   |   |   | 56,591 |   |   |   | 50,139 |   |   |   | 53,205 |   |
| Gross profit                                                       |   |                                  | 67,711  |   |   |   | 93,579 |   |   |   | 78,847 |   |   |   | 74,155 |   |   |   | 84,584 |   |
| Operating expenses (income):                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                           |   |                                  | 26,811  |   |   |   | 29,221 |   |   |   | 31,255 |   |   |   | 29,128 |   |   |   | 31,055 |   |
| Selling, general and administrative                                |   |                                  | 39,209  |   |   |   | 43,488 |   |   |   | 36,560 |   |   |   | 41,055 |   |   |   | 31,087 |   |
| Goodwill impairment                                                |   |                                  | -       |   |   |   | - |   |   |   | 2,782 |   |   |   | - |   |   |   | - |   |
| Write-off of prepayments to foundry services                       |   |                                  | -       |   |   |   | - |   |   |   | 2,942 |   |   |   | - |   |   |   | - |   |
| Litigation income                                                  |   |                                  | -       |   |   |   | (9,364 | ) |   |   | (2,000 | ) |   |   | - |   |   |   | - |   |
| Stock Exchange of Hong Kong listing expenses                       |   |                                  | 786     |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total operating expenses                                           |   |                                  | 66,806  |   |   |   | 63,345 |   |   |   | 71,539 |   |   |   | 70,183 |   |   |   | 62,142 |   |
| Income from operations                                             |   |                                  | 905     |   |   |   | 30,234 |   |   |   | 7,308 |   |   |   | 3,972 |   |   |   | 22,442 |   |
| Non-operating income (expenses) – net                        |   |                                  | 2,858   |   |   |   | 2,819 |   |   |   | (12,133 | ) |   |   | 1,369 |   |   |   | 928 |   |
| Income (loss) from continuing operations before income tax expense |   |                                  | 3,763   |   |   |   | 33,053 |   |   |   | (4,825 | ) |   |   | 5,341 |   |   |   | 23,370 |   |
| Income tax expense (benefit)                                       |   |                                  | (2,450  | ) |   |   | 1,456 |   |   |   | 2,240 |   |   |   | 1,740 |   |   |   | 1,325 |   |
| Net income (loss) from continuing operations                       |   |                                  | 6,213   |   |   |   | 31,597 |   |   |   | (7,065 | ) |   |   | 3,601 |   |   |   | 22,045 |   |
| Loss from discontinued operations, net of tax                      |   |                                  | 5,470   |   |   |   | 6,613 |   |   |   | 6,744 |   |   |   | 6,418 |   |   |   | 9,843 |   |
| Net income (loss)                                                  |   | $                                     | 743     |   |   | $ | 24,984 |   |   | $ | (13,809 | ) |   | $ | (2,817 | ) |   | $ | 12,202 |   |
| Basic earnings (loss) per share:                                   |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                              |   |                                  | -       |   |   | $ | 0.02 |   |   | $ | (0.01 | ) |   |   | - |   |   | $ | 0.01 |   |

----

| Discontinued operations                                            |   |   | -         |   |   |   | (0.01     | )      |   |   | -         |   |   |   | -         |   |   |   | -         |   |
|--------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|-----------|--------|--------|--------|-----------|--------|--------|--------|-----------|--------|--------|--------|-----------|--------|
|                                                               |   |   | -         |   |   | $      | 0.01      |   |   | $      | (0.01     | )      |   |   | -         |   |   | $      | 0.01      |   |
| Diluted earnings (loss) per share :                                |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |
| Continuing operations                                              |   |   | -         |   |   | $      | 0.02      |   |   | NA     |      |   |   | -      |      |   | $      | 0.01   |      |
| Discontinued operations                                            |   |   | -         |   |   |   | (0.01     | )      |   | NA     |      |   |   | -      |      |   |   | -      |      |
|                                                               |   |   | -         |   |   | $      | 0.01      |   |   | NA     |      |   |   | -      |      |   | $      | 0.01   |      |
| Shares used to compute basic earnings (loss) per share:            |   |   | 1,932,575 |   |   |   | 1,905,725 |   |   |   | 1,862,831 |   |   |   | 1,840,995 |   |   |   | 1,706,665 |   |
| Shares used to compute diluted earnings per share :                |   |   | 1,946,896 |   |   |   | 1,943,785 |   |   |   | 1,862,831 |   |   |   | 1,865,876 |   |   |   | 1,752,832 |   |
|                                                               |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |
| Basic earnings (loss) per ADS (1):                                 |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |
| Continuing operations                                              |   | $      | 0.16      |   |   | $      | 0.83      |   |   | $      | (0.19     | )      |   | $      | 0.10      |   |   | $      | 0.65      |   |
| Discontinued operations                                            |   |   | (0.14     | )      |   |   | (0.17     | )      |   |   | (0.18     | )      |   |   | (0.18     | )      |   |   | (0.29     | )      |
|                                                               |   | $      | 0.02      |   |   | $      | 0.66      |   |   | $      | (0.37     | )      |   | $      | (0.08     | )      |   | $      | 0.36      |   |
| Diluted earnings (loss) per ADS (1):                               |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |   |   |      |   |
| Continuing operations                                              |   | $      | 0.16      |   |   | $      | 0.81      |   |   | NA     |      |   | $      | 0.10   |      |   | $      | 0.63   |      |
| Discontinued operations                                            |   |   | (0.14     | )      |   |   | (0.17     | )      |   | NA     |      |   |   | (0.18  | )         |   |   | (0.28  | )         |
|                                                               |   | $      | 0.02      |   |   | $      | 0.64      |   |   | NA     |      |   | $      | (0.08  | )         |   | $      | 0.35   |      |
| ADS equivalents used to compute basic earnings (loss) per ADS (1): |   |   | 38,652    |   |   |   | 38,115    |   |   |   | 37,257    |   |   |   | 36,820    |   |   |   | 34,133    |   |
| ADS equivalents used to compute diluted earnings per ADS(1):       |   |   | 38,938    |   |   |   | 38,876    |   |   |   | 37,257    |   |   |   | 37,318    |   |   |   | 35,057    |   |

|                                             |   | December 31    |    |
|--------------------------------------------------|--------|----------------|---------|
|                                             |   | 2006           |    |   | 2007 |   |   | 2008 |   |   | 2009 |   |   | 2010 |   |
|                                             |   | (in thousands) |    |
| Consolidated Balance Sheet Data:                 |   |           |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |   | $              | 45,438  |   |   | $ | 52,597 |   |   | $ | 31,844 |   |   | $ | 38,831 |   |   | $ | 42,277 |   |
| Short-term investments                           |   |           | 19,697  |   |   |   | 28,650 |   |   |   | 72,344 |   |   |   | 74,502 |   |   |   | 68,728 |   |
| Working capital                                  |   |           | 90,865  |   |   |   | 118,777 |   |   |   | 122,006 |   |   |   | 124,022 |   |   |   | 124,099 |   |
| Total assets                                     |   |           | 197,020 |   |   |   | 228,412 |   |   |   | 193,273 |   |   |   | 197,314 |   |   |   | 197,634 |   |
| Long-term liabilities, excluding current portion |   |           | 455     |   |   |   | 730 |   |   |   | 878 |   |   |   | 968 |   |   |   | 1,110 |   |
| Net assets                                       |   |           | 173,511 |   |   |   | 204,179 |   |   |   | 179,780 |   |   |   | 179,444 |   |   |   | 179,700 |   |
| Ordinary shares and additional paid-in capital   |   |           | 140,262 |   |   |   | 144,982 |   |   |   | 141,821 |   |   |   | 142,715 |   |   |   | 135,737 |   |
|                                             |   |           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   | (1) | Fifty ordinary shares equal one ADS |
|--------|-----|-------------------------------------|

----

----

----

----

----

----

----

----

ITEM 

----

----

|   |   | Consumer electronics market, including LCD TVs, desktop monitors, DVD players, digital cameras, portable GPS/PND solutions for directional assistance, PDAs, games, Car TV, and general lighting products; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Computer market, including desktop, LCD monitor, Notebook computers, Netbook computers, and mobile communication applications; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|

|   |   | Industrial market, including any product that is specified to operate over an extended temperature range, for instance, beyond the standard commercial operating temperature range of standard semiconductor products (zero degrees to 70 degrees centigrade). Products include battery management systems for power tool, electric bike, and LEV applications, plus LCD monitor, Notebook, Netbook, Industrial PC and general lighting products; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Communications market, including portable DVD, Smart Phone, PDA, and other portable electronic applications; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

|   |   | Automotive market, including GPS units for navigational assistance in vehicles, Electric Vehicles battery management, and passenger entertainment systems. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                    |   | Years Ended December 31 |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
| Location of customers                                            |   | 2008                    |    |   | 2009 |   |   | 2010 |   |
|                                                                                                                                                                                                                                                                                    |   | (in thousands)          |    |
| Asia                                                                                                                                                                                                                                                                                    |   | $                       | 138,285 |   |   | $ | 127,099 |   |   | $ | 139,085 |   |
| North America                                                                                                                                                                                                                                                                           |   |                    | 252     |   |   |   | 216 |   |   |   | 390 |   |
| Other regions                                                                                                                                                                                                                                                                           |   |                    | 288     |   |   |   | 183 |   |   |   | 260 |   |
|                                                                                                                                                                                                                                                                                    |   |                    |    |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                    |   | $                       | 138,825 |   |   | $ | 127,498 |   |   | $ | 139,735 |   |

----

|                     |   | Years Ended December 31 |    |
|--------------------------|--------|-------------------------|---------|
|                     |   | 2008                    |    |   | 2009 |   |   | 2010 |   |
|                     |   | (in thousands)          |    |
|                     |   |                    |    |   |   |   |   |   |   |
| Integrated Circuit Group |   | $                       | 135,438 |   |   | $ | 124,294 |   |   | $ | 137,789 |   |
| Network Security Group   |   |                    | 3,387   |   |   |   | 3,204 |   |   |   | 1,946 |   |
|                     |   |                    |    |   |   |   |   |   |   |   |   |   |
|                     |   | $                       | 138,825 |   |   | $ | 127,498 |   |   | $ | 139,735 |   |

----

----

| Significant Subsidiary              | Country of Incorporation | Date of Incorporation |
|-------------------------------------|--------------------------|-----------------------|
| O2Micro, Inc.                       | U.S.A.                   | March 1995            |
| O2Micro Electronics, Inc.           | Taiwan                   | March 1999            |
| O2Micro International Japan Limited | Japan                    | August 1999           |
| O2Micro Pte Ltd.                    | Singapore                | September 1999        |
|  O2 Micro (Wuhan) Co., Ltd.    | China                    | January 2001          |
| O2Micro (Beijing) Co., Ltd.         | China                    | February 2001         |
| O2Micro (China) Co., Ltd.           | China                    | April 2001            |
| O2Micro (Chengdu) Co., Ltd.         | China                    | July 2004             |

----

| Location                     | Approx. Available Square Feet | Lease Expiration |
|------------------------------|-------------------------------|------------------|
|                         |                          |             |
| California, USA              | 37,180                        | not applicable   |
| Taipei, Taiwan               | 33,786                        | 2011             |
| Hsin-Chu, Taiwan             | 26,246                        | 2011             |
| Tokyo, Japan                 | 17,128                        | 2012             |
| Singapore                    | 4,535                         | 2013             |
| Wuhan, China                 | 19,045                        | 2012             |
| Beijing, China               | 12,213                        | 2014             |
| Shanghai, China              | 30,448                        | not applicable   |
| Chengdu, China               | 22,906                        | 2011             |
| Grand Cayman, Cayman Islands | 600                           | 2012             |

ITEM 

ITEM 

----

|   | · | the selection of critical accounting policies; and |
|--------|--------|----------------------------------------------------|

|   | · | the judgments and other uncertainties affecting the application of those critical accounting policies. |
|--------|--------|--------------------------------------------------------------------------------------------------------|

----

|   | Level 1 – Observable inputs such as quoted prices for identical instruments in active markets; |
|--------|------------------------------------------------------------------------------------------------------|

|   | Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; |
|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                                                                                                                                                                                                                                                                                                           |   | Years Ended December 31 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                           |   | 2008                    |   |   | 2009 |   |   | 2010 |   |
| Consolidated Statement of Operations Data:                                                                                                                                                                                                                                                                                                     |   |                    |   |   |   |   |   |   |   |
| Net sales                                                                  |   |                    | 100.0  | % |   |   | 100.0 | % |   |   | 100.0 | % |
| Cost of sales                                                              |   |                    | 41.8   |   |   |   | 40.3 |   |   |   | 38.6 |   |
| Gross margin                                                               |   |                    | 58.2   |   |   |   | 59.7 |   |   |   | 61.4 |   |
| Operating expenses (income):                                                                                                                                                                                                                                                                                                                   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                                            |   |                    | 23.1   |   |   |   | 23.5 |   |   |   | 22.5 |   |
| Selling, general and administrative                                                                                                                                                                                                                                                                                                            |   |                    | 27.0   |   |   |   | 33.0 |   |   |   | 22.6 |   |
| Goodwill impairment                                                                                                                                                                                                                                                                                                                            |   |                    | 2.0    |   |   |   | - |   |   |   | - |   |
| Write-off of prepayment to foundry services                                                                                                                                                                                                                                                                                                    |   |                    | 2.2    |   |   |   | - |   |   |   | - |   |
| Litigation income                                                                                                                                                                                                                                                                                                                              |   |                    | (1.5   | ) |   |   | - |   |   |   | - |   |
| Total operating expenses                                                                                                          |   |                    | 52.8   |   |   |   | 56.5 |   |   |   | 45.1 |   |
| Income from operations                                                     |   |                    | 5.4    |   |   |   | 3.2 |   |   |   | 16.3 |   |
| Non-operating income (expenses)–net                                                                                                                                                                                                                                                                                                      |   |                    | (9.0   | ) |   |   | 1.1 |   |   |   | 0.7 |   |
| Income tax expenses                                                        |   |                    | 1.6    |   |   |   | 1.4 |   |   |   | 1.0 |   |
| Net income (loss) from continuing operations:                                                                                                                                                                                                                                                                                                  |   |                    | (5.2   | %) |   |   | 2.9 | % |   |   | 16.0 | % |
| Loss from discontinued operations, net of tax                                                                                                                                                                                                                                                                                                  |   |                    | 5.0    | % |   |   | 5.2 | % |   |   | 7.1 | % |
| Net income (loss)                                                                                                                                                                                                                                                                                                                              |   |                    | (10.2  | %) |   |   | (2.3 | %) |   |   | 8.9 | % |

|                           |   | Years Ended December 31 |    |
|--------------------------------|--------|-------------------------|---------|
|                           |   | 2008                    |    |   | 2009 |   |   | 2010 |   |
|                           |   | (in thousands)          |    |
|                           |   |                    |    |   |   |   |   |   |   |
| Integrated Circuits:           |   |                    |    |   |   |   |   |   |   |
| Analog                         |   | $                       | 98,779  |   |   | $ | 61,944 |   |   | $ | 35,135 |   |
| Mixed-signal                   |   |                    | 26,222  |   |   |   | 56,028 |   |   |   | 96,615 |   |
| Digital                        |   |                    | 8,672   |   |   |   | 2,664 |   |   |   | 1,709 |   |
| Licensed Intellectual Property |   |                    | 1,765   |   |   |   | 3,658 |   |   |   | 4,330 |   |
| Total                          |   | $                       | 135,438 |   |   | $ | 124,294 |   |   | $ | 137,789 |   |

----

----

----

----

|                              |   | Payments due by period |
|-----------------------------------|--------|------------------------|
| Contractual Obligations           |   | Total                  |   |   | Less than 1 year |   |   | 1-3 years |   |   | 3-5 years |   |   | More than 5 years |
|                              |   | (in thousands)         |
|                              |   |                   |   |   |   |   |   |   |   |   |   |   |
| Operating lease obligations       |   | $                      | 2,968 |   |   | $ | 1,561 |   |   | $ | 1,324 |   |   | $ | 83 |   |   | $ | - |   |
| Licenses, maintenance and support |   |                   | 1,785 |   |   |   | 1,490 |   |   |   | 295 |   |   |   | - |   |   |   | - |   |
| Pension                           |   |                   | 679 |   |   |   | - |   |   |   | 19 |   |   |   | 15 |   |   |   | 645 |   |
| Total                             |   | $                      | 5,432 |   |   | $ | 3,051 |   |   | $ | 1,638 |   |   | $ | 98 |   |   | $ | 645 |   |

ITEM 

| Name                                                                                                                                                                                                                                                                                                  | Age | Position                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----|---------------------------------------------------------------------|
| Sterling Du                                                | 51  | Chief Executive Officer, Class I Director and Chairman of the Board |

| Chuan Chiung “Perry” Kuo                                                | 51     | Chief Financial Officer, Joint Secretary and Class I Director                                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| James Keim                                                                          | 66     | Class II Director and Head of Marketing and Sales                                                                                 |
| Michael Austin                                                                      | 75     | Independent Non-executive Director, Class III Director, Chairman of the Nominating committee and member of Compensation Committee |
| Lawrence Lin                                                                        | 60     | Independent Non-executive Director, Class II Director, Chairman of the Compensation Committee and member of Audit Committee       |
| Ji Liu                                                                              | 75     | Independent Non-executive Director, Class II Director                                                                             |
| Teik Seng Tan                                                                       | 56     | Independent Non-executive Director, Class I Director and Chairman of Audit Committee                                              |
| Shoji Akutsu.                                                                       | 72     | Independent Non-executive Director, Class III Director and member of the Audit Committee                                          |
| Dinghuan Shi.                                                                       | 67     | Independent Non-executive Director and Class III Director and member of the Nominating Committee                                  |
| Ivan Chang                                                                          | 48     | Vice-President, Finance                                                                                                           |
| Johnny Chiang                                                                       | 53     | Vice-President, Logistics and Backend                                                                                             |
|                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                              |

----

----

----

----

----

ITEM 

|                                                                          |   | Shares Beneficially Owned |        |
|-------------------------------------------------------------------------------|--------|---------------------------|-------------|
| Name of Beneficial Owner                                                      |   | Number                    |        |   | Percent |   |
| Wasatch Advisors, Inc.                                                        |   |                      | 265,549,400 |   |   |   | 15.71 | % |
| Sparta Asset Management, LLC                                                  |   |                      | 181,032,150 |   |   |   | 10.71 | % |
| Directors and members of our administrative, supervisory or management bodies |   |                      | 101,936,900 |   |   |   | 6.03 | % |

