UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F



(Mark one)

| |  ̈ | REGISTRATION STATEMENT
                                                                                                         PURSUANT TO SECTION 12(b)
                                                                                                         OR (g) OF THE SECURITIES
                                                                                                         EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OR

| | x | ANNUAL REPORT
                                                                                                          PURSUANT TO SECTION
                                                                                                          13 OR 15(d) OF THE SECURITIES
                                                                                                          EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2011.



OR

| |  ̈ | TRANSITION REPORT
                                                                                                         PURSUANT TO SECTION 13
                                                                                                         OR 15(d) OF THE SECURITIES
                                                                                                         EXCHANGE ACT OF 1934
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OR

| |  ̈ | SHELL COMPANY
                                                                                                         REPORT PURSUANT TO SECTION
                                                                                                         13 OR 15(d) OF THE SECURITIES
                                                                                                         EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



for the transition period from __________ to ___________



Commission file number 001-35273



Cogo
Group, Inc.

(Exact name of the Registrant as specified
in its charter)



Cayman Islands

(Jurisdiction of incorporation or organization)



Room 1001, Tower C, Skyworth Building,

High-Tech Industrial Park,

Nanshan, Shenzhen 518057, PRCTelephone: +86 (755) 2674-3210

(Address of principal executive offices)



Mr. Jeffrey Kang, Chief Executive
Officer

Room 1001, Tower C, Skyworth Building

High-Tech Industrial Park

Nanshan, Shenzhen 518057, PRC
Telephone: +86 (755) 2674-3210Facsimile: +86 (755) 2674-3522

(Name, Telephone, E-mail and/or Facsimile
Number and Address of Company Contact Person)



Copies to:



Mitchell Nussbaum

Loeb & Loeb LLP

345 Park Avenue

New York, New York 10154

Telephone: (212) 407-4000

Fax: (212) 407-4990



Securities registered or to be registered
pursuant to Section 12(b) of the Act:ORDINARY SHARES, PAR VALUE $0.01



Securities
registered or to be registered pursuant to Section 12(g) of the Act:None.



Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:None.



On December 31, 2011, the issuer had 33,560,467 shares
outstanding.



Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.

| | Yes   ̈ | No  x
| | ------ | -----



If this report is an annual or transition report, indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.

| | Yes   ̈ | No  x
| | ------ | -----



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

| | Yes  x | No   ̈
| | ------ | -----



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).

| | Yes  x | No   ̈
| | ------ | -----



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act.



| ̈Large
    Accelerated filer | xAccelerated
    filer |  ̈Non-accelerated
    filer
|---------------------------- | ---------------------- | --------------------------



Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:



|xUS
    GAAP |  ̈          International
                           Financial
        Reporting Standards as issued by
        the International Accounting
        Standards Board |  ̈Other
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------



If “Other” has been checked in response to the
previous question, indicate by check mark which financial statement item the registrant has elected to follow.

| |  ̈Item
    17 |  ̈Item
    18
| | ------------ | ------------



If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

| | Yes   ̈ | No  x
| | ------ | -----











Explanatory Note



The 2011 financial statements filed with this Annual Report on Form 20-F of Cogo Group, Inc. (the “Company”)
are being filed without XBRL (eXtensible Business Reporting Language) tagging. The Company will file an amendment to this
Annual Report to include the requisite XBRL tagging of the financial statements on or prior to the Company’s April 30,
2012 filing deadline.



1









TABLE OF CONTENTS



|          |    |                                                                                  | Page
|--------- | -- | -------------------------------------------------------------------------------- | ----
|          |    |                                                                                  |     
|PART I    |    |                                                                                  | 4   
|ITEM 1.   |    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                            | 4   
|ITEM 2.   |    | OFFER STATISTICS AND EXPECTED TIMETABLE                                          | 4   
|ITEM 3.   |    | KEY INFORMATION                                                                  | 4   
|          | A. | Selected financial data                                                          | 4   
|          | B. | Capitalization and Indebtedness                                                  | 7   
|          | C. | Reasons for the Offer and Use of Proceeds                                        | 7   
|          | D. | Risk factors                                                                     | 7   
|ITEM 4.   |    | INFORMATION ON THE COMPANY                                                       | 22  
|ITEM 4A.  |    | UNRESOLVED STAFF COMMENTS                                                        | 32  
|ITEM 5.   |    | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                     | 32  
|ITEM 6.   |    | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                       | 51  
|          | A. | Directors and senior management                                                  | 51  
|          | B. | Compensation                                                                     | 52  
|          | C. | Board Practices                                                                  | 55  
|          | D. | Employees                                                                        | 57  
|          | E. | Share Ownership                                                                  | 57  
|ITEM 7.   |    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                | 57  
|          | A. | Major shareholders                                                               | 57  
|          | B. | Related Party Transactions                                                       | 58  
|          | C. | Interests of Experts and Counsel                                                 | 59  
|ITEM 8.   |    | FINANCIAL INFORMATION                                                            | 59  
|          | A. | Consolidated Statements and Other Financial Information.                         | 59  
|          | B. | Significant Changes                                                              | 59  
|ITEM 9.   |    | THE OFFER AND LISTING                                                            | 59  
|          | A. | Offer and Listing Details                                                        | 59  
|          | B. | Plan of Distribution                                                             | 60  
|          | C. | Markets                                                                          | 60  
|          | D. | Dilution                                                                         | 60  
|          | E. | Expenses of the Issue                                                            | 60  
|ITEM 10.  |    | ADDITIONAL INFORMATION                                                           | 60  
|          | A. | Share Capital                                                                    | 60  
|          | B. | Memorandum and Articles of Association                                           | 60  
|          | C. | Material Contracts                                                               | 61  
|          | D. | Exchange controls                                                                | 62  
|          | E. | Taxation                                                                         | 62  
|          | F. | Dividends and paying agents                                                      | 66  
|          | G. | Statement by experts                                                             | 66  
|          | H. | Documents on display                                                             | 67  
|          | I. | Subsidiary Information                                                           | 67  
|ITEM 11.  |    | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                        | 67  
|ITEM 12.  |    | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                           | 68  
|PART II   |    |                                                                                  | 68  
|ITEM 13.  |    | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                  | 68  
|ITEM 14.  |    | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
    OF PROCEEDS | 68  
|ITEM 15.  |    | CONTROLS AND PROCEDURES                                                          | 69  
|ITEM 16.  |    | [RESERVED]                                                                       | 70  
|ITEM 16A. |    | AUDIT COMMITTEE FINANCIAL EXPERT                                                 | 70  
|ITEM 16B. |    | CODE OF ETHICS                                                                   | 70  
|ITEM 16C. |    | PRINCIPAL ACCOUNTANT FEES AND SERVICES.                                          | 70  
|ITEM 16D. |    | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.                      | 70  
|ITEM 16E. |    | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.          | 71  
|ITEM 16F. |    | CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT.                                   | 71  
|ITEM 16G. |    | CORPORATE GOVERNANCE                                                             | 71  
|PART III  |    |                                                                                  | 71  
|ITEM 17.  |    | FINANCIAL STATEMENTS                                                             | 71  
|ITEM 18.  |    | FINANCIAL STATEMENTS                                                             | 71  
|ITEM 19.  |    | EXHIBITS                                                                         | 71  



2







FORWARD-LOOKING STATEMENTS



This Annual Report on Form 20-F (this “Annual
Report”) contains “forward-looking statements” that represent our beliefs, projections and predictions about
future events. All statements other than statements of historical fact are “forward-looking statements” including
any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management
for future operations, any statements concerning proposed new projects or other developments, any statements regarding future
economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives,
and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”,
“could”, “would”, “predicts”, “potential”, “continue”, “expects”,
“anticipates”, “future”, “intends”, “plans”, “believes”, “estimates”
and similar expressions, as well as statements in the future tense, identify forward-looking statements.



These statements are necessarily subjective
and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based on the success of our business.



A variety of factors, some of which are
outside our control, may cause our operating results to fluctuate significantly. They include:





| | • | the availability and cost of products from our suppliers incorporated into our customized module design solutions;                                                                         
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | changes in end-user demand for the products manufactured and sold by our customers;                                                                                                        
| | • | general and cyclical economic and business conditions, domestic or foreign, and, in particular, those in China’s mobile handset, telecommunications equipment and digital media industries;
| | • | the rate of introduction of new products by our customers;                                                                                                                                 
| | • | the rate of introduction of enabling technologies by our suppliers;                                                                                                                        
| | • | changes in our pricing policies or the pricing policies of our competitors or suppliers;                                                                                                   
| | • | our ability to compete effectively with our current and future competitors;                                                                                                                
| | • | our ability to manage our growth effectively, including possible growth through acquisitions;                                                                                              
| | • | our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers;                                                                            
| | • | changes in our relationship with any of our key customers;                                                                                                                                 
| | • | changes in the favorable tax incentives enjoyed by our People’s Republic of China (“PRC”) operating companies;                                                                             
| | • | foreign currency exchange rates fluctuations;                                                                                                                                              
| | • | adverse changes in the securities markets; and                                                                                                                                             
| | • | legislative or regulatory changes in the PRC.                                                                                                                                              







Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-looking
statements after the filing date to conform these statements to actual results, unless required by law.



Forward-looking statements should not be
read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times
by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time
those statements are made and management’s belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by
the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information
on the Company” and elsewhere in this Annual Report.



3







This Annual Report should be read in conjunction
with our audited financial statements and the accompanying notes thereto, which are included in Item 18 of this Annual Report.



PART I



| | ITEM 1. | IDENTITY OF DIRECTORS,
                                                                                 SENIOR MANAGEMENT AND ADVISERS
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------



Not required.



| | ITEM 2. | OFFER STATISTICS
                                                                                 AND EXPECTED TIMETABLE
| | ------- | ------------------------------------------------------------------------------------------------------------------------



Not required.



| | ITEM 3. | KEY INFORMATION
| | ------- | ---------------



| | A. | Selected financial data
| | -- | -----------------------



The following selected consolidated statements
of income data for each of the years in the five-year period ended December 31, 2011 and selected consolidated balance sheet data
as of December 31, 2011, 2010, 2009, 2008, and 2007, presented below are derived from our audited consolidated financial statements.
The audited consolidated financial statements have been prepared in accordance with U.S. GAAP and have been audited by KPMG, an
independent registered public accounting firm, for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 and as of December
31, 2011, 2010, 2009, 2008 and 2007. The selected consolidated statements of income data for the years ended December 31, 2008
and 2007 and the selected consolidated balance sheet data as of December 31, 2009, 2008 and 2007 were derived from our audited
financial statements which are not included in this Annual Report.



The selected consolidated financial statements
are reported in Renminbi. Renminbi and U.S. dollar amounts are presented in thousands, except share and per share data. This data
should be read in conjunction with our “Management’s discussion and analysis of financial condition and results of
operations” and our audited consolidated financial statements and the related notes included elsewhere in this Annual Report.



The selected consolidated financial statement
data are expressed in Renminbi (“RMB”), the national currency of the PRC. Solely for the convenience of the reader,
the December 31, 2011 audited consolidated financial statements have been translated into United States dollars (“USD”)
at the closing rate in New York City on December 31, 2011 for cable transfers in RMB as certified for customers purposes by the
Federal Reserve Bank of New York of USD1.0000 = RMB6.2939. No representation is made that the RMB could have been, or could be,
converted into USD at that rate or at any other rate on December 31, 2011, or at any other date.



4







Selected Consolidated Statement of Income Data



|                                                                                               |  | Year Ended December 31,                            |         
|---------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------
|                                                                                               |  | 2011 USD                                           |         
|                                                                                               |  | (in thousands, except share and per share amounts) |         
|Net revenue                                                                                    |  |                                                    |         
|Product sales                                                                                  |  |                                                    | 564,737 
|Service revenue                                                                                |  |                                                    | —       
|                                                                                               |  |                                                    |         
|                                                                                               |  |                                                    | 564,737 
|Cost of sales                                                                                  |  |                                                    |         
|Cost of goods sold                                                                             |  |                                                    | (501,598
|Cost of services                                                                               |  |                                                    | —       
|                                                                                               |  |                                                    |         
|                                                                                               |  |                                                    | (501,598
|Gross profit                                                                                   |  |                                                    | 63,139  
|Selling, general and administrative expenses                                                   |  |                                                    | (29,883 
|Research and development expenses                                                              |  |                                                    | (16,149 
|Provision for doubtful accounts                                                                |  |                                                    | (369    
|Net gain on settlement relating to the acquisition of
    Long Rise before goodwill impairment |  |                                                    | —       
|Impairment loss of goodwill and intangible assets                                              |  |                                                    | (37,647 
|Other operating income / (loss),
    net                                                       |  |                                                    | (134    
|                                                                                               |  |                                                    |         
|Income / (loss) from operations                                                                |  |                                                    | (21,043 
|Interest expense                                                                               |  |                                                    | (3,202  
|Interest income                                                                                |  |                                                    | 2,372   
|                                                                                               |  |                                                    |         
|Earnings / (loss) before income taxes and extraordinary
    item                               |  |                                                    | (21,873 
|Income tax expense (1)                                                                         |  |                                                    | (1,836  
|                                                                                               |  |                                                    |         
|Income / (loss) before extraordinary item                                                      |  |                                                    | (23,709 
|Extraordinary item, net of nil tax                                                             |  |                                                    | —       
|                                                                                               |  |                                                    |         
|Net income / (loss)                                                                            |  |                                                    | (23,709 
|Less net income attributable to
    noncontrolling interest                                    |  |                                                    | (1,174  
|                                                                                               |  |                                                    |         
|Net income / (loss) attributable to Cogo Group, Inc.                                           |  |                                                    | (24,883 
|Earnings / (loss) per share attributable
    to Cogo Group, Inc.                               |  |                                                    |         
|Income / (loss) before extraordinary item                                                      |  |                                                    | (0.67   
|Extraordinary item                                                                             |  |                                                    | —       
|                                                                                               |  |                                                    |         
|Basic                                                                                          |  |                                                    | (0.67   
|                                                                                               |  |                                                    |         
|Income / (loss) before extraordinary item                                                      |  |                                                    | (0.67   
|Extraordinary item                                                                             |  |                                                    | —       
|                                                                                               |  |                                                    |         
|Diluted                                                                                        |  |                                                    | (0.67   
|                                                                                               |  |                                                    |         
|Weighted average number of common shares outstanding                                           |  |                                                    |         
|Basic                                                                                          |  |                                                    |         
|                                                                                               |  |                                                    |         
|Diluted                                                                                        |  |                                                    |         
|                                                                                               |  |                                                    |         
|Selected Consolidated Balance Sheet
    Data                                                   |  |                                                    |         
|Cash                                                                                           |  |                                                    | 90,939  
|Accounts receivable, net                                                                       |  |                                                    | 149,637 
|Property and equipment, net                                                                    |  |                                                    | 2,843   
|Total assets                                                                                   |  |                                                    | 406,742 
|Total current liabilities                                                                      |  |                                                    | 161,174 
|Total liabilities                                                                              |  |                                                    | 165,214 
|Total equity                                                                                   |  |                                                    | 241,528 



5







| | (1) | Certain of our operating subsidiaries were entitled to tax holidays.
                                                            The effect of the tax holiday increased our net income for 2011, 2010,
                                                            2009, 2008, and 2007 by RMB33.9 million (USD5.4 million), RMB26.5
                                                            million, RMB29.5 million, RMB28.2 million and RMB29.4 million, respectively
                                                            (equivalent to basic earnings per share amount of RMB0.92 (USD0.15),
                                                            RMB0.71, RMB0.81, RMB0.73 and RMB0.80 and a diluted earnings per share
                                                            amount of RMB0.92 (USD0.15), RMB0.69, RMB0.78, RMB0.71 and RMB0.77
                                                            for the years ended December 31, 2011, 2010, 2009, 2008 and 2007,
                                                            respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth information
concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. On March 23, 2012, the buying rate announced
by Federal Reserve Statistical Release was RMB 6.3021 to $1.00.



|                        |  |  | Spot Exchange Rate |       
|----------------------- |  |  | ------------------ | ------
|Period                  |  |  | Period Ended       |       
|                        |  |  | (RMB per US$1.00)  |       
|2007                    |  |  |                    | 7.2946
|2008                    |  |  |                    | 6.8225
|2009                    |  |  |                    | 6.8259
|2010                    |  |  |                    | 6.6000
|2011                    |  |  |                    | 6.2939
|September               |  |  |                    | 6.3780
|October                 |  |  |                    | 6.3547
|November                |  |  |                    | 6.3765
|December                |  |  |                    | 6.2939
|2012 (through March 23) |  |  |                    | 6.3021
|January                 |  |  |                    | 6.3080
|February                |  |  |                    | 6.2935
|                        |  |  |                    |       



6









| | Source: | Federal Reserve Statistical Release
| | ------- | -----------------------------------



| | (1) | Annual averages, lows, and highs are calculated from month-end
                                                           rates. Monthly averages, lows, and highs are calculated using the average
                                                           of the daily rates during the relevant period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | B. | Capitalization and Indebtedness
| | -- | -------------------------------



Not required.



| | C. | Reasons for the Offer and Use of Proceeds
| | -- | -----------------------------------------



Not required.



| | D. | Risk factors
| | -- | ------------



You should carefully consider the following
risk factors, together with all of the other information included in this annual report.



Risks Related to Our Business



Our operating results fluctuate from quarter to quarter.



Our quarterly revenue, income and other
operating results have fluctuated in the past and may fluctuate significantly in the future due to a number of factors, including
the following:



| | • | the ability of our suppliers to meet our supply requirements;
| | - | -------------------------------------------------------------

| | • | the cancellation of large orders;
| | - | ---------------------------------

| | • | competitive pressures;
| | - | ----------------------

| | • | the time required for research and development;
| | - | -----------------------------------------------

| | • | changing design requirements resulting from rapid technology
                                                                    shifts; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | • | industry trends impacting the overall market for our customers’
                                                                    end-products.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



As a result of these and other
factors, our results of operations may vary on a quarterly basis and net revenue may be adversely affected from period to
period. Our results of operations for a particular quarter may not be indicative of our future performance. If our operating
results in a quarter fall below our expectations or the expectations of market analysts or investors, the price of our
ordinary shares is likely to decrease.



Our operating results are substantially dependent on
development of new customized module design solutions.



We may be unable to develop new customized
module design solutions in a timely or cost-efficient manner, and these new solutions may fail to meet the requirements of our
customers’ end-markets. If we fail to develop new solutions that help our customers respond to competitive pressures, achieve
shorter time-to-market or broaden and improve their product offerings, we will lose business and our results of operations will
be materially and adversely affected.



7







If our customers do not accept our proposed customized
module design solutions or do not purchase from us the specified components contained in the proposed module reference design,
our net revenue will be adversely affected.



While many of our proposed customized
module design solutions are accepted by our customers, there is no obligation for customers to accept our proposed solutions.
We dedicate personnel, management and financial resources to research and development and technical support in developing new
customized module design solutions for our customers. The time frames for most research and development projects typically range
from two to eighteen months. For our product sales segment, because we do not charge a design fee, but rather generate revenue
through the resale of specified components contained in our proposed reference designs, if our customers do not accept our proposed
designs, we will fail to capitalize on the invested resources, time and effort that we expended on a project. Furthermore, our
customers typically make purchases on a purchase order basis. Prior to submission of a purchase order, our customers are not obligated
to purchase from us any quantity of specific components that we propose to sell in our proposed module reference design. Our customers
may cancel or defer their purchase orders on short notice without significant penalty. Even if a customer accepts our proposed
module reference design, the customer could bypass us and contract with our competitors or possibly our suppliers directly for
the purchase of the specific components we otherwise had proposed to sell. The failure to accept our proposed module reference
design, the loss of ongoing business from our customers or the transition away from us in favor of direct purchases from our competitors
or suppliers could each result in our failure to realize potentially significant net revenue.



Reliance on our suppliers, with whom we often do not
have long-term supply agreements, makes us vulnerable to the loss of one or more key suppliers or the delivery capabilities of
our suppliers.



We typically rely on a limited number
of key suppliers, and many customized module design solutions that we develop are designed around technology components provided
by our suppliers. We typically do not have long-term supply agreements or other forms of exclusive arrangements with our suppliers.
In 2011, for example, Broadcom, Freescale Semiconductor, Atmel and Sandisk, accounted for approximately 41.1%, 8.1%, 7.8% and
7.8%, respectively, of our cost of sales. If we lose a key supplier or a supplier reduces the quantity of products it sells to
us, does not maintain a sufficient inventory level of products required by us or is otherwise unable to meet our demand for its
components, we may have to expend significant time, effort and other resources to locate a suitable alternative supplier and secure
replacement components. For example, on one prior occasion, one of our key suppliers experienced an interruption in its production
capacity due to a relocation of its production facilities, which resulted in its inability to meet our quarterly supply requirements.
If suitable replacement components are unavailable, we may be forced to redevelop certain of our solutions, which ultimately may
not be accepted by our customers.



Also, if our suppliers fail to introduce
new products that keep up with new technologies, they may be surpassed by other suppliers entering the market with whom we may
not have existing relationships. The costs and delays related to finding new suppliers or redeveloping solutions could significantly
harm our business.



If we fail to attract and retain key personnel, particularly
our chief executive officer, our business will be materially impaired and our financial condition and results of operations will
suffer.



Our business greatly relies on the continued
services of Jeffrey Kang, our principal shareholder and chief executive officer. Many relationships with our key suppliers and
key customers have been developed by and continue to be maintained by Mr. Kang. Our future success will depend to a significant
degree upon the performance and contribution of Mr. Kang and other members of our senior management team in areas including
sales, research and development, information technology and finance. Therefore, our business and results of operations may be
materially and adversely affected if Mr. Kang or another member of our senior management team leaves us, which they may do
at any time. In addition, we will incur additional expenses to recruit and develop senior management members if one or more of
our key employees are unwilling or unable to continue his or her employment with us. We do not maintain any life insurance covering
our senior management or any of our key employees.



Our future success also depends on our
ability to identify, attract, hire, train, retain and motivate highly-skilled personnel. If we cannot attract and retain the personnel
we require at a reasonable cost, our cost of goods sold will increase and the profitability of our business could be negatively
affected. Our business is especially dependent on sales, marketing, research and development, and services personnel. Competition
in the PRC for executive-level and skilled technical and sales and marketing personnel is strong, and recruiting, training, and
retaining qualified key personnel are important factors affecting our ability to meet our growth objectives. Should key employees
leave our company, we may lose both an important internal asset and net revenue from customer projects in which those employees
were involved.



8







Loss of key customers may adversely impact our net revenue.



We generate the majority of our net revenue
from a small number of key customers, and we anticipate that a relatively small number of key customers will continue to account
for a significant portion of our net revenue in the foreseeable future, particularly in the telecommunications equipment market.
In 2011, our sales to ZTE, T&W Electronics, Wuhan Research Institute of Post & Telecommunications and Yulong accounted
for approximately 29.3%, 7.2%, 4.4% and 4.0% respectively, of our net revenue. Sales to our top 10 customers represented approximately
56.4% of our net revenue in 2011. Should we lose, receive reduced orders from, or experience any adverse change in our relationship
with any of our key customers, or should they decide to use solutions provided by other companies, we will suffer a substantial
loss in net revenue.



The end-markets in which we operate are highly competitive
and fragmented. Competition may intensify in the future, and if we fail to compete effectively, our business will be harmed.



Pressures from current or future competitors
could cause our solutions to lose market acceptance or require us to significantly reduce our sales prices to keep and attract
customers. Our competitors often have longer operating histories, stronger customer and supplier relationships, larger technical
staffs and sales forces, and/or greater financial, technical and marketing resources than we do. Although we believe that there
are no direct competitors of any meaningful size who operate using the same business model as ours, we face indirect competition
from:



| | • | Other technology component suppliers. For each
                                                                    project, we work with one enabling technology component supplier
                                                                    to compete against other enabling technology component suppliers.
                                                                    Consequently, we indirectly compete against our suppliers’
                                                                    competitors. For example, by working with JDS Uniphase, we
                                                                    compete against companies such as Avanex Corp. and Bookham
                                                                    Inc. in supplying optical transmission module design solutions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Component manufacturers and distributors. We compete
                                                                    indirectly with component manufacturers such as Epcos AG,
                                                                    and component distributors such as Arrow Electronics, Inc.
                                                                    and Avnet Inc., which may seek to expand their product/service
                                                                    offerings to include customized module design solutions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We may also face indirect competition
from customers and suppliers. Currently many of our customers and suppliers do not focus on customized module design. If our customers
or suppliers decide to devote more time and resources to in-house module design, the demand for our solutions may decline. In
addition, our customers may change their procurement strategy or decide to rely on us primarily for component delivery and not
for integration or design work. Similarly, component suppliers may also seek to offer their component products or modules incorporating
key components from our solutions directly to our customers. The loss of customers for our customized module design solutions
as a result of these competitive factors would have a material adverse effect on our business, financial condition and results
of operations.



As we expand our business, we intend to develop new customized
module design solutions and technological capabilities in end-markets where we do not currently have extensive experience or technological
capability. Failure to develop or execute this growth strategy will have a material adverse effect on our net revenue.



Prior to 2005, we derived substantially
all of our net revenue from our customized module design solutions provided to customers in the mobile handset and telecommunications
equipment end-markets. In 2005, we began targeting the digital media end-market. In 2006 and 2007, we began our own business of
providing engineering service and software design, respectively. In 2008, we also started targeting the industrial business end-market.
Our success in the digital media end-market will depend, in significant part, on our ability to continue to develop the necessary
technological capability and to leverage our existing customer base that has expanded into this end-market. If we are unable to
quickly develop technological expertise, increase our research and development capabilities and leverage our customer base as
anticipated, our return on our investment with respect to these efforts may be lower than anticipated and our operating results
may suffer. Finally, our customer base may not respond to our efforts to expand our proprietary capabilities and may be unwilling
to utilize these enhanced capabilities.



9







We may be unable to manage rapid
growth and a changing operating environment, which could adversely affect our ability to serve our customers and harm our business.



We have experienced rapid growth over
the last five years, with our net revenue increasing from RMB1,666.5 million in 2007 to RMB3,554.4 million (USD564.7 million)
in 2011. Our number of employees has increased from approximately 30 in 2001 to 644 as at December 31, 2011. We have limited
operational, administrative and financial resources, which may be inadequate to sustain our current growth rate. If we are unable
to manage our growth effectively, the quality of our solutions could deteriorate and our business may suffer. As our customer
base increases and we enter new end-markets, we will need to:



| | • | increase our investments in personnel, research and development
                                                                    capabilities, facilities and other operational areas;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | continue training, motivating and retaining our existing
                                                                    employees, and attract and integrate new qualified employees;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | develop and improve our operational, financial, accounting
                                                                    and other internal systems and controls; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | take enhanced measures to protect any proprietary technology
                                                                    or technological capability we develop.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Any failure to manage our growth successfully could distract
management’s attention and result in our failure to serve our customers and harm our business.



We face risks associated with future investments or acquisitions.



An important component of our growth strategy
is to invest in or acquire businesses complementary to ours that will enable us to expand the solutions we offer to our existing
target customer base, and that will provide opportunities to expand into new markets. We may be unable to identify suitable investment
or acquisition candidates or to make these investments or acquisitions on a commercially reasonable basis, if at all. If we complete
an investment or acquisition, we may not realize the anticipated benefits from the transaction.



Integrating an acquired company or technology is complex, distracting
and time consuming, as well as a potentially expensive process. The successful integration of an acquisition would require us
to:



| | • |  | integrate and retain key management, sales, research and development,
    and other personnel;                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
| | • |  | incorporate the acquired products or capabilities into our offerings
    both from an engineering and sales and marketing perspective;
| | • |  | coordinate research and development efforts;                                                                                          
| | • |  | integrate and support pre-existing supplier, distribution and customer
    relationships; and                                         
| | • |  | consolidate duplicate facilities and functions and combine back office
    accounting, order processing and support functions.        



The geographic distance between the companies,
the complexity of the technologies and operations being integrated and the disparate corporate cultures being combined may increase
the difficulties of combining an acquired company or technology. Acquired businesses are likely to have different standards, controls,
contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing,
information and other systems. Management’s focus on integrating operations may distract attention from our day-to-day business
and may disrupt key research and development, marketing or sales efforts.



Our acquisition strategy also depends on our ability to obtain
necessary government approvals that may be required, as described under “—Risks Related to Doing Business in the PRC—Our
acquisition strategy may be subject to SDRC approval under legislation enacted in 2004.”



Our competitive position could decline if we are unable
to obtain additional financing to acquire businesses or technologies that are strategic for our success, or otherwise execute
our business strategy.



We believe that our current cash will
be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. However, we
may need to raise additional funds to support more rapid expansion, respond to competitive pressures, acquire complementary businesses
or technologies or respond to unanticipated requirements. We cannot assure you that additional funding will be available to us
in amounts or on terms acceptable to us. If sufficient funds are not available or are not available on acceptable terms, our ability
to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise
respond to competitive pressures would be significantly limited.



10







If appropriate opportunities arise, we
intend to acquire businesses, technologies, services or products that we believe are strategic for our success. Our competitive
position could decline if we are unable to identify and acquire businesses or technologies that are strategic for our success
in this market.



The unauthorized use of our intellectual property could
have a material adverse impact on our net revenue.



Our in-house design engineering teams
develop our customized module design solutions. We typically do not have patent or other intellectual property protection for
our solutions, nor do we typically have non-disclosure or confidentiality agreements with most of our suppliers or customers to
keep our design specifications confidential. Suppliers or other competitors may attempt to circumvent us by selling products or
providing module design solutions directly to our customers. The unauthorized use by our suppliers or other competitors of our
module design solution specifications or other intellectual property in the future would result in a substantial decrease in our
net revenue. The validity, enforceability and scope of protection of intellectual property in the PRC is uncertain and still evolving,
and PRC laws may not protect intellectual property rights to the same extent as the laws of some other jurisdictions, such as
the United States. Moreover, litigation may be necessary in the future to enforce any intellectual property rights we may establish
or acquire in the future, which could result in substantial costs and diversion of our resources, and have a material adverse
effect on our business, financial condition and results of operations.



We became a public company through a share exchange with
a non-operating public shell company, where we were the accounting acquirer and assumed all known and unknown potential liabilities
of our predecessor entity.



Our July 2004 share exchange with Trident
Rowan Group, Inc., or Trident, was accounted for as a reverse merger in which Comtech Group, a Cayman Islands company (“Comtech
Cayman”) was deemed the accounting acquirer and Trident, which was originally incorporated in 1917, was the legal acquirer.
We have retained all the known and unknown liabilities of Trident. There may be other potential liabilities about which we are
not yet aware. For any potential liabilities arising from litigations, see the notes to the audited financial statements, on page
F-12.



We depend upon contractual agreements
with the two shareholders of Shenzhen Comtech in conducting our business through Shenzhen Comtech and Shanghai E&T and receiving
payments, which may not be as effective in providing operational control as direct ownership and may be difficult to enforce.
Further, if the PRC government finds these contractual agreements violate or conflict with PRC governmental regulations, our business
would be materially adversely affected.