----

ITEM 

ITEM 

|                                      |   |  High  |   |  Low  |
|-------------------------------------------|--------|------------------|--------|-----------------|
| January 1, 2006 through December 31, 2006 |   | $                | 13.55  |            |   | $ | 5.07 |   |
| January 1, 2007 through December 31, 2007 |   | $                | 18.00  |            |   | $ | 7.06 |   |
| January 1, 2008 through December 31, 2008 |   | $                | 11.60  |            |   | $ | 1.77 |   |
| January 1, 2009 through December 31, 2009 |   | $                | 5.60   |            |   | $ | 1.96 |   |
| January 1, 2010 through December 31, 2010 |   | $                | 7.53   |            |   | $ | 4.70 |   |

| First Quarter 2009  |   | $ | 350  |   |   | $ | 1.96 |   |
|---------------------|--------|---|------|--------|--------|---|------|--------|
| Second Quarter 2009 |   | $ | 5.60 |   |   | $ | 3.02 |   |
| Third Quarter 2009  |   | $ | 5.50 |   |   | $ | 4.51 |   |
| Fourth Quarter 2009 |   | $ | 5.29 |   |   | $ | 4.01 |   |
| First Quarter 2010  |   | $ | 7.22 |   |   | $ | 4.53 |   |
| Second Quarter 2010 |   | $ | 7.53 |   |   | $ | 5.82 |   |
| Third Quarter 2010  |   | $ | 7.48 |   |   | $ | 5.60 |   |
| Fourth Quarter 2010 |   | $ | 6.51 |   |   | $ | 5.63 |   |
|                |   | $ | 8.75 |   |   | $ | 6.15 |   |

----

| December 2010 |   | $ | 6.26 |   |   | $ | 5.63 |   |
|---------------|--------|---|------|--------|--------|---|------|--------|
| January 2011  |   | $ | 6.88 |   |   | $ | 6.15 |   |
| February 2011 |   | $ | 8.75 |   |   | $ | 6.76 |   |
| March 2011    |   | $ | 8.26 |   |   | $ | 7.11 |   |
| April 2011    |   | $ | 7.47 |   |   | $ | 6.80 |   |

ITEM 

----

|   | • | the rights, the property of every description and the business, undertaking, goodwill, benefits, immunities and privileges of each of the constituent companies, shall immediately vest in the surviving or consolidated company; |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | • | subject to any specific arrangements entered into by the relevant parties, the surviving or consolidated company shall be liable for and subject, in the same manner as the constituent companies, to all mortgages, charges or security interests, and all contracts, obligations, claims, debts, and liabilities of each of the constituent companies; |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | an existing claim, cause or proceeding, whether civil (including arbitration) or criminal pending at the time of the merger or consolidation by or against a constituent company, shall not be abated or discontinued by the merger or consolidation but shall be continued by or against the surviving or consolidated company; and |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | a conviction, judgment, ruling, order or claim, due or to become due, against a constituent company, shall not be released or impaired by the merger or consolidation, but shall apply to the surviving or consolidated company instead of to the constituent company. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | the parties have complied with the statutory provisions regarding majority vote; |
|--------|---------|----------------------------------------------------------------------------------|

|   | • | the shareholders have been fairly represented at the meeting in question; and |
|--------|---------|-------------------------------------------------------------------------------|

|   | • | the arrangement is one that a businessman would reasonably approve. |
|--------|---------|---------------------------------------------------------------------|

|   | • | 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 affected 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.” |
|--------|---------|---------------------------------------------------------------------------------------|

|   | • | 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. |
|--------|---------|--------------------------------------------------------|

----

|   | • | a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes; |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | • | a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States or any political subdivision thereof, including the District of Columbia; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | 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 primary supervision of a court within the United States and one or more U.S. persons have the authority to control all of its substantial decisions; |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | a trust in existence on August 20, 1996 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. |
|--------|---------|---------------------------------------------------------------------------------------|

|                 If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of ordinary shares or ADSs, the U.S. federal income tax consequences to a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of ordinary shares or ADSs that is a partnership and partners in such partnership should consult their individual tax advisors about the U.S. federal income tax consequences of holding or disposing of the ordinary shares or ADSs. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | life insurance companies; |
|--------|---------|---------------------------|

|   | • | tax-exempt investors; |
|--------|---------|-----------------------|

|   | • | banks and financial institutions; |
|--------|---------|-----------------------------------|

|   | • | dealers in securities or foreign currencies; |
|--------|---------|----------------------------------------------|

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

|   | • | persons liable for alternative minimum tax; |
|--------|---------|---------------------------------------------|

|   | • | U.S. investors who actually or constructively hold 10% or more of our voting shares or ADSs; |
|--------|---------|----------------------------------------------------------------------------------------------|

|   | • | investors who hold our ordinary shares or ADSs as part of straddles, hedging or integrated or conversion transactions; or |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------|

|   | • | persons whose “functional currency” is not the U.S. dollar. |
|--------|---------|-------------------------------------------------------------------------|

----

----

|   | • | any “excess distribution” by us to the U.S. Investor, which means any distributions received by the U.S. Investor on the ordinary shares or ADSs 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 or ADSs; and |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | • | the excess distribution or gain would be allocated ratably over the U.S. Investor’s holding period for the ordinary shares or ADSs; |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | 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 in the current year; |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | 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. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

ITEM 

----

|                               |   | 2011           |   |   | 2012   |   |   | 2013   |   |   | 2014   |   |   | 2015   |   |   | Thereafter |   |   | Total  |   |   | Fair Value |
|------------------------------------|--------|----------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|--------|--------|--------|--------|------------|
|                               |   | (in thousands) |
| Time Deposit:                      |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |       |   |   |   |   |
|    Fixed rate (US$) |   | $              | 42,800 |   |   | $      | 5,000  |   |   |   | -      |   |   |   | -      |   |       |   | -      |   |   |   | -          |   |   | $ | 47,800 |   |   | $ | 47,800 |   |
| Corporate Bonds                    |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |       |   |   |   |   |   |       |   |   |   |   |   |   |   |   |   |
|    Fixed rate (US$) |   |           | 1,005  |   |   |   | -      |   |   |   | -      |   |   |   | -      |   |       |   | -      |   |   |   | -          |   |   |   | 1,005 |   |   |   | 1,005 |   |
| Agency Bonds                       |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |       |   |   |   |   |   |       |   |   |   |   |   |   |   |   |   |
|    Fixed rate (US$) |   |           | 5,496  |   |   |   | -      |   |   |   | -      |   |   |   | -      |   |       |   | -      |   |   |   | -          |   |   |   | 5,496 |   |   |   | 5,496 |   |

ITEM 

----

| ADS holders must pay:                                                                                                                                                                                   | For:                                                                                                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                    |                                                                                                                                                                    |
| $5.00 (or less) per 100 ADSs (or portion of 100 ADSs)                                                                                                                                                   | §Each delivery or issuance of ADSs, including deliveries or issuances resulting from a distribution of shares or rights or other property                          |
|                                                                                                                                                                                                    | §Each surrender or cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates                                               |
| $0.02 (or less) per ADS                                                                                                                                                                                 | §Any cash distribution to ADS registered holders                                                                                                                   |
| A fee equivalent to the fee that would be payable if securities distributed to holders of deposited securities had been ordinary shares and the ordinary shares had been deposited for issuance of ADSs | §Each distribution of securities, other than ordinary shares or ADSs, to holders of deposited securities which are distributed by the Depositary to ADS registered |

| $0.02 (or less) per ADS per calendar year (to the extent that the depositary has not collected a cash distribution fee of US$0.02 per ADS during that year)                                         | §Depositary services                                                                                                                                                                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Registration or transfer fees                                                                                                                                                                       | §Transfer and registration of shares on the share register of our transfer agent to or from the name of the Depositary or its agent when an ADS holder deposits or withdraws shares |
| Expenses of the depositary                                                                                                                                                                          | §Cable, telex and facsimile transmissions as are expressly provided in the deposit agreement                                                                                        |
|                                                                                                                                                                                                | §Converting foreign currency to U.S. dollars                                                                                                                                        |
| Taxes and other governmental charges the Depositary or the Custodian have to pay on any ADS or ordinary share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | §As necessary                                                                                                                                                                       |
| Any charges incurred by the Depositary or its agents for servicing the deposited securities                                                                                                         | §As necessary                                                                                                                                                                       |

----

ITEM 

ITEM 

ITEM 

----

ITEM 

ITEM 

----

ITEM 

|               |   | Year Ended December 31, 2009 |   |   | Year EndedDecember 31, 2010 |   |
|--------------------|--------|------------------------------|--------|--------|-----------------------------|--------|
|               |   | (in thousands)               |   |
| Audit Fees         |   | $                            | 533    |   |                        | $      | 503 |   |
| Audit-related Fees |   |                         | 54     |   |                        |   | 8 |   |
| Tax Fees           |   |                         | 23     |   |                        |   | 40 |   |
|               |   |                         |   |   |                        |   |   |   |
| Total              |   | $                            | 610    |   |                        | $      | 551 |   |

ITEM 

----

ITEM 

| Period                                  | Total Number of Shares Purchased (2) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) (2) (3) | Maximum Number of Shares or Dollar of Value that May Yet Be Purchased Under the Plans or Programs (1) (2) (3) |
|-----------------------------------------|--------------------------------------|----------------------------------|----------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| February 1, 2010 to February 28, 2010   | 36,622,750                           | $0.1128                          | 36,622,750                                                                                   | 104,326,600 (4)                                                                                               |
| March 1, 2010 to March 31, 2010         | 46,449,300                           | $0.1342                          | 46,449,300                                                                                   | 57,877,300 (4)                                                                                                |
| April 1, 2010 to April 30, 2010         | 33,853,750                           | $0.1400                          | 33,853,750                                                                                   | 24,023,550 (4)                                                                                                |
| May 1, 2010 to May 31, 2010             | 13,480,000                           | $0.1284                          | 13,480,000                                                                                   | 10,543,550 (4)                                                                                                |
| June 1, 2010 to June 30, 2010           | 10,543,550                           | $0.1229                          | 10,543,550                                                                                   | - (4)                                                                                               |
| August 1, 2010 to August 31, 2010       | 12,055,450                           | $0.1308                          | 12,055,450                                                                                   | $  18,422,593 (5)                                                                                   |
| September 1, 2010 to September 30, 2010 | 1,500,000                            | $0.1139                          | 1,500,000                                                                                    | $  18,251,713 (5)                                                                                   |
| December 1, 2010 to December 31, 2010   | 5,000,000                            | $0.1152                          | 5,000,000                                                                                    | $  17,675,713 (5)                                                                                   |

ITEM 

----

ITEM 

|   | · | We are not required under Cayman Islands law to, and do not, distribute interim reports directly to shareholders. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

----

ITEM 

ITEM 

ITEM 

| 1. | Amended and Restated Memorandum and Articles of Association of the registrant adopted pursuant to a special resolution passed on May 29, 2009, which took effect upon the withdrawal of the listing of the ordinary shares of the registrant on the Main Board of The Stock Exchange of Hong Kong Limited on September 9, 2009. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| 15.1 | Consent of Deloitte & Touche, independent registered public accounting firm |
|------|---------------------------------------------------------------------------------|

----

SIGNATURES

|                     | O2MICRO INTERNATIONAL LIMITED    |
|--------------------------|-------------------------------------------------|
|  Date: May 19, 2011 |                                            | By: | /s/  STERLING DU |
|                     |                                            |   |   |
|                     | Name:                                           | Sterling Du |
|                     |                                            |   |   |
|                     | Title:                                          | Chief Executive Officer |

----

INDEX 

|                                                           | Page   |
|----------------------------------------------------------------|--------|
|                                                           |   |
| Report of Independent Registered Public Accounting Firm        | F-1    |
| Consolidated Balance Sheets                                    | F-2    |
| Consolidated Statements of Operations and Comprehensive Income | F-3    |
| Consolidated Statements of Shareholders’ Equity          | F-5    |
| Consolidated Statements of Cash Flows                          | F-6    |
| Notes to Consolidated Financial Statements                     | F-8    |

----

----

REPORT 

----

CONSOLIDATED 

|                                                                                                                          | December 31 |   |
|-------------------------------------------------------------------------------------------------------------------------------|-------------|--------|
| ASSETS                                                                                                                        |        | 2010   |   |   | 2009 |   |
|                                                                                                                          |        |   |   |   |   |   |
| CURRENT ASSETS                                                                                                                |        |   |   |   |   |   |
| Cash and cash equivalents (notes 4 and 5)                                                                                     |        | $      | 42,277 |   |   | $ | 38,831 |   |
| Restricted cash                                                                                                               |        |   | 562 |   |   |   | 236 |   |
| Short-term investments (notes 4 and 6)                                                                                        |        |   | 68,728 |   |   |   | 74,502 |   |
| Accounts receivable, net (note 7)                                                                                             |        |   | 13,239 |   |   |   | 14,556 |   |
| Inventories (note 8)                                                                                                          |        |   | 13,683 |   |   |   | 9,457 |   |
| Prepaid expenses and other current assets (note 9)                                                                            |        |   | 2,434 |   |   |   | 3,342 |   |
| Total current assets                                                                                                          |        |   | 140,923 |   |   |   | 140,924 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| LONG-TERM INVESTMENTS (notes 4 and 10)                                                                                        |        |   | 20,676 |   |   |   | 15,190 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| PROPERTY AND EQUIPMENT, NET (note 11)                                                                                         |        |   | 29,739 |   |   |   | 30,570 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| OTHER ASSETS                                                                                                                  |        |   |   |   |   |   |   |   |
| Intangible assets, net (note 12)                                                                                              |        |   | 1,936 |   |   |   | 4,266 |   |
| Restricted assets                                                                                                             |        |   | - |   |   |   | 1,443 |   |
| Other assets (note 13)                                                                                                        |        |   | 4,360 |   |   |   | 4,921 |   |
| Total other assets                                                                                                            |        |   | 6,296 |   |   |   | 10,630 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| TOTAL ASSETS                                                                                                                  |        | $      | 197,634 |   |   | $ | 197,314 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                    |        |   |   |   |   |   |   |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| CURRENT LIABILITIES                                                                                                           |        |   |   |   |   |   |   |   |
| Notes and accounts payable                                                                                                    |        | $      | 8,299 |   |   | $ | 8,760 |   |
| Income tax payable                                                                                                            |        |   | 494 |   |   |   | 411 |   |
| Accrued expenses and other current liabilities (note 14)                                                                      |        |   | 8,031 |   |   |   | 7,731 |   |
| Total current liabilities                                                                                                     |        |   | 16,824 |   |   |   | 16,902 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| OTHER LONG-TERM LIABILITIES                                                                                                   |        |   |   |   |   |   |   |   |
| Accrued pension liabilities (note 16)                                                                                         |        |   | 679 |   |   |   | 498 |   |
| Long-term income tax payable (note 15)                                                                                        |        |   | 302 |   |   |   | 341 |   |
| Other liabilities                                                                                                             |        |   | 129 |   |   |   | 129 |   |
| Total long-term liabilities                                                                                                   |        |   | 1,110 |   |   |   | 968 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| Total liabilities                                                                                                             |        |   | 17,934 |   |   |   | 17,870 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| COMMITMENTS AND CONTINGENCIES (notes 19 and 20)                                                                               |        |   |   |   |   |   |   |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| SHAREHOLDERS’ EQUITY                                                                                                    |        |   |   |   |   |   |   |   |
| Preference shares at $0.00002 par value per share;                                                                            |        |   |   |   |   |   |   |   |
| Authorized – 250,000,000 shares;                                                                                        |        |   | - |   |   |   | - |   |
| Ordinary shares at $0.00002 par value per share;                                                                              |        |   |   |   |   |   |   |   |
| Authorized – 4,750,000,000 shares;                                                                                      |        |   |   |   |   |   |   |   |
| Issued and outstanding –1,675,021,100 and 1,809,461,200 shares as of December 31, 2010 and 2009, respectively |        |   | 34 |   |   |   | 36 |   |
| Additional paid-in capital                                                                                                    |        |   | 135,703 |   |   |   | 142,679 |   |
| Retained earnings                                                                                                             |        |   | 36,937 |   |   |   | 33,214 |   |
| Accumulated other comprehensive income                                                                                        |        |   | 7,602 |   |   |   | 3,515 |   |
| Treasury stock – 5,000,000 shares and nil as of December 31, 2010 and2009, respectively                                 |        |   | (576 | ) |   |   | - |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| Total shareholders’ equity                                                                                              |        |   | 179,700 |   |   |   | 179,444 |   |
|                                                                                                                          |        |   |   |   |   |   |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                              |        | $      | 197,634 |   |   | $ | 197,314 |   |

----

CONSOLIDATED 

|                                                               |   | Years Ended December 31 |    |
|--------------------------------------------------------------------|--------|-------------------------|---------|
|                                                               |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |
| NET SALES                                                          |   | $                       | 137,789 |   |   | $ | 124,294 |   |   | $ | 135,438 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| COST OF SALES                                                      |   |                    | 53,205  |   |   |   | 50,139 |   |   |   | 56,591 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| GROSS PROFIT                                                       |   |                    | 84,584  |   |   |   | 74,155 |   |   |   | 78,847 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| OPERATING EXPENSES (INCOME)                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Research and development (a)                                       |   |                    | 31,055  |   |   |   | 29,128 |   |   |   | 31,255 |   |
| Selling, general and administrative (a)                            |   |                    | 31,087  |   |   |   | 41,055 |   |   |   | 36,560 |   |
| Goodwill impairment                                                |   |                    | -       |   |   |   | - |   |   |   | 2,782 |   |
| Write-off of prepayment to foundry services                        |   |                    | -       |   |   |   | - |   |   |   | 2,942 |   |
| Litigation income                                                  |   |                    | -       |   |   |   | - |   |   |   | (2,000 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| Total operating expenses                                           |   |                    | 62,142  |   |   |   | 70,183 |   |   |   | 71,539 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| INCOME FROM OPERATIONS                                             |   |                    | 22,442  |   |   |   | 3,972 |   |   |   | 7,308 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| NON-OPERATING INCOME (EXPENSES)                                    |   |                    |    |   |   |   |   |   |   |   |   |   |
| Interest income                                                    |   |                    | 927     |   |   |   | 1,308 |   |   |   | 2,328 |   |
| Impairment loss on long-term investments (note 10)                 |   |                    | -       |   |   |   | - |   |   |   | (14,146 | ) |
| Foreign exchange gain (loss), net                                  |   |                    | (150    | ) |   |   | 31 |   |   |   | (412 | ) |
| Other, net                                                         |   |                    | 151     |   |   |   | 30 |   |   |   | 97 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| Total non-operating income (expenses)                              |   |                    | 928     |   |   |   | 1,369 |   |   |   | (12,133 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONSBEFORE INCOME TAX          |   |                    | 23,370  |   |   |   | 5,341 |   |   |   | (4,825 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| INCOME TAX EXPENSE (note 15)                                       |   |                    | 1,325   |   |   |   | 1,740 |   |   |   | 2,240 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| NET INCOME (LOSS) FROM CONTINUINGOPERATIONS                        |   |                    | 22,045  |   |   |   | 3,601 |   |   |   | (7,065 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| LOSS FROM DISCONTINUED OPERATIONS,NET OF TAX (a)                   |   |                    | 9,843   |   |   |   | 6,418 |   |   |   | 6,744 |   |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| NET INCOME (LOSS)                                                  |   |                    | 12,202  |   |   |   | (2,817 | ) |   |   | (13,809 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| OTHER COMPREHENSIVE INCOME (LOSS)                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustments                           |   |                    | 2,583   |   |   |   | 287 |   |   |   | 1,466 |   |
| Unrealized gain (loss) on available-for-sale  securities |   |                    | 1,687   |   |   |   | 2,006 |   |   |   | (3,776 | ) |
| Unrealized pension gain (loss)                                     |   |                    | (183    | ) |   |   | 9 |   |   |   | (123 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| Total other comprehensive income (loss)                            |   |                    | 4,087   |   |   |   | 2,302 |   |   |   | (2,433 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| COMPREHENSIVE INCOME (LOSS)                                        |   | $                       | 16,289  |   |   | $ | (515 | ) |   | $ | (16,242 | ) |
|                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |

----

CONSOLIDATED 

|                                                                     |   | Years Ended December 31 |      |
|--------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                     |   | 2010                    |      |   | 2009 |   |   | 2008 |   |
|                                                                     |   |                    |      |   |   |   |   |   |   |
| BASIC EARNINGS (LOSS) PER SHARE (note 18)                                |   |                    |      |   |   |   |   |   |   |
| Continuing operations                                                    |   | $                       | 0.01      |   |   | $ | - |   |   | $ | (0.01 | ) |
| Discontinued operations                                                  |   |                    | -         |   |   |   | - |   |   |   | - |   |
|                                                                     |   | $                       | 0.01      |   |   | $ | - |   |   | $ | (0.01 | ) |
|                                                                     |   |                    |      |   |   |   |   |   |   |   |   |   |
| DILUTED EARNINGS (LOSS) PER SHARE (note 18)                              |   |                    |      |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                    |   | $                       | 0.01      |   |   | $ | - |   |   | NA |   |
| Discontinued operations                                                  |   |                    | -         |   |   |   | - |   |   | NA |   |
|                                                                     |   | $                       | 0.01      |   |   | $ | - |   |   | NA |   |
|                                                                     |   |                    |      |   |   |   |   |   |   |   |   |   |
|                                                                     |   |                    |      |   |   |   |   |   |   |   |   |   |
| NUMBER OF SHARES USED IN EARNINGS PER  SHARE CALCULATION:      |   |                    |      |   |   |   |   |   |   |   |   |   |
| Basic (in thousands)                                                     |   |                    | 1,706,665 |   |   |   | 1,840,995 |   |   |   | 1,862,831 |   |
| Diluted (in thousands)                                                   |   |                    | 1,752,832 |   |   |   | 1,865,876 |   |   |   | 1,862,831 |   |
|                                                                     |   |                    |      |   |   |   |   |   |   |   |   |   |
|                                                                     |   |                    |      |   |   |   |   |   |   |   |   |   |
| (a) INCLUDES STOCK-BASED  COMPENSATION CHARGE AS FOLLOWS: |   |                    |      |   |   |   |   |   |   |   |   |   |
| Research and development                                                 |   | $                       | 923       |   |   | $ | 1,078 |   |   | $ | 931 |   |
| Selling, general and administrative                                      |   | $                       | 2,905     |   |   | $ | 2,215 |   |   | $ | 1,621 |   |
| Discontinued operations                                                  |   | $                       | 66        |   |   | $ | 102 |   |   | $ | 136 |   |

----

CONSOLIDATED 

|                                                     |   |            |          |   |            |   |   |     |   |   | Accumulated Other    |   |   |        |    |   |       |   |
|----------------------------------------------------------|--------|-----------------|---------------|--------|-----------------|--------|--------|----------|--------|--------|----------------------|--------|--------|-------------|---------|--------|------------|--------|
|                                                     |   |            |          |   |            |   |   |     |   |   | Comprehensive Income |   |   |        |    |   |       |   |
|                                                     |   |            |          |   | Additional      |   |   |     |   |   | Unrealized           |   |   | Cumulative  |    |   | Unrealized |   |   |   |   |   |   |   |   |   |   |
|                                                     |   | Ordinary Shares |          |   | Paid – in |   |   | Retained |   |   | Investment           |   |   | Translation |    |   | Pension    |   |   |   |   |   | Treasury |   |   | Shareholders’ |   |
|                                                     |   | Shares          |          |   | Amount          |   |   | Capital  |   |   | Earnings             |   |   | Gain (Loss) |    |   | Adjustment |   |   | Loss |   |   | Total |   |   | Stock |   |   | Equity |   |
|                                                     |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, JANUARY 1, 2008                                 |   |            | 1,911,868,150 |   |            | $      | 38     |     |   | $      | 144,944              |   |   | $           | 56,847  |   |       | $      | 1,573 |   |   | $ | 2,168 |   |   | $ | (95 | ) |   | $ | 3,646 |   |   | $ | (1,296 | ) |   | $ | 204,179 |   |
|                                                     |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of:                                             |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares for exercise of stock options                     |   |            | 712,500       |   |            |   | 1      |     |   |   | 64                   |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 65 |   |
| Shares for Employee Stock Purchase Plan                  |   |            | 9,301,700     |   |            |   | -      |     |   |   | 869                  |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 869 |   |
| Shares vested under restricted share units               |   |            | 3,914,700     |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Acquisition of treasury stock – 88,008,650 shares  |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (11,779 | ) |   |   | (11,779 | ) |
| Retirement of treasury stock                             |   |            | (93,008,650   | )      |            |   | (2     | )        |   |   | (6,781               | )      |   |        | (6,292  | )      |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 13,075 |   |   |   | - |   |
| Stock-based compensation                                 |   |            | -             |   |            |   | -      |     |   |   | 2,688                |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,688 |   |
| Net loss for 2008                                        |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | (13,809 | )      |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (13,809 | ) |
| Pension loss                                             |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | (123 | ) |   |   | (123 | ) |   |   | - |   |   |   | (123 | ) |
| Foreign currency translation adjustments                 |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | 1,466 |   |   |   | - |   |   |   | 1,466 |   |   |   | - |   |   |   | 1,466 |   |
| Unrealized loss on available-for-sale securities         |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   |  (3,776 | ) |   |   | - |   |   |   | - |   |   |   | (3,776 | ) |   |   | - |   |   |   | (3,776 | ) |
|                                                     |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2008                               |   |            | 1,832,788,400 |   |            |   | 37     |     |   |   | 141,784              |   |   |        | 36,746  |   |       |   | (2,203 | ) |   |   | 3,634 |   |   |   | (218 | ) |   |   | 1,213 |   |   |   | - |   |   |   | 179,780 |   |
| Issuance of:                                             |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares for exercise of stock options                     |   |            | 2,397,000     |   |            |   | -      |     |   |   | 114                  |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 114 |   |
| Shares for Employee Stock Purchase Plan                  |   |            | 10,685,400    |   |            |   | -      |     |   |   | 575                  |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 575 |   |
| Shares vested under restricted share units               |   |            | 6,911,250     |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Acquisition of treasury stock – 43,320,850 shares  |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (3,905 | ) |   |   | (3,905 | ) |
| Retirement of treasury stock                             |   |            | (43,320,850   | )      |            |   | (1     | )        |   |   | (3,189               | )      |   |        | (715    | )      |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,905 |   |   |   | - |   |
| Stock-based compensation                                 |   |            | -             |   |            |   | -      |     |   |   | 3,395                |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,395 |   |
| Net loss for 2009                                        |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | (2,817  | )      |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (2,817 | ) |
| Pension gain                                             |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | 9 |   |   |   | 9 |   |   |   | - |   |   |   | 9 |   |
| Foreign currency translation adjustments                 |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | 287 |   |   |   | - |   |   |   | 287 |   |   |   | - |   |   |   | 287 |   |
| Unrealized gain on available-for-sale securities         |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | 2,006 |   |   |   | - |   |   |   | - |   |   |   | 2,006 |   |   |   | - |   |   |   | 2,006 |   |
|                                                     |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2009                               |   |            | 1,809,461,200 |   |            |   | 36     |     |   |   | 142,679              |   |   |        | 33,214  |   |       |   | (197 | ) |   |   | 3,921 |   |   |   | (209 | ) |   |   | 3,515 |   |   |   | - |   |   |   | 179,444 |   |
| Issuance of:                                             |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares for exercise of stock options                     |   |            | 607,300       |   |            |   | -      |     |   |   | 33                   |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 33 |   |
| Shares for Employee Stock Purchase Plan                  |   |            | 5,059,650     |   |            |   | -      |     |   |   | 500                  |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 500 |   |
| Shares vested under restricted share units               |   |            | 14,397,750    |   |            |   | 1      |     |   |   | (1                   | )      |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Acquisition of treasury stock – 159,504,800 shares |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (20,460 | ) |   |   | (20,460 | ) |
| Retirement of treasury stock                             |   |            | (154,504,800  | )      |            |   | (3     | )        |   |   | (11,402              | )      |   |        | (8,479  | )      |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 19,884 |   |   |   | - |   |
| Stock-based compensation                                 |   |            | -             |   |            |   | -      |     |   |   | 3,894                |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,894 |   |
| Net income for 2010                                      |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | 12,202  |   |       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 12,202 |   |
| Pension loss                                             |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | - |   |   |   | (183 | ) |   |   | (183 | ) |   |   | - |   |   |   | (183 | ) |
| Foreign currency translation adjustments                 |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | - |   |   |   | 2,583 |   |   |   | - |   |   |   | 2,583 |   |   |   | - |   |   |   | 2,583 |   |
| Unrealized gain on available-for-sale securities         |   |            | -             |   |            |   | -      |     |   |   | -                    |   |   |        | -       |   |       |   | 1,687 |   |   |   | - |   |   |   | - |   |   |   | 1,687 |   |   |   | - |   |   |   | 1,687 |   |
|                                                     |   |            |          |   |            |   |   |     |   |   |                 |   |   |        |    |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2010                               |   |            | 1,675,021,100 |   |            | $      | 34     |     |   | $      | 135,703              |   |   | $           | 36,937  |   |       | $      | 1,490 |   |   | $ | 6,504 |   |   | $ | (392 | ) |   | $ | 7,602 |   |   | $ | (576 | ) |   | $ | 179,700 |   |

----

CONSOLIDATED 

|                                                                                                |   | Years Ended December 31 |    |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
| OPERATING ACTIVITIES                                                                                |   |                    |    |   |   |   |   |   |   |
| Net income (loss)                                                                                   |   | $                       | 12,202  |   |   | $ | (2,817 | ) |   | $ | (13,809 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  operating activities: |   |                    |    |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                       |   |                    | 5,282   |   |   |   | 5,929 |   |   |   | 6,876 |   |
| Stock-based compensation                                                                            |   |                    | 3,894   |   |   |   | 3,395 |   |   |   | 2,688 |   |
| Asset impairment charges                                                                            |   |                    | 2,184   |   |   |   | - |   |   |   | - |   |
| Impairment loss on long-term investments                                                            |   |                    | -       |   |   |   | - |   |   |   | 14,146 |   |
| Loss on disposal of property and equipment                                                          |   |                    | 15      |   |   |   | 203 |   |   |   | 56 |   |
| Goodwill impairment                                                                                 |   |                    | -       |   |   |   | - |   |   |   | 2,782 |   |
| Deferred income taxes                                                                               |   |                    | 242     |   |   |   | (15 | ) |   |   | 46 |   |
| Other, net                                                                                          |   |                    | 14      |   |   |   | 47 |   |   |   | 57 |   |
| Changes in operating assets and liabilities:                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Accounts receivable, net                                                                            |   |                    | 1,317   |   |   |   | (3,978 | ) |   |   | 13,605 |   |
| Inventories                                                                                         |   |                    | (4,228  | ) |   |   | 6,931 |   |   |   | 5,720 |   |
| Prepaid expenses and other current assets                                                           |   |                    | 912     |   |   |   | (499 | ) |   |   | 4,981 |   |
| Prepayment for testing service and deferred charges                                                 |   |                    | (676    | ) |   |   | (757 | ) |   |   | (2,192 | ) |
| Notes and accounts payable                                                                          |   |                    | (461    | ) |   |   | 4,640 |   |   |   | (6,716 | ) |
| Income tax payable                                                                                  |   |                    | 84      |   |   |   | 176 |   |   |   | (893 | ) |
| Accrued expenses and other current liabilities                                                      |   |                    | 337     |   |   |   | (510 | ) |   |   | (2,463 | ) |
| Accrued pension liabilities                                                                         |   |                    | (65     | ) |   |   | (64 | ) |   |   | (88 | ) |
| Long-term income tax payable                                                                        |   |                    | (40     | ) |   |   | 48 |   |   |   | 92 |   |
|                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                                           |   |                    | 21,013  |   |   |   | 12,729 |   |   |   | 24,888 |   |
|                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| INVESTING ACTIVITIES                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Acquisition of:                                                                                     |   |                    |    |   |   |   |   |   |   |   |   |   |
| Short-term investments                                                                              |   |                    | (29,726 | ) |   |   | (38,245 | ) |   |   | (99,263 | ) |
| Long-term investments                                                                               |   |                    | (3,817  | ) |   |   | - |   |   |   | (5,700 | ) |
| Property and equipment                                                                              |   |                    | (2,307  | ) |   |   | (1,123 | ) |   |   | (2,408 | ) |
| Intangible assets                                                                                   |   |                    | -       |   |   |   | - |   |   |   | (293 | ) |
| Cash paid in acquisition                                                                            |   |                    | -       |   |   |   | - |   |   |   | (6,500 | ) |
| (Increase) decrease in:                                                                             |   |                    |    |   |   |   |   |   |   |   |   |   |
| Restricted assets                                                                                   |   |                    | 1,476   |   |   |   | - |   |   |   | 10,877 |   |
| Restricted cash                                                                                     |   |                    | (307    | ) |   |   | (80 | ) |   |   | 5,723 |   |
| Other assets                                                                                        |   |                    | (82     | ) |   |   | (144 | ) |   |   | 211 |   |
| Increase (decrease) in other liabilities                                                            |   |                    | -       |   |   |   | (23 | ) |   |   | 23 |   |
| Proceeds from:                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Sale of short-term investments                                                                      |   |                    | 35,648  |   |   |   | 37,116 |   |   |   | 55,849 |   |
| Disposal of a subsidiary – net of cash disposed                                               |   |                    | -       |   |   |   | - |   |   |   | 6,181 |   |
| Disposal of property and equipment                                                                  |   |                    | 16      |   |   |   | 20 |   |   |   | 51 |   |
|                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) investing activities                                                 |   |                    | 901     |   |   |   | (2,479 | ) |   |   | (35,249 | ) |
|                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| FINANCING ACTIVITIES                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Acquisition of treasury stock                                                                       |   |                    | (20,460 | ) |   |   | (3,905 | ) |   |   | (11,779 | ) |
| Proceeds from:                                                                                      |   |                    |    |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                                                           |   |                    | 33      |   |   |   | 114 |   |   |   | 65 |   |
| Issuance of ordinary shares under the Employee Stock Purchase Plan                                  |   |                    | 500     |   |   |   | 575 |   |   |   | 869 |   |
|                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities                                                               |   |                    | (19,927 | ) |   |   | (3,216 | ) |   |   | (10,845 | ) |
|                                                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |

----

CONSOLIDATED 

|                                                     |   | Years Ended December 31 |   |
|----------------------------------------------------------|--------|-------------------------|--------|
|                                                     |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                     |   |                    |   |   |   |   |   |   |   |
| EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE              |   | $                       | 1,459  |   |   | $ | (47 | ) |   | $ | 453 |   |
|                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     |   |                    | 3,446  |   |   |   | 6,987 |   |   |   | (20,753 | ) |
|                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR       |   |                    | 38,831 |   |   |   | 31,844 |   |   |   | 52,597 |   |
|                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT END OF THE YEAR             |   | $                       | 42,277 |   |   | $ | 38,831 |   |   | $ | 31,844 |   |
|                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOWS                   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Cash paid for interest                                   |   | $                       | -      |   |   | $ | - |   |   | $ | - |   |
| Cash paid for tax                                        |   | $                       | 1,296  |   |   | $ | 1,366 |   |   | $ | 2,871 |   |
|                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| NON-CASH INVESTING AND FINANCING ACTIVITIES              |   |                    |   |   |   |   |   |   |   |   |   |   |
| Restricted assets reclassified to short-term investments |   | $                       | -      |   |   | $ | - |   |   | $ | 317 |   |
| Restricted cash reclassified to short-term investments   |   | $                       | -      |   |   | $ | 1,000 |   |   | $ | - |   |
| Long-term investment in exchange for acquisition         |   | $                       | -      |   |   | $ | - |   |   | $ | 1,305 |   |
| Land in exchange for building                            |   | $                       | -      |   |   | $ | 8,918 |   |   | $ | - |   |