At the time of its incorporation, foreign
shareholding in a trading business such as Shenzhen Comtech could not exceed 65%. With subsequent PRC deregulation, foreign ownership
of such a trading business can now reach 100%, and approval of foreign ownership of companies in the PRC engaged in commodity
trading businesses—which includes agency trade, wholesale, retail and franchise operations is now delegated to local government
agencies of the PRC Ministry of Commerce. In order to exercise control over Shenzhen Comtech (a PRC operating company legally
permitted to engage in a commodity trading business), without direct shareholding by us (a U.S.-listed company and therefore a
foreign-invested entity), Honghui Li, our vice president, and Huimo Chen, the mother of our principal shareholder and chief executive
officer, Jeffrey Kang, hold 99% and 1%, respectively, of the equity interests of Shenzhen Comtech, and through contractual agreements
with us hold such equity interests exclusively for the benefit of our 100% directly owned subsidiary, Comtech China. Shenzhen
Comtech, in turn owns a 60% equity interest in another of our PRC operating companies, Shanghai E&T, with the other 40% being
held by Comtech China through trust agreements. Under the trust agreements, Shenzhen Comtech owns a 35% equity interest in Shanghai
E&T for the benefit of Comtech China and Honghui Li owns a 5% equity interest in Shanghai E&T for the benefit of Comtech
China. While we do not have any equity interest in Shenzhen Comtech, through these contractual agreements, we enjoy voting control
and are entitled to the economic interests associated with their equity interest in Shenzhen Comtech. For additional details regarding
these contractual agreements, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”
These contractual agreements may not be as effective in providing us with control over Shenzhen Comtech as direct ownership because
we rely on the performance of Honghui Li and Huimo Chen under the agreements. If they fail to perform their respective obligations
under the agreements, we may have to incur substantial costs and resources to enforce such agreements and may not be able to do
so in any case. Further, the profits of Shenzhen Comtech may not be able to be remitted outside the PRC due to foreign exchange
controls. Also, we must rely on legal remedies under applicable law, which may not be as effective as those in the United States.
Because we rely on Shenzhen Comtech and Shanghai E&T in conducting our business operations in the PRC, the realization of
any of these risks relating to our corporate structure could result in a material disruption of our business, diversion of our
resources and the incurrence of substantial costs, any of which could materially and adversely affect our operating results and
financial condition.



11







In the opinion of our PRC counsel, the
ownership structure of Shenzhen Comtech and the contractual agreements among Comtech China, Honghui Li and Huimo Chen do not violate
existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation and application
of current or future PRC laws and regulations, including but not limited to the laws and regulations governing the validity and
enforcement of these contractual agreements. Accordingly, we cannot assure you that PRC regulatory authorities will not determine
that these contractual agreements violate or conflict with PRC laws or regulations.



If we or our PRC operating company, Shenzhen
Comtech, are found to violate any existing or future PRC laws or regulations, the relevant regulatory authorities will have broad
discretion in dealing with such violation, which would cause significant disruptions to our business operations or render us unable
to conduct our business operations and may materially adversely affect our business, financial condition and results of operations.



Risks Related to Our Industry



Our inability to respond quickly and effectively to rapid
technological advances and market demands would adversely impact our competitive position and our results of operations.



Historically, we have focused on the digital
media and telecommunications equipment end-markets in the PRC. The digital media and telecommunications equipment end-markets
are characterized by rapid technological advances, intense competition, frequent introduction of new products and services and
consumer demand for greater functionality, lower costs, smaller products and better performance. We must constantly seek out new
products and develop new solutions to maintain in our portfolio. We have experienced and will continue to experience some solution
design obsolescence. We expect our customers’ demands for improvements in product performance to increase, which means that
we must continue to improve our design solutions and develop new solutions to remain competitive and grow our business. Our failure
to compete successfully for customers will result in price reductions, reduced margins or loss of market share, any of which would
harm our business, results of operations and financial condition.



A large portion of our net revenue currently comes from
sales to manufacturers in the cyclical digital media and telecommunications equipment end-markets and cyclical downturns could
harm our operating results.



The digital media and telecommunications
equipment end-markets in particular are highly cyclical and have experienced severe and prolonged downturns, often in connection
with maturing product cycles and declines in general economic conditions. These downturns have been characterized by diminished
product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. The impact of
slowing end-customer demand may be compounded by higher than normal levels of equipment and inventories among our customers and
our customers’ adjustments in their order levels, resulting in increased pricing pressure.



In addition, our recent and significant
growth in net revenue resulted, in large part, from the high growth in sales of industrial applications products in the PRC. These
domestic manufacturers may not continue to grow their sales at historical levels, if at all. The stagnation or reduction in overall
demand for industrial applications products would materially affect our results of operations and financial condition.



The digital media end-market is characterized by a short
product lifecycle, making time-to-market and sensitivity to customer needs critical to our success and our failure to respond
will harm our business.



Mobile handsets in the digital media end-market
typically have a lifecycle of approximately six to twelve months before the technology becomes obsolete. Time-to-market, both
with respect to our customers’ ability to supply consumers with timely and marketable products and our ability to provide
our customers with a wide array of latest generation customized module design solutions, is critical to our success. As design
cycles in the industry shorten, we face logistical challenges in providing our solutions in an increasingly shorter timeframe.
If we are unable to respond to the shortened lifecycles and time-to-market, our business will suffer.



12







The global financial crisis could harm our product demands
and adversely affect our results of operations.



Due to difficult market conditions, the
level of consumer and information technology spending has declined and the demand for our mobile handsets business since the third
quarter of 2008 has decreased. Furthermore, we may need to strategically lower our pricing in order to grow our business in a
slowing economic environment.



Risks Related to Doing Business in the PRC



There are substantial risks associated
with doing business in the PRC, including those set forth in the following risk factors.



Our operations may be adversely affected by the PRC’s
economic, political and social conditions.



Substantially all of our operations and
assets are located in the PRC and substantially all of our net revenue are derived from our operations in the PRC. Accordingly,
our results of operations and future prospects are subject to economic, political and social developments in the PRC. In particular,
our results of operations may be adversely affected by:



| | • |  | changes in the PRC’s political, economic and social conditions;                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
| | • |  | changes in policies of the government or changes in laws and regulations,
    or the interpretation of laws and regulations;
| | • |  | changes in foreign exchange regulations;                                                                                    
| | • |  | measures that may be introduced to control inflation, such as interest
    rate increases; and                              
| | • |  | changes in the rate or method of taxation.                                                                                  



The PRC economy has historically been
a planned economy. The majority of productive assets in the PRC are still owned by various levels of the PRC government. In recent
years the government has implemented economic reform measures emphasizing decentralization, utilization of market forces in the
development of the economy and a high level of management autonomy. Such economic reform measures may be inconsistent or ineffectual,
and we may not benefit from all such reforms. Furthermore, these measures may be adjusted or modified, possibly resulting in such
economic liberalization measures being applied inconsistently from industry to industry, or across different regions of the country.



In the past twenty years, the PRC has
been one of the world’s fastest growing economies in terms of gross domestic product, or GDP. This growth may not be sustainable.
Moreover, a slowdown in the economies of the United States, the European Union and certain Asian countries may adversely affect
economic growth in the PRC which depends on exports to those countries. Our financial condition and results of operations, as
well as our future prospects, would be materially and adversely affected by an economic downturn in the PRC.



Our financial results benefit from tax concessions granted
by the PRC government, the change to or expiration of which would materially change our results of operations.



Our results of operation may be adversely
affected by changes to or expiration of tax holiday and preferential tax concessions that some of our PRC operating companies
currently enjoy or expect to enjoy in the future. As a result of tax holiday and preferential tax rate incentives, our operations
have been subject to relatively low tax liabilities. Tax that would otherwise have been payable without preferential tax treatment
amounted to approximately RMB27.7 million (USD4.4 million) in 2011. For additional details regarding these tax incentives, please
see “Item 5. Operating and Financial Review and Prospects—Income Tax.”



Tax laws in the PRC are subject to interpretations
by relevant tax authorities. The preferential tax treatment may not remain in effect or may change, in which case we may be required
to pay the higher income tax rate generally applicable to Chinese companies, or such other rate as is required by the laws of
the PRC.



13







On March 16, 2007, the National People’s
Congress passed the Corporate Income Tax law (the “CIT law”), which revised the PRC statutory income tax rate to 25%.
The CIT law was effective on January 1, 2008. Accordingly, our PRC subsidiaries are subject to income tax at 25% effective
from January 1, 2008 unless otherwise specified. The CIT law and its relevant regulations provide a five-year transition
period from January 1, 2008 for those companies which were established before March 16, 2007 and were entitled to preferential
lower tax rates under the then effective tax regulations, as well as grandfathering certain tax holidays. The transitional tax
rates are 20%, 22%, 24% and 25% for 2009, 2010, 2011 and 2012 onwards, respectively. For our subsidiaries located in Shenzhen
Special Economic Zone, the PRC that were each entitled to a tax holiday of two-year tax exemption followed by three-year 50% tax
reduction starting from the first profit making year from the PRC tax perspective, they are entitled to enjoy the transitional
rates and continue their tax holidays until they expire. For the entities which had not commenced their respective tax holidays
as of December 31, 2007, the CIT law and its relevant regulations require their tax holidays to begin on January 1,
2008.



The telecommunications equipment market is extensively
regulated in the PRC.



The telecommunications equipment end-market
accounted for 37.1% of our net revenue in 2011. PRC’s telecommunications industry is heavily regulated. Changes in regulations
affecting sales of these customers could negatively affect the telecommunications equipment end-market for our solutions, which
will materially harm our business.



PRC government control of currency conversion may affect
our ability to meet foreign currency obligations.



Because the majority of our net revenue
are denominated in Renminbi, any restrictions on currency exchange may limit our ability to use revenue generated in Renminbi
to meet our foreign currency obligations, such as settling the purchase of materials which may be denominated in U.S. dollars.
The principal regulation governing foreign currency exchange in the PRC is the Foreign Currency Administration Rules (1996), or
the Rules, as amended. Under the Rules, once certain procedural requirements are met, Renminbi is convertible for current account
transactions, including trade and service-related foreign exchange transactions and dividend payments, but not for capital account
transactions, including direct investment, loans or investments in securities outside the PRC, without prior approval of the PRC
State Administration of Foreign Exchange (“SAFE”), or its local counter-parts. Since a significant amount of our future
revenues will continue to be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our
ability to utilize revenue generated in the PRC to fund our business activities outside of the PRC, if any, or expenditures denominated
in foreign currencies, or our ability to meet our foreign currency obligations, which could have a material adverse effect on
our business, financial condition and results of operations. We cannot be certain that the PRC regulatory authorities will not
impose more stringent restrictions on the convertibility of Renminbi with respect to foreign exchange transactions.



PRC regulations relating to offshore
investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that
could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make
any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could
expose us and our PRC resident shareholders to liability under PRC law.



In October 2005, SAFE promulgated regulations
that require PRC residents and PRC corporate entities to register with and obtain approvals from relevant PRC government authorities
in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are
PRC residents in connection with our prior and any future offshore acquisitions.



The SAFE regulation required registration
by March 31, 2006 of direct or indirect investments previously made by PRC residents in offshore companies prior to the implementation
of the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Reverse Investment Activities of
Domestic Residents Conducted via Offshore Special Purpose Companies on November 1, 2005. If a PRC shareholder with a direct
or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore
parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent
proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries, and may be prohibited
from receiving capital contributions, shareholder loan or other payments from our offshore parent company, and may be further
prohibited from making payments to or receiving payments from other overseas entities. Furthermore, failure to comply with the
various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.



14







Some of our PRC resident shareholders
may not have completed their registration with SAFE under the SAFE regulation, in part, due to confusion over the application
of the SAFE regulation to our company. For example, in mid-2006, some of our PRC resident shareholders attempted to register with
SAFE in Shenzhen under predecessor regulations to the SAFE regulation, but were informed by Shenzhen SAFE that the regulation
did not apply to them. These PRC resident shareholders did not realize they might be required to register under the new SAFE regulations.
Further, even if our PRC resident shareholders do apply for SAFE registration, they may not be able to obtain such registration
at the discretion of SAFE due to various reasons including their failure to comply with the retroactive SAFE registration requirement
prior to March 31, 2006, the statutorily prescribed deadline for compliance. The failure or inability of our PRC resident
shareholders to obtain any required approvals or make any required registrations may subject us to fines and legal sanctions,
prevent us from being able to make distributions or pay dividends or to receive capital contribution or shareholder loans, as
a result of which our business operations and our ability to distribute profits to you or capitalize our operation in the PRC
could be materially and adversely affected.



In December 2006, the People’s Bank
of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOC Regulation, setting
forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the
capital account. In January 2007, SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified
approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock
ownership plans or stock option plans of an overseas publicly-listed company. On March 28, 2007, SAFE promulgated the Application
Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option
Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options
by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company,
to register with SAFE and complete certain other procedures. We and our PRC employees who have been granted stock options will
be subject to the Stock Option Rule when our company becomes an overseas publicly-listed company. If we or our PRC optionees fail
to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.



Our acquisition strategy may be subject to SDRC approval
under legislation enacted in 2004.



State Development and Reform Commission,
or SDRC, promulgated a regulation in 2004 that requires SDRC approval in connection with direct or indirect offshore investment
activities by individuals who are PRC residents and PRC corporate entities. This regulation may apply to our future offshore or
cross-border acquisitions, as well as to the equity interests in offshore companies held by our PRC shareholders who are considered
PRC residents. We intend to make all required application and filings, and will require the shareholders of the offshore entities
in our corporate group who are considered PRC residents to make the application and filings, as required under the regulation
and under any implementing rules or approval practices that may be established under this regulation. However, because this regulation
lacks implementing rules, approval precedents or reconciliation with other approval requirements, it remains uncertain how this
regulation, and any future legislation concerning offshore or cross-border transactions, will be interpreted and implemented by
the relevant government authorities. The approval criteria by SDRC agencies for outbound investment by PRC residents are not provided
under this regulation or other SDRC regulations. Accordingly, we cannot provide any assurances that we will be able to comply
with, qualify under or obtain any approval as required by this regulation or other related legislations. Our failure or the failure
of our PRC resident shareholders to obtain SDRC approvals may restrict our ability to acquire a company outside of the PRC or
use our entities outside of the PRC to acquire or establish companies inside of the PRC, which could negatively affect our business
and future prospects.



15







PRC laws and our corporate structure
may restrict our ability to receive dividends and payments from, and transfer funds to, our PRC operating companies, which may
negatively affect our results of operations and restrict our ability to act in response to changing market conditions.



Substantially all of our operations are
conducted through our PRC operating companies. The ability of our PRC operating companies to make dividends and other payments
to us may be restricted by factors such as changes in applicable foreign exchange and other laws and regulations. For example,
under the regulations discussed above, the foreign exchange activities of our present or prospective PRC subsidiaries are conditioned
upon the compliance with the SAFE registration requirements by the shareholders of our offshore entities who are PRC residents.
Failure to comply with these SAFE registration requirements may substantially restrict or prohibit the foreign exchange inflow
to and outflow from our PRC subsidiaries, namely Comtech Communications and Comtech Software, including, remittance of dividends
and foreign-currency-denominated borrowings by these PRC subsidiaries. In addition, our PRC operating companies are required,
where applicable, to allocate a portion of their net profit to certain funds before distributing dividends, including at least
10% of their net profit to certain reserve funds until the balance of such fund has reached 50% of their registered capital. These
reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to equity
capital, and application to business expansion, and are not distributable as dividends. Our PRC operating companies are also required,
where applicable, to allocate an additional 5% to 10% of their net profits to the common welfare fund. The net profit available
for distribution from our PRC operating companies is determined in accordance with generally accepted accounting principles in
the PRC, which may materially differ from a determination performed in accordance with Generally Accepted Accounting Principles
(United States) (“U.S. GAAP”). As a result, we may not receive sufficient distributions or other payments from these
entities to enable us to make dividend distributions to our shareholders in the future, even if our U.S. GAAP financial statements
indicate that our operations have been profitable. For additional details regarding the taxation risk of dividend distributions
from our PRC operating companies, please see “Risk factors – Our global income and your capital gain may be subject
to PRC tax under the new PRC tax law, which may have an effect on our results of operations and your investments, respectively.”



We do not directly own the equity interest
in Shenzhen Comtech, which accounted for approximately 3.0% of our net revenue in 2011, or Shanghai E&T, which is owned 60%
by Shenzhen Comtech and 40% by Comtech China through contractual agreements with Shenzhen Comtech and Honghui Li respectively,
and which accounted for approximately 4.2% of our net revenue in 2011. Honghui Li and Huimo Chen, the shareholders of Shenzhen
Comtech, have contractually agreed, among others things, to apply all dividends or other payments they receive from Shenzhen Comtech
to payments to our 100% directly owned subsidiary, Comtech China, or its designated entities, for valid and valuable consideration
and to the extent permitted by applicable PRC law, including PRC foreign exchange law. PRC law and regulatory requirements would
currently restrict the ability of the shareholders of Shenzhen Comtech, based solely upon the contractual agreement, to directly
apply the dividends or other payments they receive from Shenzhen Comtech in U.S. dollars to payments to Comtech China or in Renminbi
to Comtech China’s designated entities in the PRC. For example, the PRC foreign exchange authorities would have discretion
to review the adequacy of the consideration given in exchange for the application of any dividends or payments from Shenzhen Comtech
to Comtech China. If Honghui Li and Huimo Chen fail to apply such dividends or other payments received from Shenzhen Comtech,
which might include profit distributions from Shanghai E&T to Shenzhen Comtech, to payments to Comtech China or its designated
entities, our financial condition would be negatively affected. Apart from the dividend distribution from our PRC subsidiaries
to us, the transfer of funds from our company to our PRC operating companies, either as a shareholder loan or as an increase in
registered capital or otherwise, is subject to registration or approval with or by PRC governmental authorities, including the
relevant administration of foreign exchange and/or other relevant examining and approval authorities. These limitations on the
free flow of funds between us and our PRC operating companies may restrict our ability to act in response to changing market conditions.



Fluctuations in exchange rates could
adversely affect our business.



Because a substantial majority of our
earnings and cash assets are denominated in Renminbi, fluctuations in the exchange rate between the U.S. dollar and the Renminbi
will affect the relative purchasing power of these proceeds and our balance sheet and earnings per share in U.S. dollars following
this offering. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results
of operations. Fluctuations in the exchange rate will also affect the relative value any dividend we may issue after this offering
that will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in
the future. In addition, a depreciation of the Renminbi relative to the U.S. dollar would have the effect of reducing our U.S.
dollar-translated net revenue and increasing the debt servicing requirements for our U.S. dollar-denominated debt. On the other
hand, the appreciation of the Renminbi would make our customers’ products more expensive to purchase outside of the PRC
because many of our customers are involved in the export of goods, which could adversely affect their sales, thereby eroding our
customer base and adversely affecting our results of operations.



Since July 2005, the Renminbi has no longer
been pegged to the U.S. dollar. Although currently the Renminbi exchange rate versus the U.S. dollar is restricted to a rise or
fall of no more than 0.3% per day and the People’s Bank of China regularly intervenes in the foreign exchange market
to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in
value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, the PRC authorities may
lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.



16







Very limited hedging transactions are
available in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future,
the availability and effectiveness of these transactions may be limited and we may not be able to successfully hedge our exposure
at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our
ability to convert Renminbi into foreign currencies.



The legal system in the PRC has inherent
uncertainties that may limit the legal protections available to you as an investor or to us in the event of any claims or disputes
with third parties.



The legal system in the PRC is based on
written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the central
government has promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization
and governance, commerce, taxation and trade. As PRC’s foreign investment laws and regulations are relatively new and the
legal system is still evolving, the interpretation of many laws, regulations and rules is not always uniform and enforcement of
these laws, regulations and rules involve uncertainties, which may limit the remedies available to you as an investor and to us
in the event of any claims or disputes with third parties. In addition, any litigation in the PRC may be protracted and result
in substantial costs and diversion of resources and management attention.



On August 8, 2006, six PRC regulatory
agencies, including the Chinese Securities Regulatory Commission, or CSRC, promulgated the Regulation on Mergers and Acquisitions
of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other
things, requires offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC
domestic companies and controlled by PRC individuals, to obtain the approval of the CSRC prior to publicly listing their securities
on an overseas stock exchange. We believe, based on the advice of our PRC counsel, that this regulation does not apply to us or
this offering and that CSRC approval is not required because such acquisition was completed long before September 8, 2006
when the new regulation became effective. On September 21, 2006, the CSRC published a notice specifying the documents and
materials that are required to be submitted for obtaining CSRC approval. In the opinion of our PRC counsel, the new notice does
not contradict its interpretation of the new regulation, nor does it add greater clarity to the applicability of the new regulation
to us. Based on the advice we have received from our PRC counsel, we do not intend to seek CSRC approval in connection with this
offering.



Since the new regulation has only recently
been adopted, there may be some uncertainty as to how this regulation will be interpreted or implemented. If the CSRC or other
PRC regulatory body subsequently determines that the CSRC’s approval is required for this offering, we may face sanctions
by the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the
PRC, limit our operation privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the
PRC, restrict or prohibit payment or remittance of dividends by Comtech China, or take other actions that could have a material
adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price
of our ordinary shares. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable to
us, to halt this offering before settlement and delivery of the shares being offered by us.



You may experience difficulties in effecting service
of legal process and enforcing judgments against us and our management.



Substantially all of our operations and
assets are located in the PRC. In addition, most of our directors, executive officers and some of the experts named in this document
reside within the PRC, and many of the assets of these persons are also located within the PRC. As a result, it may not be possible
to effect service of process within the United States or elsewhere outside the PRC upon these directors or executive officers
or some of the experts named in this document, including with respect to matters arising under U.S. federal securities laws. Moreover,
our PRC legal counsel has advised us that the PRC does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of court judgments. As a result, recognition and enforcement in the PRC of judgments
of a court of the United States or any other jurisdiction, including judgments against us or our directors, executive officers,
or the named experts, may be difficult or impossible.



17







The enforcement of civil liabilities against us may be
more difficult than if we were a U.S. company.



We are a Cayman Islands company and all of
our assets are and will be located outside the United States. As a result, investors could experience more difficulty enforcing
judgments obtained against us in U.S. courts than would otherwise be the case for U.S. judgments obtained against a company organized
in the United States. In addition, some claims may be more difficult to bring against us in Cayman Islands courts than it would
be to bring similar claims against a U.S. company in a U.S. court.



As a Cayman Islands company and, because judicial precedent
regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection
of your shareholder rights than you would under U.S. law.



We are a Cayman Islands company and our corporate
affairs are be governed by are memorandum and articles of association, the Cayman Islands Companies Law and the common law of
the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the
fiduciary responsibilities of our directors under Cayman Islands law are to a large extent governed by the common law of the Cayman
Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands
as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights
of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established
as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands
has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Maryland or Delaware,
have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.



As a result of all of the above, public shareholders
may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors
or controlling shareholders than they would as public shareholders of a U.S. company.



Our global income and your dividend/capital gain may
be subject to PRC tax under the new PRC tax law, which may have an effect on our results of operations and your investment, respectively.



Under the new PRC tax law, effective January 1,
2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered
a resident enterprise and will be subject to the corporate income tax at the rate of 25% on its global income. The new PRC tax
law does not, however, clearly define the term “de facto management bodies.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our global income may be subject to the corporate income
tax at the rate of 25%.



Under the previous PRC tax law, dividend
payments to foreign investors made by foreign-invested enterprises in the PRC are exempt from PRC withholding tax. We have
been advised by our PRC counsel, Commerce & Finance Law Offices, that pursuant to the new PRC tax law which became
effective on January 1, 2008, however, dividends payable from earnings accumulated beginning on January 1, 2008 by
a PRC resident enterprise to its foreign corporate investors will be subject to a 10% withholding tax, unless any such
foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a different
withholding arrangement. According to the Agreement between the Mainland China and Hong Kong Special Administrative Region
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and its relevant
regulations, dividends paid by a PRC resident enterprise to its direct holding company in Hong Kong will be subject to
withholding tax at a rate of no more than 5% (if the Hong Kong investor is the “beneficial owner” and owns
directly at least 25% of the equity interest of the PRC resident enterprise). The new PRC tax law provides, however, that
dividends distributed between qualified resident enterprises will be exempted. Dividends distributed between qualified
resident enterprises refer to the dividends derived by a PRC resident enterprise from its direct investment in another PRC
resident enterprise. In addition, we have been advised by our PRC counsel, Commerce & Finance Law Offices, that
under the new PRC tax law, foreign corporate investors may be subject to a 10% PRC tax upon any gain they realize from the
transfer of our ordinary shares, if such income is regarded as income from “sources within the PRC.” We have been
advised by Commerce & Finance Law Offices that it is uncertain whether such income would be regarded as income from
“sources within the PRC” because whether the Company would be regarded as a “PRC resident enterprise”
is not clear. If we are required under the new PRC tax law to withhold PRC withholding tax on our dividends payable to our
non-PRC shareholders, or such shareholders are subject to PRC tax on any gains on the transfer of their shares, the
investment of such shareholders in our ordinary shares may be affected.



18







There is a risk that we could be treated as a foreign
corporation for U.S. federal income tax purposes, which could result in significantly greater U.S. federal income tax liability
to us.



Section 7874(b) of the Internal Revenue Code
of 1986, as amended (the “Code”) generally provides that a corporation organized outside the United States that acquires,
directly or indirectly, pursuant to a plan or series of related transactions, substantially all of the assets of a corporation
organized in the United States, will be treated as a U.S. corporation for U.S. federal income tax purposes if (i) the acquiring
corporation, together with all corporations connected to it by a chain of greater than 50% ownership by vote and value (the “expanded
affiliated group”), does not have substantial business activities in the country in which the acquiring corporation is organized,
compared to the total worldwide business activities of the expanded affiliated group, and (ii) shareholders of the acquired corporation,
by reason of owning shares of the acquired corporation, own at least 80% of either the voting power or the value of the stock
of the acquiring corporation after the acquisition.



If Section 7874(b) were determined not
to apply to the redomestication merger that Cogo Group, Inc. (the Maryland corporation) effected in August 2011 (as
such transaction is described in the section of this Annual Report entitled “Information on the Company”
and “Operational and Financial Review and Prospects Taxation – USA “), we would be treated as a foreign
corporation for U.S. federal income tax purposes as a result of the redomestication merger and, among other things, Cogo
Group, Inc. (the Maryland corporation) would be required to recognize gain (but not loss) under Section 367 of the Code equal to
the excess, if any, of the fair market value of each of its assets over such asset’s adjusted tax basis at the
effective time of the redomestication merger. Any U.S. federal income tax liability incurred by Cogo Group, Inc. (the
Maryland corporation) as a result of such gain should become our liability by reason of the redomestication merger.



Although we expect that Section 7874(b) should
apply to treat us as a U.S. corporation, rather than a foreign corporation, and, therefore, that Cogo Group, Inc. (the Maryland
corporation) would not recognize gain (or loss) as a result of the redomestication merger for U.S. federal income tax purposes, due
to the absence of full guidance on how the rules of Section 7874(b) applies to the August 2011 redomestication merger (and our
subsequent operations, as well as members of our expanded affiliated group), this result is not entirely free from doubt. The
balance of this discussion (including the discussion in the section of this Annual Report entitled “Additional Information
– Taxation – United States Federal Income Taxation”) assumes that we will be treated as a U.S. corporation for
U.S. federal income tax purposes.



Under the PRC CIT Law, we and/or our non-PRC subsidiaries
may be classified as  “resident enterprises” of the PRC.  Such classification could result in PRC tax consequences
to us, our non-PRC  subsidiaries and/or our non-PRC resident shareholders.



On March 16, 2007, the National People’s Congress approved
and promulgated a new tax law, the PRC Corporate Income Tax Law, or “CIT Law,” which took effect on January 1, 2008.  Under
the CIT Law, enterprises are classified as resident enterprises and non-resident enterprises.  An enterprise established
outside of the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise,”
meaning that it can be treated in a manner similar to an enterprise organized under the laws of the PRC for PRC enterprise income
tax purposes.  The implementing rules of the CIT Law define “de facto management bodies” as a managing body
that in practice exercises “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our
managing body as being located within the PRC.  Due to the short history of the CIT Law and lack of applicable legal
precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case
basis.



If the PRC tax authorities determine that we are a
“resident enterprise” or our Hong Kong subsidiaries are “resident enterprises” for PRC corporate
income tax purposes, a number of PRC tax consequences could follow.  First, we and/or our non-PRC subsidiaries
may be subject to the corporate income tax at a rate of 25% on our and/or non-PRC subsidiaries’ worldwide
taxable income, as well as PRC corporate income tax reporting obligations.  Second, under the CIT Law and its
implementing rules, dividends paid between “qualified resident enterprises” may be exempt from corporate income
tax.  However, so far it is unclear whether the dividends we may receive from our PRC subsidiaries through our non-PRC subsidiaries will constitute dividends between “qualified resident enterprises” and would therefore qualify
for a tax exemption, because the definition of qualified resident enterprises is unclear and the relevant PRC government
authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated
as resident enterprises for PRC enterprise income tax purposes.



19







Finally, if we are determined to be a “resident enterprise”
under the CIT Law, this could result in a PRC tax being imposed on dividends we pay to our enterprise or individual investors
that are not tax residents of the PRC (“non-resident investors”) and gains derived by them from transferring our ordinary
shares, if such income or gain is considered PRC-sourced income by the relevant PRC tax authorities. Such PRC tax would be imposed
at a rate of 10% in the case of nonresident investors that are enterprises.  In addition, a potential 20% PRC tax would
be imposed on dividends we pay to our non-resident investors who are individuals and who (i) are not domiciled in the PRC and
who do not reside in the PRC or (ii) are not domiciled in the PRC and have resided in the PRC for less than one year, to the extent
that such dividends are deemed to be sourced within the PRC, and on gains derived by them from transferring our ordinary shares,
if such gain is considered PRC-sourced income by the relevant PRC tax authorities.  In such event, we may be required
to withhold the applicable PRC income tax on any dividends paid to its non-resident investors.  Our non-resident investors
also may be responsible for paying the applicable PRC tax on any gain realized from the sale or transfer of our ordinary shares
in certain circumstances.  We would not, however, have an obligation to withhold PRC tax with respect to such gain under
the PRC tax laws.



Moreover, the State Administration of Taxation (“SAT”)
released Circular Guoshuihan No. 698 (“Circular 698”) on December 10, 2009 that reinforces the taxation of certain
equity transfers by non-resident investors through overseas holding vehicles.  Circular 698 is retroactively effective
from January 1, 2008.  Circular 698 addresses indirect equity transfers as well as other issues.  According
to Circular 698, where a non-resident investor that indirectly holds an equity interest in a PRC resident enterprise through a
non-PRC offshore holding company indirectly transfers an equity interest in the PRC resident enterprise by selling an equity interest
in the offshore holding company, and the latter is located in a country or jurisdiction where the actual tax burden is less than
12.5% or where the offshore income of its residents is not taxable, the non-resident investor is required to provide the PRC tax
authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the execution of the equity
transfer agreement.  The tax authorities in charge will evaluate the offshore transaction for tax purposes.  In
the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial
purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities
will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form.  If SAT’s
challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning
purposes and subject the non-resident investor to PRC tax on the capital gain from such transfer.  Since Circular 698
has a short history, there is uncertainty as to its application.  We (or a non-resident investor) may become at risk
of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish
that we (or such non-resident investor) should not be taxed under Circular 698, which could have a material adverse effect on
our financial condition and results of operations.  If the PRC tax authority determines that Circular 698 applies to
us (or a non-resident investor), we (or a non-resident investor) will be obligated to make a tax return filing with the relevant
PRC tax authority in accordance with PRC tax laws and regulations.  Failure to do so will subject us (or a non-resident
investor) to fines up to RMB10,000.