----

NOTES 

| 1.   | GENERAL |
|----------------|---------|

|   | Business |
|--------|----------|

|   | O2Micro, Inc. was incorporated in the state of California in the United States of America on March 29, 1995 to design, develop, and market innovative power management and e-commerce components and systems for the Communications, Computer, Consumer, Industrial and Automotive markets. In March 1997, O2Micro International Limited (the “Company”) was formed in the Cayman Islands and all authorized and outstanding common stock, preferred stock, and stock options of O2Micro, Inc. were exchanged for the Company’s ordinary shares, preference shares, and stock options with identical rights and preferences.  O2Micro, Inc. became the Company’s subsidiary after the share exchange. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company’s ordinary shares (“Shares”) were initially listed on The NASDAQ National Market (“NASDAQ”) on August 23, 2000 and on the Cayman Islands Stock Exchange on February 1, 2001.  At the Extraordinary General Meeting of Shareholders (“EGM”) held on November 14, 2005, the shareholders approved a public global offering of the Company’s Shares and the proposed listing of the Company's Shares on the Main Board of The Stock Exchange of Hong Kong Limited (“SEHK”) and various matters related to the proposed listing and offering.  Following the approval of these matters, the Company ceased trading its Shares on the NASDAQ, effected a 50-for-1 share split of Shares, created an American depositary share (“ADS”) program for the ADSs to be quoted on the NASDAQ, and delisted the Shares from the NASDAQ on November 25, 2005. The Company commenced trading of ADSs on the NASDAQ on November 28, 2005 and subsequently listed the Shares on the SEHK on March 2, 2006 by way of introduction. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On February 27, 2009, the Company submitted an application for the voluntary withdrawal of the listing of Shares on the Main Board of SEHK (collectively referred to as “Proposed Withdrawal”) for reasons of cost and utility.  The Company will retain its existing primary listing of ADSs on the NASDAQ following the Proposed Withdrawal and for the foreseeable future.  The Proposed Withdrawal has been approved at the EGM held on May 30, 2009 and the listing of the Shares on SEHK was withdrawn on September 9, 2009. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company has incorporated various wholly-owned subsidiaries, including (among others) O2Micro Electronics, Inc. (“O2Micro-Taiwan”), O2Micro International Japan Ltd. (“O2Micro-Japan”), O2Micro Pte Limited-Singapore (“O2Micro-Singapore”), O2Micro (China) Co., Ltd. (“O2Micro-China”), and O2Security Limited (“O2Security”). O2Micro-Taiwan is engaged in operations and sales support services. O2Micro-Japan is engaged in sales support services. O2Micro-Singapore, O2Micro-China, and other subsidiaries are mostly engaged in research and development services.  O2Security was primarily engaged in operations and sales of Network Security products (“Network Security Group”).  To assure its testing capacity and flexibility, the Company also established a subsidiary, OceanOne Semiconductor (Ningbo) Limited (“OceanOne”) in Ningbo of the People’s Republic of China (“China”) in August 2005.  OceanOne is engaged in semiconductor testing service and commenced its operations in January 2007. In June 2008, the Company entered into a share transfer agreement with Sigurd Microelectronics (Cayman) Co., Ltd. (“Sigurd Cayman”) to dispose of 100% ownership of OceanOne for $6,700,000.  The share transfer was subsequently completed on July 2, 2008. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2010, the Company commenced a plan to terminate its Network Security business and initiated shutdown activities associated with the Network Security Group.  The Company has reflected the operating results of this business group as discontinued operations in the accompanying consolidated statements of operations.  Please also see discussions in Note 3. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | SUMMARY OF SIGNIFICANT 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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Significant accounting estimates reflected in the Company’s consolidated financial statements include valuation allowance for deferred income tax assets, allowance for doubtful accounts, inventory valuation, useful lives for property and equipment, impairment on long-lived assets, identified intangible assets, and goodwill, allowances for sales adjustments, pension and uncertain tax liabilities, contingencies and stock-based compensation. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Concentration of Credit Risk |
|--------|------------------------------|

|   | Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, short-term investments and accounts receivable.  Cash is deposited with high credit quality financial institutions.  For cash equivalents and short-term investments, the Company invests primarily in time deposits and debt securities with high credit quality.  For accounts receivable, the Company performs ongoing credit evaluations of its customers’ financial condition and the Company maintains an allowance for doubtful accounts based upon a review of the expected collectability of individual accounts. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Fair Value of Financial Instruments |
|--------|-------------------------------------|

|   | The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, and notes and accounts payable. The carrying amounts approximate the fair value due to the short-term maturity of those instruments.  Fair value of available-for-sale investments including short-term investments and long-term investments is based on quoted market prices.  Long-term investments in private company equity securities are accounted for under the cost method because the Company does not exercise significant influence over the entities.  The Company evaluates related information, including operating performance, subsequent rounds of financing, advanced product development and related business plans in determining the fair value of these investments, and whether an other-than-temporary decline in value exists.  Fair value of restricted assets, which are composed of government bonds, negotiable certificates of deposit and cash, is estimated based on the combination of fair value of each component. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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.  Investments with maturities of more than three months are classified as short-term investments. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Restricted Assets/Cash |
|--------|------------------------|

|   | The Company classifies deposits made for customs and cash pledged to a bank for the issuance of letters of credit as restricted cash.  The deposits are classified as current assets if refundable within a twelve-month period from the balance sheet date. Restricted assets as of December 31, 2009 consisted of deposits made for Taiwan court cases in the form of Taiwan Government bonds, negotiable certificates of deposit and cash (note 20).  By December 31, 2010, all restricted assets were released upon the resolution of the related litigation. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Short-term Investments |
|--------|------------------------|

|   | The Company maintains its excess cash in time deposits, US treasury bills, government, corporate, or other agency bonds issued with high credit 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, 2010, all the above-mentioned investments were classified as available-for-sale securities and were recorded at fair value. Unrealized gains and losses on these investments are included in accumulated other comprehensive income and loss 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 are stated at the lower of standard cost or market value.  The cost of inventories comprises cost of purchasing raw materials and where applicable, those overheads that have been incurred in bringing the inventories to their present location and condition.  Cost is determined on a currently adjusted standard basis, which approximates actual cost on a first-in, first-out basis. The Company assesses its inventory for estimated obsolescence or unmarketable inventory based upon management’s assumptions about future demand and market conditions and writes down inventory as needed. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Long-term Investments |
|--------|-----------------------|

|   | Long-term investments in private companies over which the Company does not exercise significant influence are accounted for under the cost method. Management evaluates related information in determining 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 financing 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Long-term investments in listed companies are classified as available-for-sale securities and are recorded at fair value.  Unrealized gains and losses on these investments are included in accumulated other comprehensive income and loss 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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Property and Equipment |
|--------|------------------------|

|   | Property and equipment are stated at cost less accumulated depreciation. Major additions and betterments are capitalized, while maintenance and repairs are expensed as incurred. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Depreciation is computed on a straight-line basis over estimated service lives that range as follows: buildings - 35 to 49.7 years, equipment - 3 to 10 years, furniture and fixtures - 3 to 9 years, leasehold improvements - the shorter of the estimated useful life or the lease term, which is 2 to 6 years, and transportation equipment - 5 years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Long-lived 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 the asset is separately identifiable and is less than the carrying value.  If impairment occurs, a loss based on the excess of the carrying value over the fair value of the long-lived asset is recognized.  Fair value is determined by reference to quoted market prices, if available, or discounted cash flows, as appropriate. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Goodwill |
|--------|----------|

|   | The Company records goodwill when the purchase price of an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.  The Company performs an annual impairment review or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable for each reporting unit using a fair value approach.  Reporting units may be operating segments as a whole or an operation one level below an operating segment, referred to as a component.  Goodwill impairment is tested using a two-step approach.  The first step compares the fair value of a reporting unit to its carrying amount, including goodwill.  If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and the second step is not required.  If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test measures the amount of the impairment loss, if any, by comparing the implied fair value of goodwill to its carrying amount.  If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess.  The implied fair value of goodwill is calculated in the same manner that goodwill is calculated in a business combination, whereby the fair value of the reporting unit is allocated to all of the assets and |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | liabilities of that unit, with the excess purchases price over the amounts assigned to assets and liabilities.  Estimating fair value is performed by utilizing various valuation approaches, such as the income approach or market approach. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Identified Intangible Assets |
|--------|------------------------------|

|   | Intellectual property assets primarily represent customer relationship, tradename, and developed technologies acquired, and are recorded based on a purchase price allocation analysis on the fair value of the assets acquired. The Company amortizes acquired intangible assets using straight-line method over the estimated life ranging from 3 to 10 years. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The intangible assets, subject to amortization, are reviewed for impairment whenever circumstances indicate that the useful life is shorter than the Company had originally estimated or that the carrying amount of assets may not be recoverable.  If such facts and circumstances exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets.  The Company determines the fair value using the income approach which includes the discounted cash flow and other economic factors as inputs. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Treasury Stock |
|--------|----------------|

|   | The Company retires ordinary shares repurchased under a share repurchase plan.  Accordingly, upon retirement the excess of the purchase price over par value is allocated between additional paid-in capital and retained earnings based on the average issuance price of the shares repurchased.  A repurchase of ADS is recorded as treasury stock until the Company completes the withdrawal of the underlying ordinary shares from the ADS program. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 collectability. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Freight Costs |
|--------|---------------|

|   | Costs of shipping and handling for delivery of the Company’s products that are reimbursed by customers are recorded as revenue in the consolidated statements of operations.  Shipping and handling costs are charged to cost of sales as incurred. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 and intellectual property 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 approximately $1,450,000 in 2010, $827,000 in 2009, and $2,127,000 in 2008, respectively.  A portion of these costs was for advertising, which approximately amounted to $374,000 in 2010, $361,000 in 2009, and $549,000 in 2008, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Pension Costs |
|--------|---------------|

|   | For employees under defined contribution pension plans, pension costs are recorded based on the actual contributions made to employees’ pension accounts.  For employees under defined benefit pension plans, pension costs are recorded based on the actuarial calculation. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Income Tax |
|--------|------------|

|   | 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 relevant years.  Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.  The Company believes that uncertainty exists regarding the realizability of certain deferred income tax assets and, accordingly, has established a valuation allowance for those deferred income tax assets to the extent the realizability is not deemed to be more likely than not.  Deferred income tax assets and liabilities are measured using enacted tax rates. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

|   | The Company utilizes a two step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained in a dispute with taxing authorities, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Stock-based Compensation |
|--------|--------------------------|

|   | The Company grants stock options to its employees and certain non-employees and estimates the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods.  The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options on the date of grant.  The Company also grants restricted stock units (“RSU”) to its employees and the RSU are measured based on the fair market value of the underlying stock on the dates of grant. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 receivable and payable 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 recorded 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 US dollar.  Accordingly, the financial statements of the foreign subsidiaries are translated into US 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 (loss) represents net income (loss) plus the results of certain changes in shareholders’ equity during a period from non-owner sources that are not reflected in the consolidated statements 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.  In view 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. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company indemnifies third parties with whom it enters into contractual relationships, including customers; however, it is not possible to determine the range of the amount of potential liability under these indemnification obligations due to the lack of prior indemnification claims.  These indemnities typically hold these third parties harmless against specified losses, such as those arising from a breach of representation or covenant, or other third party claims that the Company’s products when used for their intended purposes infringe the intellectual property rights of such other third parties.  The indemnities are triggered by any claim of infringement of intellectual property rights brought by a third party with respect to the Company’s products.  The terms of these indemnities may not be waived or amended except by written notice signed by both parties and may only be terminated with respect to the Company’s products. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Recent Accounting Pronouncements |
|--------|----------------------------------|

|   | In June 2009, Financial Accounting Standard Board (“FASB”) issued new guidance to improve financial reporting by enterprises involved with variable interest entities (“VIE”). The new guidance modifies the approach for determining the primary beneficiary of a VIE. Under the modified approach, an enterprise is required to make a qualitative assessment whether it has (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If an enterprise has both of these characteristics, the enterprise is considered the primary beneficiary and must consolidate the VIE.  The new guidance becomes effective for annual reporting periods beginning after November 15, 2009.  The adoption of the guidance did not have a material effect on the Company’s results of operations, financial positions and cash flows. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In June 2009, the FASB issued new guidance relating to the transfer of financial assets. The new guidance requires entities to provide more information regarding sales of securitized financial assets and similar transactions, particularly if the entity has continuing exposure to the risks related to the transferred financial assets. It also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. The new guidance becomes effective for annual reporting periods beginning after November 15, 2009. This guidance is effective for the year ending December 31, 2010. The adoption of the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | In September 2009, the FASB issued an accounting standard update which provides guidance on how to separate consideration in multiple-deliverable arrangements and significantly expands the related disclosure requirements. The standard establishes a hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The update is effective for annual reporting periods beginning on or after June 15, 2010. Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In September 2009, the FASB issued an accounting standard update on arrangements that include software elements. Tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. The update is effective for annual reporting periods beginning on or after June 15, 2010.  Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

|   | In January 2010, the FASB issued an accounting update that amended guidance and clarified the disclosure requirements about fair market value measurement. These amended standards require new disclosures for significant transfers of assets or liabilities between Level 1 and Level 2 in the fair value hierarchy; separate disclosures for purchases, sales, issuance and settlements of Level 3 fair value items on a gross, rather than net basis; and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and Level 3 assets and liabilities. Except for the detailed disclosures of changes in Level 3 items, which will be effective for the Company as of January 1, 2011, the remaining new disclosure requirements were effective for the Company as of January 1, 2010. The Company has included these new disclosures, as applicable, in Note 4 below. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2010, the FASB issued an accounting update to clarify the scope of decrease in ownership provisions of ASC 810-10 and expands the disclosures required upon deconsolidation of a subsidiary. This guidance requires retrospective application for the company for the year ending December 31, 2009. The adoption of the guidance did not have a material effect on the Company’s results of operations, financial position and cash flows. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2010, the FASB issued an accounting update that provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for certain research and development transactions. Under this new standard, a company can recognize as revenue consideration that is contingent upon achievement of a milestone in the period in which it is achieved, only if the milestone meets all criteria to be considered substantive.  This standard will be effective for the company on a prospective basis as of January 1, 2011.  Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2010, the FASB issued an accounting update to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades must not be considered to contain a market, performance, or service condition. Therefore, an entity should not classify such an award as a liability if it otherwise qualifies for classification in equity. This guidance is effective for annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment to the opening balance of retained earnings for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. Earlier application is permitted.  Based on the Company’s analysis, the Company currently does not anticipate that the new guidance will have a material effect on the Company’s results of operations and financial position or cash flows. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In December 2010, the FASB issued an accounting update to require that supplemental pro forma information disclosures pertaining to acquisitions should be presented as if the business combination(s) occurred as of the beginning of the prior annual period when comparative financial statements are presented.  This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations consummated in periods beginning after December 15, 2010.  Early adoption is permitted.  The Company will make the required disclosures prospectively as of the date of the adoption for any material business combinations or series of immaterial business combinations that are material in the aggregate. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 3.   | DISCONTINUED OPERATIONS |
|----------------|-------------------------|

|   | As part of the Company’s strategy to evaluate its business segments periodically, management noted that the Network Security Group has incurred significant operating losses and its business had not grown as projected.  In light of the downturn of business in Network Security products the Company determined that a triggering event had occurred and initiated an impairment loss analysis on the Network Security Group’s long-lived assets using a discounted cash flow approach in estimating fair value as market values could not be readily determined.  Along with the analysis, a portion of the developed technologies intangible asset recognized in connection with the acquisition of 360 Degree Web, the property and equipment, and other assets associated with the Network Security Group, with a total net carrying value of $2,184,000 were fully written off in the third quarter of 2010. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2010, the Board of Directors (the “Board”) board resolved to discontinue the operations of Network Security Group and to liquidate the assets of the Network Security Group in due course.  The Company has ceased operation and has commenced the related shutdown activities and it does not expect any significant future revenues from the operations of this business segment. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company determined that the Network Security Group meets the definition of a component and the results of the Network Security Group are reported as discontinued operations in the accompanying statements of operations.  Prior year financial statements have been restated to present the Network Security Group as a discontinued operation. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In conjunction with the discontinued operations, the Company recorded charges of $1,218,000 during the year ended December 31, 2010 for certain exit costs relating to the discontinuance of these operations which is reflected as part of loss from discontinued operations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Network Security Group accounted for $1,946,000 of net revenues and $9,591,000 of loss from operations for the year ended December 31, 2010, which are included as part the $9,843,000 of loss from discontinued operations in the accompanying consolidated statements of operations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.   | FAIR VALUE MEASUREMENTS |
|----------------|-------------------------|

|   | The Company measures its cash equivalents and marketable securities at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Level 1 – Observable inputs such as quoted prices for identical instruments in active markets; |
|--------|------------------------------------------------------------------------------------------------------|

|   | Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; |
|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Assets and liabilities measured at fair value on a recurring basis were as follows: |
|--------|-------------------------------------------------------------------------------------|

|                                                                  |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total  |   |
|-----------------------------------------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|
| Items measured at fair value on a recurringbasis at December 31, 2010 |   |    |   |   |    |   |   |    |   |   |   |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |
| Cash and cash equivalents                                             |   |    |   |   |    |   |   |    |   |   |   |   |
| Money market mutual funds                                             |   | $       | -      |   |    | $      | 928    |    |   | $      | -      |   |   | $ | 928 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Short-term investments                                                |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Government bonds                                                      |   |    | -      |   |    |   | 501    |    |   |   | -      |   |   |   | 501 |   |
| Corporate bonds                                                       |   |    | -      |   |    |   | 1,005  |    |   |   | -      |   |   |   | 1,005 |   |
| Agency bonds                                                          |   |    | -      |   |    |   | 7,754  |    |   |   | -      |   |   |   | 7,754 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Long-term investments                                                 |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Available-for-sale securities                                         |   |    | 5,106  |   |    |   | -      |    |   |   | -      |   |   |   | 5,106 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Total                                                                 |   | $       | 5,106  |   |    | $      | 10,188 |    |   | $      | -      |   |   | $ | 15,294 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Items measured at fair value on a recurringbasis at December 31, 2009 |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                             |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Money market mutual funds                                             |   | $       | -      |   |    | $      | 514    |    |   | $      | -      |   |   | $ | 514 |   |
| Agency bonds                                                          |   |    | -      |   |    |   | 1,392  |    |   |   | -      |   |   |   | 1,392 |   |
| Treasury bills                                                        |   |    | 1,000  |   |    |   | -      |    |   |   | -      |   |   |   | 1,000 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Short-term investments                                                |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Agency bonds                                                          |   |    | -      |   |    |   | 7,099  |    |   |   | -      |   |   |   | 7,099 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Long-term investments                                                 |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Available-for-sale securities                                         |   |    | 3,437  |   |    |   | -      |    |   |   | -      |   |   |   | 3,437 |   |
|                                                                  |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |
| Total                                                                 |   | $       | 4,437  |   |    | $      | 9,005  |    |   | $      | -      |   |   | $ | 13,442 |   |

|   | The Company utilizes a pricing service to estimate fair value measurements for the money market mutual funds, government bonds, corporate bonds and agency bonds. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Fixed maturity securities other than U.S. Treasury securities generally trade daily on Dealer bids rather than bids recorded on exchanges.  The pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The fair value estimates provided by the pricing service for the Company’s investments are based on observable market information rather than market quotes.  Accordingly, the estimates of fair value for short-term investments were determined based on Level 2 inputs at December 31, 2010 and 2009, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Assets and liabilities measured at fair value on a non-recurring basis were as follows (nil at December 31, 2009): |
|--------|--------------------------------------------------------------------------------------------------------------------|

|                                                                      |   | Level 1 |   |   | Level 2 |   |   | Level 3 |   |   | Total  |   |   | TotalGains(Losses) |   |
|---------------------------------------------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|--------|--------------------|--------|
| Items measured at fair value on a non-recurringbasis at December 31, 2010 |   |    |   |   |    |   |   |    |   |   |   |   |   |               |   |
|                                                                      |   |    |   |   |    |   |   |    |   |   |   |   |   |               |   |
| Long-lived assets held and used related to the Network Security Group     |   |    |   |   |    |   |   |    |   |   |   |   |   |               |   |
| Property and equipment, net (note 11)                                     |   | $       | -      |   |    | $      | -      |    |   | $      | -      |   |   | $                  | -      |   |   | $ | (340 | ) |
| Intangible assets, net (note 12)                                          |   |    | -      |   |    |   | -      |    |   |   | -      |   |   |               | -      |   |   |   | (1,729 | ) |
| Deferred charges (note 13)                                                |   |    | -      |   |    |   | -      |    |   |   | -      |   |   |               | -      |   |   |   | (115 | ) |
|                                                                      |   |    |   |   |    |   |   |    |   |   |   |   |   |               |   |   |   |   |   |   |
| Total                                                                     |   | $       | -      |   |    | $      | -      |    |   | $      | -      |   |   | $                  | -      |   |   | $ | (2,184 | ) |

|   | As described in Note 3, in light of the downturn of business in Network Security products, the Company determined that a triggering event had occurred and initiated an impairment loss analysis on the Network Security Group’s long-lived assets.  In conducting this analysis, the Company used a discounted cash flow approach in estimating fair value as market values could not be readily determined given the unique nature of the respective assets.  For the assets identified as being impaired, the cash flows associated with the underlying assets did not support a value greater than zero given the shutdown of the Network Security business as a result of the Company’s change in business strategy.  Accordingly, long-lived assets held and used with a carrying amount of $2,184,000 were written down to their fair value of zero, resulting in an impairment charge of $2,184,000, which was included in loss from discontinued operations for the year ended December 31, 2010. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5.   | CASH AND CASH EQUIVALENTS |
|----------------|---------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                       |   | December 31 |   |
|--------------------------------------------|--------|-------------|--------|
|                                       |   | 2010        |   |   | 2009 |   |
|                                       |   |        |   |   |   |   |
| Time deposits                              |   | $           | 8,911  |   |   | $ | 6,561 |   |
| Savings and checking accounts              |   |        | 32,416 |   |   |   | 29,348 |   |
| Money market mutual funds and agency bonds |   |        | 928    |   |   |   | 1,906 |   |
| Treasury bills                             |   |        | -      |   |   |   | 1,000 |   |
| Petty cash                                 |   |        | 22     |   |   |   | 16 |   |
|                                       |   |        |   |   |   |   |   |   |
|                                       |   | $           | 42,277 |   |   | $ | 38,831 |   |

----

| 6.   | SHORT-TERM INVESTMENTS |
|----------------|------------------------|

|   | (In Thousands) |
|--------|----------------|

|                          |   | December 31, 2010 |   |
|-------------------------------|--------|-------------------|--------|
|                          |   |              |   |   | Gross |   |   | Gross |   |   |   |   |
|                          |   |              |   |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
|                          |   | Cost              |   |   | Gains |   |   | Losses |   |   | Value |   |
|                          |   |              |   |   |   |   |   |   |   |   |   |   |
| Time deposits                 |   | $                 | 59,468 |   |   | $ | - |   |   | $ | - |   |   | $ | 59,468 |   |
|                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale securities |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government bonds              |   |              | 501    |   |   |   | - |   |   |   | - |   |   |   | 501 |   |
| Corporate bonds               |   |              | 1,000  |   |   |   | 5 |   |   |   | - |   |   |   | 1,005 |   |
| Agency bonds                  |   |              | 7,748  |   |   |   | 8 |   |   |   | (2 | ) |   |   | 7,754 |   |
|                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |   | $                 | 68,717 |   |   | $ | 13 |   |   | $ | (2 | ) |   | $ | 68,728 |   |

|   | (In Thousands) |
|--------|----------------|

|                          |   | December 31, 2009 |   |
|-------------------------------|--------|-------------------|--------|
|                          |   |              |   |   | Gross |   |   | Gross |   |   |   |   |
|                          |   |              |   |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
|                          |   | Cost              |   |   | Gains |   |   | Losses |   |   | Value |   |
|                          |   |              |   |   |   |   |   |   |   |   |   |   |
| Time deposits                 |   | $                 | 67,403 |   |   | $ | - |   |   | $ | - |   |   | $ | 67,403 |   |
|                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale securities |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency bonds                  |   |              | 7,104  |   |   |   | - |   |   |   | (5 | ) |   |   | 7,099 |   |
|                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          |   | $                 | 74,507 |   |   | $ | - |   |   | $ | (5 | ) |   | $ | 74,502 |   |

|   | Short-term investments by contractual maturity were as follows: |
|--------|-----------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                 |   | December 31, 2010 |   |
|--------------------------------------|--------|-------------------|--------|
|                                 |   |              |   |   | Fair |   |
|                                 |   | Cost              |   |   | Value |   |
| Time deposits                        |   |              |   |   |   |   |
| Due within one year                  |   | $                 | 54,468 |   |   | $ | 54,468 |   |
| Due after one year through two years |   |              | 5,000  |   |   |   | 5,000 |   |
|                                 |   |              | 59,468 |   |   |   | 59,468 |   |
|                                 |   |              |   |   |   |   |   |   |
| Available-for-sale securities        |   |              |   |   |   |   |   |   |
| Due within one year                  |   |              | 9,249  |   |   |   | 9,260 |   |
|                                 |   |              |   |   |   |   |   |   |
|                                 |   | $                 | 68,717 |   |   | $ | 68,728 |   |

|   | (In Thousands) |
|--------|----------------|

|                          |   | December 31, 2009 |   |
|-------------------------------|--------|-------------------|--------|
|                          |   |              |   |   | Fair |   |
|                          |   | Cost              |   |   | Value |   |
| Time deposits                 |   |              |   |   |   |   |
| Due within one year           |   | $                 | 67,381 |   |   | $ | 67,381 |   |
| Due after two years           |   |              | 22     |   |   |   | 22 |   |
|                          |   |              | 67,403 |   |   |   | 67,403 |   |
|                          |   |              |   |   |   |   |   |   |
| Available-for-sale securities |   |              |   |   |   |   |   |   |
| Due within one year           |   |              | 7,104  |   |   |   | 7,099 |   |
|                          |   |              |   |   |   |   |   |   |
|                          |   | $                 | 74,507 |   |   | $ | 74,502 |   |

----

|   | The Company’s gross realized gains and losses on the sale of investments for the year ended December 31, 2010 were $2,000 and $0, the Company’s gross realized gains and losses on the sale of investments for the year ended December 31, 2009 were $1,000 and $0, respectively, and for the year ended December 31, 2008 were $1,000 and $0, respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 and 2009.  The Company presently does not intend to sell the debt securities listed below and believes that it is more likely than not that the Company will not be required to sell these securities that are in an unrealized loss position before recovery of the Company’s amortized cost. Furthermore, the Company has the intent and ability to hold the equity securities listed below for a sufficient period of time to allow for recovery in market value. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|         |   | December 31, 2010   |   |
|--------------|--------|---------------------|--------|
|         |   | Less Than 12 Months |   |   | 12 Months or Greater |   |   | Total |   |
|         |   |                |   |   | Unrealized |   |   |   |   |   | Unrealized |   |   |   |   |   | Unrealized |   |
|         |   | Fair Value          |   |   | Losses |   |   | Fair Value |   |   | Losses |   |   | Fair Value |   |   | Losses |   |
|         |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency bonds |   | $                   | 6,766  |   |   | $ | 2 |   |   | $ | - |   |   | $ | - |   |   | $ | 6,766 |   |   | $ | 2 |   |

|   | (In Thousands) |
|--------|----------------|

|                                                                                                                          |   | December 31, 2009   |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                                                          |   | Less Than 12 Months |   |   | 12 Months or Greater |   |   | Total |   |
|                                                                                                                          |   |                |   |   | Unrealized |   |   |   |   |   | Unrealized |   |   |   |   |   | Unrealized |   |
|                                                                                                                          |   | Fair Value          |   |   | Losses |   |   | Fair Value |   |   | Losses |   |   | Fair Value |   |   | Losses |   |
|                                                                                                                          |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Agency bonds                                                                                                                  |   | $                   | 7,099  |   |   | $ | 5 |   |   | $ | - |   |   | $ | - |   |   | $ | 7,099 |   |   | $ | 5 |   |
|                                                                                                                          |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment in China Resources    Microelectronics Limited    (“CR Micro”) (Note 10) |   |                | -      |   |   |   | - |   |   |   | 2,246 |   |   |   | 472 |   |   |   | 2,246 |   |   |   | 472 |   |
|                                                                                                                          |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                          |   | $                   | 7,099  |   |   | $ | 5 |   |   | $ | 2,246 |   |   | $ | 472 |   |   | $ | 9,345 |   |   | $ | 477 |   |

| 7.   | ACCOUNTS RECEIVABLE, NET |
|----------------|--------------------------|

|   | (In Thousands) |
|--------|----------------|

|                        |   | December 31 |   |
|-----------------------------|--------|-------------|--------|
|                        |   | 2010        |   |   | 2009 |   |
|                        |   |        |   |   |   |   |
| Accounts receivable         |   | $           | 14,201 |   |   | $ | 15,124 |   |
| Allowances for              |   |        |   |   |   |   |   |   |
| Doubtful accounts           |   |        | (343   | ) |   |   | (84 | ) |
| Sales returns and discounts |   |        | (619   | ) |   |   | (484 | ) |
|                        |   |        |   |   |   |   |   |   |
|                        |   | $           | 13,239 |   |   | $ | 14,556 |   |

----

|   | The changes in the allowances are summarized as follows: |
|--------|----------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                       |   | December 31 |   |
|--------------------------------------------|--------|-------------|--------|
|                                       |   | 2010        |   |   | 2009 |   |
| Allowances for doubtful accounts           |   |        |   |   |   |   |
| Balance, beginning of the year             |   | $           | 84     |   |   | $ | 283 |   |
| Additions                                  |   |        | 259    |   |   |   | - |   |
| Reversal and write-off                     |   |        | -      |   |   |   | (199 | ) |
|                                       |   |        |   |   |   |   |   |   |
| Balance, end of the year                   |   | $           | 343    |   |   | $ | 84 |   |
|                                       |   |        |   |   |   |   |   |   |
| Allowances for sales returns and discounts |   |        |   |   |   |   |   |   |
| Balance, beginning of the year             |   | $           | 484    |   |   | $ | 283 |   |
| Additions                                  |   |        | 1,150  |   |   |   | 1,794 |   |
| Write-off                                  |   |        | (1,015 | ) |   |   | (1,593 | ) |
|                                       |   |        |   |   |   |   |   |   |
| Balance, end of the year                   |   | $           | 619    |   |   | $ | 484 |   |

| 8.   | INVENTORIES |
|----------------|-------------|

|   | (In Thousands) |
|--------|----------------|

|            |   | December 31 |   |
|-----------------|--------|-------------|--------|
|            |   | 2010        |   |   | 2009 |   |
|            |   |        |   |   |   |   |
| Finished goods  |   | $           | 3,984  |   |   | $ | 3,885 |   |
| Work-in-process |   |        | 2,009  |   |   |   | 2,920 |   |
| Raw materials   |   |        | 7,690  |   |   |   | 2,652 |   |
|            |   |        |   |   |   |   |   |   |
|            |   | $           | 13,683 |   |   | $ | 9,457 |   |

| 9.   | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
|----------------|-------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                        |   | December 31 |   |
|-----------------------------|--------|-------------|--------|
|                        |   | 2010        |   |   | 2009 |   |
|                        |   |        |   |   |   |   |
| Prepaid expenses            |   | $           | 1,081  |   |   | $ | 1,247 |   |
| Interest receivable         |   |        | 352    |   |   |   | 706 |   |
| Other receivable            |   |        | 305    |   |   |   | 549 |   |
| Value-added-tax recoverable |   |        | 36     |   |   |   | 50 |   |
| Deferred income tax assets  |   |        | 15     |   |   |   | 11 |   |
| Other                       |   |        | 645    |   |   |   | 779 |   |
|                        |   |        |   |   |   |   |   |   |
|                        |   | $           | 2,434  |   |   | $ | 3,342 |   |

----

| 10.   | LONG-TERM INVESTMENTS |
|-----------------|-----------------------|

|   | (In Thousands) |
|--------|----------------|

|                                                    |   | December 31 |   |
|---------------------------------------------------------|--------|-------------|--------|
|                                                    |   | 2010        |   |   | 2009 |   |
| Cost method                                             |   |        |   |   |   |   |
| Sigurd Cayman                                           |   | $           | 7,200  |   |   | $ | 5,700 |   |
| X-FAB Silicon Foundries N.V. (“X-FAB”)      |   |        | 4,968  |   |   |   | 4,968 |   |
| Philip Ventures Enterprise Fund (“PVEF”)    |   |        | 942    |   |   |   | 585 |   |
| GEM Services, Inc. (“GEM”)                  |   |        | 500    |   |   |   | 500 |   |
| Excelliance MOS Co., Ltd (“EMC”)            |   |        | 1,960  |   |   |   | - |   |
| Asia Sinomos Semiconductor Inc. (“Sinomos”) |   |        | -      |   |   |   | - |   |
| Silicon Genesis Corporation (“SiGen”)       |   |        | -      |   |   |   | - |   |
|                                                    |   |        | 15,570 |   |   |   | 11,753 |   |
| Available-for-sale securities – noncurrent        |   |        |   |   |   |   |   |   |
| CR Micro                                                |   |        | 3,018  |   |   |   | 2,246 |   |
| Etrend Hitech Corporation (“Etrend”)        |   |        | 2,088  |   |   |   | 1,191 |   |
|                                                    |   |        | 5,106  |   |   |   | 3,437 |   |
|                                                    |   |        |   |   |   |   |   |   |
|                                                    |   | $           | 20,676 |   |   | $ | 15,190 |   |

|   | The following table shows the gross unrealized gains and losses and fair value of the Company’s long-term investments in available-for-sale securities at December 31, 2010 and 2009. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|     |   | December 31, 2010 |   |
|----------|--------|-------------------|--------|
|     |   |              |   |   | Gross |   |   | Gross |   |   |   |   |
|     |   |              |   |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
|     |   | Cost              |   |   | Gains |   |   | Losses |   |   | Value |   |
|     |   |              |   |   |   |   |   |   |   |   |   |   |
| CR Micro |   | $                 | 2,718  |   |   | $ | 300 |   |   | $ | - |   |   | $ | 3,018 |   |
| Etrend   |   |              | 920    |   |   |   | 1,168 |   |   |   | - |   |   |   | 2,088 |   |
|     |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     |   | $                 | 3,638  |   |   | $ | 1,468 |   |   | $ | - |   |   | $ | 5,106 |   |

|   | (In Thousands) |
|--------|----------------|

|     |   | December 31, 2009 |   |
|----------|--------|-------------------|--------|
|     |   |              |   |   | Gross |   |   | Gross |   |   |   |   |
|     |   |              |   |   | Unrealized |   |   | Unrealized |   |   | Fair |   |
|     |   | Cost              |   |   | Gains |   |   | Losses |   |   | Value |   |
|     |   |              |   |   |   |   |   |   |   |   |   |   |
| CR Micro |   | $                 | 2,718  |   |   | $ | - |   |   | $ | (472 | ) |   | $ | 2,246 |   |
| Etrend   |   |              | 920    |   |   |   | 271 |   |   |   | - |   |   |   | 1,191 |   |
|     |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     |   | $                 | 3,638  |   |   | $ | 271 |   |   | $ | (472 | ) |   | $ | 3,437 |   |

----

|   | In July 2008, the Company invested in preferred shares of Sigurd Cayman for $5,700,000 to become a strategic partner of Sigurd Microelectronics Corporation (“Sigurd”).  Upon completion of the transaction, the Company obtained a 19.54% ownership of Sigurd Cayman.  The Company accounts for the investment under the cost method as the Company does not exercise significant influence over operating and financial policies of Sigurd Cayman and management of Sigurd holds the controlling interests.  In April 2010, the Company participated in another round of preferred shares issued by Sigurd Cayman amounting to $1,500,000. As of December 31, 2010, the Company held 9,690,445 shares, which represented an 18.88% ownership of Sigurd Cayman. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company invested in X-FAB’s ordinary shares in July 2002.  X-FAB (formerly known as X-FAB Semiconductor Foundries AG) is a European-American foundry group that specializes in analog/mixed-signal application. As of December 31, 2010, the Company held 530,000 shares at the cost of $4,968,000 (4,982,000 EURO), which represented a 1.60% ownership of X-FAB. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In November 2005, the Company invested in PVEF, a fund management company in Singapore, with an investment amount of $585,000 (SG$1,000,000) for 20 units in the placement at SG$50,000 per unit.  The Company further invested $357,000 (SG$500,000) in June 2010 to obtain 30 units.  The Company held a 5% interest in the fund as of December 31, 2010. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company invested in GEM’s preference shares in August 2002. GEM is a multinational semiconductor assembly and test company. As of December 31, 2010, the Company held 333,334 shares at the value of $500,000, which represented a 0.94% ownership of GEM. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company invested in EMC’s ordinary shares in June 2010. EMC is a fabless power device design company in Taiwan, specialized in power semiconductor process development, and the design of high efficiency power device and system.  As of December 31, 2010, the Company held 3,400,000 shares at the cost of $1,960,000 (NT$62,900,000), which represented a 12.73% ownership of EMC. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In August 2004, the Company invested in CSMC Technology Corporation, a subsidiary of China Resources Microelectronic Company Limited) (“CR Micro”) by purchasing its ordinary shares which are listed on the SEHK at a purchase price of $4,547,000. CR Micro is a semiconductor foundry company.  As of December 31, 2010, the Company held 70,200,000 shares, which represented approximately 0.80% ownership of CR Micro.  The Company considered the investment to be other-than-temporarily impaired at June 30, 2006 and recognized an impairment loss of $756,000 based on the quoted market price of HK$0.42 per share on June 30, 2006. On February 23, 2009, CR Micro announced that it was considering a privatization proposal with a cash offering price of HK$0.30 per share.  In respect to this development, the Company considered this investment to be other-than-temporarily impaired and recognized an impairment loss of $1,073,000 as of December 31, 2008.  CR Micro, however, remains listed on the SEHK as its privatization proposal was disapproved by over 10% of its shareholders in June 2009. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company invested in Etrend’s ordinary shares in December 2002, July 2003, and March 2004, respectively. Etrend is a wafer probing, packing and testing company.  As of December 31, 2010, the Company held a 7.62% ownership of Etrend.  In August 2007, Etrend’s shares were listed on the Emerging Stock GreTai Security Market of Taiwan and the Company reclassified the investment in Etrend to available-for-sale securities.  Etrend was successfully listed on the GreTai Securities Market of Taiwan in November 2010. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In January 2005, the Company invested in ordinary shares of Sinomos, a privately owned foundry company, at a total amount of $5,000,000. In May and December 2006, the Company further invested in preferred shares of $3,288,000 and $4,785,000, respectively. In September 2008, in view of Sinomos’ operating status and recurring financial losses, the Company determined that the decline in fair value of the investment in Sinomos was other-than-temporary and recognized an impairment charge of $13,073,000.  Along with the recognition of impairment charge, the Company also wrote-off the outstanding prepayments in relation to Sinomos’ foundry service of $2,942,000.  As of December 31, 2010, the Company held 30,101,353 of ordinary and preference shares, representing an 18.41% ownership of Sinomos. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company invested in SiGen preferred shares in December 2000.  SiGen is an advanced nanotechnology company that develops Silicon-on-insulator, stained-silicon products and other engineered multi-layer structures to microelectronics and photonic for advanced electronic and opto-electronic device applications.  In 2002 and 2003, the Company reviewed qualitative factors related to the investment, determined that the decline in value was other-than temporary and the carrying value was decreased to zero. The Company held 23,946 shares of SiGen as of December 31, 2010, representing a 0.06% ownership of SiGen. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 11.   | PROPERTY AND EQUIPMENT, NET |
|-----------------|-----------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                  |   | December 31 |   |
|---------------------------------------|--------|-------------|--------|
|                                  |   | 2010        |   |   | 2009 |   |
| Cost                                  |   |        |   |   |   |   |
| Land                                  |   | $           | 2,510  |   |   | $ | 2,510 |   |
| Buildings                             |   |        | 8,055  |   |   |   | 8,055 |   |
| Equipment                             |   |        | 30,793 |   |   |   | 31,360 |   |
| Furniture and fixtures                |   |        | 1,221  |   |   |   | 1,314 |   |
| Leasehold improvements                |   |        | 2,639  |   |   |   | 2,333 |   |
| Transportation equipment              |   |        | 581    |   |   |   | 569 |   |
| Prepayment for property and equipment |   |        | 10,204 |   |   |   | 8,878 |   |
|                                  |   |        | 56,003 |   |   |   | 55,019 |   |
| Accumulated depreciation              |   |        |   |   |   |   |   |   |
| Buildings                             |   |        | 1,035  |   |   |   | 854 |   |
| Equipment                             |   |        | 21,748 |   |   |   | 20,313 |   |
| Furniture and fixtures                |   |        | 990    |   |   |   | 1,079 |   |
| Leasehold improvements                |   |        | 2,032  |   |   |   | 1,767 |   |
| Transportation equipment              |   |        | 459    |   |   |   | 436 |   |
|                                  |   |        | 26,264 |   |   |   | 24,449 |   |
|                                  |   |        |   |   |   |   |   |   |
|                                  |   | $           | 29,739 |   |   | $ | 30,570 |   |