If any PRC tax applies to a non-resident investor, the non-resident
investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a deduction for such PRC tax
against such investor’s domestic taxable income or a foreign tax credit in respect of such PRC tax against such investor’s
domestic income tax liability (subject to applicable conditions and limitations).  Investors should consult their own
tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available
deductions or foreign tax credits.







We make diminished filings with the SEC as a foreign
private issuer which filings do not provide shareholders the same level of information that would normally be available to shareholders
of United States public companies.



The term foreign private issuer means any foreign issuer other
than a foreign government except an issuer with more than 50 percent of its outstanding voting securities held directly or indirectly
of record by residents of the United States, and that meets any of the following conditions (i) the majority of the executive
officers or directors are United States citizens or residents; (ii) more than 50 percent of the assets of the issuer are located
in the United States; or (iii) the business of the issuer is administered principally in the United States.  As of the
date of this Annual Report, we do not meet any of the conditions in (i) – (iii).  Accordingly, we file with the
SEC as a foreign private issuer, and therefore we are exempted from certain SEC requirements, including



20









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



Therefore, holders of our ordinary shares may receive less
information on our business and operations than do holders of securities of US domestic issuers.



As a foreign private issuer we may rely on exemptions
from certain Nasdaq corporate governance standards applicable to U.S. issuers. This may afford less protection to holders of our ordinary
shares.



The Nasdaq Listing Rules in general require listed companies
to follow a stipulated set of corporate governance practices. As a foreign private issuer, we are permitted to, and we expect
to, follow home country corporate governance practices instead of certain requirements of the Nasdaq Listing Rules, including,
among others, the shareholder approval rules. Under Nasdaq Listing Rule 5635(c), shareholder approval is required prior to
the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation
arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants,
subject to certain exceptions. This includes the issuance of shares to officers or directors in a private placement at a price
less than market value, which is considered a form of equity compensation. The corporate governance practice in our home country,
the Cayman Islands, does not require shareholder approval for the issuance of shares to officers or directors in a private placement
at a price less than the greater of book value and market value, provided that the directors consider the issue price as representing
fair value for the shares being issued. We may determine that it should instead rely upon such home country exemption in lieu
of the Nasdaq requirement for shareholder approval of such share issuances.  As a result of the above home country differences
that we expect to follow, you may receive less shareholder protection from dilution and other matters than if we were not a foreign
private issuer.



Risks Related to Our Ordinary Shares



Our principal shareholder and chief executive officer
beneficially owns a substantial portion of our ordinary shares. As a result, the trading price for our ordinary shares may be
depressed due to market perception that our principal shareholder and chief executive officer will be able to take actions that
may be adverse to your interests.



Jeffrey Kang, our principal shareholder and chief
executive officer, directly and through entities he controls, currently beneficially owns approximately 29.2% of our issued
and outstanding ordinary shares. This significant concentration of share ownership may adversely affect the trading price of our
  ordinary shares because investors, often perceive a disadvantage in owning shares in a company with only one or very few
controlling shareholders. Furthermore, Mr. Kang has the ability to significantly influence the outcome of all matters
requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such
as mergers, consolidations or the sale of substantially all of our assets. This concentration of ownership may have the
effect of delaying or preventing a change of control, including a merger, consolidation or other business combination
involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even
if such a change of control would benefit you.



21







The trading prices of our ordinary shares have been and
are likely to continue to be volatile, which could result in substantial losses to you.



The trading prices of our ordinary shares have been and are
likely to continue to be volatile. Since January 1, 2006, the trading price of our ordinary shares on the Nasdaq Global Market
has ranged from USD1.61 to USD22.15 per share, and the last reported sale price on March 22, 2012 was USD2.82 per share. The trading
prices of our ordinary shares could fluctuate widely in response to factors beyond our control. In particular, the performance
and fluctuation of the market prices of other companies with business operations located mainly in the PRC that have listed their
securities in the United States may affect the volatility in the price of and trading volumes for our ordinary shares. Recently,
a number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S.
stock markets. Some of these companies have experienced significant volatility, including significant price declines after their
initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings
may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading
performance of our ordinary shares. These broad market and industry factors may significantly affect the market price and volatility
of our ordinary shares, regardless of our actual operating performance.



In addition to market and industry factors, the price and trading
volume for our ordinary shares may be highly volatile for specific business reasons. In particular, factors such as variations
in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions or sales of
large blocks of our ordinary shares, could cause the market price for our ordinary shares to change substantially. Any of these
factors may result in large and sudden changes in the volume and trading price of our ordinary shares. In the past, following
periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class
action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management,
and, if adversely determined, could have a material adverse effect on our financial condition and results of operations.



Future sales of shares could have an adverse effect on
the market price of our ordinary shares.



A significant portion of our ordinary shares are held by
a small number of shareholders. Historically, trading volume of our ordinary shares has been relatively low. Sales by our
current shareholders of a substantial number of shares could significantly reduce the market price of our ordinary shares. These
sales could also impede our ability to raise future capital.



As of December 31, 2011, we had 33,560,467
ordinary shares    outstanding, which shares will be able to be sold in the public market in the near future, subject to,
with respect to ordinary shares held by affiliates and shares issued between 12 and 24 months ago, the volume
restrictions and/or manner of sale requirements of Rule 144 under the Securities Act. These shares are freely tradable
without restriction or further registration, subject to the related prospectus delivery requirements.



As of December 31, 2011, we had 1,184,769 stock
options, equity share units, performance shares, warrants and shares issuable in relation to our acquisitions which may
result in a significant number of shares entering the public market and the dilution of our ordinary shares. In addition, in the
event that any future financing should be in the form of securities convertible into, or exchangeable for, equity securities,
investors may experience additional dilution upon the conversion or exchange of such securities.



| | ITEM 4 | INFORMATION ON
                                                                                THE COMPANY
| | ------ | ----------------------------------------------------------------------------------------------------------



History and Development of the Company



We provide customized module design solutions for a diverse
set of applications and end markets, serving as a gateway for our technology component suppliers to access leading electronics
manufacturers in the People’s Republic of China (the “PRC”). Our customized module design solutions allow our
customers to take advantage of technology components from reputable suppliers in an efficient and cost-effective manner, effectively
reducing their time-to-market and lowering their overall costs. Our close collaboration with our customers’ product development
teams enables us to customize our suppliers’ technology components with module designs that meet our customers’ unique
requirements. In addition, we offer technology and engineering as well as software design services in the PRC while we have expanded
into the industrial business end-market.



The Company was incorporated in the Cayman Islands on April
12, 2011 under the name of “Cogo Group Cayman, Inc.” for the sole purpose of effectuating the redomestication of the
Company’s predecessor, Cogo Group, Inc., a Maryland corporation (“Cogo Maryland”).



22







The redomestication merger was approved by the shareholders
of Cogo Maryland on July 25, 2011, pursuant to which each new ordinary share in the Company was issued in
exchange for one share of common stock of Cogo Maryland held by the shareholders. The redomestication became effective August
4, 2011. After the closing of the redomestication merger, the Company changed its name to Cogo Group, Inc. and Cogo Maryland ceased
to exist.



Cogo Maryland, formerly known as Trident, was incorporated
in 1917. On July 22, 2004, Trident, which was a public reporting company that ceased operations in 2000, acquired all of the outstanding
capital stock of Comtech Cayman, in exchange for the issuance of approximately 91.2% of the then-outstanding shares of its common
stock to the shareholders of Comtech Cayman. On August 2, 2004, Trident changed its name from Trident to Comtech Group, Inc. and
on May 13, 2008, further changed its name to Cogo Group, Inc..



Our registered office is c/o Abacus Management
Limited, Ground Floor Elizabethan Square, George Town, P.O. Box 2499, Grand Cayman, KY1-1104 Cayman Islands.



Company Overview



We provide customized module design solutions for a diverse
set of applications and end markets, serving as a gateway for our technology component suppliers to access leading electronics
manufacturers in the PRC. Our customized module design solutions allow our customers to take advantage of technology components
from reputable suppliers in an efficient and cost-effective manner, effectively reducing their time-to-market and lowering their
overall costs. Our close collaboration with our customers’ product development teams provides us with a unique understanding
of their needs, enabling us to customize our suppliers’ technology components with module designs that meet our customers’
needs. In addition, we offer technology and engineering services as well as software design services in the PRC.



We focus on the digital media, telecommunications equipment
and industrial business end-markets in the PRC. In the digital media end-market, we provide mobile handset and module solutions
for functionalities such as CMMB mobile TV, motion sensor, camera, power supply and bluetooth as well as solutions for high definition
digital set-top box, GPS and solutions for Tablet. In the telecommunications equipment end-market, we provide solutions for public
switched telephone network, or PSTN, switching, optical transmitters, electrical signal processing and optical signal amplification.
In the industrial business end-market, we provide industrial solutions for the smart meter, smart grid, railway and auto-electronics
sectors. Currently, we have approximately 1,800 customers, including many of the most established manufacturers in the digital
media, telecommunications equipment and industrial business end-markets in the PRC such as ZTE, TCL and BYD. We work with original
equipment manufacturers, or OEMs, as well as subsystem designers and contract manufacturers to provide solutions to support industry
leaders like Huawei. In developing customized module design solutions for use in our customers’ products, we collaborate
closely with over 30 suppliers of technology components, including many large multinational companies such as Broadcom, Sandisk,
Freescale Semiconductor and Atmel. Additionally, in October 2006 we became one of the first the PRC-based companies to license
software technology and have access to selected source codes relating to digital media directly from Microsoft.



Based on the customer’s specific requirements, we will
propose a customized module reference design, which usually incorporates technology components from our suppliers. If the customer
accepts our module reference design, it will generally agree to purchase specific components contained in our proposed design
from us. However, our customers and their third-party contract manufacturers are responsible for the manufacture and assembly
of the customized module based on our designs. Our business model is based on generating recurring revenue by reselling specific
components required in our module reference designs. The difference between the purchase price we pay our suppliers for these
components and our sales price to our customers for these components compensates us for our design, technical support and distribution
services.



We continue to explore and identify new end-markets where we
can leverage both our design and engineering expertise. For example, in January 2011, we acquired MDC Tech International Holdings
Limited which provides us with a strong foothold in two fast growing industrial markets: health care and smart grid. In 2009,
we acquired Mega Smart Group Limited which provides industrial solutions for the green energy and auto-electronics sectors.



23







From 2009 to 2011, our net revenue grew from RMB2,066.8 million
to RMB3,554.4 million (USD564.7 million), representing a compound annual growth rate, or CAGR, of 31.1%.



Competitive Strengths



We believe that our customized module design solutions allow
our customers to more effectively utilize our suppliers’ enabling technology components, which in turn allows them to better
compete in their targeted end-markets. We believe our competitive strengths include:



Broad customer base and deep customer relationships.
Our broad customer base includes many major domestic telecommunications equipment, industrial business and digital consumer electronics
manufacturers in the PRC and many of their supporting subsystem suppliers. Being a customized module design solution provider
to our customers requires a time-consuming and difficult procurement qualification process, which we believe serves as a significant
barrier to entry for other participants. We believe that these close customer relationships, together with our continued qualified
solution provider status, facilitate better understanding of our customers’ time-to-market, technology and cost requirements.
These relationships also present new business opportunities by enabling us to identify and capture additional revenue streams
from our customers’ new growth areas.



Differentiated business model. We facilitate our customers’
use of technology components in their end-products, thus reducing both their time-to-market and overall costs. As we focus on
providing solutions to meet our customers’ specific requirements, we believe that we are less vulnerable to risks associated
with the development and adoption of new and unproven technology. We do not directly charge a design fee for our customized module
solutions. Instead, we are compensated by a markup on the components recommended in our design solution, which is determined principally
by the extent of the design work we provide.



Accumulated design solutions expertise.Over the years,
we have developed an extensive portfolio of design solutions we can leverage to accommodate the needs of new clients or existing
clients with changed needs. As such, we are able to achieve significant design cost efficiencies by reducing the need to invest
the time or resources associated with designing a new solution. In addition, our engineers have also accumulated a significant
amount of design and engineering expertise from working with various clients from our extensive customer base.



Strong relationships with enabling technology components
suppliers. We work closely with more than 30 technology components suppliers, including major global components suppliers
such as Broadcom, Sandisk, Freescale Semiconductor and Atmel. In addition to facilitating the customization of their technology
components, our suppliers often rely on us as a means of penetrating new PRC-based electronics manufacturers via our existing
domestic relationships.



Strategy



We intend to strengthen our position as a technology solution
provider for customers in PRC’s digital media, telecommunications equipment and industrial business end-markets.



Leverage our strong customer relationships into new opportunities.In 2008, we began targeting the industrial business end-market to provide industrial solutions for the green energy and auto-electronics
sectors. We have since then grown our revenues generated from this market from constituting 4.5% of our 2008 revenue to 20.6%
of our 2011 revenue. We anticipate that sales related to the industrial business end-markets will generally have higher profit
margins than our digital media and telecom equipment modules related sales, though such higher margins may decline over time as
this industry matures. We will also look for opportunities to expand into new end markets that we believe represent significant
growth opportunities.



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



24







Strengthen our design and development capabilities.
To meet the changing needs of our customers, which include increasingly shorter product life cycles, we intend to continue to
improve and strengthen our in-depth and diversified solution development and design capabilities. We plan to continue investing
resources to maintain the most experienced and skilled design team to preserve competitiveness within a frequently changing and
challenging industry landscape. We expect to continue to incur additional research and development expenses, through hiring additional
engineering personnel to develop new solutions and expanding our intellectual property and technological capabilities to meet
the needs of our customers that have expanded into or are expected to expand into different end-markets, such as digital media
and industrial business.



Enhance our competitiveness in new product areas through
strategic alliances.We intend to broaden our product offerings by leveraging our existing design and engineering expertise
as well as selectively entering into strategic alliances with third parties to complement our existing capabilities. For example,
we entered into an arrangement with Microsoft whereby we will have the ability to license next generation software technology
from Microsoft’s IP Ventures program and use Microsoft’s source codes to develop design solutions across a variety
of digital media applications. We believe this arrangement will enhance our competitiveness in design solutions for digital media
initiatives, targeting various end-markets including high definition digital set top-box, GPS, game console, smartphone and portable
media player markets. We intend to continue working with third parties in ways that will enhance our competitiveness.



Make strategic investments and acquisitions. We intend
to grow and expand our business by making strategic investments in and acquiring businesses complementary to ours that will enable
us to expand the solutions we offer to our existing target customer base, and that will provide opportunities to expand into new
markets. In particular, we plan to pursue opportunities where we expect to generate additional near-term revenue or expand our
long-term growth opportunities by expanding our customer base or target end-markets. For example, in January 2011, we acquired
MDC Tech International Holdings Limited which provides us with a strong foothold in two fast growing industrial markets: health
care and smart grid. In 2009, we acquired 100% of Mega Smart Group Limited and its subsidiary, which engage in the development
of industrial applications components in the PRC.







In 2012, our Board of Directors received a proposal involving
the sale of a series of operating entities. If closed, we will reassess our current business strategy in our existing end-markets.
Closing of the transaction is subject to the final approval based on the best interests of the Company and our shareholders. We
intend to continue to strengthen our position as a technology solution provider for PRC customers in our end-markets.













Products and Technology



We provide customization of our suppliers’ technology
components with module designs to suit each of our customers’ specific needs. Our customized module design solutions include:



|Digital Media Modules                      |  | Telecommunications Equipment Modules  |  | Industrial Business Solutions
|------------------------------------------ |  | ------------------------------------- |  | -----------------------------
|                                           |  |                                       |  |                              
|CMMB mobile TV                             |  | Fixed line telecommunications network |  | Smart Meter                  
|                                           |  |                                       |  |                              
|Motion Sensor                              |  | Data communications                   |  | Smart Grid                   
|                                           |  |                                       |  |                              
|Persistent storage                         |  | Optical transmission                  |  | Railways                     
|                                           |  |                                       |  |                              
|Input / output                             |  | Wireless base-station                 |  | Auto-electronics             
|                                           |  |                                       |  |                              
|Sound system                               |  |                                       |  | Health Care                  
|                                           |  |                                       |  |                              
|Power supplies                             |  |                                       |  |                              
|                                           |  |                                       |  |                              
|Bluetooth                                  |  |                                       |  |                              
|                                           |  |                                       |  |                              
|Multimedia                                 |  |                                       |  |                              
|                                           |  |                                       |  |                              
|High definition digital set-top box        |  |                                       |  |                              
|                                           |  |                                       |  |                              
|GPS                                        |  |                                       |  |                              
|                                           |  |                                       |  |                              
|Multimedia module in portable media player |  |                                       |  |                              
|                                           |  |                                       |  |                              
|Multimedia module in home entertainment    |  |                                       |  |                              
|                                           |  |                                       |  |                              
|Tablets functionality                      |  |                                       |  |                              



25







The following table sets forth the revenue contribution from
our digital media, telecommunications equipment, industrial business and other services end-markets during 2009, 2010 and 2011.



|Market                       |  | 2011 |       |   | 2010 |  |       | 2009 | 
|---------------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- | 
|Digital media                |  |      | 42.3  | % |      |  | 57.0  | %    | 
|Telecommunications equipment |  |      | 37.1  | % |      |  | 24.3  | %    | 
|Industrial business          |  |      | 20.6  | % |      |  | 17.4  | %    | 
|Services revenue             |  |      | 0.0   | % |      |  | 1.3   | %    | 
|Total                        |  |      | 100.0 | % |      |  | 100.0 | %    | 



Our research and development (“R&D”) unit has
always been a driving component in our business and remains crucial in providing the best design solutions for our customers.
We have a team of approximately 370 highly qualified design and application engineering specialists and other technical employees
engaged in R&D related activities to develop new customized module solutions targeted at the wireless handset, telecommunications
equipment, industrial business and digital media industries. In 2009, 2010 and 2011, we invested RMB67.5 million, RMB77.9 million
and RMB101.6 million (USD16.1 million), respectively, for R&D purposes and we expect to continue to devote significant resources
to supporting and enhancing the depth and capabilities of our R&D unit.



Customers



Our broad customer base includes many of the major domestic
digital media, telecommunications equipment and industrial business manufacturers in the PRC. In addition, our customers include
industry participants supporting these OEMs, such as subsystem designers and contract manufacturers in the PRC, as well as international
manufacturers who have begun to manufacture end-products in the PRC for the domestic and international markets. Our three largest
customers in the digital media market in terms of 2011 net revenue were ZTE, both a large domestic mobile handset manufacturer
and one of the largest telecommunications equipment manufacturers in the PRC, Skyworth Digital, one of the leading digital set-top
box manufacturers in the PRC and T&W Electronics, a major broadband terminal equipment and digital consumer electronic provider
in the PRC. Our two largest customers from the telecommunications equipment industry in terms of 2011 net revenue were ZTE and
Wuhan Research Institute of Post & Telecommunications, a major telecommunications equipment manufacturer in the PRC.
Our customers in the industrial business end-market are mainly small and medium enterprises. During 2011, ZTE, T&W Electronics,
Wuhan Research Institute of Post & Telecommunications, Yulong and TCL, accounted for 29.3%, 7.2%, 4.4%, 4.0% and 2.5%
of our net revenue, respectively.



As of December 31, 2011, our major customers by end-market
were as follows:



| | • |  | Digital Media—TCL, Skyworth Digital, Yulong, Starnet Digital Technology
    and ZTE.                            
| | - |  | ----------------------------------------------------------------------------------------------------------------
| | • |  | Telecommunications Equipment— ZTE, T&W Electronics and Wuhan
    Research Institute of Post & Telecommunications
| | • |  | Industrial Business—BYD and small and medium enterprises                                                        



In 2009, 2010 and 2011, our top 10 customers to whom we sold
directly, including several contract manufacturers used by some of our major end-market customers, were as follows:



26







|                                                      |  | 2011                                  |         |  | 2010     |  |      | 2009        | 
|----------------------------------------------------- |  | ------------------------------------- | ------- |  | -------- |  | ---- | ----------- | 
|                                                      |  |                                       |         |  |          |  |      |             | 
|                                                      |  |                                       |         |  | % of Net |  |      |             | 
|                                                      |  |                                       |         |  | Revenue  |  |      |             | 
|Customer Name                                         |  | Net Revenue                           |         |  | (%)      |  |      | Net Revenue | 
|                                                      |  | (in millions, except for percentages) |        
|ZTE                                                   |  | RMB                                   | 1,039.9 |  |          |  | 29.3 |             | 
|T&W Electronics                                       |  |                                       | 255.5   |  |          |  | 7.2  |             | 
|Wuhan Research Institute of Post & Telecommunications |  |                                       | 157.2   |  |          |  | 4.4  |             | 
|Yulong                                                |  |                                       | 142.9   |  |          |  | 4.0  |             | 
|TCL                                                   |  |                                       | 89.2    |  |          |  | 2.5  |             | 
|Tenda                                                 |  |                                       | 70.4    |  |          |  | 2.0  |             | 
|Skyworth Digital                                      |  |                                       | 67.3    |  |          |  | 1.9  |             | 
|BYD                                                   |  |                                       | 63.9    |  |          |  | 1.8  |             | 
|Goertek                                               |  |                                       | 63.1    |  |          |  | 1.8  |             | 
|Starnet Digital Technology                            |  |                                       | 54.8    |  |          |  | 1.5  |             | 
|COSHIP                                                |  |                                       | *       |  |          |  | *    |             | 
|Shanghai Xiangnei Auto                                |  |                                       | *       |  |          |  | *    |             | 
|Allied Teleris                                        |  |                                       | *       |  |          |  | *    |             | 
|Longcheer Communications                              |  |                                       | *       |  |          |  | *    |             | 
|Total                                                 |  | RMB                                   | 2,004.2 |  |          |  | 56.4 |             | 



|* | Not a top 10 customer in the respective year.
|- | ---------------------------------------------



The value of our technology solutions can be illustrated by
specific examples of how we have worked closely with our customers and suppliers in leveraging our competitive position and unique
business model to solidify and extend our existing business, as well as identify and capture new opportunities:



Applying our customized module design capabilities to new
end-markets. We have leveraged our customized module design capabilities and our deep, multi-level customer relationships
to follow our customers into new end-markets. Since 1995, we have been a provider of customized module design solutions for telecommunications
equipment to ZTE, one of the largest telecommunications equipment manufacturers in the PRC. ZTE first sought to enter the mobile
handset market in the PRC in 2000. Based on our working history with ZTE on telecommunications equipment solutions and on our
proven design capabilities, ZTE selected us as a provider of customized module design solutions for their mobile handsets in 2000.
Our total net revenue from ZTE was RMB1,039.9 million (USD165.2 million) in 2011.



Suppliers



We develop our customized module design solutions based on
technology components provided by key technology and other suppliers in our target end-markets. We work with a select list of
more than 30 key suppliers, including:



|Supplier Name           |  | Product                                                    
|----------------------- |  | -----------------------------------------------------------
|Broadcom                |  | Various products including integrated circuit and Bluetooth
|                        |  |                                                            
|Freescale Semiconductor |  | Microcontrollers                                           
|                        |  |                                                            
|Atmel                   |  | Microcontrollers                                           
|                        |  |                                                            
|Sandisk                 |  | Flash memory                                               
|                        |  |                                                            
|Matsushita              |  | Switches, connectors, relay                                
|                        |  |                                                            
|Xilinx                  |  | Microcontrollers                                           



In 2009, 2010 and 2011, based on cost, our major suppliers
from whom we purchase components sold to our customers were as follows:



27







|                        |  | 2011                   |      |  | 2010                   |  |      | 2009                   | 
|----------------------- |  | ---------------------- | ---- |  | ---------------------- |  | ---- | ---------------------- | 
|Supplier Name           |  | % of Cost of sales (%) |      |  | % of Cost of sales (%) |  |      | % of Cost of sales (%) | 
|Broadcom                |  |                        | 41.1 |  |                        |  | 37.7 |                        | 
|Freescale Semiconductor |  |                        | 8.1  |  |                        |  | 6.3  |                        | 
|Atmel                   |  |                        | 7.8  |  |                        |  | 7.1  |                        | 
|Sandisk                 |  |                        | 7.8  |  |                        |  | 8.2  |                        | 
|Matsushita              |  |                        | 7.4  |  |                        |  | 9.3  |                        | 










We have established long-standing relationships with our key
suppliers. For example, we have worked with Matsushita since our inception in 1995. While we depend on our key suppliers, we believe
that we can find alternative suppliers within a reasonable amount of time without significantly altering our proposed solutions.
For further information concerning our reliance on Broadcom, Matsushita and other key suppliers, see “Risk factors—Reliance
on our suppliers, with whom we often do not have long-term supply agreements, makes us vulnerable to the loss of one or more key
suppliers or the delivery capabilities of our suppliers.”



Development of collaborative relationships with key component
suppliers. We have expanded our business by collaborating with our key component suppliers and incorporating our suppliers’
technology components into our module reference designs to provide customized solutions for different OEM customers. For example,
demand for flash memory integrated circuits has increased as the need for high volume storage has grown rapidly due to the more
advanced data services offered over wireless networks onto mobile handsets. We developed a storage module by incorporating our
supplier’s flash memory products, customizable for each customer according to their varying design criteria. Through this
approach, we were able to customize each module to provide optimal functionality to a variety of OEM customers. Our ability to
bring this solution to each of these OEM customers:



| | • |  | allow our customers to optimize their mobile handsets by incorporating
    flash memory technology in a fast and cost-efficient fashion;                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • |  | allow this supplier to penetrate the PRC market and specific OEM customers,
    without having to design and manufacture separate flash memory products; and
| | • |  | reinforce and broaden our relationship with this key component supplier.                                                                                    



Sales and Marketing



We generate sales of our customized module design solutions
through our direct sales force, consisting of approximately 168 sales directors, account managers and sales support staff as of
December 31, 2011. Our sales directors are responsible for establishing sales strategy and setting objectives for specific
customer accounts. Each account manager is dedicated to a specific customer account and is responsible for the day-to-day management
of that customer relationship. Account managers work closely with customers and, in many cases, provide on-site support. Account
managers often attend our customers’ internal meetings related to production, engineering design and quality assurance to
ensure that our customers’ expectations are appropriately interpreted and communicated to our operations group, and ultimately
met or exceeded throughout the design process. Account managers also work with our customers to identify and meet their cost and
design-to-delivery cycle time objectives.



Our new business development account managers initiate and
maintain long-term, multi-level relationships with customer accounts and work closely with customers on new business opportunities
throughout the design-to-delivery cycle.



Competition



We believe that the principal competitive factors affecting
the markets for our customized module design solutions and engineering services include:



| | • |  | understanding our customers’ time-to-market, technology and cost
    requirements;
| | - |  | ----------------------------------------------------------------------------------
| | • |  | access to technology providers;                                                   
| | • |  | pricing and efficiency;                                                           
| | • |  | design capabilities;                                                              



28







| | • |  | customer relationships; and
| | - |  | ---------------------------
| | • |  | technical support.         



We believe that we compare favorably with respect to each of
these criteria. In addition, while we do not believe that there are any direct competitors of any meaningful size that operate
using the same business model as ours, we face indirect competition from the following:



Other technology component suppliers. For each project,
we work with suppliers to compete against other technology component suppliers. Consequently, we indirectly compete against our
suppliers’ competitors. For example, by working with JDS Uniphase, we compete indirectly against companies such as Avanex
and Bookham in supplying optical transmission module designs.



Component manufacturers and distributors. We compete
indirectly with component manufacturers such as Epcos, and component distributors such as Arrow Electronics, Inc. and Avnet, Inc.,
which may seek to expand their product/service offerings to include customized module design solutions. We believe that these
large component manufacturers and distributors have not historically engaged in customized module design, and therefore we believe
that it is not one of their core competencies.



We may also face indirect competition from customers and suppliers.
Currently many of our customers and suppliers do not focus on customized module design. If our customers or suppliers decide to
devote more time and resources to in-house module design, the demand for our solutions may decline. In addition, our customers
may change their procurement strategy or decide to rely on us primarily for component delivery and not for integration or design
work. Similarly, component suppliers may also seek to offer their component products or modules incorporating key components from
our solutions directly to our customers.



Intellectual Property



We currently have five issued utility patents relating to our
lightning surge protection for network products and a ceramic-to-steel adhesive application and a patent on algorism for quality
of services, or QoS, relating to our digital media application. Historically, we have derived a small percentage of our net revenue
from our proprietary products.



Government Regulations



The telecommunications industry in the PRC is heavily regulated.
The Ministry of Information Industry, which is the primary telecommunications industry regulator in the PRC, is responsible for
formulating policies and regulations for the telecommunications industry including on matters such as tariffs and service quality,
granting telecommunications licenses, allocating frequency spectrum and numbers, formulating interconnection and settlement arrangements
between telecommunications operators, and enforcing industry regulations. Telecommunications operators are subject to various
regulatory requirements and failure to comply with such requirements may subject them to mandatory penalties or other punitive
measures, any of which could have a material adverse effect on their operations and financial condition.