|   | Depreciation expense recognized during the years ended December 31, 2010, 2009, and 2008 was approximately $3,731,000, $4,442,000, and $5,931,000, respectively. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | An impairment charge of $340,000 was incurred as a result of impairment analysis on Network Security Group’s property and equipment for the year ended December 31, 2010.  Please see discussions in Note 3. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In August 2009, the Company sold its land, located in Hsin-Chu, Taiwan, to a developer in exchange for a portion of the real estate after it is developed, which portion will include a portion of an office building and a portion of a parking lot, valued at approximately $8,918,000.  The Company consummated this transaction to acquire office building space and parking lot space for the purpose of future operations and business growth.  The Company deferred the transaction gain of $129,000 as the building was still under the construction stage as of December 31, 2010. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 12.   | INTANGIBLE ASSETS, NET |
|-----------------|------------------------|

|   | In March 2008, the Company entered into an agreement with 360 Degree Web to acquire certain software products, sales and licensing contracts, registered trademarks, issued patents, patent applications, and proprietary technology in exchange for $6,500,000 and all of the shares of 360 Degree Web held by the Company with a carrying value of $1,305,000.  As a result of the acquisition, the Company obtained certain core technologies that are essential to the future growth of the Company’s business. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company determined that such acquisition meets the criteria for a business transfer and accounted for the transaction by the standards for business combinations. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The total purchase price was allocated as follows: |
|--------|----------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                   |   |   |   |
|------------------------|--------|--------|--------|
| Developed technologies |   | $      | 4,706  |   |
| Customer relationship  |   |   | 261    |   |
| Tradename              |   |   | 56     |   |
| Goodwill               |   |   | 2,782  |   |
|                   |   |   |   |   |
| Total consideration    |   | $      | 7,805  |   |

|   | The above purchase price allocation was based on an analysis of the fair value of the assets acquired.  The customer relationship and tradename are all amortized over 3 years.  The developed technologies, including security access control, full disk encryption, and virtual private network (“VPN”) technologies, are amortized from 8 to 10 years.  The goodwill of $2,782,000 was fully assigned to the reporting unit of Integrated Circuit Group and was primarily comprised of buyer-specific synergies.  Given that the Company’s products already incorporated certain of 360 Degree Web’s technologies, management anticipated achieving higher revenue growth as a result of this acquisition. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As a result of the global economic crisis and the resulting decline in customer demand in the fourth quarter of 2008, the overall decline in equity values and the resulting deterioration in the Company’s market capitalization made it necessary to review whether there was an indication that goodwill was impaired. The fair value of the Integrated Circuit Group reporting unit was estimated using the market approach-guideline public company method.  The information used in the valuation was obtained through discussions and a review of historical financial statements, prospective financial information, product descriptions and other relevant documents.  In addition, external research and data was considered.  Upon the completion of the goodwill impairment analysis, the Company recognized a goodwill impairment of $2,782,000 for the quarter ended December 31, 2008. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Intangible assets consisted of the following as of December 31, 2010: |
|--------|-----------------------------------------------------------------------|

|   |  (In Thousands) |
|--------|----------------------|

|                   |   | Gross    |   |   |         |   |   |   |   |
|------------------------|--------|----------|--------|--------|--------------|--------|--------|--------|--------|
|                   |   | Carrying |   |   | Accumulated  |   |   |   |   |
|                   |   | Amount   |   |   | Amortization |   |   | Net    |   |
|                   |   |     |   |   |         |   |   |   |   |
| Developed technologies |   | $        | 2,564  |   |         | $      | (819   | )      |   | $ | 1,745 |   |
| Customer relationship  |   |     | 261    |   |         |   | (225   | )      |   |   | 36 |   |
| Tradename              |   |     | 56     |   |         |   | (48    | )      |   |   | 8 |   |
| Other                  |   |     | 302    |   |         |   | (155   | )      |   |   | 147 |   |
|                   |   |     |   |   |         |   |   |   |   |   |   |   |
|                   |   | $        | 3,183  |   |         | $      | (1,274 | )      |   | $ | 1,936 |   |

----

|   | Intangible assets consisted of the following as of December 31, 2009: |
|--------|-----------------------------------------------------------------------|

|   |  (In Thousands) |
|--------|----------------------|

|                   |   | Gross    |   |   |         |   |   |   |   |
|------------------------|--------|----------|--------|--------|--------------|--------|--------|--------|--------|
|                   |   | Carrying |   |   | Accumulated  |   |   |   |   |
|                   |   | Amount   |   |   | Amortization |   |   | Net    |   |
|                   |   |     |   |   |         |   |   |   |   |
| Developed technologies |   | $        | 4,706  |   |         | $      | (790   | )      |   | $ | 3,916 |   |
| Customer relationship  |   |     | 261    |   |         |   | (138   | )      |   |   | 123 |   |
| Tradename              |   |     | 56     |   |         |   | (29    | )      |   |   | 27 |   |
| Other                  |   |     | 293    |   |         |   | (93    | )      |   |   | 200 |   |
|                   |   |     |   |   |         |   |   |   |   |   |   |   |
|                   |   | $        | 5,316  |   |         | $      | (1,050 | )      |   | $ | 4,266 |   |

|   | An impairment charge of $1,729,000 was incurred as a result of impairment analysis on Network Security Group’s intangible assets for the year ended December 31, 2010.  Please see discussions in Note 3. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Amortization expense of the intangible assets acquired was $608,000, $663,000 and $387,000 for years ended December 31, 2010, 2009, and 2008, respectively.  The estimated amortization expense of the intangible assets as of December 31, 2010 for the coming five years was as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|   |   |
|--------|--------|

| Year   |   |   |   |
|--------|--------|--------|--------|
| 2011   |   | $      | 377    |   |
| 2012   |   |   | 333    |   |
| 2013   |   |   | 302    |   |
| 2014   |   |   | 273    |   |
| 2015   |   |   | 273    |   |
|   |   |   |   |   |
| Total  |   | $      | 1,558  |   |

| 13.   | OTHER ASSETS |
|-----------------|--------------|

|   | (In Thousands) |
|--------|----------------|

|                                    |   | December 31 |   |
|-----------------------------------------|--------|-------------|--------|
|                                    |   | 2010        |   |   | 2009 |   |
|                                    |   |        |   |   |   |   |
| Land use rights                         |   | $           | 1,264  |   |   | $ | 1,293 |   |
| Deferred charges                        |   |        | 1,827  |   |   |   | 1,650 |   |
| Prepayment for testing service          |   |        | 441    |   |   |   | 979 |   |
| Refundable deposits                     |   |        | 675    |   |   |   | 593 |   |
| Deferred income tax assets - noncurrent |   |        | 153    |   |   |   | 406 |   |
|                                    |   |        |   |   |   |   |   |   |
|                                    |   | $           | 4,360  |   |   | $ | 4,921 |   |

|   | All land within municipal zones in China is owned by the government.  Limited liability companies, joint stock companies, foreign-invested enterprises, privately held companies and individual natural persons must pay fees for granting of rights to use land within municipal zones.  Legal use of land is evidenced and sanctioned by land use certificates issued by the local municipal administration of land resources.  Land use rights granted for industrial purposes are limited to a term of no more than 50 years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Land use rights are recorded at cost less accumulated amortization.  Amortization is provided on a straight-line basis over the term of the land use rights agreement which is 49.7 years.  Amortization expense of the land use rights for the years ended December 31, 2010, 2009, and 2008 was approximately $29,000, $29,000, and $28,000, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In view of the expansion of its supply chain in China, the Company entered into a testing service agreement with Sigurd Cayman to obtain certain manufacturing and testing services.  The total prepayment amounts to $1,450,000 for the service period from July 2008 to June 2011. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Deferred charges consist of consultant and maintenance contracts and are amortized over the term of the contract which is 3 to 5 years.  Amortization expense of the deferred charges for the years ended December 31, 2010, 2009, and 2008 was approximately $914,000, $795,000, and $530,000, respectively.  An impairment charge of $115,000 was incurred as a result of the impairment analysis on Network Security Group’s deferred charges for the year ended December 31, 2010.  Please see discussions in Note 3. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 14.   | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
|-----------------|------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                 |   | December 31 |   |
|--------------------------------------|--------|-------------|--------|
|                                 |   | 2010        |   |   | 2009 |   |
|                                 |   |        |   |   |   |   |
| Salaries, bonus and benefits         |   | $           | 3,162  |   |   | $ | 2,931 |   |
| Legal and audit fees                 |   |        | 1,588  |   |   |   | 1,366 |   |
| Engineering related expenses         |   |        | 891    |   |   |   | 832 |   |
| Consulting fees                      |   |        | 518    |   |   |   | 499 |   |
| Shipping expenses                    |   |        | 251    |   |   |   | 361 |   |
| Withholding tax payable              |   |        | 194    |   |   |   | 178 |   |
| Value-added tax payable              |   |        | 125    |   |   |   | 150 |   |
| Promotional expenses                 |   |        | 105    |   |   |   | 109 |   |
| Payable for acquisition of equipment |   |        | 19     |   |   |   | 48 |   |
| Deferred income tax liabilities      |   |        | 28     |   |   |   | 35 |   |
| Other accrued expenses               |   |        | 1,150  |   |   |   | 1,222 |   |
|                                 |   |        |   |   |   |   |   |   |
|                                 |   | $           | 8,031  |   |   | $ | 7,731 |   |

| 15.   | INCOME TAX |
|-----------------|------------|

|   | 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Income (loss) before income taxes from continuing operations consisted of: |
|--------|----------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|           |   | Years Ended December 31 |   |
|----------------|--------|-------------------------|--------|
|           |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|           |   |                    |   |   |   |   |   |   |   |
| Cayman Islands |   | $                       | 18,235 |   |   | $ | (780 | ) |   | $ | (12,029 | ) |
| Foreign        |   |                    | 5,135  |   |   |   | 6,121 |   |   |   | 7,204 |   |
|           |   |                    |   |   |   |   |   |   |   |   |   |   |
|           |   | $                       | 23,370 |   |   | $ | 5,341 |   |   | $ | (4,825 | ) |

----

|   | Income tax expense from continuing operations consisted of: |
|--------|-------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|               |   | Years Ended December 31 |   |
|--------------------|--------|-------------------------|--------|
|               |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|               |   |                    |   |   |   |   |   |   |   |
| Current            |   | $                       | 1,330  |   |   | $ | 1,508 |   |   | $ | 2,194 |   |
| Deferred           |   |                    | (5     | ) |   |   | 232 |   |   |   | 46 |   |
|               |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income tax expense |   | $                       | 1,325  |   |   | $ | 1,740 |   |   | $ | 2,240 |   |

|   | Income tax expenses (benefit) from discontinued operations were $261,000 in 2010, $(138,000) in 2009, and $0 in 2008, respectively. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 (loss) from continuing operations was as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                         |   | Years Ended December 31 |   |
|--------------------------------------------------------------|--------|-------------------------|--------|
|                                                         |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                         |   |                    |   |   |   |   |   |   |   |
| Cayman statutory rate                                        |   |                    | 0      | % |   |   | 0 | % |   |   | 0 | % |
| Foreign rates in excess of statutory rates                   |   |                    | 5.02   | % |   |   | 30.48 | % |   |   | (37.76 | %) |
| Changes in deferred income tax assets                        |   |                    | (0.97  | %) |   |   | (2.28 | %) |   |   | (18.96 | %) |
| Adjustments to prior years’ taxes                      |   |                    | (0.82  | %) |   |   | (4.27 | %) |   |   | 0.52 | % |
| Change in valuation allowance for deferred income tax assets |   |                    | 0.95   | % |   |   | 6.63 | % |   |   | 15.87 | % |
| Other                                                        |   |                    | 1.49   | % |   |   | 2.02 | % |   |   | (6.09 | %) |
|                                                         |   |                    |   |   |   |   |   |   |   |   |   |   |
| Effective tax rate                                           |   |                    | 5.67   | % |   |   | 32.58 | % |   |   | (46.42 | %) |

|   | The deferred income tax assets and liabilities as of December 31, 2010 and 2009 consisted of the following: |
|--------|-------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                  |   | December 31 |   |
|---------------------------------------|--------|-------------|--------|
|                                  |   | 2010        |   |   | 2009 |   |
| Deferred income tax assets            |   |        |   |   |   |   |
| Research and development credits      |   | $           | 4,772  |   |   | $ | 4,474 |   |
| Net operating loss carryforwards      |   |        | 521    |   |   |   | 494 |   |
| Depreciation and amortization         |   |        | 472    |   |   |   | 495 |   |
| Accrued vacation and other expenses   |   |        | 97     |   |   |   | 177 |   |
|                                  |   |        | 5,862  |   |   |   | 5,640 |   |
| Valuation allowance                   |   |        | (5,694 | ) |   |   | (5,223 | ) |
|                                  |   |        |   |   |   |   |   |   |
| Total net deferred income tax assets  |   | $           | 168    |   |   | $ | 417 |   |
|                                  |   |        |   |   |   |   |   |   |
| Deferred income tax liabilities       |   |        |   |   |   |   |   |   |
| Unrealized capital allowance          |   | $           | 15     |   |   | $ | 3 |   |
| Unrealized foreign exchange           |   |        | 13     |   |   |   | 32 |   |
|                                  |   |        |   |   |   |   |   |   |
| Total deferred income tax liabilities |   | $           | 28     |   |   | $ | 35 |   |

----

|   | The valuation allowance shown in the table above relates to net operating losses, credit carryforwards and temporary differences for which the Company believes that realization is not more than likely. The valuation allowance increased by $471,000 and $629,000 for the years ended December 31, 2010 and 2009, respectively.  The increase in the valuation allowance is primarily due to the new research and development credits generated that cannot be fully utilized by the Company. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2010, O2Micro, Inc. had US federal and state research and development credit carryforwards of approximately $4,632,000 and $5,209,000, respectively.  The US federal research and development credit will expire from 2020 through 2030 if not utilized, while the state research and development credit will never expire. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | At December 31, 2010, the Company had $310,000 of unrecognized tax benefits, all of which would affect its effective tax rate if recognized.  For the years ended December 31, 2010, 2009, and 2008, the total amount of interest expense and penalties related to tax uncertainty recorded in the provision for (reversal of) income expense was approximately ($21,000), $21,000, and $81,000, respectively.  The total amount of interest and penalties recognized as of December 31, 2010 and 2009 was $81,000 and $102,000, respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows: |
|--------|--------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                                 |   | Years EndedDecember 31 |   |
|------------------------------------------------------|--------|------------------------|--------|
|                                                 |   | 2010                   |   |   | 2009 |   |
|                                                 |   |                   |   |   |   |   |
| Balance, beginning of the year                       |   | $                      | 350    |   |   | $ | 302 |   |
| Increase in tax position balance during current year |   |                   | 103    |   |   |   | 48 |   |
| Decrease related to settlements                      |   |                   | (11    | ) |   |   | - |   |
| Reduction related to lapses                          |   |                   | (132   | ) |   |   | - |   |
|                                                 |   |                   |   |   |   |   |   |   |
| Balance, end of the year                             |   | $                      | 310    |   |   | $ | 350 |   |

|   | Uncertain tax positions were primarily related to the allocation of income and deductions amongst the Company’s global entities.  During the next twelve months, it is reasonably possible that the total amount of unrecognized tax benefits will significantly change by up to approximately $183,000 due to the expiration of statute of limitations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company files income tax returns in various foreign jurisdictions.  The Company is generally no longer subject to income tax examinations by tax authorities for years prior to 2005 because of the statute of limitations. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 16.   | RETIREMENT AND PENSION PLANS |
|-----------------|------------------------------|

|   | The Company has a savings plan that qualifies under Section 401(k) of the US Internal Revenue Code. Participating employees may defer up to the US Internal Revenue Service statutory limit amounts of pretax salary.  The Company may make voluntary contributions to the savings plan but has made no contributions since the inception of the savings plan in 1997. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | The Company also participates in mandatory pension funds and social insurance schemes, if applicable, for employees in jurisdictions in which other subsidiaries or offices are located to comply with local statutes and practices.  For the years ended December 31, 2010, 2009, and 2008, pension costs charged to income in relation to the contributions to these schemes were $1,406,000, $1,335,000, and $1,880,000, respectively.  The Company adopted a defined benefit pension plan and established an employee pension fund committee for certain employees of O2Micro-Taiwan who are subject to the Taiwan Labor Standards Law (“Labor Law”) to comply with local requirements.  This benefit pension plan provides benefits based on years of service and average salary computed based on the final six months of employment.  The Labor Law requires the Company to contribute between 2% to 15% of employee salaries to a government specified plan, which the Company currently makes monthly contributions equal to 2% of employee salaries.  Contributions are required to be deposited in the name of the employee pension fund committee with the Bank of Taiwan.  The measurement date of the plan is December 31. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The government is responsible for the administration of all the defined benefit plans for the companies in Taiwan under the Labor Standards Law. The government also sets investment policies and strategies, determines investment allocation and selects investment managers. As of December 31, 2010 and 2009, the asset allocation was primarily in cash, equity securities and debt securities. Furthermore, under the Labor Standards Law, the rate of return on assets shall not be less than the average interest rate on a two-year time deposit published by the local banks and the government is responsible for any shortfall in the event that the rate of return is less than the required rate of return. However, information on how investment allocation decisions are made, inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets is not fully made available to the companies by the government. Therefore, the Company is unable to provide the required fair value disclosures related to pension plan assets. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The percentage of major category of plan assets as of December 2010 and 2009 were as follows: |
|--------|-----------------------------------------------------------------------------------------------|

|              |   | December 31 |   |
|-------------------|--------|-------------|--------|
|              |   | 2010        |   |   | 2009 |   |
|              |   |        |   |   |   |   |
| Cash              |   |        | 29     | % |   |   | 44 | % |
| Equity securities |   |        | 7      | % |   |   | 11 | % |
| Debt securities   |   |        | 23     | % |   |   | 15 | % |

|   | Changes in projected benefit obligation and plan assets for the years ended December 31, 2010 and 2009 were as follows: |
|--------|-------------------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                                |   | Years EndedDecember 31 |   |
|-----------------------------------------------------|--------|------------------------|--------|
|                                                |   | 2010                   |   |   | 2009 |   |
|                                                |   |                   |   |   |   |   |
| Projected benefit obligation, beginning of the year |   | $                      | 760    |   |   | $ | 724 |   |
| Service cost                                        |   |                   | 5      |   |   |   | 6 |   |
| Interest cost                                       |   |                   | 19     |   |   |   | 19 |   |
| Benefits paid                                       |   |                   | -      |   |   |   | - |   |
| Actuarial loss                                      |   |                   | 263    |   |   |   | 11 |   |
|                                                |   |                   |   |   |   |   |   |   |
| Projected benefit obligation, end of the year       |   | $                      | 1,047  |   |   | $ | 760 |   |
|                                                |   |                   |   |   |   |   |   |   |
| Fair value of plan assets, beginning of the year    |   | $                      | 262    |   |   | $ | 171 |   |
| Employer contributions                              |   |                   | 76     |   |   |   | 86 |   |
| Actual return on plan assets                        |   |                   | 30     |   |   |   | 5 |   |
|                                                |   |                   |   |   |   |   |   |   |
| Fair value of plan assets, end of the year          |   | $                      | 368    |   |   | $ | 262 |   |

----

|   | The component of net periodic benefit cost was as follows: |
|--------|------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                             |   | Years EndedDecember 31 |   |
|----------------------------------|--------|------------------------|--------|
|                             |   | 2010                   |   |   | 2009 |   |
|                             |   |                   |   |   |   |   |
| Service cost                     |   | $                      | 5      |   |   | $ | 6 |   |
| Interest cost                    |   |                   | 19     |   |   |   | 19 |   |
| Expected return on plan assets   |   |                   | (6     | ) |   |   | (5 | ) |
| Amortization of net pension loss |   |                   | 7      |   |   |   | 6 |   |
|                             |   |                   |   |   |   |   |   |   |
| Net periodic benefit cost        |   | $                      | 25     |   |   | $ | 26 |   |

|   | The funded status of the plan was as follows: |
|--------|-----------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                           |   | December 31 |   |
|--------------------------------|--------|-------------|--------|
|                           |   | 2010        |   |   | 2009 |   |
|                           |   |        |   |   |   |   |
| Accumulated benefit obligation |   | $           | (755   | ) |   | $ | (537 | ) |
|                           |   |        |   |   |   |   |   |   |
| Project benefit obligation     |   |        | (1,047 | ) |   |   | (760 | ) |
| Plan assets at fair value      |   |        | 368    |   |   |   | 262 |   |
|                           |   |        |   |   |   |   |   |   |
| Funded status of the plan      |   | $           | (679   | ) |   | $ | (498 | ) |

|   | The actuarial assumptions to determine the benefit obligations were as follows: |
|--------|---------------------------------------------------------------------------------|

|                           |   | December 31 |   |
|--------------------------------|--------|-------------|--------|
|                           |   | 2010        |   |   | 2009 |   |
|                           |   |        |   |   |   |   |
| Discount rate                  |   |        | 2.3    | % |   |   | 2.3 | % |
| Rate of compensation increases |   |        | 2.0    | % |   |   | 2.0 | % |

|   | The actuarial assumptions to determine the net periodic benefit cost were as follows: |
|--------|---------------------------------------------------------------------------------------|

|                                             |   | Years EndedDecember 31 |   |
|--------------------------------------------------|--------|------------------------|--------|
|                                             |   | 2010                   |   |   | 2009 |   |
|                                             |   |                   |   |   |   |   |
| Discount rate                                    |   |                   | 2.3    | % |   |   | 2.3 | % |
| Rate of compensation increases                   |   |                   | 2.0    | % |   |   | 2.0 | % |
| Expected long-term rate of return on plan assets |   |                   | 2.0    | % |   |   | 2.0 | % |

----

|   | The expected long-term rate of return shown for the plan assets was weighted to reflect a two-year deposit interest rate of local banking institutions. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Estimated future benefit payments are as follows: |
|--------|---------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

| Year                                    |   |   |   |
|-----------------------------------------|--------|--------|--------|
|                                    |   |   |   |
| 2011                                    |   | $      | -      |   |
| 2012                                    |   |   | 16     |   |
| 2013                                    |   |   | 3      |   |
| 2014                                    |   |   | 9      |   |
| 2015-2020                               |   |   | 145    |   |
|                                    |   |   |   |   |
| Total estimated future benefit payments |   | $      | 173    |   |

| 17.   | STOCK-BASED COMPENSATION |
|-----------------|--------------------------|

|   | Employee Stock Purchase Plan |
|--------|------------------------------|

|   | In October 1999, the Board adopted the 1999 Employee Stock Purchase Plan (“1999 Purchase Plan”), which was approved by the shareholders prior to the consummation of its initial public offering in August 2000.  A total of 50,000,000 ordinary shares were reserved for issuance under the 1999 Purchase Plan, plus annual increases on January 1 of each year, commencing in 2001, up to 40,000,000 shares as approved by the Board.  In June 2008, an additional 20,000,000 shares were reserved for issuance as also approved by the Board. 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.  Beginning November 1, 2005, the 1999 Purchase Plan shall be implemented through consecutive offer periods of 3 months’ duration commencing on the first day of February, May, August and November.  Under the 1999 Purchase Plan, ordinary shares may be purchased at a price equal to the lesser of 90% of the fair market value of the Company’s ordinary shares on the date of grant of the option to purchase (which is the first day of the offer period) or 90% of the fair market value of the Company’s ordinary shares on the applicable exercise date (which is the last day of the offer period).  Employees may elect to discontinue their participation in the purchase plan at any time; however, all of the employee’s payroll deductions previously credited to the employee’s account will be applied to the exercise of the employee’s option on the next exercise date.  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 2009, 10,685,400 ordinary shares had been purchased under the 1999 Purchase Plan. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As approved by the EGM held on May 30, 2009, the Company adopted the 2009 Employee Stock Purchase Plan (“2009 Purchase Plan”) along with the Company delisting from SEHK in September 2009.  The terms and provisions of 2009 Purchase Plan are generally the same as the 1999 Purchase Plan.  The 2009 Purchase Plan will also have a term of 10 years, if not terminated earlier.  A total of 25,000,000 ordinary shares were reserved for issuance under the 2009 Purchase Plan starting November 2009.   During 2010, 5,059,650 ordinary shares had been purchased under the 2009 Purchase Plan. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Stock Option Plans |
|--------|--------------------|

|   | In 1997, the Board adopted the 1997 Stock Plan, and in 1999, adopted the 1999 Stock Incentive Plan.  The plans provide for the granting of stock options to employees, directors and consultants of the Company. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Under the 1997 Stock Plan, the Board reserved 185,000,000 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 150,000,000 ordinary shares plus an annual increase on January 1 of each year, commencing in 2001, equal to the lesser of 75,000,000 shares or 4% of the |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | outstanding ordinary shares on the last day of the preceding fiscal year or a smaller number determined by the plan administrator.  As of December 31, 2010, the number of options outstanding and exercisable was 204,480,000 and 202,383,650, respectively, under the 1999 Stock Incentive Plan. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Board adopted the 2005 Share Option Plan (“2005 SOP”), which was effective on March 2, 2006, the date the Company completed the listing on the SEHK, and then the Board terminated the 1997 Stock Plan and 1999 Stock Incentive Plan. The Company began issuing stock options solely under the 2005 SOP for up to 100,000,000 ordinary shares.  As approved by the EGM held on May 30, 2009, the number of shares available for issue was increased from 100,000,000 to 175,000,000 shares.  The references to Hong Kong and Hong Kong related rules and regulations were also removed along with the completion of the Company’s delisting from the SEHK in 2009.  Under the terms of the 2005 SOP, stock options are generally granted at fair market value of the Company’s ordinary shares.  The stock options have a contractual term of 8 years from the date of grant and vest over a requisite service period of 4 years.  As of December 31, 2010, the number of options outstanding and exercisable was 118,054,250 and 68,564,750, respectively, under the 2005 SOP. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A summary of the Company’s stock option activity under the plans as of December 31, 2010 and changes during the year then ended is presented as follows: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                          |   |           |        |   |     |   |   |          |   |   |      |   |
|---------------------------------------------------------------|--------|----------------|-------------|--------|----------|--------|--------|---------------|--------|--------|-----------|--------|
|                                                          |   |           |        |   | Weighted |   |   | Weighted      |   |   |      |   |
|                                                          |   |           |        |   | Average  |   |   | Average       |   |   | Aggregate |   |
|                                                          |   | Number of      |        |   | Exercise |   |   | Remaining     |   |   | Intrinsic |   |
|                                                          |   | Options Shares |        |   | Price    |   |   | Contract Life |   |   | Value     |   |
|                                                          |   |           |        |   |     |   |   |          |   |   |      |   |
| Outstanding Options, January 1, 2010                          |   |           | 321,869,850 |   |     | $      | 0.2083 |          |   |   |      |   |   |   |
| Granted                                                       |   |           | 29,544,300  |   |     | $      | 0.1155 |          |   |   |      |   |   |   |
| Exercised                                                     |   |           | (607,300    | )      |     | $      | 0.0556 |          |   |   |      |   |   |   |
| Forfeited or expired                                          |   |           | (28,272,600 | )      |     | $      | 0.2235 |          |   |   |      |   |   |   |
|                                                          |   |           |        |   |     |   |   |          |   |   |      |   |   |   |
| Outstanding Options, December 31, 2010                        |   |           | 322,534,250 |   |     | $      | 0.1988 |          |   |   | 3.77      |   |   | $ | 3,291,000 |   |
|                                                          |   |           |        |   |     |   |   |          |   |   |      |   |   |   |   |   |
| Vested and Expected to Vest Options at December 31, 2010 |   |           | 311,668,900 |   |     | $      | 0.2068 |          |   |   | 3.65      |   |   | $ | 2,321,000 |   |
|                                                          |   |           |        |   |     |   |   |          |   |   |      |   |   |   |   |   |
| Exercisable Options at December 31, 2010                      |   |           | 270,948,400 |   |     | $      | 0.2171 |          |   |   | 3.23      |   |   | $ | 1,480,000 |   |

|   | The total intrinsic value of options exercised during the years ended December 31, 2010, 2009, and 2008 were $45,000, $60,000, and $38,000, respectively. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The following table summarizes information about outstanding and vested stock options: |
|--------|----------------------------------------------------------------------------------------|

|                       |   | 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 |   |
|                       |   |                |        |   |                |   |   |   |   |   |   |   |   |   |   |
| $0.0460 - $0.1198          |   |                | 65,108,000  |   |                |   | 6.36 |   |   | $ | 0.0731 |   |   |   | 25,247,400 |   |   | $ | 0.0650 |   |
| $0.1222 - $0.1792          |   |                | 61,527,450  |   |                |   | 3.32 |   |   | $ | 0.1597 |   |   |   | 52,959,850 |   |   | $ | 0.1610 |   |
| $0.1808 - $0.2348          |   |                | 110,751,250 |   |                |   | 3.91 |   |   | $ | 0.2063 |   |   |   | 109,755,300 |   |   | $ | 0.2063 |   |
| $0.2420 - $0.2994          |   |                | 47,368,750  |   |                |   | 1.70 |   |   | $ | 0.2771 |   |   |   | 46,540,450 |   |   | $ | 0.2770 |   |
| $0.3076 - $0.4836          |   |                | 37,778,800  |   |                |   | 2.23 |   |   | $ | 0.3588 |   |   |   | 36,445,400 |   |   | $ | 0.3603 |   |
|                       |   |                |        |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2010 |   |                | 322,534,250 |   |                |   | 3.77 |   |   | $ | 0.1988 |   |   |   | 270,948,400 |   |   | $ | 0.2171 |   |

----

|   | Share Incentive Plan |
|--------|----------------------|

|   | The Board adopted the 2005 Share Incentive Plan (“2005 SIP”), which was effective on March 2, 2006, the date the Company completed the SEHK listing. The 2005 SIP provides for the grant of restricted shares, restricted share units (“RSU”), share appreciation rights and dividend equivalent rights (collectively referred to as “Awards”) up to 75,000,000 ordinary shares.  As approved by the EGM held on May 30, 2009, the number of shares available for issue was increased from 75,000,000 to 125,000,000 shares.  The references to Hong Kong and Hong Kong related rules and regulations were also removed along with the completion of the Company’s delisting from the SEHK. Awards may be granted to employees, directors and consultants.  The RSUs vest over a requisite service period of 4 years. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A summary of the status of the Company’s RSUs as of December 31, 2010, and changes during the year ended December 31, 2010 is presented as follows: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|                           |   |        |        |   | Weighted   |   |
|--------------------------------|--------|-------------|-------------|--------|------------|--------|
|                           |   | Number of   |        |   | Average    |   |
|                           |   | Outstanding |        |   | Price/Fair |   |
|                           |   | Awards      |        |   | Value      |   |
|                           |   |        |        |   |       |   |
| Nonvested at January 1, 2010   |   |        | 42,888,600  |   |       | $      | 0.0904 |   |
| Granted                        |   |        | 17,329,100  |   |       | $      | 0.1172 |   |
| Vested                         |   |        | (14,397,750 | )      |       | $      | 0.1209 |   |
| Forfeited and expired          |   |        | (2,599,500  | )      |       | $      | 0.1018 |   |
|                           |   |        |        |   |       |   |   |   |
| Nonvested at December 31, 2010 |   |        | 43,220,450  |   |       | $      | 0.0911 |   |

|   | As of December 31, 2010, there was $3,906,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans including stock options and RSUs.  The cost is expected to be recognized over a weighted-average period of 2.26 years. The total fair value of RSUs vested during the years ended December 31, 2010, 2009, and 2008 was $1,688,000, $492,000, and $741,000, respectively. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2010, 2009, and 2008 was $533,000, $689,000, and $934,000, respectively. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option pricing model that use the assumptions in the following table.  Risk-free interest rate is based on the US Treasury yield curve in effect at the time of grant.  The Company uses the simplified method to estimate the expected life because the Company had limited relevant historical information to support the expected sale and exercise behavior of the employees who had been granted options under the 2005 SOP.  Expected volatilities are based on historical volatility of stock prices for a period equal to the options’ expected term.  The dividend yield is zero as the Company has never declared or paid dividends on the ordinary shares or other securities and does not anticipate paying dividends in the foreseeable future. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                    | Stock Options           | Employee Stock Purchase Plan |
|-------------------------|-------------------------|------------------------------|
|                    | Years Ended December 31 | Years Ended December 31      |
|                    | 2010                    | 2009                         | 2008 | 2010 | 2009 | 2008 |
|                    |                    |                         |   |   |   |   |
| Risk-free interest rate | 1.17%-2.55%             | 1.85%-2.69%                  | 1.93%-3.41% | 0.10%-0.17% | 0.06%-0.27% | 0.49%-2.10% |
| Expected life           | 5                       | 5                            | 5 | 0.25-0.26 | 0.25-0.26 | 0.25-0.26 |
|                    | Years                   | Years                        | Years | Years | Years | Years |
| Volatility              | 52%-54%                 | 53%-58%                      | 53%-56% | 39%-52% | 33%-103% | 43%-82% |
| Dividend                | -                       | -                            | - | - | - | - |

|   | The weighted-average grant-date fair values of options granted during the years ended December 31, 2010, 2009, and 2008 were $0.0551, $0.0242, and $0.0767, respectively.  The weighted-average fair values of options granted under the 1999 Purchase Plan during the years ended December 31, 2010, 2009, and 2008 were $0.0232, $0.0176, and $0.0236, respectively. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Ordinary Shares Reserved |
|--------|--------------------------|

|   | As of December 31, 2010, ordinary shares reserved for future issuance were as follows: |
|--------|----------------------------------------------------------------------------------------|

| Outstanding stock options                        |   |   | 322,534,250 |   |
|--------------------------------------------------|--------|--------|-------------|--------|
| Outstanding RSUs                                 |   |   | 43,220,450  |   |
| Shares reserved for future stock option grants   |   |   | 55,770,950  |   |
| Shares reserved for Employee Stock Purchase Plan |   |   | 19,940,350  |   |
| Shares reserved for Awards                       |   |   | 54,633,750  |   |
|                                             |   |   |        |   |
|                                             |   |   | 496,099,750 |   |