Organizational Structure



The following chart illustrates our organizational
structure as of December 31, 2011:



29











30







The following table sets forth our significant subsidiaries
as of December 31, 2011:



|Name of company                                                                       |  | Place of incorporation or establishment |  | Attributable equity interest held |   |  | Principal activity                                                                                                                        
|------------------------------------------------------------------------------------- |  | --------------------------------------- |  | --------------------------------- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Comloca Technology (Shenzhen) Company Limited (“Comloca”)                             |  | PRC                                     |  | 100                               | % |  | Location-based search business                                                                                                            
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Comtech Broadband Corporation Limited (“Comtech Broadband”)                           |  | Hong Kong                               |  | 70                                | % |  | Sales of electronics components and related products                                                                                      
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Comtech Communication Technology (Shenzhen) Company Limited (“Comtech Communication”) |  | PRC                                     |  | 100                               | % |  | Sales of electronics components and related products                                                                                      
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Comtech International (Hong Kong) Limited (“Comtech Hong Kong”)                       |  | Hong Kong                               |  | 100                               | % |  | Sales of electronics components and related products                                                                                      
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Comtech Software Technology (Shenzhen) Company Limited (“Comtech Software”)           |  | PRC                                     |  | 100                               | % |  | Sales of electronics components and related products and research and development of software products                                    
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Epcot Multimedia Technology (SZ) Co. Ltd. (“Epcot”)                                   |  | PRC                                     |  | 100                               | % |  | Provision of media communication and collaboration platforms and solutions                                                                
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Shenzhen Comtech International Limited (“Shenzhen Comtech”)                           |  | PRC                                     |  | 100                               | % |  | Sales of electronics components and related products (note a)                                                                             
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Shanghai E&T System Company Limited (“Shanghai E & T”)                                |  | PRC                                     |  | 100                               | % |  | Sales of electronics components and related products (note a)                                                                             
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Shenzhen Huameng Software Company Limited (“Huameng PRC”)                             |  | PRC                                     |  | 100                               | % |  | Provision of technology and engineering services, outsourcing, network system integration and related training and maintenance services   
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Viewtran Technology (Shenzhen) Co., Limited (“Viewtran PRC”)                          |  | PRC                                     |  | 100                               | % |  | Provision of media communication and collaboration platforms and solutions                                                                
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Comtech Digital Technology (Hong Kong) Limited (“Comtech Digital”)                    |  | Hong Kong                               |  | 60                                | % |  | Sales and development of digital and industrial applications, microcontrollers and complementary products                                 
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Comtech Industrial (Hong Kong) Limited (“Comtech Industrial”)                         |  | Hong Kong                               |  | 100                               | % |  | Sales and development of industrial applications, microcontrollers and complementary products                                             
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Mega Sky (Shenzhen) Limited (“Mega Sky SZ”)                                           |  | PRC                                     |  | 100                               | % |  | Provision of industrial and microcontroller based system solutions and research and development of software products                      
|                                                                                      |  |                                         |  |                                   |   |  |                                                                                                                                           
|Mega Smart (Shenzhen) Limited (“Mega Smart SZ”)                                       |  | PRC                                     |  | 100                               | % |  | Provision of industrial and microcontroller based system solutions on customer, industrial, automotive, smart meter and smart grid markets



31







| | Note a | The Company
                                                                                  exercises its control over Shenzhen Comtech,
                                                                                  which in turn, has 95% equity interest in Shanghai
                                                                                  E&T, through legal arrangements between
                                                                                  Comtech (China) Holding Limited (“Comtech
                                                                                  China”), a wholly-owned subsidiary of
                                                                                  the Company, and Shenzhen Comtech’s legal
                                                                                  shareholders (“Legal Shareholders”),
                                                                                  Jeffrey Kang, CEO of the Group, Huimo Chen,
                                                                                  the mother of Jeffrey Kang, and Honghui Li,
                                                                                  the Vice President of the Group. In 2006, Jeffrey
                                                                                  Kang executed an agreement to transfer his 99%
                                                                                  equity interest in Shenzhen Comtech to Honghui
                                                                                  Li. The Legal Shareholders agreed to hold the
                                                                                  equity interest in Shenzhen Comtech on behalf
                                                                                  of Comtech China, and waived their full rights
                                                                                  and risks of ownership of the equity interests
                                                                                  in favor of Comtech China.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The legal shareholders of Shanghai E&T is Shenzhen
Comtech and Honghui Li with equity interests of 95% and 5% respectively. Honghui Li entered into and is bound by similar legal
arrangements with Comtech China relating to his holding of 5% equity interest in Shanghai E&T on behalf of Comtech China waiving
his full rights and risks of ownership of the equity interests in favor of Comtech China.



Property, plant and equipment



We lease properties with
a total area of approximately 160,000 square feet in 22 locations in the PRC including Shenzhen, Shanghai, Beijing, Hangzhou,
Wuhan, Suzhou, Chengdu, Nanjing, Xi’an, Taiwan and Hong Kong. Approximately 22,000 square feet is for our corporate headquarters
located in Shenzhen, approximately 54,000 square feet is for our research and development centers in Shenzhen and Shanghai, approximately
62,000 square feet is for our representative offices located in the other cities, and approximately 22,000 square feet is used
for manufacturing of our proprietary lightning protection product for wireless base stations. These leases have remaining terms
ranging from 2 to 30 months.



As of December 31, 2011,
the Group has entered into a land use right agreement with the PRC government in Shenzhen. The Group has paid RMB19.3 million
(USD3.1 million) as deposit for the purchase of land use right. Pursuant to the land use right agreement, the Group is required
to develop on the piece of land a new headquarter for research and development purposes for the Group and the Group is required
to contribute a minimum of RMB500 million (USD79.4 million) for the land development.



We believe that our existing
facilities and equipment are well maintained and in good operating condition, and are sufficient to meet our needs for the foreseeable
future.



ITEM 4A. UNRESOLVED STAFF COMMENTS



None.



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS



The following discussion of our financial condition and results
of operations should be read in conjunction with our audited consolidated financial statements and the notes to those financial
statements appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that involve significant
risks and uncertainties. As a result of many factors, such as those set forth under “Forward Looking Statements” and
“Item 3D. Risk Factors” and elsewhere in this Annual Report, our actual results may differ materially from those
anticipated in these forward-looking statements.



Overview



We provide customized module design solutions
for a diverse set of applications and end markets, serving as a gateway for our technology component suppliers to access leading
electronics manufacturers in the PRC. Our customized module design solutions allow our customers to take advantage of technology
components from reputable suppliers in an efficient and cost-effective manner, effectively reducing their time-to-market and lowering
their overall costs. Our close collaboration with our customers’ product development teams provides us with a unique understanding
of their needs, enabling us to customize our suppliers’ technology components with module designs that meet our customers’
requirements. In addition, we offer technology and engineering services as well as software design services in the PRC.



32







We focus on the digital media, telecommunications
equipment and industrial business end-markets in the PRC. In the digital media end-market, we provide mobile handset and module
solutions for functionalities such as CMMB mobile TV, motion sensor, camera, power supply and Bluetooth as well as solutions for
high definition digital set-top box, GPS and solutions for Tablet. In the telecommunications equipment end-market, we provide
solutions for PSTN switching, optical transmitters, electrical signal processing and optical signal amplification; in the industrial
business end-market, we provide industrial solutions for the green energy, auto-electronics and health care sectors. Currently,
we have approximately1,800 customers, including many of the most established manufacturers in the digital media, telecommunications
equipment and industrial business end-markets in the PRC such as ZTE, TCL and BYD. We work with original equipment manufacturers,
or OEMs, as well as subsystem designers and contract manufacturers to provide solutions to support industry leader like Huawei.
In developing customized module design solutions for use in our customers’ products, we collaborate closely with over 30
suppliers of technology components, including many large multinational companies such as Broadcom, Matsushita, Sandisk and Atmel.
Additionally, in October 2006, we became one of the first PRC-based companies to license software technology and have access to
selected source codes directly from Microsoft.



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



Principal Factors Affecting Our Results
of Operations



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



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



Growth in end-market industries.
The rapid growth of the domestic telecommunications equipment, industrial business and digital media end-markets have been important
growth drivers for PRC’s electronics manufacturing industries. Specific markets that we expect to experience continued growth
are the data communications market, consisting of asymmetric digital subscriber line (ADSL) modems and Voice over Internet Protocol
(VoIP) equipment; the routers and network security equipment markets; the optical transmission systems market; the fixed line
telecommunications network market, as well as the digital media market particularly relating to digital TV and GPS. Increased
domestic consumer spending power has contributed to rapid growth in these markets. This growth in domestic consumer spending power
in turn has driven, and we believe will continue to drive, growth in the electronics manufacturing businesses supporting hardware
OEMs, including those engaged in the customized design of module solutions such as ourselves. However, these industries and the
respective domestic manufacturers that operate in these industries may not continue to grow their sales at historical levels,
if at all. The stagnation or reduction in overall demand for telecommunications equipment, industrial business and digital media
products could materially affect our results of operations.



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



Growth by entering new end-markets,
strengthening in-house capabilities and leveraging our customer base. In 2008, we began targeting the industrial business
end-market by providing industrial solutions for the green energy and auto-electronics sectors. Since then the revenues generated
from this market have grown from 4.5% of our 2008 revenue to 20.6% of our 2011 revenue. We anticipate that sales related to the
industrial business end-markets will generally have higher profit margins than our digital media and telecommunications equipment
modules related sales, though such higher margins may decline over time as this industry matures. We will also look for opportunities
to expand into new end-markets that we believe represent significant growth opportunities.



33







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



General economic and market conditions.Due to market conditions, the level of consumer and information technology spending has declined and reduced the demand for
our mobile handsets since the third quarter of 2008. Furthermore, our profit margins have been reduced since we strategically
lowered our pricing in order to grow the business in a slowing economic environment.



Net Revenue



Product sales



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



Our broad and diversified customer base
includes many of the major telecommunications equipment, industrial business and digital consumer electronics manufacturers in
the PRC. In addition, our customers include industry participants supporting these OEMs, such as subsystem designers and contract
manufacturers in the PRC, as well as international manufacturers who have begun to manufacture end-products in the PRC for the
domestic and international market. Our two largest customers from the telecommunications equipment industry in terms of 2011 net
revenue were ZTE and Wuhan Research Institute of Post & Telecommunications, a major telecommunications equipment manufacturer
in the PRC. Our largest customers in the digital media end-market in terms of 2011 net revenue was ZTE and Skyworth Digital, two
of the leading digital set up box manufacturers in the PRC and T&W Electronics, a major broadband terminal equipment and digital
consumer electronic provider in the PRC. Our largest customer from the industrial end-market in terms of 2011 net revenue was
BYD, a leading high-tech enterprise in the PRC specializing in information technology, automobile and new energy. During 2011,
ZTE, T&W Electronics, Wuhan Research Institute of Post & Telecommunications, Yulong and TCL, accounted for 29.3%,
7.2%, 4.4%, 4.0% and 2.5% of our net revenue, respectively.



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



Service Revenue



We provide technology and engineering
services, and related training and maintenance services to our customers. We generate revenue when our services are rendered and
acknowledged by our customers. Our service revenue is net of business tax.



Cost of Sales



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



34







Cost of Goods Sold



Cost of goods sold primarily consists
of the purchase of components from suppliers. We develop our customized module design solutions based on specific technology components
purchased from suppliers in our target end-markets. Our list of over 30 key suppliers includes Broadcom (integrated circuit and
Bluetooth), Matsushita (switches), Sandisk (Flash memory), Freescale Semiconductor (automotive solutions) and Atmel (industrial
solutions). We typically make purchases from our suppliers only after we have received customer orders, enabling us to maintain
adequate inventory levels and, in turn, minimize risks typically associated with holding excessive inventory. During 2011, based
on cost of sales, we purchased approximately 41.1%, 8.1%, 7.8% and 7.8% of the components sold to our customers from Broadcom,
Freescale Semiconductor, Atmel and its affiliated entities and Sandisk, respectively. If we lose a key supplier, or a supplier
reduces the quantity of products it sells to us, does not maintain a sufficient inventory level of products required by us or
is otherwise unable to meet our demands for its components, we may have to expend significant time, effort and other resources
to locate a suitable alternative supplier and secure replacement components. Even if we are able to find a replacement supplier,
we may be required to redevelop the customized module design solution to effectively incorporate the replacement components.



Cost of Services



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



Operating Expenses



Selling, General and Administrative
Expenses



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



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



Research and Development Expenses



Research and development expenses consist
primarily of salaries and related costs of the employees engaged in research, design and development activities; the costs for
design and testing; the cost of parts for prototypes; equipment depreciation; and third party development expenses. We expense
research and development expenses as they are incurred. As of December 31, 2011, we had approximately 370 engineers and other
technical employees engaged in research and development related activities to develop new customized module design solutions targeted
at the telecommunications equipment, industrial business and digital media industries. As a result of additional costs incurred
in developing new customized module design solutions, research and development expenses were higher in 2011 than they were in
2010, and we expect that our research and development expenses, including those relating to the planned hiring of additional research
and development personnel, will increase in the future as we seek to expand our business by developing new customized module design
solutions and penetrating new end-markets, and as we seek to grow our engineering services business.



Noncontrolling Interest



Noncontrolling interest consisted of 40%
and 30% of the outstanding equity interest in Comtech Digital and Comtech Broadband, respectively. For the year ended December 31,
2011, approximately 54.5% of our total net revenue was generated through Comtech Broadband. Comtech Digital generated 3.1% of
our total net revenue for the year 2011.



Taxation



We and our subsidiaries file separate
income tax returns.





35







USA



Cogo Maryland was incorporated in the
United States, and was subject to United States federal income taxes. On August 4, 2011, Cogo Maryland redomesticated from the
State of Maryland, USA, to the Cayman Islands, through a redomestication merger with and into its indirect wholly owned subsidiary,
Cogo Group Cayman, Inc., a company formed on April 12, 2011 under the laws of the Cayman Islands (“Cogo Cayman”).
Assuming (as discussed below) that Cogo Cayman will be treated as a U.S. corporation for U.S. federal income tax purposes, Cogo
Maryland should not recognize gain or loss as a result of the redomestication merger.



Section 7874(b) of the Code generally
provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant to a plan or series
of related transactions, substantially all of the assets of a corporation organized in the United States, will be treated as a
U.S. corporation for U.S. federal income tax purposes if (i) the acquiring corporation, together with all corporations connected
to it by a chain of greater than 50% ownership by vote and value (the “expanded affiliated group”), does not have
substantial business activities in the country in which the acquiring corporation is organized, compared to the total worldwide
business activities of the expanded affiliated group, and (ii) shareholders of the acquired corporation, by reason of owning shares
of the acquired corporation, own at least 80% of either the voting power or the value of the stock of the acquiring corporation
after the acquisition (ignoring for this purpose certain shares of the acquiring corporation held by members of its expanded affiliated
group and, pursuant to temporary regulations under Sections 7874, counting as shares certain options or warrants). If Section
7874(b) were to apply to the redomestication merger, then Cogo Cayman, as the surviving entity, would be subject to U.S. federal
income tax on its worldwide taxable income following the redomestication merger as if it were a U.S. corporation, and Cogo Maryland
should not recognize gain (or loss) as a result of the redomestication merger for U.S. federal income tax purposes.



After the completion of the redomestication
merger, it is not expected that any shares of Cogo Cayman would be held by any member of an expanded affiliated group that includes
Cogo Cayman. In addition, after the redomestication merger, as a result of which Cogo Cayman directly acquired all of the assets
of the Cogo Maryland, it is expected that the former stockholders of Cogo Maryland (including option or warrant holders treated
as owning shares of common stock of Cogo Maryland pursuant to the temporary regulations under Section 7874) should be considered
to own, by reason of owning (or being treated as owning) stock of the Cogo Maryland, more than 80% of the voting power and the
value of Cogo Cayman’s ordinary shares (including any options or warrants treated as ordinary shares of Cogo Cayman pursuant
to the temporary regulations promulgated under Section 7874). Moreover, after the redomestication merger, it is expected that
the expanded affiliated group that would include Cogo Cayman will not conduct any substantial business activities in the Cayman
Islands as compared to the total worldwide business activities of such expanded affiliated group. Accordingly, it is expected
that Section 7874(b) should apply and that Cogo Cayman would be treated as a U.S. corporation for U.S. federal income tax purposes. 
However, due to the absence of full guidance on how the rules of Section 7874(b) will apply to the transactions contemplated by
the redomestication merger (and the subsequent operations of Cogo Cayman, as well as members of its expanded affiliated group),
this result is not entirely free from doubt. If, for example, Section 7874(b) were determined not to apply to the redomestication
merger, and Cogo Cayman were treated as a foreign corporation for U.S. federal income tax purposes as a result of the redomestication
merger, then, among other things, the Cogo Maryland would be required to recognize gain (but not loss) under Section 367 of the
Code equal to the excess, if any, of the fair market value of each of its assets over such asset’s adjusted tax basis at
the effective time of the redomestication merger.



Cayman Islands and British Virgin Islands



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



Hong Kong



Our subsidiaries that are incorporated
in Hong Kong are subject to Hong Kong Profits Tax. The applicable profits tax rate is 16.5% for 2009, 2010 and 2011. The payments
of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.



36







PRC



On March 16, 2007, the National People’s
Congress passed the Corporate Income Tax law (the “CIT law”) which revised the PRC statutory income tax rate to 25%.
The CIT law was effective on January 1, 2008. Accordingly, our PRC subsidiaries are subject to income tax at 25% effective
from January 1, 2008 unless otherwise specified.



Prior to January 1, 2008, Shenzhen
Comtech International Limited (“Shenzhen Comtech”), Comtech Communication Technology (Shenzhen) Company Limited (“Comtech
Communication”), Comtech Software Technology (Shenzhen) Company Limited (“Comtech Software”), Comloca Technology
(Shenzhen) Company Limited (“Comloca”), Epcot Multimedia Technology (SZ) Co. Ltd. (“Epcot”), Shenzhen
Huameng Software Company Limited (“Huameng PRC”) and Viewtran Technology (Shenzhen) Co., Limited (“Viewtran
PRC”) (collectively the “Shenzhen Subsidiaries”), being entities located in the Shenzhen Special Economic Zone,
were entitled to the preferential tax rate of 15%. In addition, the Shenzhen Subsidiaries, being production oriented foreign investment
enterprises, were each entitled to a tax holiday of two-year tax exemption followed by three-year 50% tax reduction starting from
the first profit making year from the PRC tax perspective (“2+3 tax holiday”) under the then effective tax regulations.



The CIT law and its relevant regulations
provide a five-year transition period from January 1, 2008 for those companies which were established before March 16,
2007 and were entitled to preferential lower tax rates under the then effective tax regulations, as well as grandfathering certain
tax holidays. The transitional tax rates are 18%, 20%, 22%, 24% and 25% for 2008, 2009, 2010, 2011 and 2012 onwards, respectively.



Accordingly, the Shenzhen Subsidiaries
are entitled to enjoy the transitional rates and continue their tax holidays until they expire. For Comloca and Huameng PRC, they
had not commenced their respective tax holidays as of December 31, 2007 and CIT law and its relevant regulations require
their tax holidays to begin on January 1, 2008.



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



| | • |  | Shenzhen Comtech and Comtech Communication are subject to income tax
    at 20%, 22%, 24% and 25% for 2009, 2010, 2011 and 2012 onwards, respectively.                                                                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • |  | Comtech Software is subject to income tax at 10%, 22%, 24% and 25% for
    2009, 2010, 2011 and 2012 onwards, respectively.                                                                                                                                                                
| | • |  | Comloca and Huameng PRC were tax exempt for 2009. They are subject to
    income tax at 11%, 12%, 12.5% and 25% for 2010, 2011, 2012 and 2013 onwards, respectively.                                                                                                                       
| | • |  | Viewtran PRC and Epcot are subject to income tax at 10%, 11%, 12% and
    25% for 2009, 2010, 2011 and 2012 onwards, respectively.                                                                                                                                                         
| | • |  | Mega Sky SZ and Mega Smart SZ, being software and integrated circuit
    design enterprises, are each granted a 2+3 tax holiday during 2010. As a result, they are tax exempt for 2010 and 2011, and
    are subject to income tax at 12.5% from 2012 to 2014 and at 25% from 2015 onwards.



In addition, in 2011, Shanghai E&T
System Company Limited, Shanghai Comtech Electronic Technology Limited, Keen Awards Beijing Limited, R&E Microelectronics
(Shenzhen) Company Limited, Comtech Digital Technology (Shenzhen) Limited, Chengdu Comtech Communication Technology Company Limited,
Wuhan Comtech Communication Technology Company Limited, Hangzhou Mega Sky Communication Technology Company Limited and Nanjing
Youyingjie Technology Company Limited are subject to the corporate income tax of 25% under the CIT law.



As a result of the incentives above, our operations have historically
been subject to relatively low tax liabilities, which increase in the near future. See “Risk Factors – Our financial
results benefit from tax concessions granted by the PRC government, the change to or expiration of which would materially change
our results of operations.” Our effective tax rate was (8.4)%, 9.5% and 10.8% in 2011, 2010 and 2009, respectively. Included
in the income tax expense for the year ended December 31, 2011 was deferred income tax benefit of RMB4.7 million as
a result of the amortization of intangible assets of RMB28.6 million.



Basis of Presentation



On August 4, 2011, we redomesticated from
the State of Maryland, USA, to the Cayman Islands, through a redomestication merger with and into its indirect wholly owned subsidiary,
Cogo Cayman, a company formed on April 12, 2011 under the laws of the Cayman Islands. On July 25, 2011, Cogo Cayman changed its
name to Cogo Group, Inc. The consolidated financial position, results of operations and cash flows for all periods
presented that arose prior to August 4, 2011 relate to those of Cogo Maryland.



37







In the July 2004 share exchange with Trident,
the stockholders of Comtech Cayman received in exchange for our business approximately 91.2% of the then-outstanding common stock
of Trident. This share exchange transaction was accounted for as a reverse acquisition in which Comtech Cayman was deemed the
accounting acquirer and Trident was deemed the legal acquirer. In connection with the share exchange, we changed our name to Comtech
Group, Inc. from Trident. On May 13, 2008, we changed our name to Cogo Group, Inc.



As a result of the share exchange transaction:



| | • |  | the historical financial statements of Trident for periods prior to
    the date of the share exchange transaction are no longer presented;                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • |  | the historical financial statements for periods prior to the date of
    the transaction are those of Comtech Cayman, as the accounting acquirer;           
| | • |  | all references to the financial statements apply to the historical financial
    statements of Comtech Cayman prior to the transaction; and                 
| | • |  | the number of our ordinary shares have been restated retroactively to
    reflect the share exchange ratio as at the date of the share exchange transaction.



In order to exercise control over Shenzhen
Comtech (a PRC operating company legally permitted to engage in a commodity trading business), without direct shareholding by
us (a U.S.-listed company and therefore a foreign-invested entity), Honghui Li, our vice president, and Huimo Chen, the mother
of Jeffrey Kang, our chief executive officer, through contractual agreements exercise control over Shenzhen Comtech, which in
turn owns a controlling interest in Shanghai E&T. Under these contractual agreements, we enjoy voting control and are entitled
to the economic interests associated with their equity interest in Shenzhen Comtech and Shanghai E&T. For additional details
regarding these contractual agreements, see “Item 7B. Related Party Transactions.”



Critical Accounting Policies and Estimates



The preparation of our consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenue and
expenses. These estimates are based on our historical experience and on various other assumptions that we believe to be reasonable.
Estimates are evaluated on an ongoing basis, but actual results may differ from these estimates.



Critical accounting policies are those
that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Those
that require significant judgments and estimates include:



Business Combinations. In 2009,
we acquired 100% equity interest in Mega Smart. Prior to 2009, our significant acquisitions included the acquisition of a 70%
equity interest in Long Rise, the acquisition of the remaining 45% equity interest in Comtech Broadband, the acquisition of 100%
equity interest in Keen Awards which the consideration payable was contingent upon achieving certain agreed earning levels over
an agreed measurement period, and the acquisition of the 100% equity interest in Viewtran. In 2011, we acquired 100% equity interest
in MDC.



We have adopted ASC 805, Business Combinations,in connection with the acquisition of Mega Smart in 2009, and SFAS No. 141, Business Combinations, in connection
with the acquisitions prior to 2009. For our acquisitions, we allocate the cost of an acquired entity to the assets acquired and
the liabilities assumed based on their estimated fair value on the date of acquisition. This process is commonly referred to as
the purchase price allocation. As part of the purchase price allocation, we are required to determine the fair value of any identifiable
intangible assets acquired. The determination of the fair value of the intangible assets acquired involves certain judgments and
estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future.
A change in the amount allocated to identifiable intangible assets would have an offsetting effect on the amount of goodwill recognized
from the acquisition and would change the amount of amortization expense recognized related to those identifiable intangible assets.



38







The fair values of our identifiable intangible
assets were determined by us with inputs from our independent appraisers using mainly the income approach. Future cash flows are
predominately based on the historical pricing and expense levels, taking into consideration the relevant market size, growth factors
and expected industry growth. The resulting cash flows are then discounted at a rate approximating our weighted average cost of
capital.



Valuation of Long-Lived Assets.We
assess the impairment of long-lived assets, which include goodwill, identifiable intangible assets, and property and equipment
(“P&E”), at least
annually for goodwill or whenever events or changes in circumstances indicate that the carrying value may not be recoverable for
all long-lived assets. Changes in the underlying business could adversely affect the fair value of the enterprise and intangible
asset and P&E asset groups. Important factors which could require an impairment review include: (i) underperformance
relative to expected historical or projected future operating results; (ii) changes in the manner of use of the assets or
the strategy for our overall business; (iii) negative industry or economic trends; (iv) our enterprise fair value relative
to net book value.



Our impairment evaluation of identifiable
intangible assets and P&E includes an analysis of estimated future undiscounted net cash flows expected to be generated by
the assets over their remaining estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to
recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment loss in the amount
by which the carrying value of the assets exceeds the fair value. We determine fair value based on either market quotes, if available,
or discounted cash flows using a discount rate commensurate with the risk inherent in our current business model for the specific
asset being valued. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated
with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. If, as a result
of our analysis, we determine that our amortizable intangible assets or other long-lived assets have been impaired, we will recognize
an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could
have a material negative effect on our results of operations.



Our impairment evaluation of goodwill
is based on comparing the fair value to the carrying value of our reporting units. The reporting units’ fair value is measured
using a combination of the market and income approaches. If we fail to deliver new products, if the products fail to gain expected
market acceptance, or if market conditions fail to materialize as anticipated, our revenue and cost forecasts may not be achieved
and we may incur charges for goodwill impairment, which could be significant and could have a material negative effect on our
results of operations. Please refer to “Impairment loss of goodwill” under “Results of operations” below
for details of impairment loss of goodwill recorded in the current year.



The net book values of these tangible
and intangible long-lived assets at December 31, 2011 and 2010 were as follows:



|                            |  | Years ended December 31, |     
|--------------------------- |  | ------------------------ | ----
|                            |  | 2011                     |     
|                            |  | Amount                   |     
|                            |  | (in millions)            |     
|Property and equipment, net |  | USD                      | 2.8 
|Goodwill                    |  |                          | —   
|Intangible assets, net      |  |                          | 24.5
|                            |  |                          |     
|Total net book value        |  | USD                      | 27.3



Allowance for Doubtful Accounts.
We establish an allowance for doubtful accounts primarily based upon the age of receivables and factors surrounding the credit
risk of specific customers. We generally do not require collateral or other security from our customers. As of December 31,
2011, our accounts receivable balance was RMB1,017.4 million (USD161.7 million), net of a RMB75.6 million (USD12.0 million) allowance
for doubtful accounts. As our business grows, we expect our accounts receivable balance to increase, as could our allowance for
doubtful accounts. If the financial condition of our customers deteriorates, our uncollectible accounts receivable could exceed
our current or future allowances.





39









Share-based Compensation. We applied
ASC 718, Compensation—Stock Compensation. ASC 718 requires that all share-based compensation be recognized as an
expense in the consolidated financial statements and that such cost be measured at the fair value of the award and requires compensation
cost to reflect estimated forfeitures. The determination of the fair value of share-based compensation awards on the date of grant
using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective
variables, including our expected stock price volatility over the term of the awards, actual and projected share option exercise
behaviors, risk-free interest rate and expected dividends. Furthermore, we estimate forfeitures at the time of grant and record
share-based compensation expense only for those awards that are expected to vest. If actual forfeitures differ from those estimates,
we revise the estimates used in subsequent periods which will affect the amount of employee share-based compensation expenses
we recognize in our consolidated financial statements. ASC 718 was adopted using the modified prospective method of application.
Under this method, we record share-based compensation expense for awards granted prior to, but not yet vested as of January 1,
2006 and for share-based awards granted after January 1, 2006. Compensation cost is recognized on a straight line basis over
the requisite service period, which is generally the same as the vesting period. Since the adoption of ASC 718, we have only granted
equity share unit and performance shares to minimize the level of estimation. Our share-based compensation expense for the years
ended December 31, 2011 and 2010 was RMB66.7 million (USD10.6 million) and RMB100.9 million, respectively.



We currently use authorized shares and
shares of a subsidiary to satisfy share award exercises.



Write-down for Obsolete Inventories.
We record inventory write-downs for estimated obsolescence or unmarketable inventory in an amount equal to the difference between
the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. Management
records a write-down against inventory based on several factors, including expected sales price of the item and the length of
time the item has been in inventory. If actual demand and market conditions are less favorable than those projected by management,
additional inventory write-down could be required. In that event, our gross margin would be reduced.



Taxation. We provide for income
taxes in accordance with the provisions of ASC 740, Income Taxes. Deferred tax assets and liabilities are recognized consistent
with the asset and liability method required by ASC 740. Our deferred tax assets and liabilities primarily result from temporary
differences between the amounts recorded in our consolidated financial statements and the tax basis of our assets and liabilities.



At each balance sheet date, we assess
the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some
portion, of the deferred tax assets will not be realized. A valuation allowance would be based on all available information including
our assessment of uncertain tax positions and projections of future taxable income from each tax-paying component in each jurisdiction,
principally derived from business plans and available tax planning strategies. The deferred tax asset balance is analyzed regularly
by management. Based on these analyses, we have determined that our deferred tax asset is irrecoverable and full valuation allowance
is provided as of December 31, 2011. Projections of future taxable income incorporate several assumptions of future business
and operations that are apt to differ from actual experience. If, in the future, our assumptions and estimates that resulted in
our forecast of future taxable income for each tax-paying component prove to be incorrect, the valuation allowance against our
deferred tax asset may be adjusted.



We adopted the provisions of ASC 740-10-25
and as a result, we apply a more likely than not recognition threshold for all tax uncertainties. ASC 740-10-25 only allows the
recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities.
As of December 31, 2011, all uncertain tax positions were considered to be more likely than not to be sustained upon examination
by the relevant authorities. If, in the future, our assumptions and estimates that resulted in the determination of sustainability
prove to be incorrect, a tax expense adjustment may be necessary.



Results of Operations



Year ended December 31, 2011 compared to year ended
December 31, 2010



Net Revenue.Total net revenue
increased by RMB964.9 million (USD153.3 million), or 37.3%, in 2011 when compared to 2010. The increase was mainly due to the
continued expansion in the Telecommunications equipment and Industrial business end-markets.



40







Product Sales



Details of product sales by product type
for the years ended December 31, 2011 and 2010 were as follows:





|                             |  | Years ended December 31,              |      
|---------------------------- |  | ------------------------------------- | -----
|                             |  | 2011                                  |      
|                             |  |                                       |      
|                             |  | Amount                                |      
|                             |  | (in millions, except for percentages)
|Digital media                |  | USD                                   | 238.8
|Telecommunications equipment |  |                                       | 209.4
|Industrial business          |  |                                       | 116.5
|Total product sales          |  | USD                                   | 564.7



Product sales for the year ended 2011 was RMB3,554.4 million
(USD564.7 million), or RMB999.4 million (USD158.8 million), higher than the year ended 2010. Digital media related sales increased
by RMB28.8 million (USD4.6 million), or 2%, telecommunications equipment related sales increased by RMB688.1 million (USD109.3
million), or 109.2%, and industrial business related sales increased by RMB282.5 million (USD44.9 million), or 62.7%. The increase
in product sales was mainly attributable to the increase in sales in the telecommunications equipment end-market resulting from
the increase in investments in the 3G telecommunications infrastructure in the PRC. It was also attributable to the Group’s
continued effort and strategic focus in the expansion of the industrial business end-market, the increased sales volume as a result
of growing demand from some existing customers such as ZTE and T&W Electronics,and promising new lines of business such as automotive, HDTV, smart meters, smart grid and 3G handset access. The sale
of medical equipment and components of the smart grid business resulting from the acquisition of MDC also contributed to the increase.
The contribution to total net revenue by digital media sales in 2011 increased to RMB1,503.1 million (USD238.8 million), or 42.3%
of total net revenue, from RMB1,474.3 million, or 57.0% of total net revenue in 2010. The contribution to total net revenue by
telecommunications equipment sales in 2011 increased to RMB1,318.2 million (USD209.4 million), or 37.1% of total net revenue,
from RMB630.1 million, or 24.3% of total net revenue in 2010. The contribution to total net revenue by industrial business sales
increased, from RMB450.6 million or 17.4% in 2010, to RMB733.1 million (USD116.5 million) or 20.6% in 2011.