|   | Shares issued for the exercise of stock options, Employee Stock Purchase Plan and shares vested under restricted stock units are from the new ordinary shares. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 18.   | EARNINGS (LOSS) PER SHARE |
|-----------------|---------------------------|

|   | Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the period.  Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period, using the treasury stock method for options. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A reconciliation of the numerator and denominator of basic and diluted earnings (loss) per share calculations was as follows: |
|--------|-------------------------------------------------------------------------------------------------------------------------------|

|                                                                        |   | Years Ended December 31 |      |
|-----------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                        |   | 2010                    |      |   | 2009 |   |   | 2008 |   |
|                                                                        |   |                    |      |   |   |   |   |   |   |
| Net Income (loss) from continuing operations (in thousands)                 |   | $                       | 22,045    |   |   | $ | 3,601 |   |   | $ | (7,065 | ) |
| (Loss) from discontinued operations (in thousands)                          |   |                    | (9,843    | ) |   |   | (6,418 | ) |   |   | (6,744 | ) |
|                                                                        |   |                    |      |   |   |   |   |   |   |   |   |   |
| Net income (loss) (in thousands)                                            |   | $                       | 12,202    |   |   | $ | (2,817 | ) |   | $ | (13,809 | ) |
|                                                                        |   |                    |      |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding (in thousands) – basic            |   |                    | 1,706,665 |   |   |   | 1,840,995 |   |   |   | 1,862,831 |   |
| Effect of dilutive securities:                                              |   |                    |      |   |   |   |   |   |   |   |   |   |
| Options and RSUs (in thousands)                                             |   |                    | 46,167    |   |   |   | 24,881 |   |   |   | - |   |
|                                                                        |   |                    |      |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding (in thousands) – diluted          |   |                    | 1,752,832 |   |   |   | 1,865,876 |   |   |   | 1,862,831 |   |
|                                                                        |   |                    |      |   |   |   |   |   |   |   |   |   |
|       Earnings (loss) per share – basic |   |                    |      |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                       |   | $                       | 0.01      |   |   | $ | - |   |   | $ | (0.01 | ) |
| Discontinued operations                                                     |   |                    | -         |   |   |   | - |   |   |   | - |   |
|                                                                        |   | $                       | 0.01      |   |   |   | - |   |   | $ | (0.01 | ) |
|                                                                        |   |                    |      |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per share – diluted                                   |   |                    |      |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                       |   | $                       | 0.01      |   |   | $ | - |   |   | NA |   |
| Discontinued operations                                                     |   |                    | -         |   |   |   | - |   |   | NA |   |
|                                                                        |   | $                       | 0.01      |   |   |   | - |   |   | NA |   |

|   | Certain outstanding options and RSUs were excluded from the computation of diluted EPS since their effect would have been antidilutive. The antidilutive stock options excluded and their associated exercise prices per share were 288,759,438 shares at $0.0858 to $0.4836 as of December 31, 2010, 298,316,025 shares at $0.0522 to $0.4836 as of December 31, 2009, and 297,832,900 shares at $0.0522 to $0.4836 as of December 31, 2008. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 19.   | COMMITMENTS |
|-----------------|-------------|

|   | Lease Commitments |
|--------|-------------------|

|   | The Company leases office space and certain equipment under noncancelable operating lease agreements that expire at various dates through December 2014.  For the years ended December 31, 2010, 2009, and 2008, leasing costs charged to income in relation to these agreements were $2,045,000, $2,051,000, and $2,218,000, respectively.  The Company’s office lease provides for periodic rental increases based on the general inflation rate. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As of December 31, 2010, future minimum lease payments under all noncancelable operating lease agreements were as follows: |
|--------|----------------------------------------------------------------------------------------------------------------------------|

|   Year             |   | Operating Leases |   |
|------------------------------|--------|------------------|--------|
|                         |   | (In Thousands)   |   |
|                         |   |             |   |
| 2011                         |   | $                | 1,561  |   |
| 2012                         |   |             | 862    |   |
| 2013                         |   |             | 462    |   |
| 2014                         |   |             | 83     |   |
|                         |   |             |   |   |
| Total minimum lease payments |   | $                | 2,968  |   |

|   | Purchase obligations and commitments include payments due under various types of license, maintenance and support agreements with contractual terms from one to three years.  As of December 31, 2010, those purchase commitments were as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   Year |   |           |   |
|------------------|--------|----------------|--------|
|             |   | (In Thousands) |   |
|             |   |           |   |
| 2011             |   | $              | 1,490  |   |
| 2012             |   |           | 259    |   |
| 2013             |   |           | 36     |   |
|             |   |           |   |   |
| Total            |   | $              | 1,785  |   |

| 20.   | CONTINGENCIES |
|-----------------|---------------|

|   | The Company is involved in several litigation matters relating to its intellectual property, as detailed below. While the Company cannot make any assurances regarding the eventual resolution of these matters, the Company does not believe at this time that the final outcomes will have a material adverse effect on its consolidated results of operations or financial condition. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Certain Cold Cathode Fluorescent Lamp Inverter Circuits And Products Containing Same, Investigation No. 337-TA-666.  On December 15, 2008, the Company filed a complaint with the United States International Trade Commission (“ITC”) in Washington, D.C. The Company alleges that Monolithic Power Systems, Inc. (“MPS”), Microsemi Corporation (“Microsemi”), Asustek, LG and BenQ have engaged in unfair acts through the unlicensed importation of certain products with MPS or Microsemi inverter controllers covered by the Company’s patents.  The Company sought an order preventing the importation of the products into the United States.  On April 20, 2010, the ITC judge issued an initial determination that the products of Microsemi infringed on one of the Company’s patents, but, MPS and Asustek do not infringe on the Company’s patents; however the full commission ruled that none of the named parties infringed on the Company’s patents.  The Company has appealed the ruling as it pertains to Microsemi. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Monolithic Power Systems, Inc. v. O2Micro International Limited, Case No. C 08-4567 CW.  On October 1, 2008, MPS filed a complaint in the United States District Court in the Northern District of California for declaratory judgment that certain claims of the Company’s patents are invalid and not infringed.  The Company has filed counterclaims for patent infringement. The matter was scheduled for trial in July 2010; however the Company dismissed the case in June 2010, and agreed to assert the patent in dispute for this matter against MPS.  MPS moved for costs and attorneys fees.  In March 2011, the Court ruled that the Company should pay MPS approximately $339,000, but deferred to rule on attorneys fees. The Company intends to appeal this ruling.    |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | O2Micro International Limited v. HonHai Precision Industry, Ltd., et al., Case No. C -08-CV-466DF.  On December 9, 2008, the Company filed a suit against HonHai Precision Industry for breach of a settlement agreement entered into by the parties in October 2007, terminating an earlier patent infringement action initiated by the Company.  The Company alleged fraud, misrepresentation and interference with business relationships by HonHai.  The case was scheduled to go to trial in November 2010, but the parties mutually settled the case before trial pursuant to a confidential settlement agreement. = |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | O2Micro Int'l Ltd. v. Taiwan Sumida Elecs., Inc., 2009 U.S. App. LEXIS 4382 (Fed. Cir. Mar. 5, 2009), and Case No. 03-CV-007TW, Eastern District of Texas.  In a companion case involving Taiwan Sumida Electronics, Inc., the Federal Circuit vacated a judgment of infringement from the District Court for the Eastern District of Texas because the Federal Circuit had held in the MPS case that the same claims of the ‘722 patent were invalid.  The Company filed an appeal in the United States Court of Appeals, and in March 2009, the court upheld the Federal Circuit’s ruling, and a judgment to that effect was entered by the Eastern District Court of Texas.  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | O2Micro International Ltd. v. Beyond Innovation Technology Co. et al., Case No. 2:04-CV-32 (TJW).   On April 3, 2008, the United States Court of Appeals for the Federal Circuit vacated a jury verdict and final judgment of infringement, including a permanent injunction, against defendants Beyond Innovation Technology Company Limited, SPI Electronic Company Limited and FSP Group, and Lien Chang Electronic Enterprise Company Limited.  The Federal Circuit further remanded the case to the Eastern District of Texas, and the case was tried and submitted to the court in July 2009, and in 2010, the court ruled again in favor of O2Micro.  Beyond Innovation Technology Company is appealing the judgment.    |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ECS International Trading (Shanghai) Co. Ltd v. O2Security (Wuhan) Ltd.  On July 22, 2010, ECS International Trading (Shanghai) Co. Ltd (“ECS”) filed the arbitration case with China International Economic and Trade Arbitration Commission (“CIETAC”) in Beijing (Case No. DX20100430) for breach of contract relating to local compliance issues, requesting termination of the agreement between the parties, and demanding a refund of approximately $387,000 (RMB 2,560,000) from O2Security (Wuhan) Ltd (“OSW”). The case was served on November 15, 2010, and the tribunal is set but the hearing has not yet been scheduled. In addition, on November 11, 2010, ECS posted a bond of RMB 2,649,641 and applied an order for provisional seizure of RMB 2,560,240 from OSW’s bank accounts before the Honshan District Court in Wuhan (Case No. Honchungbo Tzu No 5). OSW moved the court to lift the said seizure but the court has yet to reach a decision on OSW’s request. |
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|   | As of December 31, 2009, the Company deposited an amount of New Taiwan dollars equivalent to $1,443,000 with the Taiwan court for court bonds, which was accounted for as restricted assets, in connection with those actions and related preliminary injunction actions. The court bonds provide security for the enjoined party to claim damages against the Company incurred from the preliminary injunctions or the provision of a counter security in the event the Company does not ultimately succeed in the underlying infringement actions. All the court bonds have been retrieved back from the Taiwan court during the year of 2010 as related actions were closed. |
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|   | In March 2008, the Company received $2,000,000 from a litigation case with Rohm Co. Ltd. settled in the United States.  No other litigation proceeds were received for the years ended December 31, 2009 and 2010.   In January 2011, the Company received $850,000 litigation income in relation to a patent litigation case in the United States. |
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|   | The Company, as a normal course of business, is a party to litigation matters, legal proceedings, and claims. These actions may be in various jurisdictions and may involve patent protection and/or 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.  As of December 31, 2010 and 2009, no provision for any litigation has been provided. |
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| 21.   | FINANCIAL INSTRUMENTS |
|-----------------|-----------------------|

|   | Information on the Company’s financial instruments was as follows: |
|--------|--------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                                                   |   | December 31 |   |
|--------------------------------------------------------|--------|-------------|--------|
|                                                   |   | 2010        |   |   | 2009 |   |
|                                                   |   | Carrying    |   |   | Fair |   |   | Carrying |   |   | Fair |   |
|                                                   |   | Amount      |   |   | Value |   |   | Amount |   |   | Value |   |
| Assets                                                 |   |        |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                              |   | $           | 42,277 |   |   | $ | 42,277 |   |   | $ | 38,831 |   |   | $ | 38,831 |   |
| Restricted cash                                        |   |        | 562    |   |   |   | 562 |   |   |   | 236 |   |   |   | 236 |   |
| Short-term investments                                 |   |        | 68,728 |   |   |   | 68,728 |   |   |   | 74,502 |   |   |   | 74,502 |   |
| Long-term investments in available-for-sale securities |   |        | 5,106  |   |   |   | 5,106 |   |   |   | 3,437 |   |   |   | 3,437 |   |
| Restricted assets                                      |   |        | -      |   |   |   | - |   |   |   | 1,443 |   |   |   | 1,443 |   |

|   | The carrying amounts of cash and cash equivalents and restricted cash reported in the consolidated balance sheets approximate their estimated fair values.  The fair values of short-term investments and long-term investments in available-for-sale securities are based on quoted market prices. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Fair value of restricted assets made in the form of Taiwan Government bonds are based on quoted market price; the remaining restricted assets are carried at amounts which approximate fair value. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Long-term investments, except for investments in available-for-sale securities, are in privately-held companies where there is no readily determinable market value and are recorded using the cost method.  Since they entail an unreasonable high cost to obtain verifiable fair values, fair value is not presented.  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 loss is recorded in the period of decline in value. |
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| 22.   | RELATED PARTY TRANSACTIONS |
|-----------------|----------------------------|

|   | Executive Severance and Change of Control Agreements |
|--------|------------------------------------------------------|

|   | In April 2007, the Company entered into an Executive Severance and Change of Control Agreement with Sterling Du, the Chief Executive Officer and Chairman of the Board, pursuant to which Mr. Du would be entitled to, among other things, two times his base salary and annual target bonus and immediate vesting of 50% of his unvested equity awards if terminated under certain circumstances.  In addition, Mr. Du would be entitled to, among other things, three times his base salary and annual target bonus and immediate vesting of 100% of his unvested equity awards if terminated under certain circumstances within twenty-four months of a change of control of the Company. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | In April 2007, the Company entered into Executive Severance and Change of Control Agreements with Chuan Chiung “Perry” Kuo, the Chief Financial Officer, and James Keim, the Head of Marketing and Sales, pursuant to which these |
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|   | officers would be entitled to, among other things, one time base salary and annual target bonus and immediate vesting of 50% of unvested equity awards if terminated under certain circumstances.  In addition, Mr. Kuo and Mr. Keim would be entitled to, among other things, one and a half times base salary and annual target bonus and immediate vesting of 50% of unvested equity awards if terminated under certain circumstances within twelve months of a change of control of the Company. |
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| 23.   | SEGMENT INFORMATION |
|-----------------|---------------------|

|   | In September 2008, the Board approved a plan to transfer Network Security business to O2Security along with its Series A preference shares financing.  In anticipation of the business transfer, management identified two reportable segments as of December 31, 2008, including Integrated Circuit Group and Network Security Group. The Integrated Circuit Group’s core products and principal source of revenue are its power management semiconductors.  These semiconductor products are produced with digital, analog, and mixed signal integrated circuit manufacturing processes.  The Network Security Group’s system security solution products include support for VPN and firewalls, which provide security functions between computer systems and networks, including the transmission of data across the Internet.  In November 2010, the Company determined to discontinue the Network Security Group.  Please see discussions in Note 3. |
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|   | Prior to the approval of the transfer plan of O2Seucrity, the Company’s Chief Operating Decision Maker (“CODM”), the Chief Executive Officer, reviewed information on an enterprise-wide basis to assess performance and allocate resources.  Commencing in the fourth quarter of 2008, the CODM began to manage the Company on the basis of the new segment structure and assessed the performance of each operating segment using information of its net sales and income from operations. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Company does not identify or allocate assets by operating segment, nor does the CODM evaluate operating segments using discrete asset information.  The Company does not have inter-segment revenue, and, accordingly, there is none to be reported.  The Company does not allocate gains and losses from interest and other income, or income taxes to operating segments.  The accounting policies for segment reporting are the same as for the Company as a whole. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Operating segment net sales and operating income (loss), including the discontinued Network Security Group, were as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                          |   | Years Ended December 31 |    |
|-------------------------------|--------|-------------------------|---------|
|                          |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
| Net sales                     |   |                    |    |   |   |   |   |   |   |
| Integrated Circuit Group      |   | $                       | 137,789 |   |   | $ | 124,294 |   |   | $ | 135,438 |   |
| Network Security Group        |   |                    | 1,946   |   |   |   | 3,204 |   |   |   | 3,387 |   |
|                          |   |                    |    |   |   |   |   |   |   |   |   |   |
|                          |   | $                       | 139,735 |   |   | $ | 127,498 |   |   | $ | 138,825 |   |
|                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations |   |                    |    |   |   |   |   |   |   |   |   |   |
| Integrated Circuit Group      |   | $                       | 22,442  |   |   | $ | 3,972 |   |   | $ | 7,308 |   |
| Network Security Group        |   |                    | (9,591  | ) |   |   | (6,560 | ) |   |   | (6,744 | ) |
|                          |   |                    |    |   |   |   |   |   |   |   |   |   |
|                          |   | $                       | 12,851  |   |   | $ | (2,588 | ) |   | $ | 564 |   |

|   | Net sales to unaffiliated customers (including the discontinued Network Security Group) by geographic region are based on the customer’s ship-to location and were as follows: |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (In Thousands) |
|--------|----------------|

|   |   | Years Ended December 31 |    |
|--------|--------|-------------------------|---------|
|   |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
|   |   |                    |    |   |   |   |   |   |   |
| China  |   | $                       | 105,170 |   |   | $ | 100,205 |   |   | $ | 109,083 |   |
| Korea  |   |                    | 14,623  |   |   |   | 14,327 |   |   |   | 10,742 |   |
| Japan  |   |                    | 11,131  |   |   |   | 9,360 |   |   |   | 12,952 |   |
| Taiwan |   |                    | 3,854   |   |   |   | 1,966 |   |   |   | 2,606 |   |
| Other  |   |                    | 4,957   |   |   |   | 1,640 |   |   |   | 3,442 |   |
|   |   |                    |    |   |   |   |   |   |   |   |   |   |
|   |   | $                       | 139,735 |   |   | $ | 127,498 |   |   | $ | 138,825 |   |

|   | For the year ended December 31, 2010, one customer accounted for 10% or more of net sales.  For the year ended December 31, 2009, one customer accounted for 10% or more of net sales.  For the year ended December 31, 2008, two customers accounted for 10% or more of net sales.  Sales to these major customers were generated from the Integrated Circuit Group.  The percentage of net sales to those customers was as follows: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|       |   | Years Ended December 31 |   |
|------------|--------|-------------------------|--------|
|       |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|       |   |                    |   |   |   |   |   |   |   |
| Customer A |   |                    | 18.9   | % |   |   | 11.3 | % |   |   | 11.5 | % |
| Customer B |   |                    | 3.1    | % |   |   | 5.4 | % |   |   | 12.3 | % |

|   | Long-lived assets, consist of property and equipment and are based on the physical location of the assets at the end of each year, and were as follows: |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (In Thousands) |
|--------|----------------|

|                              |   | December 31 |   |
|-----------------------------------|--------|-------------|--------|
|                              |   | 2010        |   |   | 2009 |   |   | 2008 |   |
|                              |   |        |   |   |   |   |   |   |   |
| China                             |   | $           | 12,991 |   |   | $ | 12,784 |   |   | $ | 13,873 |   |
| Taiwan                            |   |        | 11,815 |   |   |   | 12,807 |   |   |   | 14,994 |   |
| U.S.A.                            |   |        | 4,599  |   |   |   | 4,873 |   |   |   | 5,348 |   |
|     Singapore |   |        | 213    |   |   |   | 32 |   |   |   | 73 |   |
| Other                             |   |        | 121    |   |   |   | 74 |   |   |   | 65 |   |
|                              |   |        |   |   |   |   |   |   |   |   |   |   |
|                              |   | $           | 29,739 |   |   | $ | 30,570 |   |   | $ | 34,353 |   |

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