Service Revenue. Service revenue
for the years ended December 31, 2011 and 2010 were as follows:







|                |  | Years ended December 31,              |  
|--------------- |  | ------------------------------------- | -
|                |  | 2011                                  |  
|                |  |                                       |  
|                |  | Amount                                |  
|                |  | (in millions, except for percentages) |  
|Service revenue |  | USD                                   | —



Service revenue was derived from the provision
of technology and engineering services, software design, network system integration and related training and maintenance services.
The decrease of RMB34.5 million (USD5.5 million) for the year ended December 31, 2011, as compared to same period of 2010, was
due to no longer providing services, revenue and focusing on the fast-growing telecommunications equipment and industrial business
end-markets in the year ended December 31, 2011.



Gross Profit. Gross profit was
RMB397.4 million (USD63.1 million) in 2011, an increase of RMB30.8 million (USD4.9 million), or 8.4%, when compared to RMB366.6
million in 2010. Gross margin was 11.2% in 2011, compared to 14.2% in 2010. The increase in gross profit is consistent with the
increase in sales due to the continued expansion in all end-markets during the year. The decrease in gross margin is primarily
attributable to change in revenue mix, of which the digital media and telecommunications equipment end-markets related sales had
a relatively lower margin.



41







Selling, General, Administrative, Research &
Development Expenses and allowance for doubtful accounts.Selling, general and administrative, R&D expenses, provision
for doubtful accounts, impairment loss of goodwill and intangible assets were RMB529.0 million (USD84.0 million) for the year
ended December 31, 2011, or 113.7% higher than those of the prior year. The expenses for the years ended December 31,
2011 and 2010 were as follows:





|                                                                                           |  | Years ended December 31,              |     
|------------------------------------------------------------------------------------------ |  | ------------------------------------- | ----
|                                                                                           |  | 2011                                  |     
|                                                                                           |  |                                       |     
|                                                                                           |  | Amount                                |     
|                                                                                           |  | (in millions, except for percentages) |     
|Selling expenses                                                                           |  | USD                                   | 10.3
|General and administrative expenses                                                        |  |                                       | 19.6
|R&D expenses                                                                               |  |                                       | 16.1
|Allowance for doubtful accounts                                                            |  |                                       | 0.4 
|Net gain on settlement relating to the acquisition of Long Rise before goodwill impairment |  |                                       | —   
|Impairment loss of goodwill                                                                |  |                                       | 37.6
|                                                                                           |  |                                       |     
|Total                                                                                      |  | USD                                   | 84.0



Selling, General and Administrative
Expenses.The increase in selling expenses in 2011 of RMB19.5 million (USD3.1 million), or 43.0%, was mainly attributable
to the increased staff within the sales team and the effects of salary increases in 2011 which led to increase in staff related
cost. Increased expenditures on other indirect selling expenses such as product logistics, traveling and promotion expenses as
a result of increased volume of sales transactions also contributed to the increase in selling expenses.



The decrease in general and administrative
expenses of RMB23.2 million (USD3.7 million), or 15.8%, was primarily attributable to share-based compensation cost of RMB22.1
million (USD3.5 million), as compared to share-based compensation cost of RMB61.5 million for the same period of 2010. The decrease
in general and administrative expenses was also offset in part by an increase in other general and administrative expenses such
as staff cost and office rental due to an increase in headcount as a result of our expansion in industrial business end-market
and the acquisition of MDC in January 2011.



R&D Expenses. R&D expenses
increased in 2011 by RMB23.7 million (USD3.8 million), or 30.4%, as compared to 2010. The increase was primarily attributable
to the increase in staff cost, including the increase in share-based compensation cost of RMB4.7 million (USD0.7 million),as a result of additional R&D personnel and engineers,
and research expenditures for potential new markets, such as industrial business.



Allowance for Doubtful Accounts.
Additional charge against doubtful accounts of RMB2.3 million (USD0.4 million) was made in 2011, as compared to RMB0.002 million
made in 2010. The additional charge of doubtful accounts was due to certain receivable balance being overdue in which the assessment
of recoverability is remote.



Impairment loss of goodwill.As
a result of the continued significant decline in the price of the Company’s shares of common stock in 2011, the Company’s
aggregate market value was significantly lower than the aggregate carrying value of the Company’s reporting units. Accordingly,
the Company determined that the carrying amounts of goodwill exceeded their respective implied fair values of nil and recorded
a goodwill impairment charge of RMB236.9 million (USD37.6 million). The goodwill impairment charge did not impact debt covenants
compliance under the Company’s existing credit facility.



Interest Expense.Interest expense
increased in 2011 by RMB10.7 million (USD1.7 million) or 114.2%, as compared to 2010. The increase in interest expense was attributable
to an increase in the average bank borrowing balances.



Interest Income. Interest income
in 2011 amounted to RMB14.9 million (USD2.4 million), compared to RMB14.7 million in 2010. The increase by RMB0.2 million (USD0.03
million) was mainly attributable to an increase in average term deposit as compared to 2010.



Income Tax. The effective tax rate
for 2011 was (8.4)% compared to 9.5% for 2010. The income tax expense for 2011 was contributed to significant non-deductible items
including impairment of goodwill of RMB236.9 million (USD37.6 million), offset by the transitional tax rates under the PRC CIT
law of 22% in 2010 and 24% in 2011 and the expiry of tax holiday for certain Shenzhen subsidiaries.



42







Noncontrolling Interest.Noncontrolling
interest consisted of 30% and 40% of the outstanding equity interest in Comtech Broadband and Comtech Digital. For the year ended
December 31, 2011, net income attributable to noncontrolling interest amounted to RMB7.4 million (USD1.2 million).



Net Income/(Loss) and Earnings/(Loss)
Per Share attributable to Cogo Group, Inc. As a result of the above items, net loss attributable to Cogo Group, Inc. for 2011
was RMB156.6 million (USD24.9 million), compared to net income attributable to Cogo Group, Inc. of RMB112.4 million in 2010. We
reported basic and diluted per share loss of RMB4.22 (USD0.67) for 2011, based on 37,094,995 outstanding weighted average shares,
compared to basic per share earnings of RMB3.01 for 2010, based on 37,275,427 outstanding weighted average shares, and a diluted
per share earnings of RMB2.94, based on 38,188,814 outstanding weighted average shares.



Year ended December 31, 2010 compared to year ended
December 31, 2009



Net Revenue.Total net revenue
increase RMB493.3 million, or 23.5%, in 2010 when compared to 2009. The increase was mainly due to the continued expansion in
all end-markets.



Product Sales



Details of product sales by product type
for the years ended December 31, 2010 and 2009 were as follows:



|                             |  | Years ended December 31,             |        
|---------------------------- |  | ------------------------------------ | -------
|                             |  | 2010                                 |        
|                             |  | (in millions, except for percentage) |        
|                             |  |                                      |        
|                             |  | Amount                               |        
|Digital Media                |  | RMB                                  | 1,474.3
|Telecommunications equipment |  |                                      | 630.1  
|Industrial business          |  |                                      | 450.6  
|                             |  |                                      |        
|Total product sales          |  | RMB                                  | 2,555.0



Product sales for the year ended 2010
was RMB2,555.0 million, or RMB488.2 million, higher than the year ended 2009. Digital media related sales increased by RMB207.2
million, or 16.3%, telecommunications equipment related sales increased by RMB106.2 million, or 20.3%, and industrial business
related sales increased by RMB174.8 million, or 63.4%. The increase in product sales was mainly attributable to the Group’s
continued effort and strategic focus in the expansion of the industrial business end-market, and increased sales volume, which
resulted from an increase in customer base and an increase in our product variety for all product markets offset by lower selling
prices (which attracted additional customers), particularly for mobile handset and telecommunications equipment products. The
wider variety of component solutions drove an increase in sales orders from some existing customers such as ZTE and Skyworth Digital.
The contribution to total net revenue by digital media sales in 2010 increased to RMB1,474.3 million, or 57.0% of total net revenue,
from RMB1,267.1 million, or 60.4% of total net revenue, in 2009. The contribution to total net revenue by telecommunications equipment
sales in 2010 increased to RMB630.1 million, or 24.3% of total net revenue, from RMB523.9 million, or 25.0% of total net
revenue in 2009. The contribution to total net revenue by industrial business sales increased, from RMB275.8 million or 13.2%
in 2009 to RMB450.6 million or 17.4% in 2010.



Service Revenue. Service revenue
for the years ended December 31, 2010 and 2009 were as follows:





|                |  | Years ended December 31,              |     
|--------------- |  | ------------------------------------- | ----
|                |  | 2010                                  |     
|                |  | (in millions, except for percentages) |     
|                |  |                                       |     
|                |  | Amount                                |     
|Service revenue |  | RMB                                   | 34.5





43







Service revenue was derived from the provision
of technology and engineering services, software design, network system integration and related training and maintenance services.
The increase of RMB5.1 million, or 17.3%, was mainly attributable to more sales generated from software design services in 2010,
such as Microsoft software for embedded systems, as compared to 2009.



Gross Profit. Gross profit was
RMB366.6 million in 2010, a increase of RMB65.3 million, or 21.7%, when compared to RMB301.3 million in 2009. Gross margin was
14.2% in 2010, compared to 14.4% in 2009. The increase in gross profit is consistent with the increase in sales due to the continued
expansion in all end-markets during the year. The decrease in gross margin is primarily attributable to reduced selling prices
for mobile handset and telecommunications equipment products.



Selling, General, Administrative, Research &
Development Expenses, allowance for doubtful accounts, net gain on settlement relating to the acquisition of Long Rise before
goodwill impairment and impairment loss of goodwill and intangible assets.Selling, general and administrative, R&D expenses
and allowance for doubtful accounts and were RMB247.5 million for the year ended December 31, 2010, or 8.5% higher than those
of the prior year. The expenses for the years ended December 31, 2010 and 2009 were as follows:





|                                                                                |  | Years ended December 31,              |      
|------------------------------------------------------------------------------- |  | ------------------------------------- | -----
|                                                                                |  | 2010                                  |      
|                                                                                |  | (in millions, except for percentages) |      
|                                                                                |  |                                       |      
|                                                                                |  | Amount                                |      
|Selling expenses                                                                |  | RMB                                   | 45.4 
|General and administrative expenses                                             |  |                                       | 146.5
|R&D expenses                                                                    |  |                                       | 77.9 
|Allowance for doubtful accounts                                                 |  |                                       | —    
|Net gain on settlement relating to the acquisition of Long Rise before goodwill |  |                                       | (43.7
|Impairment loss of goodwill                                                     |  |                                       | 21.4 
|Total                                                                           |  | RMB                                   | 247.5





Selling, General and Administrative
Expenses.The increase in selling expenses in 2010 of RMB10.0 million, or 28.2%, was mainly attributable to increased staff
within the sales team and the effects of salary increases in 2010 which led to an increase in staff related cost. Increased expenditures
on other indirect selling expenses such as product logistics, traveling and promotion expenses as a result of increased volume
of sales transactions also contributed to the increase in selling expenses.



The increase in general and administrative
expenses of RMB57.1 million, or 63.9%, was primarily attributable to share-based compensation cost of RMB61.5 million, including
fair value of RMB31.7 million relating to an incentive stock grant of a subsidiary, Comtech Broadband, as compared to share-based
compensation cost of RMB23.3 million for the same period of 2009. The increase in general and administrative expenses was also
contributed to a foreign currency exchange loss of RMB3.0 million for the year ended December 31, 2010, as compared to an
exchange gain of RMB14.8 million, mainly consisting of RMB14.9 million unrealized gain resulted by the appreciation of Australian
Dollars against RMB for the same period of 2009, and an increase in other general and administrative expenses such as staff cost
and office rental due to an increase in headcount as a result of our expansion in industrial business end-market and the acquisition
of Mega Smart in May 2009.



R&D Expenses. R&D expenses
increased in 2010 by RMB10.4 million, or 15.4%, as compared to 2009. The increase was primarily attributable to the increase in
share-based compensation cost of RMB4.9 million as a result of additional R&D personnel and engineers and research expenditures
spent for potential new markets, such as industrial business.



44







Allowance for Doubtful Accounts.
Additional charge for doubtful accounts of RMB0.002 million was made in 2010, as compared to RMB36.0 million made in 2009.
The additional charge for doubtful accounts was due to certain receivable balance being overdue in which the assessment of recoverability
is remote.



Impairment loss of goodwill and intangible
assets.On December 31, 2010, the selling shareholders of Long Rise and the Company agreed to a supplementary agreement
to the original share purchase agreement in which the selling shareholders of Long Rise discharged our obligation to pay the outstanding
payable for the acquisition of Long Rise and transferred the remaining 30% equity interest in Long Rise to us for no consideration
in exchange for our release of the selling shareholders of Long Rise from a certain non-compete agreement (the “Supplementary
Agreement”). At the execution of the Supplementary Agreement, the selling shareholders of Long Rise and the key employees
included in the non-compete agreement resigned from the Company. Based on the goodwill impairment review analysis resulting from
the Supplementary Agreement, a significant decline in the fair value of Long Rise was noted. The decline in fair value resulted
from the loss of key employees with market knowledge and technical expertise, in addition to the loss of key customer relationships.
The Company compared the fair value of Long Rise as a reporting unit with the carrying amount. As a result, the Company recorded
total goodwill impairment charges of RMB21.4 million related to Long Rise.



Net gain on settlement relating to
the acquisition of Long Rise before goodwill impairment.As a result of the Supplementary Agreement relating to Long Rise,
the Company recorded a net gain on settlement relating to the acquisition of Long Rise before goodwill impairment of RMB43.7 million
for the year ended December 31, 2010, with the amount consisting of RMB54.2 million relating to the release of deferred consideration
no longer payable, offset by the elimination of the non-compete agreement of RMB2.6 million and impairment losses of customer
relationships and proprietary technology of RMB7.9 million.



Interest Expense.Interest expense
increased in 2010 by RMB7.4 million or 370%, as compared to 2009. The increase in interest expense was attributable to an increase
in the average bank borrowing balances.



Interest Income. Interest income
in 2010 amounted to RMB14.7 million, compared to RMB14.5 million in 2009. The increase by RMB0.2 million was mainly attributable
to an increase in average interest rates as compared to 2009.



Income Tax. The effective tax rate
for 2010 was 9.5% compared to 10.8% for 2009. The decrease in effective tax rate was contributed by significant non-taxable items
including the net gain on settlement relating to the acquisition of Long Rise before goodwill impairment of RMB43.7 million, offset
by the transitional tax rates under the PRC CIT law of 20% in 2009 to 22% in 2010 and the expiry of tax holiday for certain Shenzhen
subsidiaries.



Noncontrolling Interest.Noncontrolling
interest consisted of 30% and 40% of the outstanding equity interest in Comtech Broadband and Comtech Digital. For the year ended
December 31, 2010, net income attributable to noncontrolling interest amounted to RMB0.7 million.



Net Income and Earnings Per Share attributable
to Cogo Group, Inc. As a result of the above items, net income attributable to Cogo Group, Inc. for 2010 was RMB112.4 million,
compared to net income attributable to Cogo Group, Inc. of RMB80.2 million in 2009. We reported basic per share earnings of RMB3.01
for 2010, based on 37,275,427 outstanding weighted average shares, and a diluted per share earnings of RMB2.94, based on 38,188,814
outstanding weighted average shares, compared to basic per share earnings of RMB2.20 for 2009, based on 36,541,037 outstanding
weighted average shares, and a diluted per share earnings of RMB2.13, based on 37,673,351 outstanding weighted average shares.



Quarterly Results of Operations



The following table presents our supplemental
selected unaudited quarterly results of operations for the eight quarters prior to and including the quarter ended December 31,
2011. You should read the following table in conjunction with our audited consolidated financial statements and related notes
contained elsewhere in this Annual Report. In our management’s opinion, we have prepared our unaudited quarterly results
of operations on substantially the same basis as our audited consolidated financial statements. Due to the evolving nature of
our business and other factors affecting our business as described under “Item 3D. Risk factors,” our results of operations
for any quarter are not necessarily indicative of results that may be expected for any future periods.



45







|                                                    |  | For the three months ended,                 |        
|--------------------------------------------------- |  | ------------------------------------------- | -------
|                                                    |  | Dec 31,                                     |        
|                                                    |  | 2011                                        |        
|                                                    |  | (in millions of RMB, except per share data) |        
|Net revenue                                         |  |                                             | 1,066.8
|Gross profit                                        |  |                                             | 96.6   
|Net income / (loss) attributable to Cogo Group Inc. |  |                                             | (225.3 
|Earnings per share                                  |  |                                             |        
|Basic                                               |  |                                             | (6.26  
|Diluted                                             |  |                                             | (6.26  



The overall increase in our net revenue
over the past two years was consistent with (1) the Group’s continued effect and strategic focus in the expansion of
the industrial business end-market, and (2) a wider variety of products (due to the various acquisitions made since 2006
which brought new businesses to the Group) generating revenue.



The gradual increase in gross profit in
the first half of 2011 was primarily attributable to an increase in industrial business related sales and increased sales volume
for mobile handset and telecommunications equipment products. As a result of reduced selling price and change in revenue mix,
gross profit was decreased in the latter half of 2011.



The decrease in our net income attributable
to Cogo Group, Inc. in the latter half of 2010 was primarily due to impairment loss of goodwill as discussed in the section of
“Results of Operations” above.





46









Recently Issued Accounting Pronouncements



Accounting Standards Update (“ASU”) 2011-11,
an update to ASC 210, Balance sheet



In December 2011, the Financial Accounting
Standards Board (“FASB”) issued ASU 2011-11, an update to ASC 210, Balance Sheet - Disclosures about Offsetting Assets
and Liabilities. The FASB issued this ASU in conjunction with the International Accounting Standards Board’s (“IASB”)
issuance of amendments to Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to International
Financial Reporting Standards (“IFRS”)7). ASU 2011-11 requires disclosures to allow investors to better compare financial
statements prepared under U.S. GAAP with financial statements prepared under IFRS while retaining the existing offsetting models
under U.S. GAAP and IFRS. For the Company, ASU 2010-11 is effective for annual periods beginning January 1, 2013 and interim periods
within those annual periods. Retrospective application is required. Since this standard impacts disclosure requirements only,
its adoption will not have a material impact on our Company’s consolidated results of operations or financial condition.



ASU 2011-05, an update to ASC 220, Comprehensive Income



In June 2011, the FASB issued ASU 2011-05,
an update to ASC 220, Comprehensive Income - Presentation of Comprehensive Income. ASU 2011-05 increases the prominence of other
comprehensive income in financial statements. ASU 2011-05 permits entity to present the components of net income and comprehensive
income in either one or two consecutive financial statements and eliminates the option in U.S. GAAP to present other comprehensive
income in the statement of changes in equity. For the Company, ASU 2011-05 is effective for fiscal years, and interim periods
within those years beginning after December 15, 2011. Retrospective application is required and early adoption is permitted. Since
the standard impacts presentation and disclosure requirements only, the adoption is not expected to have a material impact on
our Company’s consolidated results of operations or financial condition.



ASU 2011-04, an update to ASC820, Fair Value Measurements
and Disclosures



In May 2011, the FASB issued ASU 2011-04,
an update to ASC 820, Fair Value Measurements and Disclosures – Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 is issued to provide largely identical guidance about fair value measurement
and disclosure requirements with the IASB’s new IFRS 13, Fair Value Measurement. ASU 2011-04 provides guidance about how
fair value should be applied where it already is required or permitted under U.S. GAAP and most of changes are clarifications
of existing guidance or wording changes to align with IFRS 13. ASU 2011-04 requires a reporting entity to disclose a change, if
any, in valuation technique and related inputs that result from applying the ASU and to quantify the total effect, if practicable
in period of adoption. For the Company, ASU 2011-04 is effective prospectively for interim and annual periods beginning after
December 15, 2011. The adoption of this standard is not expected to have a material impact on our Company’s consolidated
results of operations or financial condition.



ASU 2010-29, an update to ASC 805, Business Combination



In December 2010, the FASB issued ASU
2010-29, Business Combination (ASC 805): Disclosure of Supplementary Pro Forma Information for Business Combination. ASU 2010-29
requires disclosure about pro forma information including revenues and earnings of the combined entity within the notes to the
financial statements and pro forma information be presented as if business combination occurred at the beginning of the prior
annual reporting period for purposes of calculating both the current and prior reporting period pro forma financial information.
ASU 2010-29 also requires that the disclosure be accompanied by narrative description of the amount and nature of material nonrecurring
pro forma adjustment. For the Company, ASU 2010-29 is effective for business combinations with effective dates on or after the
beginning of the first annual reporting period beginning on or after December 15, 2010. Prospective application is required with
early adoption permitted. The Company adopted the provisions of this standard prospectively to business combinations with effective
dates on or after January 1, 2011. Since this standard impacts disclosure requirements only, its adoption did not have a material
impact on our Company’s consolidated results of operations or financial condition.



47







Liquidity and Capital Resources



Cash Flows and Working capital



Our accounts payable cycle typically averages
approximately ten days, whereas our receivables cycle typically averages approximately three to four months. Accordingly, additional
working capital, being current assets less current liabilities, is needed to fund this timing difference.



As at December 31, 2011, we had no
material commitments for capital expenditures.



As of December 31, 2011, we had approximately
RMB572.4 million (USD90.9 million) in cash. We regularly review our cash funding requirements and attempt to meet those requirements
through a combination of cash on hand, cash provided by operations, available borrowings under bank lines of credit and factoring
facilities and possible future public or private equity offerings. At times, we may evaluate possible acquisitions of, or investments
in, businesses that are complementary to ours, which may require the use of cash. We believe that our cash, increased operating
cash flows, credit arrangements, and access to equity and debt capital markets, taken together, provide adequate resources to
fund our ongoing operating expenditures for the next 12 months. In the event that they do not, we may require additional funds
in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through
the sale of public or private equity, as well as from other sources.



As of December 31, 2011, we had working
capital of RMB1,352.3 million (USD214.9 million), including RMB572.4 million (USD90.9 million) in cash, as compared with working
capital of RMB1,446.1 million including RMB699.7 million in cash as of December 31, 2010.



Operating activities used cash of RMB147.1
million (USD23.4 million) for the year ended December 31, 2011, compared to cash used of RMB22.3 million for the year ended
December 31, 2010. The increase in cash used in operating activities for 2011 was primarily due to an increase in accounts
receivables as sales increased in the fourth quarter of 2011 which had not been settledas of year-end. For the year ended December 31, 2010, operating activities used cash of RMB22.3 million, compared
to cash used of RMB33.5 million for the year ended December 31, 2009, was primarily due to improved cash management approach by
utilizing banking facilities to factor accounts receivable.



Investing activities used RMB264.4 million
(USD42.0 million) during 2011, mainly for increase in pledged bank deposit of RMB113.9 million (USD18.1 million), payments for
acquisitions of subsidiaries, net of cash acquired of RMB140.4 million (USD22.3 million) and purchases of property and equipment
of RMB10.0 million (USD1.6 million). Investing activities used RMB292.5 million during 2010, mainly for increases in pledged bank
deposits of RMB220.4 million, payments for the acquisition of subsidiaries, net of cash acquired,of RMB65.3 million and purchases of property and equipment of RMB6.9 million.



Financing activities provided cash of
RMB288.3 million (USD45.8 million) during 2011, primarily attributable to proceeds from bank borrowings of RMB381.8 million (USD60.7
million), partly offset by purchase of treasury stock of RMB93.5 million (USD14.9 million). Financing activities provided cash
of RMB352.3 million during 2010, primarily attributable to proceeds from bank borrowings of RMB400.5 million, partly offset by
purchase of treasury stock of RMB48.2 million.



Distributions by our PRC operating companies
to us may be subject to governmental approval and taxation. Any transfer of funds from us to our PRC operating companies, either
as a shareholder loan or as an increase in registered capital, is subject to registration or approval with or by PRC governmental
authorities, including the relevant administration of foreign exchange and/or other relevant examining and approval authorities.
These limitations on the free flow of funds between us and our PRC operating companies may restrict our ability to act in response
to changing market conditions. To date, none of our PRC operating companies, including Shenzhen Comtech and Shanghai E&T,
have declared or paid dividends to us, and historically, we have not relied on such distributions for our liquidity needs. In
addition, we have not declared dividends since the share exchange transaction. Our holding companies have no business operations
and therefore the related expenses are relatively low, consisting mainly of legal, accounting and other fees and expenses associated
with being a holding company or, in the case of Cogo Group, Inc., a public company. Our major operating companies, Comtech International,
Comtech Broadband and Comtech Industrial, Hong Kong incorporated companies, and Comtech Communication, Comtech Software and Viewtran,
wholly owned foreign enterprises, are legally permitted to declare and pay dividends, enabling them to provide any funds necessary
to meet the holding companies’ limited operating expenses, although in the case of a wholly owned foreign enterprise, such
dividends would be subject to the conditions described in “Risk Factors—PRC laws and our corporate structure may restrict
our ability to receive dividend payments from, and transfer funds to, our PRC operating companies, which may negatively affect
our results of operations and restrict our ability to act in response to changing market conditions.” We do not expect restrictions
between us and our PRC operating companies to affect our liquidity and capital resources in the near future. For risks associated
with the uncertainty in our receipt of the equivalent economic interest in connection with the equity interest in Shenzhen Comtech,
see “Risk factors—PRC laws and our corporate structure may restrict our ability to receive dividends and payments
from, and transfer funds to, our PRC operating companies, which may negatively affect our results of operations and restrict our
ability to act in response to changing market conditions.”



48







Our PRC operating companies are required,
where applicable, to allocate a portion of their net profit to certain funds before distributing dividends, including at least
10% of their net profit to certain reserve funds until the balance of such fund has reached 50% of their registered capital. These
reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to equity
capital, and application to business expansion, and are not distributable as dividends. Our PRC operating subsidiaries are required,
where applicable, to allocate an additional 5% to 10% of their net profits to a statutory common welfare fund. These reserves
can only be used for specific purposes and are not distributable as dividends. For risks associated with the uncertainty in our
receipt of the equivalent economic interest in connection with the equity interest in Shenzhen Comtech or Shanghai E&T, see
“Risk factors—PRC laws and our corporate structure may restrict our ability to receive dividends and payments from,
and transfer funds to, our PRC operating companies, which may negatively affect our results of operations and restrict our ability
to act in response to changing market conditions.”



Indebtedness



We entered into several banking facilities
with Standard Chartered Bank (Hong Kong) Limited (“SCB”), Bank of China (Hong Kong) Limited (“BOC”), Guangdong
Development Bank Holdings Company Limited (“GDB”) and the Hongkong and Shanghai Banking Corporation Limited (“HSBC”).
As of December 31, 2011 and 2010, the aggregate credit limit of these facilities amounted to RMB1,431.9 million (USD227.5
million) and RMB886.2 million, respectively. These facilities include letters of guarantee, bank loans and irrevocable letters
of credit. The banking facility with BOC also included an accounts receivable factoring agreement as discussed below. The credit
limit and the respective secured deposits for the accounts receivable factoring agreement shares the same credit limit with the
banking facility with BOC.



Our banking facilities contain various
covenants, including our consolidated net borrowing ratio not exceeding 0.25 times and our Company maintaining a tangible net
worth of not less than RMB1,000.0 million (USD158.9 million). Other conditions include our Company’s Chief Executive Officer
remaining as the single largest beneficial owner of our Company and Chairman of the Board of Directors and actively involving
in the management of our Company and our Company remaining as listed in NASDAQ and retaining at least 50% equity interest in these
subsidiaries which entered into the banking facilities with the banks. As of December 31, 2011, we were in compliance with
all covenants.



As of December 31, 2011 and 2010,
the total outstanding bank borrowings amounted to RMB854.2 million (USD135.7 million) and RMB505.9 million, respectively. The
weighted average interest rate on outstanding bank borrowings as of December 31, 2011 was 2.2% (2010: 2.1%). The aggregate
amount of funds secured as pledged deposits with the respective banks at December 31, 2011 and 2010 amounted to RMB431.7
million (USD68.6 million) and RMB332.1 million, respectively.



As of December 31, 2011 and 2010,
the aggregate amount of unutilized banking facilities (including the unutilized facility amount under the accounts receivable
factoring agreement with BOC) amounted to RMB318.3 million (USD50.6 million) and RMB192.3 million, respectively.



In 2010, we entered into a factoring agreement
with BOC in which certain accounts receivable were transferred with recourse to BOC. Under the factoring agreement, BOC pays an
amount net of discount to us and collects the factored accounts receivable balances directly from customers. The discount costs
2.7% to 3.1% of the balance transferred and is included in “interest expense”. For the years ended December 31,
2011 and 2010, we received proceeds from the sale of accounts receivable amounting to RMB660.2million (USD104.9 million) and RMB455.4
million, respectively.



49







Some of our customers enter into arrangements
with their respective banks for purposes of settling their bills. Under such arrangements, we were entitled to collect the amounts
owed directly from the customers’ banks when the invoice becomes due. In certain circumstances, we have arranged to transfer
with recourse certain of our bills receivable to the bank. Under this discounting arrangement, the bank pays a discounted amount
to us and collects the amounts owed from the customers’ banks. The discount typically ranges from 1.0% to 4.5% of the balance
transferred, which is recorded as “interest expense”. For the year ended December 31, 2011, we had received proceeds
from the sales of the bills receivable amounting to RMB51.7 million (USD8.2 million), compared with RMB22.9 million for the previous
year.



Contractual Obligations and Commercial Commitments



The following table sets forth our contractual
payment obligations for operating leases and purchase obligations as of December 31, 2011:



|                            |  | Payments due by Period |      
|--------------------------- |  | ---------------------- | -----
|                            |  |                        |      
|Contractual Obligations     |  | Total                  |      
|                            |  | (in millions of RMB)   |      
|Operating lease obligations |  |                        | 17.4 
|Purchase obligations        |  |                        | 643.9
|                            |  |                        |      
|Total                       |  |                        | 661.3



Operating lease obligations consist primarily
of operating lease agreements for our office facilities, including our head office and research center in Shenzhen. Our leases
have remaining terms ranging from 3 to 30 months.



Purchase obligations consists of outstanding
purchase orders for components from our suppliers. We do not have any minimum purchase obligations with these suppliers.



As of December 31, 2011, the Group
has entered into a land use right agreement with the PRC government in Shenzhen. The Group has paid RMB19.3 million (USD3.1 million)
as deposit for the purchase of land use right. Pursuant to the land use right agreement, the Group is required to develop on the
piece of land a new headquarter for research and development purposes for the Group and the Group is required to contribute a
minimum of RMB500.0 million (USD79.4 million) for the land development.



Proposed acquisition of certain subsidiaries
of the Group by the Chief Executive Officer and Chairman



On March 15, 2012, Chief Executive Officer
and Chairman of the Company, Jeffrey Kang, proposed to the Company’s Board of Directors that he would purchase a series
of operating entities of the Group, including Comtech (China) Holding, Comtech Communication Technology (Shenzhen) Company Limited,
Comtech Communication Technology (Hong Kong) Company Limited, Comtech Software Technology (Shenzhen) Company Limited, Comtech
(HK) Holding, Comtech International (HK) Company Limited, Hong Kong JJT Limited, Alphalink Global Limited and Epcot Multimedia
Technology (Shenzhen) Limited. Under the proposal, the total purchase price is to be based on the results of an appraisal by an
independent appraisal firm. The Company’s Board of Directors has authorized the audit committee, which is comprised of the
independent directors, to review the proposed transaction.



Off-Balance Sheet Arrangements



Apart from the factoring of accounts receivable
and discounting of bills receivable discussed under “Indebtedness” and operating lease obligations discussed under
“Contractual Obligations,” we have no outstanding off-balance sheet arrangements, derivative financial instruments,
interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange
traded contracts.



50







ITEM 6. 	DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES



| | A. | Directors and senior management
| | -- | -------------------------------



The following table sets forth information
about our directors and executive officers:



|Name                      | Age | Position                                                  
|------------------------- | --- | ----------------------------------------------------------
|Jeffrey Kang              | 42  | Chief Executive Officer and Chairman of the Board         
|Yi Yuan                   | 51  | President                                                 
|Frank Zheng               | 45  | Chief Financial Officer, Treasurer, Secretary and Director
|Dr. Q.Y. Ma (1)(2)(3)     | 55  | Director                                                  
|Dr. George Mao(1)(2)(3)   | 50  | Director                                                  
|Dr. Nathan Zhang(1)(2)(3) | 47  | Director                                                  



|(1) | Member of Audit Committee                    
|--- | ---------------------------------------------
|(2) | Member of Nominating and Governance Committee
|(3) | Member of Compensation Committee             



Jeffrey Kang, Chairman of the Board and Chief Executive
Officer. Mr. Kang was a co-founder of Cogo and has served as our chief executive officer and chairman of the board since September
1999. Mr. Kang founded Shenzhen Matsunichi Electronics Co., Ltd. and Matsunichi Electronic (Hong Kong) Limited, a predecessor
of the Company, in 1995, when Matsunichi commenced operations as a distributor for Matsushita. In 1999, Mr. Kang transferred all
operations and assets of Matsunichi into our immediate predecessor. Prior to forming Matsunichi, Mr. Kang worked for Matsushita
Electronics from June 1992 to July 1995 where he was responsible for selling components to the telecommunications industry within
China. From 1998 to 1999, Mr. Kang was vice president of Shenzhen SME (Small and Medium Enterprises) Association, a non-profit
association in Shenzhen. Mr. Kang earned a B.S. degree in Electrical Engineering from South China Technology University in Guangzhou,
China.



Yi Yuan, President. Mr. Yuan has been the President
of Cogo since May 8, 2008 and was the Chief Operating Officer from April 1, 2008 through May 8, 2008. Prior to
joining Cogo, Mr. Yuan was the President of TCL Communication Technology from September 2005 to February 2008. Prior to joining
TCL, he had been in various positions at Broadcom from March 2000 to August 2005, including the Chief Representative, General
Manager and Director of Sales for Greater China and the Director of Asia business development. Prior to joining Broadcom, he was
the global business manager at Texas Instruments where he pioneered China development. Mr. Yuan received a B.S. degree from
Shanghai Jiao Tong University and obtained a M.S. degree in Electronic Engineering from Northern Illinois University.



Frank Zheng, Chief Financial Officer, Treasurer, Secretary
and Director. Mr. Zheng has been Chief Financial Officer since January 1, 2008, Treasurer and Secretary from May 2008, was
a director from January 2005 to December 2007 and was re-elected a director in December 2008. He was the vice president of travel
service for eLong, Inc., a leading online travel service company in China, from July 2000 to June 2007. Mr. Zheng was responsible
for the overall operation of eLong’s travel services. Before he joined eLong, Mr. Zheng was a senior director of travel
services with Asia.com. From 1994 through 2000, Mr. Zheng held various financial and operations positions with The Bank of New
York, The Reserve Management Corp, and Dean Witter Intercapital Company. Mr. Zheng received a B.B.A degree in Accounting from
City University of New York.



Dr. Q.Y. Ma, Director. Dr. Ma has been a director
since December 2004. Dr. Ma has been the managing director of Time Innovation Ventures, a venture capital firm, since 2000,
and served as a professor at the University of Hong Kong from 1998 to 2000. Dr. Ma was an associate professor at Columbia
University from 1994 to 2000. He has also served as a technology consultant to IBM, General Electric, TRW, Inc. and DuPont. Dr. Ma
is a co-founder and advisor of Semiconductor Manufacturing International Corp., and has served as an adviser to the Ministry of
Information Industry, Beijing Government, and a senior advisor to Zhangjiang Hi-Tech Park in Shanghai. Dr. Ma received his
Ph.D. from Columbia University, and attended the Executive Program of Stanford University’s School of Business.



Dr. George Mao, Director. Dr. Mao has been a director
since January 2008. Dr. Mao is the co-founder and has been the general manager of RYHT Asset Management Inc. since 2005.
Before co-founding RYHT, Dr. Mao was Vice General Manager of Franklin Templeton Sealand Fund Management Co. Ltd. from May
2003 to December 2004. Dr. Mao held management positions with Pin An Securities Company Inc. and China Eagle Securities Company
overseeing IPOs from September 1999 through May 2003. Dr. Mao obtained an MBA degree and a PhD degree from the University
of Western Ontario in Canada and an M.A. degree from the Chinese Academy of Sciences, Beijing. Dr. Mao sits on various boards,
including Shenzhen Cao Technology Co., Ltd. which is listed on Shenzhen Stock Exchange and Beijing Zhong Biao Fang Yuan Technology
Anti-counterfeiting Company.



51







Dr. Nathan Xin Zhang, Director.  Dr. Zhang
was elected to the board of directors on December 22, 2011. Dr. Zhang is the Managing Director of Sinocro Partners, a merchant
bank specialized in investment and advisory services with a China focus, where he has worked since 2004.  Dr. Zhang
has advised many Chinese companies on capital raises and public offerings while at Sinocro Partners.  Dr. Zhang founded
Sinocro Medical in 2008, a medical device company specialized in product licensing, manufacturing and distribution in China, where
he serves as CEO.  Dr. Zhang is on the board of directors of Ziao Xing Mobile, a NYSE listed company, and Venturepharm
Laboratories Limited, a company listed on the Hong Kong Stock Exchange.  Dr. Zhang has served as a managing director
at Delirium, a global consulting company in New York, Hong Kong and China and other Asian countries.   Dr. Zhang
also worked with KPMG and Credit Suisse First Boston in New York. Dr. Zhang received his M.D. from Tianjin Medical University, Ph.D.
from University of Pennsylvania, and MBA from the University of Chicago with a concentration in Finance and Accounting.



There are no family relationships between any of the directors
and executive officers.



| | B. | Compensation
| | -- | ------------



Compensation of Directors
and Executive Officers



For the
2011fiscal year we paid an aggregate of approximately $355,000 in cash compensation and non-share-based compensation to our executive
officers (three persons).



We paid
our three independent directors an aggregate of $104,000 in compensation for their services to the board of directors and its
committees for the 2011 fiscal year. We paid no compensation to our employee directors for their services to the board. We reimburse
all of our directors for expenses accrued in connection with their services to the board.



Retirement Benefits



Social
insurance under government mandated defined contribution plans or other similar benefits that have been set aside for our executive
officers was $4,644 for the 2011 fiscal year.



Employment Agreements



Jeffrey
Kang, Chief Executive Officer. Comtech International (Hong Kong) Limited entered into an employment agreement with Jeffrey Kang,
our Chief Executive Officer, in January 2011, which will expire in December, 2013. Pursuant to the agreement, Mr. Kang’s
annual base compensation is $120,000 in cash and 40,000 ordinary shares. Mr. Kang is eligible to receive a bonus of 80,000 ordinary
shares annually if we reach a compound annual growth rate above 20%, and he is eligible to receive an additional bonus of 80,000
ordinary shares if we reach a compound annual growth rate above 30%. Pursuant to the agreement, Mr. Kang will devote all of his
working time to his respective duties with us and will not become employed in any competitive business while employed by us or
for two years following the termination of his employment with us, and Mr. Kang will not solicit the services of any of our employees
for two years after he terminates employment with us. We may terminate Mr. Kang for cause at any time without notice, or without
cause upon 12 weeks prior written notice to Mr. Kang.



Yi Yuan,
President. Comtech Broadband Corporation Limited entered into an employment agreement with Yi Yuan, our President, in April 2009,
which expired in March 2011. Pursuant to the agreement, Mr. Yuan’s annual base compensation is $100,000 in cash and 22,666
ordinary shares. Mr. Yuan is eligible to receive a bonus of up to 26,667 ordinary shares annually if we reach a compound annual
growth rate above 30%, and he is eligible to receive an additional bonus of up to 26,667 ordinary shares annually if we reach
a compound annual growth rate above 40%. In March 2011, Mr. Yuan entered into another employment agreement with Comtech Broadband
Corporation Limited, which will expire in March 2014. Pursuant to the agreement, Mr. Yuan’s annual base compensation is
$120,000 in cash and 50,000 of our ordinary shares. Mr. Yuan is eligible to receive a bonus of 10,000 of our ordinary shares annually
if we reach a compound annual growth rate above 20%, and he is eligible to receive an additional bonus of 10,000 of our ordinary
shares annually if we reach a compound annual growth rate above 30%. Pursuant to the agreement, Mr. Yuan will devote all of his
working time to his respective duties with us and will not become employed in any competitive business while employed by us or
for two years following the termination of his employment with us, and Mr. Yuan will not solicit the services of any of our employees
for two years after he terminates employment with us. We may terminate Mr. Yuan for cause at any time without notice, or without
cause upon 12 weeks prior written notice to Mr. Yuan.



52







Frank
Zheng, Chief Financial Officer. Comtech Broadband Corporation Limited entered into an employment agreement with Frank Zheng, our
President, in January 2011, which will expire in December, 2013. Pursuant to the agreement, Mr. Zheng’s annual base compensation
is $120,000 in cash and 30,000 ordinary shares. Mr. Zheng is eligible to receive an annual bonus of 20,000 ordinary shares if
we timely file our Quarterly and Annual Reports on Forms 10-Q and 10-K, and he is eligible to receive an additional bonus of 10,000
ordinary shares annually if we reach a compound annual growth rate above 20% and he is eligible to receive an additional bonus
of 10,000 ordinary shares annually if we reach a compound annual growth rate above 30%.. Pursuant to the agreement, Mr. Zheng
will devote all of his working time to his respective duties with us and will not become employed in any competitive business
while employed by us or for two years following the termination of his employment with us, and Mr. Zheng will not solicit the
services of any of our employees for two years after he terminates employment with us. We may terminate Mr. Zheng for cause at
any time without notice, or without cause upon one month prior written notice to Mr. Zheng.



The Cogo Group, Inc. 2009 Omnibus Securities and Incentive
Plan



Our board of directors adopted the Cogo
Group, Inc. 2009 Omnibus Securities and Incentive Plan (the “2009 Plan”) on November 9, 2009. On August 4, 2011,
upon completion of the redomestication merger, the Company assumed the obligations to provide for the issuance of the Company’s
ordinary shares rather than the common stock of Cogo Maryland upon the exercise of all outstanding options to purchase shares
of Cogo Maryland common stock and all other outstanding equity awards granted under equity plans to directors, employees and consultants
under Cogo Maryland’s 2009 Incentive Plan.



Administration. The 2009 Plan is
administered by the compensation committee of our board of directors, which consists of three members of our board of directors,
each of whom is a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act and
an “outside director” within the meaning of Code Section 162(m). Among other things, the compensation committee
has complete discretion, subject to the express limits of the 2009 Plan, to determine the directors, employees and independent
contractors to be granted an award, the type of award to be granted, the number of ordinary shares subject to each award, the
exercise price of each option and base price of each SAR, the term of each award, the vesting schedule for an award, whether to
accelerate vesting, the value of the shares, and the required withholding. The compensation committee may amend, modify or terminate
any outstanding award, provided that the participant’s consent to such action is required if the action would materially
and adversely affect the participant. The compensation committee is also authorized to construe the award agreements, and may
prescribe rules relating to the 2009 Plan. Notwithstanding the foregoing, the Committee does not have any authority to grant or
modify an award under the 2009 Plan with terms or conditions that would cause the grant, vesting or exercise to be considered
nonqualified “deferred compensation” subject to Section 409A of the Code.



Grant of Awards; Shares Available for
Awards. The 2009 Plan provides for the grant of options, SARs, performance share awards, performance unit awards, distribution
equivalent right awards, restricted share awards and unrestricted share awards in an amount equal to 6,000,000 ordinary shares,
to directors, officers, employees and independent contractors of the Company or its affiliates. If any award expires, is cancelled,
or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2009 Plan.
The number of ordinary shares for which awards may be granted to a participant under the 2009 Plan in any calendar year cannot
exceed 2,400,000.



Currently, there are 58 employees and directors
who would be entitled to receive share options and/or restricted shares under the 2009 Plan. Future new hires and additional consultants
would be eligible to participate in the 2009 Plan as well. The number of share options and/or restricted shares to be granted
to executives and directors cannot be determined at this time as the grant of share options and/or restricted shares is dependent
upon various factors such as hiring requirements and job performance.



53







Share Options. Options granted under
the 2009 Plan may be either “incentive share options” (“ISOs”), which are intended to meet the requirements
for special federal income tax treatment under the Code, or “nonqualified share options” (“NQSOs”). Options
may be granted on such terms and conditions as the Committee may determine; provided, however, that the exercise price of an option
may not be less than the fair market value of the underlying shares on the date of grant and the term of the option my not exceed
10 years (110% of such value and five years in the case of an ISO granted to an employee who owns (or is deemed to own) more than
10% of the total combined voting power of all classes of capital shares of the Company or a parent or subsidiary of the Company).
ISOs may only be granted to employees. In addition, the aggregate fair market value of the ordinary shares covered by ISOs (determined
at the time of grant) which are exercisable for thefirst time by an employee during any calendar year may not exceed $100,000.
Any excess is treated as a NQSO.



Share Appreciation Rights. A SAR
entitles the participant, upon exercise, to receive an amount, in cash or share or a combination thereof, equal to the increase
in the fair market value of the underlying shares between the date of grant and the date of exercise. SARs may be granted in tandem
with, or independently of, options granted under the 2009 Plan. A SAR granted in tandem with an option (i) is exercisable
only at such times, and to the extent, that the related option is exercisable in accordance with the procedure for exercise of
the related option; (ii) terminates upon termination or exercise of the related option (likewise, the option granted in tandem
with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related option; and (iv) if the
related option is an ISO, may be exercised only when the value of the shares subject to the option exceeds the exercise price
of the option. A SAR that is not granted in tandem with an option is exercisable at such times as the compensation committee may
specify.



Performance Shares or Performance Unit
Awards. Performance share or performance unit awards entitle the participant to receive cash or ordinary shares upon attaining
specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.



Distribution Equivalent Right Awards.
A distribution equivalent right award under the 2009 Plan entitles the participant to receive bookkeeping credits, cash payments
and/or ordinary share distributions equal in amount to the distributions that would have been made to the participant had the
participant held a specified number of our ordinary shares during the period the participant held the distribution equivalent
right. A distribution equivalent right may be awarded under the 2009 Plan as a component of another award, where, if so awarded,
such distribution equivalent right will expire or be forfeited by the participant under the same conditions as under such other
award.



Restricted Share Awards or Restricted
Share Unit Award. A restricted share award is a grant or sale of ordinary shares to the participant, subject to our right
to repurchase all or part of the ordinary shares at their purchase price (or to require forfeiture of such shares if purchased
at no cost) in the event that conditions specified by the compensation committee in the award are not satisfied prior to the end
of the time period during which the ordinary shares subject to the award may be repurchased by or forfeited to us. A restricted
share unit entitles the holder to receive a cash payment equal to the fair market value of an ordinary share, or one ordinary
share for each restricted share unit subject to such restricted share unit award, if the holder satisfies the applicable vesting
requirement.



Unrestricted Share Awards. An unrestricted
share award under the 2009 Plan is a grant or sale of our ordinary shares to the participant that is not subject to transfer,
forfeiture or other restrictions, in consideration for past services rendered to us or an affiliate or for other valid consideration.



Change-in-Control Provisions. In
connection with the grant of an award, the compensation committee may provide that, in the event of a change in control, any outstanding
awards that are unexercisable or otherwise unvested will become fully vested and immediately exercisable.



Amendment and Termination. The compensation
committee may adopt, amend and rescind rules relating to the administration of the 2009 Plan, and amend, suspend or terminate
the 2009 Plan, but no amendment will be made that adversely affects in a material manner any rights of the holder of any award
without the holder’s consent, other than amendments that are necessary to permit the granting of awards in compliance with
applicable laws. We have attempted to structure the 2009 Plan so that remuneration attributable to share options and other awards
will not be subject to a deduction limitation contained in Section 162(m) of the Code.



54







As of December 31, 2011, awards representing 1,952,861 ordinary
shares had been granted under the 2009 Plan.



| | C. | Board Practices
| | -- | ---------------



Our board of directors has an audit committee,
a nominating and corporate governance committee, and a compensation committee, each established in 2005. Our board of directors
has determined that Dr. Q.Y. Ma, Mr. JP Gan and Dr. George Mao, the members of these committees during the 2011 fiscal year, are
“independent” under the current independence standards of Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock
Market, LLC and meet the criteria for independence set forth in Rule 10A(m)(3) under the U.S. Securities Exchange Act of 1934,
as amended (the Exchange Act). Our board of directors has also determined that these persons have no material relationships with
us—either directly or as a partner, shareholder or officer of any entity—which could be inconsistent with a finding
of their independence as members of our board of directors. The board of directors has determined that Dr. Nathan Zhang, who was
elected by shareholders on December 22, 2011 to replace Mr. Gan on the board of directors, is “independent” under
the current independence standards of Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and meet the criteria
for independence set forth in Rule 10A(m)(3) under the Exchange Act.   Dr. Zhang has served on the compensation committee,
the nominating and corporate governance committee and as the chairperson of the audit committee of the board of directors since
December 22, 2011.



Audit Committee



The audit committee, consisting in 2011
of Dr. Ma, Mr. Gan and Dr. Mao, oversees our financial reporting process on behalf of the board of directors. A copy of the audit
committee’s charter is available on our website at http://www.cogo.com.cn/pdf/cogo_AC_Charter.pdf.  During
2011, the audit committee met seven times and acted by written consent one time. The committee’s responsibilities include
the following functions:



| | ● | approve and retain the independent auditors to conduct
                                                                    the annual audit of our books and records;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | review the proposed scope and results of the audit;
| | - | ---------------------------------------------------

| | ● | review and pre-approve the independent auditors’
                                                                    audit and non-audited services rendered;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | approve the audit fees to be paid;
| | - | ----------------------------------

| | ● | review accounting and financial controls with the independent
                                                                    auditors and our internal auditors and financial and accounting
                                                                    staff;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | review and approve transactions between us and our directors,
                                                                    officers and affiliates;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | recognize and prevent prohibited non-audit services; and
| | - | --------------------------------------------------------

| | ● | meet separately and periodically with management and our
                                                                    internal auditor and independent auditors.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------





Nominating and Corporate Governance Committee



The nominating and governance committee,
consisting of Dr. Ma, Mr. Gan and Dr. Mao in 2011, is responsible for identifying potential candidates to serve on our board and
its committees.  A copy of the nominating and governance committee’s  charter is available on our website
at http://www.cogo.com.cn/pdf/cogo_NCGC_Charter.pdf.  The nominating and corporate governance committee acted
by written consent one time in 2011 and did not otherwise meet during 2011. The committee’s responsibilities include the
following functions:



| | ● | making recommendations to the board regarding the size
                                                                    and composition of the board of directors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | identifying and recommending to the board nominees for
                                                                    election or re-election to the board of directors, or for
                                                                    appointment to fill any vacancy;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | establishing procedures for the nomination process;
| | - | ---------------------------------------------------

| | ● | advising the board periodically with respect to corporate
                                                                    governance matters and practices, including periodically reviewing
                                                                    corporate governance guidelines to be adopted by the board
                                                                    of directors; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | establishing and administering a periodic assessment procedure
                                                                    relating to the performance of the board of directors as a
                                                                    whole and its individual members.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



55







The nominating and corporate governance
committee will consider director candidates recommended by security holders. Potential nominees to our board of directors are
required to have such experience in business or financial matters as would make such nominee an asset to the board of directors
and may, under certain circumstances, be required to be “independent”, as such term is defined under independence
standards applicable to us. Security holders wishing to submit the name of a person as a potential nominee to the board of directors
must send the name, address, and a brief (no more than 500 words) biographical description of such potential nominee to the committee
at the following address: nominating and corporate governance committee of the board of directors, c/o Cogo Group, Inc., Suite
1001, Tower C, Skyworth Building, High-Tech Industrial Park, Nanshan, Shenzhen 518057, People’s Republic of China. Potential
director nominees will be evaluated by personal interview, such interview to be conducted by one or more members of the committee,
and/or any other method the committee deems appropriate, which may, but need not, include a questionnaire. The nominating and
corporate governance committee may solicit or receive information concerning potential nominees from any source it deems appropriate.
The committee need not engage in an evaluation process unless (1) there is a vacancy on the board, (2) a director is not standing
for re-election, or (3) the committee does not intend to recommend the nomination of a sitting director for re-election. A potential
director nominee recommended by a security holder will not be evaluated any differently than any other potential nominee.



There are no differences in the manner
in which the nominating and corporate governance committee evaluates nominees for director based on whether the nominee was recommended
by a shareholder. Among other things, the nominating and corporate governance committee takes into account, when acting upon nominees,
factors such as familiarity with the industry in which we operate, experience in working with China-based companies, the relevant
expertise of its directors and director nominees, whether the director or nominee would be considered independent, the time that
the director or nominee will be able to devote to Company matters, experience with U.S. public companies, language skills and
other factors. “Diversity,” as such, is not a criterion that the committee considers. The nominating and corporate
governance committee believes that it is appropriate to include representation of senior management on our board of directors.



Compensation Committee



The compensation committee, consisting
of Dr. Ma, Mr. Gan and Dr. Mao in 2011, is responsible for making recommendations to the board of directors concerning salaries
and incentive compensation for our officers and employees and administers our share option plans. We do not have a charter for
the compensation committee. The compensation committee acted by written consent one time in 2011 but did not otherwise meet. Its
responsibilities include the following functions:



| | ● | reviewing and recommending policy relating to the compensation
                                                                    and benefits of our officers and employees, including reviewing
                                                                    and approving corporate goals and objectives relevant to the
                                                                    compensation of our chief executive officer and other senior
                                                                    officers; evaluating the performance of these officers in
                                                                    light of those goals and objectives; and setting compensation
                                                                    of these officers based on such evaluations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | administering our benefit plans and the issuance of share
                                                                    options and other awards under our share plans; and reviewing
                                                                    and establishing appropriate insurance coverage for our directors
                                                                    and executive officers;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | recommending the type and amount of compensation to be
                                                                    paid or awarded to members of our board of directors, including
                                                                    consulting, retainer, meeting, committee and committee chair
                                                                    fees and share option grants or awards; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | reviewing and approving the terms of any employment agreements,
                                                                    severance arrangements, change-of-control protections and
                                                                    any other compensatory arrangements for our executive officers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Compensation Committee Interlocks and Insider Participation



No member of our compensation committee
has at any time been an officer or employee of ours, or our subsidiaries. No interlocking relationship exists between our board
of directors or compensation committee and our board of directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.

56







| | D. | Employees
| | -- | ---------



The table below provides information as
to the total number of employees at the end of the last three fiscal years. We have no contracts or collective bargaining agreements
with labor unions and have never experienced work stoppages due to labor dispute. We consider our relations with our employees
to be good.



|                          |  | 2009 |     |  | 2010 |  |     | 2011 | 
|------------------------- |  | ---- | --- |  | ---- |  | --- | ---- | 
|Research and Development  |  |      | 237 |  |      |  | 280 |      | 
|Sales and Marketing       |  |      | 161 |  |      |  | 177 |      | 
|Administrative            |  |      | 87  |  |      |  | 103 |      | 
|Total Full-time Employees |  |      | 485 |  |      |  | 560 |      | 



We make contributions for all of our employees
in the PRC to retirement benefits based on their salaries and length of service upon retirement in accordance with a PRC government-managed
retirement plan. The mandatory insurance schemes in Shenzhen, PRC includes a pension scheme, medical insurance, work-related insurance
and unemployment insurance. The PRC government is directly responsible for the payments of benefits to these retired employees.
We are required to make contributions to the government-managed retirement plan at specified rates of the salaries, bonuses and
certain allowances of our employees, up to a maximum amount specified by the local government from time to time.



We operate a Mandatory Provident Fund Scheme
(“the MPF scheme’) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the
jurisdiction of the Hong Kong Employment Ordinance. The assets of the MPF scheme are held by independent trustees and are separated
from those of our assets. Under the MPF scheme, the employer and its employees are each required to make contributions to the
plan at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HKD20,000. Contributions to
the plan by the employee vest immediately.



Our future success will depend, in part,
on our ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel, for
whom competition is intense. Our employees are not covered by any collective bargaining agreement and we have never experienced
a work stoppage. We believe we enjoy good relations with our employees.



| | E. | Share Ownership
| | -- | ---------------



See Item 7, below.



ITEM
7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



| | A. | Major shareholders
| | -- | ------------------



The following table sets forth, as of
March 9, 2012, certain information as to the stock ownership of (1) each person known by us to own beneficially more than
five percent of our ordinary shares, (2) each of our directors, (3) each of our executive officers, and (4) our
executive officers and directors as a group. The business address of each shareholder is c/o Cogo Group, Inc. Company, Suite 1001,
Tower C, Skyworth Building, High-Tech Industrial Park, Nanshan, Shenzhen 518057, People’s Republic of China.



|                                                                |  | Number of       |            |        |            | 
|--------------------------------------------------------------- |  | --------------- | ---------- | ------ | ---------- | 
|                                                                |  | Ordinary Shares |            |        |            | 
|                                                                |  | Beneficially    |            |        | Percentage | 
|Name of Beneficial Owner                                        |  | Owned (1)       |            |        | Ownership  | 
|Jeffrey Kang, Chief Executive Officer and Chairman of the Board |  |                 | 10,351,567 | (2)(3) |            | 
|Yi Yuan, President                                              |  |                 | 183,333    |        |            | 
|Frank Zheng, Chief Financial Officer, Secretary and Director    |  |                 | 158,801    |        |            | 
|Dr. Q.Y. Ma, Director                                           |  |                 | 11,301     | (4)    |            | 
|Dr. George Mao, Director                                        |  |                 | 5,000      |        |            | 
|Dr. Nathan Zhang, Director                                      |  |                 | -          |        |            | 
|All executive officers and directors as a group (6 persons)     |  |                 | 10,721,502 |        |            | 
|                                                                |  |                 |            |        |            | 
|Principal Shareholders                                          |  |                 |            |        |            | 
|Nan Ji                                                          |  |                 | 9,721,524  | (3)(5) |            | 
|Comtech Global Investment Ltd.                                  |  |                 | 9,721,524  | (3)(5) |            | 
|Lake Union Capital Management, LLC                              |  |                 | 3,435,439  | (6)    |            | 
|Chelsun Limited                                                 |  |                 | 2,711,945  | (7)    |            | 
|Ren Investment International Ltd.                               |  |                 | 2,290,028  | (8)    |            | 



57




















| | * | Represents beneficial ownership of less than one percent of our
                                                           outstanding ordinary shares.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Beneficial ownership is determined
                                                                                                 in accordance with the rules
                                                                                                 and regulations of the SEC. In
                                                                                                 computing the number of shares
                                                                                                 beneficially owned by a person
                                                                                                 and the percentage ownership
                                                                                                 of that person, ordinary shares
                                                                                                 subject to options held by that
                                                                                                 person that are currently exercisable
                                                                                                 or exercisable within 60 days
                                                                                                 of March 9, 2012 are deemed outstanding.
                                                                                                 Such shares, however, are not
                                                                                                 deemed outstanding for the purposes
                                                                                                 of computing the percentage ownership
                                                                                                 of any other person. Except as
                                                                                                 indicated in the footnotes to
                                                                                                 the following table or pursuant
                                                                                                 to applicable community property
                                                                                                 laws, each shareholder named
                                                                                                 in the table has sole voting
                                                                                                 and investment power with respect
                                                                                                 to the shares set forth opposite
                                                                                                 such shareholder’s name.
                                                                                                 The percentage of beneficial
                                                                                                 ownership is based on 33,560,467
                                                                                                 ordinary shares outstanding as
                                                                                                 of March 9, 2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Consists of (a) 450,043
                                                                                                 ordinary shares underlying options,
                                                                                                 (b) 180,000 ordinary shares
                                                                                                 and (c)  9,721,524 ordinary
                                                                                                 shares beneficially owned by
                                                                                                 Comtech Global Investment Ltd.,
                                                                                                 over which Mr. Jeffrey Kang
                                                                                                 and his wife, Ms. Nan Ji,
                                                                                                 share voting and investment power.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Mr. Jeffrey Kang owns a 29%
                                                                                                 interest and Ms. Nan Ji a 71%
                                                                                                 interest in Comtech Global Investment
                                                                                                 Ltd. The directors of Comtech
                                                                                                 Global Investment Ltd. are Mr.
                                                                                                 Jeffrey Kang and his brother,
                                                                                                 Mr. Yi Kang who does not have
                                                                                                 an economic interest in any shares
                                                                                                 of Comtech Global Investment
                                                                                                 Ltd.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes 5,000 ordinary
                                                                                                 shares underlying options.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Mr. Jeffrey Kang and
                                                                                                 his wife, Ms. Nan Ji, share
                                                                                                 voting and investment power over
                                                                                                 the 9,721,524 ordinary shares
                                                                                                 beneficially owned by Comtech
                                                                                                 Global Investment Ltd.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Based on the Schedule 13G
                                                                                                 jointly filed by Lake Union Capital
                                                                                                 Management, LLC, Lake Union Capital
                                                                                                 Fund, LP and Michael Self on
                                                                                                 February 29, 2012.  Lake
                                                                                                 Union Capital Management, LLC
                                                                                                 is the General Partner of Lake
                                                                                                 Union Capital Fund, LP.  Michael
                                                                                                 Self is the Managing Member of
                                                                                                 Lake Union Capital Management,
                                                                                                 LLC.  The business address
                                                                                                 of Lake Union Capital Management,
                                                                                                 LLC is 601 Union Street, Suite
                                                                                                 4616 Seattle, WA 98101
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Based on the Schedule 13G
                                                                                                 jointly filed by Chelsun Limited
                                                                                                 and Wei Shen on November 29,
                                                                                                 2011, Chelsun Limited is located
                                                                                                 at Room 1318-20, 13/F, Hollywood
                                                                                                 Plaza, 610 Nathan Road, Mongkok,
                                                                                                 Kowloon, Hong Kong. Wei Shen
                                                                                                 has the sole power to vote and
                                                                                                 dispose of the shares of Chelsun
                                                                                                 Limited.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Yi Kang, Jeffrey Kang’s
                                                                                                 brother, as sole director, has
                                                                                                 sole voting and investment power
                                                                                                 over the shares owned by Ren
                                                                                                 Investment International Ltd.
                                                                                                 Yi Kang does not have an economic
                                                                                                 interest in any shares of Ren
                                                                                                 Investment International Ltd.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of March 30, 2012, there were 33,869,467
of our ordinary shares outstanding, and we had  279 shareholders of record.



| | B. | Related Party Transactions
| | -- | --------------------------



We have not proposed or been a party to
any transactions with related persons as described in Item 7B of Form 20-F since the beginning of our last fiscal year.



In the event any transaction in which we
propose to engage is a related-person transaction, our management must present information regarding the proposed related-person
transaction to the disinterested non-employee members of our board of directors for consideration and approval or ratification.
The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of
the related persons, the benefits to us of the transaction and whether any alternative transactions were available. To identify
related-person transactions in advance, we rely on information supplied by our executive officers, directors and significant shareholders.
In considering related-person transactions, the disinterested non-employee members of the board take into account the relevant
available facts and circumstances including, but not limited to (a) the risks, costs and benefits to us, (b) the impact
on a director’s independence in the event the related person is a director, immediate family member of a director or an
entity with which a director is affiliated, (c) the terms of the transaction, (d) the availability of other sources
for comparable services or products and (e) the terms available to or from, as the case may be, unrelated third parties or
to or from employees generally. In the event a director has an interest in the proposed transaction, the director must excuse
himself or herself from the deliberations and approval. The policy requires that, in determining whether to approve, ratify or
reject a related-person transaction, the disinterested non-employee members of our board of directors look at, in light of known
circumstances, whether the transaction is in, or is not inconsistent with, our best interests and our shareholders, as determined
in the good faith exercise of such directors’ discretion.



58







| | C. | Interests of Experts and Counsel
| | -- | --------------------------------



Not required.



ITEM
8.	FINANCIAL INFORMATION



| | A. | Consolidated Statements and Other Financial Information.
| | -- | --------------------------------------------------------



See Item 18.



| | B. | Significant Changes
| | -- | -------------------



None



ITEM
9.	THE OFFER AND LISTING



| | A. | Offer and Listing Details
| | -- | -------------------------



The following table sets forth, for the
calendar quarters indicated and through March 23, 2012, the quarterly high and low sale prices for our ordinary shares, as reported
on NASDAQ Global Select Market under the symbol “COGO.”



|                      |  | Shares |      
|--------------------- |  | ------ | -----
|                      |  | High   |      
|Annual Highs and Lows |  |        |      
|2007                  |  |        | 22.15
|2008                  |  |        | 15.30
|2009                  |  |        | 8.47 
|2010                  |  |        | 9.22 
|2011                  |  |        | 9.40 
|                      |  |        |      
|2010                  |  |        |      
|First Quarter         |  |        | 7.63 
|Second Quarter        |  |        | 7.89 
|Third Quarter         |  |        | 7.07 
|Fourth Quarter        |  |        | 9.22 
|                      |  |        |      
|2011                  |  |        |      
|First Quarter         |  |        | 9.40 
|Second Quarter        |  |        | 8.24 
|Third Quarter         |  |        | 5.21 
|Fourth Quarter        |  |        | 2.52 
|                      |  |        |      
|2012                  |  |        |      
|First Quarter         |  |        | 3.13 
|                      |  |        |      
|September 2011        |  |        | 2.64 
|October 2011          |  |        | 2.52 
|November 2011         |  |        | 2.42 
|December 2011         |  |        | 1.82 
|January 2012          |  |        | 2.21 
|February 2012         |  |        | 2.31 
|March 2012            |  |        | 3.13 



59







| | B. | Plan of Distribution
| | -- | --------------------



Not Applicable.



| | C. | Markets
| | -- | -------



Our ordinary shares are listed on the NASDAQ
Global Select Market under the symbol COGO. Our ordinary shares have been listed on Nasdaq since January 31, 2005.



Not Applicable.



| | D. | Dilution
| | -- | --------



Not Applicable.



| | E. | Expenses of the Issue
| | -- | ---------------------



Not Applicable.



ITEM
10.	ADDITIONAL INFORMATION



| | A. | Share Capital
| | -- | -------------



Not Applicable.



| | B. | Memorandum and Articles of Association
| | -- | --------------------------------------



Registered Office.  Our
registered office is c/o Abacus Management Limited, Ground Floor Elizabethan Square, George Town, P.O. Box 2499, Grand Cayman,
KY1-1104 Cayman Islands, or at such other place as our directors may determine.



Objects and Purposes.  There
are no limitations on the business that the Company may carry on provided that it may not be prohibited by any law as provided
by Section 7(4) of The Companies Law (2010 Revision) and the Company must be duly licensed to carry on a business for which a
license is required in the Cayman Islands.



Directors. Our articles provide
that until otherwise determined by its members in a general meeting, the number of directors shall not be less than three or be
more than nineteen. A director is not required to hold our ordinary shares as a qualification to serve as a member of the board
of directors. Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of
care and owe a fiduciary duty to the companies for which they serve. Our directors stand for reelection annually. Pursuant to
our articles, the quorum necessary for the transaction of the business of our directors may be fixed by the directors and, unless
so fixed, shall be a minimum of three directors.



Interested Transactions.
Under our memorandum and articles of association, subject to any separate requirement for audit committee approval under the applicable
rules of the exchange on which we are listed at the time or unless disqualified by the chairman of the relevant board meeting,
so long as a director promptly and adequately discloses the nature of his interest in any contract or arrangement which he is
interested in to the other directors, a director may vote, attend a board meeting or sign a document on our behalf with respect
to any contract or transaction in which he or she is interested and he or she may be counted in the quorum at such meeting.



60







Ordinary Shares. The authorized
share capital of the Company is $2 million divided into 200,000,000 shares each with a nominal or par value of $0.01 each. Each
ordinary share entitles the shareholder to one vote and rank pari passu with other ordinary shares as to voting. Directors
are elected by a majority vote as provided in memorandum and articles of association; certain other matters are decided by a majority
of those shares present and entitled to vote subject to the Companies Law which may require a special resolution which is two-thirds
of those members attending in person or by proxy.



While there is nothing under the laws of
the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of our
directors, it is not a concept that is accepted as a common practice in the Cayman Islands, and we have made no provisions in
our memorandum and articles of association to allow cumulative voting for such elections.



Variation of Share Rights.
If at any time the share capital is divided into different classes of shares the rights attached to any class may be varied with
the consent in writing of the holders of three fourths of the issued shares of that class or with the sanction of a majority of
not less than two-thirds of the shareholders passed at a separate general meeting of the holders of the shares of the class.



Dividends. Under Cayman Islands
law, our board of directors may pay dividends to our ordinary shareholders out of our profits; from our asset revaluation reserve;
from our capital redemption reserve if used for a bonus share issue; or from our share premium account, which represents the excess
of the price paid to us on issue of our ordinary shares over the par or “nominal” value of those shares, which is
similar to the U.S. concept of additional paid in capital.  However, no dividends may be paid if, after payment, we would
not be able to pay our debts as they come due in the ordinary course of business.



Charter amendments. Under
the Companies Law, our memorandum and articles of association may be amended only by a special resolution (a resolution passed
by a majority of not less than two-thirds of the members, unless a greater number is specified in a company’s articles).
Our board of directors may not effect amendments to our articles of association.



Meetings of Shareholders.
Notice of a meeting of shareholders must be given not less than nine days (exclusive of the day on which the notice is served
or deemed to be served but inclusive of the day for which the notice is given). There is no statute in the Cayman Islands permitting
shareholders to participate in meetings by way of telephone. There is English case law which may be followed by the courts of
the Cayman Islands allowing for meetings to be conducted by electronic means provided that each shareholder may be seen and heard
by all other shareholders and may see and hear all other shareholders. Meetings of shareholders, which may be within or outside
the Cayman Islands, may be called by the directors or by shareholders holding one quarter of the outstanding votes. Our articles
require an annual meeting of the members for the election of directors to be called by the directors. Meetings on short notice
may be called upon waiver or presence of all the members holding shares entitled to attend and vote thereat or their proxies.
A minimum of two shareholders must be present at the time when a general meeting of shareholders proceeds to business, and a minimum
of two members present in person or by proxy and entitled to cast a majority of votes constitutes a quorum at such meeting.



Additional information required by Item
10.B of Form 20-F is included in the section titled “Comparison of Stockholder Rights” in our Registration Statement
on Form F-4 initially filed with the SEC on May 2, 2011 (File No.: 333-173844), which section is incorporated herein by reference.



| | C. | Material Contracts
| | -- | ------------------



The information required by Item 10.C of
Form 20-F is included in the Current Reports on Form 8-K filed by us on January 28, 2010, April 29, 2010, July 9, 2010, October
20, 2010, December 15, 2010, January 3, 2011, May 16, 2011, July 20, 2011 and July 21, 2011 and the Current Report on Form 6-K
filed by us on November 11, 2011, which filings are incorporated herein by reference.



Except for the above and as otherwise described
herein, we did not enter into any other material contracts during our fiscal years ended December 31, 2010 or 2011.



61







| | D. | Exchange controls
| | -- | -----------------



Under Cayman Islands law, there are currently
no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance
of dividends, interest or other payments to nonresident holders of our ordinary shares.



| | E. | Taxation
| | -- | --------



United States Federal Income Taxation



General



The following is a summary of the
material U.S. federal income tax consequences of the ownership and disposition of our ordinary shares. As described in
“Key Information – Risk Factors – There is a risk that we could be treated as a foreign corporation for
U.S. federal income tax purposes, which could result in significantly greater U.S. federal income tax liability to us,”
this discussion assumes that we will be treated as a U.S. corporation for U.S. federal income tax purposes. All Reference
herein to “we” “us” and our” refer to Cogo Group, Inc.



The discussion below of the U.S. federal
income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares that is for U.S.
federal income tax purposes:



| | · | an
                                                                                                                                 individual
                                                                                                                                 citizen
                                                                                                                                 or
                                                                                                                                 resident
                                                                                                                                 of
                                                                                                                                 the
                                                                                                                                 United
                                                                                                                                 States;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a
                                                                                                                                 corporation
                                                                                                                                 (or
                                                                                                                                 other
                                                                                                                                 entity
                                                                                                                                 treated
                                                                                                                                 as
                                                                                                                                 a
                                                                                                                                 corporation)
                                                                                                                                 that
                                                                                                                                 is
                                                                                                                                 created
                                                                                                                                 or
                                                                                                                                 organized
                                                                                                                                 (or
                                                                                                                                 treated
                                                                                                                                 as
                                                                                                                                 created
                                                                                                                                 or
                                                                                                                                 organized)
                                                                                                                                 in
                                                                                                                                 or
                                                                                                                                 under
                                                                                                                                 the
                                                                                                                                 laws
                                                                                                                                 of
                                                                                                                                 the
                                                                                                                                 United
                                                                                                                                 States,
                                                                                                                                 any
                                                                                                                                 state
                                                                                                                                 thereof
                                                                                                                                 or
                                                                                                                                 the
                                                                                                                                 District
                                                                                                                                 of
                                                                                                                                 Columbia;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an
                                                                                                                                 estate
                                                                                                                                 whose
                                                                                                                                 income
                                                                                                                                 is
                                                                                                                                 includible
                                                                                                                                 in
                                                                                                                                 gross
                                                                                                                                 income
                                                                                                                                 for
                                                                                                                                 U.S.
                                                                                                                                 federal
                                                                                                                                 income
                                                                                                                                 tax
                                                                                                                                 purposes
                                                                                                                                 regardless
                                                                                                                                 of
                                                                                                                                 its
                                                                                                                                 source;
                                                                                                                                 or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a
                                                                                                                                 trust
                                                                                                                                 if
                                                                                                                                 (i)
                                                                                                                                 a
                                                                                                                                 U.S.
                                                                                                                                 court
                                                                                                                                 can
                                                                                                                                 exercise
                                                                                                                                 primary
                                                                                                                                 supervision
                                                                                                                                 over
                                                                                                                                 the
                                                                                                                                 trust’s
                                                                                                                                 administration
                                                                                                                                 and
                                                                                                                                 one
                                                                                                                                 or
                                                                                                                                 more
                                                                                                                                 U.S.
                                                                                                                                 persons
                                                                                                                                 are
                                                                                                                                 authorized
                                                                                                                                 to
                                                                                                                                 control
                                                                                                                                 all
                                                                                                                                 substantial
                                                                                                                                 decisions
                                                                                                                                 of
                                                                                                                                 the
                                                                                                                                 trust,
                                                                                                                                 or
                                                                                                                                 (ii)
                                                                                                                                 it
                                                                                                                                 has
                                                                                                                                 a
                                                                                                                                 valid
                                                                                                                                 election
                                                                                                                                 in
                                                                                                                                 effect
                                                                                                                                 under
                                                                                                                                 applicable
                                                                                                                                 U.S.
                                                                                                                                 Treasury
                                                                                                                                 regulations
                                                                                                                                 to
                                                                                                                                 be
                                                                                                                                 treated
                                                                                                                                 as
                                                                                                                                 a
                                                                                                                                 U.S.
                                                                                                                                 person.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A beneficial owner of shares of our ordinary
shares that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares
is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal
income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences
of the ownership and disposition of our ordinary shares applicable specifically to Non-U.S. Holders is described below under the
heading “Non-U.S. Holders.”



This summary is based on the Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are subject to change possibly on a retroactive basis
or differing interpretations.



This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.
In particular, this discussion considers only holders that own and hold our ordinary shares, as capital assets within the meaning
of Section 1221 of the Code, and does not discuss the alternative minimum tax. In addition, this discussion does not address U.S.
federal income tax consequences to holders that are subject to special rules, including:



| | · | financial institutions
                                                                                                               or financial services
                                                                                                               entities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | broker-dealers;
| | - | ---------------

| | · | persons that
                                                                                                               are subject to
                                                                                                               the mark-to-market
                                                                                                               accounting rules
                                                                                                               under Section 475
                                                                                                               of the Code;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | tax-exempt
                                                                                                               entities;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| | · | governments
                                                                                                               or agencies or
                                                                                                               instrumentalities
                                                                                                               thereof;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | insurance companies;
| | - | --------------------

| | · | regulated investment
                                                                                                               companies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | · | real estate
                                                                                                               investment trusts;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| | · | certain expatriates
                                                                                                               or former long-term
                                                                                                               residents of the
                                                                                                               United States;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | persons that
                                                                                                               actually or constructively
                                                                                                               own 5% or more
                                                                                                               of our voting shares;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | persons that
                                                                                                               acquired our ordinary
                                                                                                               shares pursuant
                                                                                                               to an exercise
                                                                                                               of employee options,
                                                                                                               in connection with
                                                                                                               employee incentive
                                                                                                               plans or otherwise
                                                                                                               as compensation;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | persons that
                                                                                                               hold our ordinary
                                                                                                               shares as part
                                                                                                               of a straddle,
                                                                                                               constructive sale,
                                                                                                               hedging, conversion
                                                                                                               or other integrated
                                                                                                               transaction; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | persons whose
                                                                                                               functional currency
                                                                                                               is not the U.S.
                                                                                                               dollar.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



62







This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws or state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of
our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status
of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made)
by us in respect of our ordinary shares and any consideration received (or deemed received) by a holder in consideration for the
sale or other disposition of our ordinary shares will be in U.S. dollars.



We have not sought, or will we seek, a
ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover,
we cannot assure you that future legislation, regulations, administrative rulings or court decisions will not adversely affect
the accuracy of the statements in this discussion.



THIS DISCUSSION IS ONLY A SUMMARY OF THE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT TAX ADVICE. EACH
HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO SUCH
HOLDER OF THE OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, AND
NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.



U.S. Holders



Taxation of Cash Distributions Paid
on Ordinary Shares



A U.S. Holder generally will be required
to include in gross income as ordinary income the amount of any cash dividend paid on our ordinary shares. A cash distribution
on such shares generally will be treated as a dividend for U.S. federal income tax purposes to the extent paid out of our current
or accumulated earnings and profits (as determined under U.S. federal income tax principles). The portion of such cash distribution,
if any, in excess of such earnings and profits generally will be applied against and reduce (but not below zero) the U.S. Holder’s
adjusted tax basis in such ordinary shares. Any remaining excess generally will be treated as gain from the sale or other taxable
disposition of such ordinary shares and will be treated as described under “— Taxation on the Disposition of Ordinary
Shares” below.



Any cash dividends we pay to a U.S. Holder
that is treated as a taxable corporation for U.S. federal income tax purposes generally will qualify for the dividends received
deduction if the applicable holding period and other requirements are satisfied. With certain exceptions, if the applicable holding
period and other requirements are satisfied, cash dividends we pay to a non-corporate U.S. Holder generally will constitute “qualified
dividends” that will be subject to U.S. federal income tax at the maximum regular tax rate accorded to long-term capital
gains for taxable years beginning before January 1, 2013, after which the regular U.S. federal income tax rate applicable to dividends
is scheduled to return to the regular U.S. federal income tax rate generally applicable to ordinary income.



If a PRC income tax applies to any cash
dividends paid to a U.S. Holder on our ordinary shares, such tax may be treated as a foreign tax eligible for a deduction from
such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal income tax liability
(subject to applicable conditions and limitations). In addition, such U.S. Holder may be entitled to certain benefits under the
Agreement between the Government of the United States of America and the Government of the People’s Republic of China for
the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “U.S.-PRC Tax Treaty”),
if such holder is considered a resident of the United States for purposes of, and otherwise meets the requirements of, the U.S.-PRC
Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction or credit for any such PRC tax and their
eligibility for the benefits of the U.S.-PRC Tax Treaty.



63







Taxation on the Disposition of Our Ordinary
Shares



Upon a sale or other taxable disposition
of our ordinary shares, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between
the amount realized and the U.S. Holder’s adjusted tax basis in such shares.



The regular U.S. federal income tax rate
on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax
at a maximum regular rate of 15% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to 20%
for taxable years beginning on or after January 1, 2013). Capital gain or loss will constitute long-term capital gain or loss
if the U.S. Holder’s holding period for the ordinary shares disposed of exceeds one year. The deductibility of capital losses
is subject to various limitations.



If a PRC income tax applies to any gain
recognized on the disposition of our ordinary shares by a U.S. Holder, such tax may be treated as a foreign tax eligible for a
deduction from such holder’s U.S. federal taxable income or a foreign tax credit against such holder’s U.S. federal
income tax liability (subject to applicable conditions and limitations). In addition, such U.S. Holder may be entitled to certain
benefits under the U.S.-PRC Tax Treaty, if such holder is considered a resident of the United States for purposes of, and otherwise
meets the requirements of, the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the deduction
or credit for any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.



Additional Taxes After 2012



For taxable years beginning on or after
January 1, 2013, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds generally will
be subject to a 3.8% Medicare contribution tax on unearned income, including, among other things, cash dividends on, and capital
gains from the sale or other taxable disposition of, our ordinary shares, subject to certain limitations and exceptions. U.S.
Holders should consult their own tax advisors regarding the effect, if any, of such tax on their ownership and disposition of
our ordinary shares.



Non-U.S. Holders



Taxation of Cash Distributions



Any cash distribution we make to a Non-U.S.
Holder of our ordinary shares, to the extent paid out of our current or accumulated earnings and profits (as determined under
U.S. federal income tax principles), generally will constitute a dividend for U.S. federal income tax purposes. Any such dividend
paid to a Non-U.S. Holder with respect to our ordinary shares that is not effectively connected with the Non-U.S. Holder’s
conduct of a trade or business within the United States, as described below, generally will be subject to U.S. federal withholding
tax at a rate of 30% of the gross amount of the dividend, unless such Non-U.S. Holder is eligible for a reduced rate of withholding
tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually
on an IRS Form W-8BEN). In satisfying the foregoing withholding obligation with respect to a cash distribution, we may withhold
up to 30% of either (i) the gross amount of the entire distribution, even if the amount of the distribution is greater than the
amount constituting a dividend, as described above, or (ii) the amount of the distribution we project will be a dividend, based
upon a reasonable estimate of both our current and accumulated earnings and profits for the taxable year in which the distribution
is made. If U.S. federal income tax is withheld on the amount of a distribution in excess of the amount constituting a dividend,
the Non-U.S. Holder may obtain a refund of all or a portion of the excess amount withheld by timely filing a claim for refund
with the IRS. Any such distribution not constituting a dividend generally will be treated, for U.S. federal income tax purposes,
first as reducing the Non-U.S. Holder’s adjusted tax basis in our ordinary shares (but not below zero) and, to the extent
such distribution exceeds the Non-U.S. Holder’s adjusted tax basis, as gain from the sale or other taxable disposition of
such shares, which will be treated as described under “Non-U.S. Holders — Taxation on the Disposition of Our Ordinary
Shares” below.



64







Cash dividends we pay to a Non-U.S. Holder
that are effectively connected with such Non-U.S. Holder’s conduct of a trade or business within the United States (and,
if certain income tax treaties apply, are attributable to a permanent establishment or fixed base the Non-U.S. Holder maintains
or maintained in the United States) generally will not be subject to U.S. withholding tax, provided such Non-U.S. Holder complies
with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally
will be subject to U.S. federal income tax (but not the Medicare contribution tax), net of certain deductions, at the same regular
U.S. federal income tax rates applicable to a comparable U.S. Holder. If the Non-U.S. Holder is a corporation, such dividends
that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30% (or such lower
rate as may be specified by an applicable income tax treaty).



Taxation on the Disposition of Our Ordinary
Shares



A Non-U.S. Holder generally will not be
subject to U.S. federal income tax in respect of gain recognized on a sale or other taxable disposition of our ordinary shares
unless:



| | · | the
                                                                                                                                 gain
                                                                                                                                 is
                                                                                                                                 effectively
                                                                                                                                 connected
                                                                                                                                 with
                                                                                                                                 the
                                                                                                                                 conduct
                                                                                                                                 of
                                                                                                                                 a
                                                                                                                                 trade
                                                                                                                                 or
                                                                                                                                 business
                                                                                                                                 by
                                                                                                                                 the
                                                                                                                                 Non-U.S.
                                                                                                                                 Holder
                                                                                                                                 within
                                                                                                                                 the
                                                                                                                                 United
                                                                                                                                 States
                                                                                                                                 (and,
                                                                                                                                 under
                                                                                                                                 certain
                                                                                                                                 income
                                                                                                                                 tax
                                                                                                                                 treaties,
                                                                                                                                 is
                                                                                                                                 attributable
                                                                                                                                 to
                                                                                                                                 a
                                                                                                                                 permanent
                                                                                                                                 establishment
                                                                                                                                 or
                                                                                                                                 fixed
                                                                                                                                 base
                                                                                                                                 the
                                                                                                                                 Non-U.S.
                                                                                                                                 Holder
                                                                                                                                 maintains
                                                                                                                                 or
                                                                                                                                 maintained
                                                                                                                                 in
                                                                                                                                 the
                                                                                                                                 United
                                                                                                                                 States);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                                 Non-U.S.
                                                                                                                                 Holder
                                                                                                                                 is
                                                                                                                                 an
                                                                                                                                 individual
                                                                                                                                 who
                                                                                                                                 is
                                                                                                                                 present
                                                                                                                                 in
                                                                                                                                 the
                                                                                                                                 United
                                                                                                                                 States
                                                                                                                                 for
                                                                                                                                 183
                                                                                                                                 days
                                                                                                                                 or
                                                                                                                                 more
                                                                                                                                 in
                                                                                                                                 the
                                                                                                                                 taxable
                                                                                                                                 year
                                                                                                                                 of
                                                                                                                                 disposition
                                                                                                                                 and
                                                                                                                                 certain
                                                                                                                                 other
                                                                                                                                 conditions
                                                                                                                                 are
                                                                                                                                 met;
                                                                                                                                 or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | we
                                                                                                                                 are
                                                                                                                                 or
                                                                                                                                 have
                                                                                                                                 been
                                                                                                                                 a
                                                                                                                                 “United
                                                                                                                                 States
                                                                                                                                 real
                                                                                                                                 property
                                                                                                                                 holding
                                                                                                                                 corporation”
                                                                                                                                 (“USRPHC”)
                                                                                                                                 for
                                                                                                                                 U.S.
                                                                                                                                 federal
                                                                                                                                 income
                                                                                                                                 tax
                                                                                                                                 purposes
                                                                                                                                 at
                                                                                                                                 any
                                                                                                                                 time
                                                                                                                                 during
                                                                                                                                 the
                                                                                                                                 shorter
                                                                                                                                 of
                                                                                                                                 the
                                                                                                                                 five
                                                                                                                                 year
                                                                                                                                 period
                                                                                                                                 ending
                                                                                                                                 on
                                                                                                                                 the
                                                                                                                                 date
                                                                                                                                 of
                                                                                                                                 disposition
                                                                                                                                 or
                                                                                                                                 the
                                                                                                                                 Non-U.S.
                                                                                                                                 Holder’s
                                                                                                                                 holding
                                                                                                                                 period
                                                                                                                                 for
                                                                                                                                 such
                                                                                                                                 shares
                                                                                                                                 disposed
                                                                                                                                 of,
                                                                                                                                 and,
                                                                                                                                 generally,
                                                                                                                                 in
                                                                                                                                 the
                                                                                                                                 case
                                                                                                                                 where
                                                                                                                                 such
                                                                                                                                 shares
                                                                                                                                 are
                                                                                                                                 regularly
                                                                                                                                 traded
                                                                                                                                 on
                                                                                                                                 an
                                                                                                                                 established
                                                                                                                                 securities
                                                                                                                                 market,
                                                                                                                                 the
                                                                                                                                 Non-U.S.
                                                                                                                                 Holder
                                                                                                                                 has
                                                                                                                                 owned,
                                                                                                                                 directly
                                                                                                                                 or
                                                                                                                                 indirectly,
                                                                                                                                 more
                                                                                                                                 than
                                                                                                                                 5%
                                                                                                                                 of
                                                                                                                                 our
                                                                                                                                 ordinary
                                                                                                                                 shares
                                                                                                                                 at
                                                                                                                                 any
                                                                                                                                 time
                                                                                                                                 during
                                                                                                                                 the
                                                                                                                                 shorter
                                                                                                                                 of
                                                                                                                                 the
                                                                                                                                 five
                                                                                                                                 year
                                                                                                                                 period
                                                                                                                                 ending
                                                                                                                                 on
                                                                                                                                 the
                                                                                                                                 date
                                                                                                                                 of
                                                                                                                                 disposition
                                                                                                                                 or
                                                                                                                                 the
                                                                                                                                 Non-U.S.
                                                                                                                                 Holder’s
                                                                                                                                 holding
                                                                                                                                 period
                                                                                                                                 for
                                                                                                                                 our
                                                                                                                                 ordinary
                                                                                                                                 shares
                                                                                                                                 disposed
                                                                                                                                 of.
                                                                                                                                 There
                                                                                                                                 can
                                                                                                                                 be
                                                                                                                                 no
                                                                                                                                 assurance
                                                                                                                                 that
                                                                                                                                 our
                                                                                                                                 ordinary
                                                                                                                                 shares
                                                                                                                                 will
                                                                                                                                 be
                                                                                                                                 treated
                                                                                                                                 as
                                                                                                                                 regularly
                                                                                                                                 traded
                                                                                                                                 on
                                                                                                                                 an
                                                                                                                                 established
                                                                                                                                 securities
                                                                                                                                 market
                                                                                                                                 for
                                                                                                                                 this
                                                                                                                                 purpose.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Unless an applicable tax treaty provides
otherwise, gain described in the first and third bullet points above generally will be subject to U.S. federal income tax (but
not the Medicare contribution tax), net of certain deductions, at the same regular U.S. federal income tax rates applicable to
a comparable U.S. Holder. Any gain described in the first bullet point above of a Non-U.S. Holder that is a foreign corporation
also may be subject to an additional “branch profits tax” at a 30% rate (or a lower applicable tax treaty rate). Any
U.S. source capital gain of a Non-U.S. Holder described in the second bullet point above (which may be offset by U.S. source capital
losses during the taxable year of the disposition) generally will be subject to a flat 30% U.S. federal income tax rate (or a
lower applicable tax treaty rate).



In connection with the third bullet point
above, we generally will be classified as a USRPHC if (looking through certain subsidiaries) the fair market value of our “United
States real property interests” equals or exceeds 50% of the sum of the fair market value of our worldwide real property
interests plus our other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes.
Based on the current composition of the assets of us and our subsidiaries, we believe that we currently are not a USRPHC (although
no assurance can be given that we will not become a USRPHC in the future). Non-U.S. Holders, particularly those Non-U.S. Holders
that could be treated as actually or constructively holding more than 5% of our ordinary shares, should consult their own tax
advisors regarding the U.S. federal income tax consequences of owning and disposing of our ordinary shares.



65







Payments After 2012



Effective generally for payments made on
or after January 1, 2013, a Non-U.S. Holder may be subject to a U.S. federal withholding tax at a 30% rate with respect to cash
dividends on, and the gross proceeds from the sale or other disposition of, our ordinary shares if certain disclosure requirements
related to the U.S. accounts maintained by, or the U.S. ownership of, the Non-U.S. Holder are not satisfied. Pursuant to recent
guidance, however, the IRS has indicated that withholding with respect to such dividends generally will be required only for payments
made on or after January 1, 2014, and withholding with respect to such proceeds generally will be required only for payments made
on or after January 1, 2015. If payment of such withholding taxes is required, a Non-U.S. Holder that is otherwise eligible for
an exemption from, or a reduction of, U.S. withholding taxes with respect to such dividends and proceeds generally will be required
to seek a refund from the IRS to obtain the benefit of such exemption or reduction. Non-U.S. Holders should consult their own
tax advisors regarding the effect, if any, of such withholding taxes on their ownership and disposition of our ordinary shares.



Information Reporting and Backup
Withholding



We generally must report annually to the
IRS and to each holder the amount of cash dividends and certain other distributions we pay to such holder on our ordinary shares
and the amount of tax, if any, withheld with respect to those distributions. In the case of a Non-U.S. Holder, copies of the information
returns reporting those distributions and withholding also may be made available to the tax authorities in the country in which
the Non-U.S. Holder is a resident under the provisions of an applicable income tax treaty or agreement. Information reporting
is also generally required with respect to proceeds from the sales and other dispositions of our ordinary shares to or through
the U.S. office (and in certain cases, the foreign office) of a broker. Pursuant to recently enacted legislation, certain information
concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether any gain
or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS.



In addition, backup withholding of U.S.
federal income tax, at a rate of 28% for taxable years beginning before January 1, 2013 (but currently scheduled to increase to
31% for taxable years beginning on or after January 1, 2013), generally will apply to distributions made on our ordinary shares
to, and the proceeds from sales and other dispositions of such shares by, a U.S. Holder (other than an exempt recipient) who:



| | · | fails to provide
                                                                                                               an accurate taxpayer
                                                                                                               identification
                                                                                                               number;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | is notified
                                                                                                               by the IRS that
                                                                                                               backup withholding
                                                                                                               is required; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | in certain
                                                                                                               circumstances,
                                                                                                               fails to comply
                                                                                                               with applicable
                                                                                                               certification requirements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A Non-U.S. Holder generally may eliminate
the requirement for information reporting (other than with respect to distributions, as described above) and backup withholding
by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by
otherwise establishing an exemption.



Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and
the availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.



| | F. | Dividends and paying agents
| | -- | ---------------------------



Not required.



| | G. | Statement by experts
| | -- | --------------------



Not required.



66













| | H. | Documents on display
| | -- | --------------------





Documents concerning us that are referred
to in this document may be inspected at Room 10001, Tower C, Skyworth Building, High-Tech Industrial Park, Nanshan, Shenzhen 518057,
PRC.



In addition, we file annual reports and
other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information
under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange
Act and our officers, directors and principal shareholders are exempt from the insider short-swing disclosure and profit recovery
rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at
the public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies
of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission
at 1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request copies of the documents
upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains
reports and other information regarding registrants (including us) that file electronically with the Commission which can be assessed
at http://www.sec.gov.



| | I. | Subsidiary Information
| | -- | ----------------------



Not required.



ITEM
11.	    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Foreign Exchange Risk



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



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



On July 21, 2005, People’s Bank of
China adjusted the exchange rate of U.S. dollar to Renminbi from $1 = RMB8.27 to $1 = RMB8.11, and ceased to peg the Renminbi
to the U.S. dollar. Instead, the Renminbi is pegged to a basket of currencies, which components are subject to adjustment based
on changes in market supply and demand under a set of systematic principles. On September 23, 2005, the PRC government widened
the daily trading band for Renminbi against non-U.S. dollar currencies from 1.5% to 3.0% to improve the flexibility of the new
foreign exchange system. On June 19, 2010, the People’s Bank of China released a statement indicating that they would “proceed
further with reform of RMB exchange rate regime and increase the RMB exchange rate flexibility.” Since the adoption of these
measures, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow ranges, but overall the
Renminbi has further strengthened against the U.S. dollar. There remains significant international pressure on the PRC government
to further liberalize its currency policy, which could result in a further and more significant fluctuation in the value of the
Renminbi against the U.S. dollar. The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be
permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the
Renminbi against the U.S. dollar or other currencies.



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



67







Any devaluation of the Renminbi against
the U.S. dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms
of U.S. dollars. On the other hand, the appreciation of the Renminbi could make our customers’ products more expensive to
purchase because many of our customers are involved in the export of goods, which may have an adverse impact on their sales. A
decrease in sales by our customers could have an adverse effect on our operating results. In addition, as of December 31, 2011
and 2010, we have cash denominated in U.S. dollars amounting to RMB469.5 million (USD74.5 million) and RMB291.5 million, respectively.
Also, from time to time we may have U.S. dollar denominated borrowings. Accordingly, a decoupling of the Renminbi may affect our
financial performance in the future.



We recognized a foreign currency translation
adjustment of approximately RMB10.8 million (USD1.7 million) for the year ended December 31, 2011. We do not currently engage
in hedging activities, as such, we may in the future experience economic loss as a result of any foreign currency exchange rate
fluctuations.



Interest Rate Risk



We are exposed to interest rate risk arising
from short-term variable rate borrowings from time to time. Our future interest expense will fluctuate in line with any change
in our borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and
other relevant market risks is not material. Our bank borrowings amounted to RMB854.2 million (USD135.7 million) as of December
31, 2011. Based on the variable nature of the underlying interest rate, the bank borrowings approximated fair value at that date.



If there was a hypothetical 1% change in
interest rates, the net impact to earnings and cash flows would be approximately RMB8.5 million (USD1.4 million). The potential
change in cash flows and earning is calculated based on the change in the net interest expense over a one year period due to an
immediate 1% change in price.



Inflation



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



ITEM
12.	    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



Not required.



PART II



ITEM
13.	    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES



There has been no default of any indebtedness
nor is there any arrearage in the payment of dividends.



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



On August 4, 2011, Cogo Group, Inc., then
a Maryland corporation, merged with and into its indirect wholly owned subsidiary, Cogo Group, Inc., a Cayman Islands company
(then known as Cogo Group Cayman, Inc.), resulting in the redomestication of Cogo Group, Inc. to the Cayman Islands. At the time
of the merger, each outstanding share of common stock of Cogo Group, Inc. (the Maryland corporation) converted automatically into one
ordinary share of the Cayman Islands entity. Accordingly, our ordinary shares became governed by our memorandum and articles of
association and the laws of the Cayman Islands. The rights and duties attaching to each share remained substantially equivalent.
For a detailed comparison of the laws of Maryland and the laws of the Cayman Islands, as well as a comparison of stockholder rights
in each such jurisdiction, you may refer to the section titled “Comparison of Stockholder Rights” in our Registration
Statement on Form F-4 initially filed with the SEC on May 2, 2011 (File No.: 333-173844), which section is incorporated herein
by reference.



There are no restrictions on working capital
and no removal or substitution of assets securing any class of our registered securities.



68







ITEM
15.	     CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and
Procedures



Based on an evaluation under the supervision
of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective
as of December 31, 2011.



Disclosure controls and procedures are
designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under
the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



Inherent Limitations Over Internal Controls



Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies
and procedures that:



(i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;



(ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts
and expenditures are being made only in accordance with authorizations of our management and directors; and



(iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect
on the financial statements.



Management, including our Chief Executive
Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,
no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have
been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal
controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or
procedures may deteriorate.



Management’s Annual Report on
Internal Control Over Financial Reporting



Our management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act. Management
conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria
set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Our management’s annual report on internal control over financial reporting and the related
report of our independent registered public accounting firm are included in this report on pages F-2 and F-3, respectively.



Changes in Internal Control Over Financial
Reporting



There were no changes in our internal control
over financial reporting during the fourth quarter of fiscal 2011, which were identified in connection with management’s
evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.



69







ITEM
16.	       [RESERVED]



ITEM 16A.	    AUDIT
COMMITTEE FINANCIAL EXPERT



Our board of directors has determined that
JP Gan, the chairperson of the audit committee through December 22, 2011, is an “audit committee financial expert”
as defined by the SEC’s rules and “independent” as that term is defined in Item 16A(b) of Form 20-F and the
NASDAQ listing standards. Our board of directors has determined that Dr. Nathan Zhang, who replaced JP Gan on the board of directors
in December 2011, is an “audit committee financial expert” as defined by the SEC’s rules and “independent”
as that term is defined in Item 16A(b) of Form 20-F and the NASDAQ listing standards..



ITEM 16B.	    CODE
OF ETHICS.



On November 4, 2004, we adopted a Code
of Business Conduct and Ethics that applies to our directors, officers and employees, including our chief executive officer and
chief financial officer—our principal executive officer and principal financial and accounting officer, respectively. A
copy of our Code of Business Conduct and Ethics is available on the Investor Information page of our website, http://www.cogo.com.cn/investorinfo_coe.html.



ITEM 16C.	    PRINCIPAL
ACCOUNTANT FEES AND SERVICES.



Audit Fees



The following table presents the aggregate
fees for professional services and other services rendered by our principal accountant to us in 2011 and 2010.



|                       |  | 2011          |     |  | 2010 |    
|---------------------- |  | ------------- | --- |  | ---- | ---
|                       |  | (in millions) |    
|Audit fees (1)         |  | RMB           | 3.8 |  |      | RMB
|Audit related fees (2) |  |               | 0.7 |  |      |    
|Tax fees               |  |               | —   |  |      |    
|All other fees         |  |               | —   |  |      |    
|Total                  |  | RMB           | 4.5 |  |      | RMB



| | (1) | Audit fees consist of fees billed for the professional services
                                                            rendered for the audit of our consolidated financial statements for
                                                            each of these fiscal years and the review of the interim financial
                                                            statements for the fiscal years ended December 31, 2011 and December 31,
                                                            2010, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Audit-related fees consist of services by KPMG that are reasonably
                                                            related to the performance of the audit or review of our financial
                                                            statements and are not reported above under Audit Fees.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are required to obtain pre-approval by
our audit committee for all audit and permitted non-audit services performed by our independent auditors.  In accordance
with this requirement, during fiscal 2010, 100% of all audit, audit-related, tax and other services performed by KPMG were approved
in advance by the audit committee. Any pre-approved decisions are presented to the full audit committee at the next scheduled
meeting.  KPMG was our principal auditor and no work was performed by persons outside of this firm.



Audit of Financial Statements.



During fiscal 2010 and 2011, KPMG was our
principal auditor and no work was performed by persons outside of this firm.



ITEM 16D.	    EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.



None.



70







ITEM 16E.	    PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.



Pursuant to our approved stock purchase
program, we made the following purchases of our equity securities in 2011:





|ISSUER PURCHASE OF EQUITY SECURITIES
|------------------------------------
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|Period                              
|May 1 through May 31, 2011          
|June 1 through June 30, 2011        
|July 1 through July 31, 2011        
|August 1 through August 31, 2011    
|November 1 through November 30, 2011
|December 1 through December 31, 2011
|Total                               





ITEM 16F.      CHANGES
IN REGISTRANT’S CERTIFYING ACCOUNTANT.



Not applicable.



ITEM 16G.     CORPORATE
GOVERNANCE



There are no material differences in our
corporate governance practices from those of U.S. domestic companies under the listing standards of the Nasdaq Stock Market, LLC.
We did not make use of any exemptions from the corporate governance standards set forth in the Nasdaq Listing Rules.



PART III



ITEM
17.	    FINANCIAL STATEMENTS



We have elected to provide financial statements
pursuant to Item 18.



ITEM
18.	    FINANCIAL STATEMENTS



The financial statements are filed as part
of this Annual Report beginning on page F-1.



ITEM
19.	    EXHIBITS



|Exhibit No. |  | Description                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1         |  | Memorandum of Association of Cogo Group, Inc.                                                                                                                                                     
|1.2         |  | Amended and Restated Articles of Association of
    Cogo Group, Inc.                                                                                                                              
|2.1         |  | Specimen Ordinary Share Certificate (Incorporated
    by reference to Exhibit 4.1 of the registration statement on Form F-4 filed with the Securities and Exchange Commission on
    May 27, 2011)



71







|4.1  |  | Plan of Merger (Incorporated by reference
    to Annex C of the proxy statement/prospectus filed with the Securities and Exchange Commission on June 9, 2011)                                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.2  |  | Shareholders Agreement, dated July 23, 2004.
    (Incorporated by reference to Exhibit 4.1 of the Form 8-K filed with the Securities and Exchange Commission on July 22,
    2004.)                                                                                                                                             
|4.3  |  | Facility Letter by and between Bank of China and
    Comtech Broadband Corporation Limited, Comtech International (Hong Kong) Limited, Keen Awards Limited and Hong Kong JJT Limited,
    dated March 19, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April 29,
    2010)   
|4.4  |  | Factoring Agreement by and between Bank of China
    (Hong Kong) Limited and Comtech Broadband Corporation Limited, dated April 28, 2010. (Incorporated by reference to the Current
    Report on Form 8-K filed with the Commission on April 29, 2010)                                                                         
|4.5  |  | Amendment to the Factoring Agreement by and between
    Bank of China (Hong Kong) Limited and Comtech Broadband Corporation Limited, dated October 13, 2010. (Incorporated by reference
    to the Current Report on Form 8-K filed with the Commission on January 3, 2011)                                                     
|4.6  |  | Confirmation Letter of Bank of China (Hong Kong)
    Limited, dated April 23, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April
    29, 2010)                                                                                                                               
|4.7  |  | Confirmation Letter of Bank of China (Hong Kong)
    Limited, dated April 28, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April
    29, 2010)                                                                                                                               
|4.8  |  | General Terms and Conditions for Banking Facilities.
    (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April 29, 2010)                                                                                                                                                              
|4.9  |  | General Banking Facility Letter dated July 4,
    2011 (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on July 20, 2011)                                                                                                                                                                 
|4.10 |  | General Terms and Conditions for General Banking
    Facilities and Loan Facilities dated July 4, 2011 (Incorporated by reference to the Current Report on Form 8-K filed with
    the Commission on July 20, 2011)                                                                                                             
|4.11 |  | Cross Guarantee (Incorporated by reference to
    the Current Report on Form 8-K filed with the Commission on July 20, 2011)                                                                                                                                                                                                    
|4.12 |  | Confirmation Letter dated July 15, 2011 (Incorporated
    by reference to the Current Report on Form 8-K filed with the Commission on July 20, 2011)                                                                                                                                                                            
|4.13 |  | Confirmation Letter of Standard Chartered Bank
    (Hong Kong) Limited, dated July 6, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission
    on July 9, 2010)                                                                                                                         
|4.14 |  | Facility Letter by and among Standard Chartered
    Bank (Hong Kong) Limited, Comtech International (Hong Kong) Limited, Keen Awards Limited and Comtech Broadband Corporation
    Limited, dated February 22, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on
    July 9, 2010)
|4.15 |  | Facility Letter by and among Standard Chartered
    Bank (Hong Kong) Limited, Comtech International (Hong Kong) Limited, Keen Awards Limited and Comtech Broadband Corporation
    Limited, dated February 22, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on
    July 9, 2010)
|4.16 |  | Facility Letter by and between Comtech International
    (Hong Kong) Limited and Hong Kong Branch of China Merchants Bank, dated October 8, 2010. (Incorporated by reference to the
    Current Report on Form 8-K filed with the Commission on October 20, 2010)                                                               
|4.17 |  | Form of General Commercial Agreement. (Incorporated
    by reference to the Current Report on Form 8-K filed with the Commission on October 20, 2010)                                                                                                                                                                           
|4.18 |  | Form of Credit Amount Contract by and between
    Comtech International (Hong Kong) Limited and Macau Branch of Guangdong Development Bank, dated December 10, 2010. (Incorporated
    by reference to the Current Report on Form 8-K filed with the Commission on December 15, 2010)                                           
|4.19 |  | Form of Credit Amount Contract by and between
    Comtech Broadband Limited and Macau Branch of Guangdong Development Bank, dated December 10, 2010. (Incorporated by reference
    to the Current Report on Form 8-K filed with the Commission on December 15, 2010)                                                           
|4.20 |  | Form of Credit Facility Agreement by and between
    Comtech Communication Technology (Shenzhen) Company Limited and Shenzhen Branch of Guangdong Development Bank, dated December
    7, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on December 15, 2010)                    
|4.21 |  | Form of Maximum Amount Rights Pledge Contract
    by and between Comtech Communication Technology (Shenzhen) Company Limited and Shenzhen Branch of Guangdong Development Bank,
    dated December 7, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on December
    15, 2010)    



72







|4.22    |  | Form of Maximum Amount Rights Pledge
    Contract by and between Comtech Software Technology (Shenzhen) Company Limited and Shenzhen Branch of Guangdong Development
    Bank, dated December 7, 2010. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission
    on December 15, 2010)                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.23    |  | Amendment to the Factoring Agreement by and between
    Bank of China (Hong Kong) Limited and Comtech Broadband Corporation Limited, dated October 13, 2010. (Incorporated by reference
    to the Current Report on Form 8-K filed with the Commission on January 3, 2011)                                                                                                                                                                                                                                                                                                                                                                          
|4.24    |  | Credit Facility Agreement with Standard Chartered
    Bank (Hong Kong) Limited dated February 11, 2011 (Incorporated by reference to the Current Report on Form 8-K filed with the
    Commission on May 16, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.25    |  | Letter from Standard Chartered Bank (Hong Kong)
    Limited confirming the availability of the Credit Facility as of May 11, 2011. (Incorporated by reference to the Current Report
    on Form 8-K filed with the Commission on May 16, 2011)                                                                                                                                                                                                                                                                                                                                                                                                       
|4.26    |  | Credit Facility Agreement by and between Guangdong
    Development Bank and Shenzhen Comtech International Electronics Co., Ltd., dated July 14, 2011. (Incorporated by reference
    to the Current Report on Form 8-K filed with the Commission on July 21, 2011)                                                                                                                                                                                                                                                                                                                                                                                  
|4.27    |  | Credit Facility Agreement by and between Guangdong
    Development Bank and Comtech Communications Technology (Shenzhen) Co., Ltd., dated July 14, 2011. (Incorporated by reference
    to the Current Report on Form 8-K filed with the Commission on July 21, 2011)                                                                                                                                                                                                                                                                                                                                                                                
|4.28    |  | Domestic Letter of Credit-Trade Finance Credit
    Facility Contract by and between Guangdong Development Bank and Shenzhen Comtech International Electronics Co., Ltd., dated
    July 14, 2011. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on July 21, 2011)                                                                                                                                                                                                                                                                                                                                           
|4.29    |  | Domestic Letter of Credit-Trade Finance Credit
    Facility Contract by and between Guangdong Development Bank and Comtech Communications Technology (Shenzhen) Co., Ltd., dated
    July 14, 2011. (Incorporated by reference to the Current Report on Form 8-K filed with the Commission on July 21, 2011)                                                                                                                                                                                                                                                                                                                                         
|4.30    |  | Maximum Guarantee Contract by and between Guangdong
    Development Bank and Comtech Software Technology (Shenzhen) Co. Ltd., dated July 14, 2011.  (Incorporated by reference
    to the Current Report on Form 8-K filed with the Commission on July 21, 2011)                                                                                                                                                                                                                                                                                                                                                                                     
|4.31    |  | Credit Facility Agreement with HSBC dated May
    18, 2011 (Incorporated by reference to the Current Report on Form 6-K filed with the Commission on November 1, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.32    |  | Letter from HSBC confirming the availability of
    the Credit Facility as of October 25, 2011. (Incorporated by reference to the Current Report on Form 6-K filed with the Commission
    on November 11, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.33    |  | Land Use Rights Agreement dated     August 18,
    2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.34    |  | Employment Agreement of Jeffrey Kang dated as
    of January 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.35    |  | Employment Agreement of Yi Yuan dated as of March
    2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.36    |  | Employment Agreement of Frank Zheng dated as of
    January 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.1     |  | Cogo Group, Inc. 2009 Omnibus Securities and Incentive
    Plan (Incorporated by reference to Exhibit A of our proxy statement filed with the Commission on November 24, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|8.1     |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|11.1    |  | Code of Business Conduct and Ethics. (Incorporated
    by reference to Exhibit 14.1 to our Form 10-K for the year ended December 31, 2004 filed on March 31, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|12.1    |  | Certification of the Chief Executive Officer (Principal
    Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|12.2    |  | Certification of the Chief Financial Officer (Principal
    Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|13.1    |  | Certification of the Chief Executive Officer and
    Chief Financial Officer pursuant to 80 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|15.1    |  | Consent of KPMG, an independent registered public
    accounting firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|100.1** |  | The following financial information from Cogo
    Group’s Annual Report on Form 20-F for the year ended December 31, 2011, formatted in Extensible Business Reporting
    Language (XBRL): (i) Consolidated Balance Sheets as of December 31, 2011 and 2010, (ii) Consolidated Statements of Income
    for the years ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements of Changes in Shareholders’ Equity
    for the years ended December 31, 2011, 2010 and 2009, (iv) the Consolidated Statements of Cash Flows for the years ended December
    31, 2011, 2010 and 2009, and (iv) Notes to Consolidated Financial Statements





**IN ACCORDANCE WITH THE TEMPORARY HARDSHIP EXEMPTION PROVIDED BY RULE 201 OF REGULATION S-T, THE DATE BY WHICH THE INTERACTIVE
DATA FILE IS REQUIRED TO BE SUBMITTED HAS BEEN EXTENDED BY SIX BUSINESS DAYS.

73







SIGNATURES



The Registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this
annual report on its behalf.



|              | COGO GROUP, INC.
|------------- | ----------------
|              |                 
|April 2, 2012 | By:             
|              |                 
|              |                 
|              |                 
|April 2, 2012 | By:             
|              |                 
|              |                 



74







INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





|MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING                                                | F-2
|--------------------------------------------------------------------------------------------------------------- | ---
|                                                                                                                |    
|REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                        | F-3
|                                                                                                                |    
|CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010                                                    | F-5
|                                                                                                                |    
|CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009 | F-6
|                                                                                                                |    
|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009               | F-7
|                                                                                                                |    
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009                      | F-8
|                                                                                                                |    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                      | F-9





F-1







MANAGEMENT’S REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING



Our management is responsible for establishing and maintaining
adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act
of 1934) for Cogo Group, Inc. (the “Company”) and its subsidiaries (collectively, the “Group”). Our internal
control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. A company’s
internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records
that accurately and fairly reflect, in reasonable detail, transactions and dispositions of our assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of management
and the directors of the Company, and (3) provide reasonable assurance regarding the prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on our financial statements.



Because of its inherent limitations, internal control over
financial reporting cannot provide absolute assurance of achieving financial reporting objectives. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with policies or procedures may deteriorate.



Under the supervision of and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, management evaluated the effectiveness of Cogo’s
internal control over financial reporting as of December 31, 2011. In its evaluation, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.



Based on our assessment and the criteria described above, management
has concluded that, our internal control over financial reporting was effective as of December 31, 2011.



Our independent registered public accounting firm has issued
an audit report on our internal control over financial reporting. This report is included on page F-3 of this annual report.



F-2







Report of Independent Registered Public
Accounting Firm



The Board of Directors and Stockholders

Cogo Group, Inc.:



We have audited Cogo Group, Inc.’s internal control over
financial reporting as of December 31, 2011, based on criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cogo Group, Inc.’s management
is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on Cogo Group, Inc.’s internal control over financial reporting
based on our audit.



We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.



A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.



Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.



In our opinion, Cogo Group, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal
Control – Integrated Framework issued by COSO.



We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cogo Group, Inc. and subsidiaries
as of December 31, 2011 and 2010, and the related consolidated statements of income and comprehensive income, changes in
equity, and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated April
2, 2012 expressed an unqualified opinion on those consolidated financial statements.



|/s/ KPMG        
|----------------
|                
|Hong Kong, China
|April 2, 2012   



F-3







Report of Independent Registered Public
Accounting Firm



The Board of Directors and Stockholders

Cogo Group, Inc.:



We have audited the accompanying consolidated balance sheets
of Cogo Group, Inc. (the “Company”) and subsidiaries (collectively, the “Group”) as of December 31,
2011 and 2010, and the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for
each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility
of Cogo Group, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.



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



In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of Cogo Group, Inc. and subsidiaries as of December 31,
2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2011, in conformity with U.S. generally accepted accounting principles.



As discussed in Note 1(b) to the consolidated financial
statements, the Group completed the redomestication merger of the Company, a Cayman Islands corporation, and Cogo Group,
Inc., a Maryland corporation (“Cogo Maryland”) and the Company’s predecessor, on August 4, 2011. The
consolidated financial position, results of operations and cash flows for all periods presented prior to August 4, 2011
relate to those of Cogo Maryland.



The accompanying consolidated financial statements as of and
for the year ended December 31, 2011 have been translated into United States dollars solely for the convenience of the reader.
We have audited the translation and, in our opinion, such consolidated financial statements expressed in Renminbi have been translated
into United States dollars on the basis set forth in Note 2(c) to the consolidated financial statements.



We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Cogo Group, Inc.’s internal control over financial reporting
as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 2, 2012 expressed an
unqualified opinion on the effectiveness of Cogo Group, Inc.’s internal control over financial reporting.



|/s/ KPMG        
|----------------
|                
|Hong Kong, China
|April 2, 2012   



F-4













COGO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                               |  |      |       |  | December 31, | 
|---------------------------------------------------------------------------------------------- |  | ---- | ----- |  | ------------ | 
|                                                                                               |  | Note |       |  | 2011         | 
|                                                                                               |  |      |       |  |              | 
|ASSETS                                                                                         |  |      |       |  |              | 
|Current assets:                                                                                |  |      |       |  |              | 
|Cash                                                                                           |  |      |       |  |              | 
|Pledged bank deposits                                                                          |  |      | 9     |  |              | 
|Accounts receivable, net                                                                       |  |      | 3     |  |              | 
|Bills receivable                                                                               |  |      | 4     |  |              | 
|Inventories                                                                                    |  |      | 5     |  |              | 
|Income taxes receivable                                                                        |  |      |       |  |              | 
|Prepaid expenses and other receivables                                                         |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|Total current assets                                                                           |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|Property and equipment, net                                                                    |  |      | 6     |  |              | 
|Intangible assets, net                                                                         |  |      | 7 & 8 |  |              | 
|Goodwill                                                                                       |  |      | 7 & 8 |  |              | 
|Other assets                                                                                   |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|TOTAL ASSETS                                                                                   |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|LIABILITIES AND EQUITY                                                                         |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|Current liabilities:                                                                           |  |      |       |  |              | 
|Accounts payable                                                                               |  |      |       |  |              | 
|Bank borrowings                                                                                |  |      | 9     |  |              | 
|Income taxes payable                                                                           |  |      |       |  |              | 
|Accrued expenses and other liabilities                                                         |  |      | 11    |  |              | 
|Total current liabilities                                                                      |  |      |       |  |              | 
|Deferred tax liabilities                                                                       |  |      | 10    |  |              | 
|Total liabilities                                                                              |  |      |       |  |              | 
|Equity:                                                                                        |  |      |       |  |              | 
|Common stock                                                                                   |  |      |       |  |              | 
|Par value: USD0.01                                                                             |  |      |       |  |              | 
|Authorized: 200,000,000 shares Issued: 42,309,285 shares in 2011 and 41,181,529 shares in 2010 |  |      |       |  |              | 
|Outstanding: 33,560,467 shares in 2011 and 35,848,764 shares in 2010                           |  |      |       |  |              | 
|Additional paid in capital                                                                     |  |      |       |  |              | 
|Retained earnings                                                                              |  |      |       |  |              | 
|Accumulated other comprehensive loss                                                           |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|Less cost of common stock in treasury, 8,748,818 shares in 2011 and 5,332,765 shares in 2010   |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|Total Cogo Group, Inc. equity                                                                  |  |      |       |  |              | 
|Noncontrolling interests                                                                       |  |      |       |  |              | 
|Total equity                                                                                   |  |      |       |  |              | 
|                                                                                               |  |      |       |  |              | 
|Commitments and contingencies                                                                  |  |      | 16    |  |              | 
|                                                                                               |  |      |       |  |              | 
|TOTAL LIABILITIES AND EQUITY                                                                   |  |      |       |  |              | 



See accompanying notes to consolidated financial
statements.



F-5







COGO GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except share data)



|                                                                                           |  |      |       |  | Year ended December 31, | 
|------------------------------------------------------------------------------------------ |  | ---- | ----- |  | ----------------------- | 
|                                                                                           |  | Note |       |  | 2011                    | 
|                                                                                           |  |      |       |  | USD                     | 
|Net revenue                                                                                |  |      |       |  |                         | 
|Product sales                                                                              |  |      | 14    |  |                         | 
|Service revenue                                                                            |  |      | 14    |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|Cost of sales                                                                              |  |      |       |  |                         | 
|Cost of goods sold                                                                         |  |      |       |  |                         | 
|Cost of services                                                                           |  |      |       |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|Gross profit                                                                               |  |      |       |  |                         | 
|Selling, general and administrative expenses                                               |  |      |       |  |                         | 
|Research and development expenses                                                          |  |      |       |  |                         | 
|Provision for doubtful accounts                                                            |  |      | 3     |  |                         | 
|Net gain on settlement relating to the acquisition of Long Rise before goodwill impairment |  |      | 7 (d) |  |                         | 
|Impairment loss of goodwill                                                                |  |      | 7 & 8 |  |                         | 
|Other operating income / (loss), net                                                       |  |      |       |  |                         | 
|Income / (loss) from operations                                                            |  |      |       |  |                         | 
|Interest expense                                                                           |  |      |       |  |                         | 
|Interest income                                                                            |  |      |       |  |                         | 
|Earnings / (loss) before income taxes and extraordinary item                               |  |      |       |  |                         | 
|Income tax expense                                                                         |  |      | 10    |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|Income / (loss) before extraordinary item                                                  |  |      |       |  |                         | 
|Extraordinary item, net of nil tax                                                         |  |      | 7 (d) |  |                         | 
|Net income / (loss)                                                                        |  |      |       |  |                         | 
|Less net income attributable to noncontrolling interests                                   |  |      |       |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|Net income / (loss) attributable to Cogo Group, Inc.                                       |  |      |       |  |                         | 
|Earnings / (loss) per share attributable to Cogo Group, Inc.                               |  |      |       |  |                         | 
|Income / (loss) before extraordinary item                                                  |  |      |       |  |                         | 
|Extraordinary item                                                                         |  |      |       |  |                         | 
|- Basic                                                                                    |  |      | 13    |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|Income / (loss) before extraordinary item                                                  |  |      |       |  |                         | 
|Extraordinary item                                                                         |  |      |       |  |                         | 
|- Diluted                                                                                  |  |      | 13    |  |                         | 
|Weighted average number of common shares outstanding                                       |  |      |       |  |                         | 
|- Basic                                                                                    |  |      | 13    |  |                         | 
|- Diluted                                                                                  |  |      | 13    |  |                         | 
|Amounts attributable to Cogo Group, Inc.                                                   |  |      |       |  |                         | 
|Income / (loss) before extraordinary item                                                  |  |      |       |  |                         | 
|Extraordinary item                                                                         |  |      |       |  |                         | 
|Net income / (loss) attributable to Cogo Group, Inc.                                       |  |      |       |  |                         | 
|Comprehensive income / (loss):                                                             |  |      |       |  |                         | 
|Net income / (loss)                                                                        |  |      |       |  |                         | 
|Other comprehensive income / (loss), net of tax                                            |  |      |       |  |                         | 
|Foreign currency translation adjustments                                                   |  |      |       |  |                         | 
|                                                                                           |  |      |       |  |                         | 
|Comprehensive income / (loss)                                                              |  |      |       |  |                         | 
|Less comprehensive income, net of tax attributable to noncontrolling interests             |  |      |       |  |                         | 
|Comprehensive income / (loss) attributable to Cogo Group, Inc.                             |  |      |       |  |                         | 



See accompanying notes to consolidated financial
statements.



F-6







COGO GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands, except share data)



|                                                                                                            |  | Cogo Group, Inc. Stockholders |            |   |                    |  |       |            | 
|----------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ------------------ |  | ----- | ---------- | 
|                                                                                                            |  | Common Stock                  |            |   | Additional
paid in |  |       | Retained   | 
|                                                                                                            |  | No. of Shares
    outstanding |            |   | RMB                |  |       | capitalRMB | 
|Balance as of January 1, 2009                                                                               |  |                               | 35,231,661 |   |                    |  | 3,196 |            | 
|Net income                                                                                                  |  |                               | —          |   |                    |  | —     |            | 
|Foreign currency translation
    adjustments                                                                |  |                               | —          |   |                    |  | —     |            | 
|Issuance of common stock
    pursuant to share-based compensation                                           |  |                               | 785,059    |   |                    |  | 53    |            | 
|Share-based compensation                                                                                    |  |                               | —          |   |                    |  | —     |            | 
|Issuance of common stock
    in connection with consideration paid for the acquisition of Comtech Broadband |  |                               | 118,205    |   |                    |  | 9     |            | 
|Purchase
    of treasury stock                                                                              |  |                               | (364,900   | ) |                    |  | —     |            | 
|Balance as of December 31, 2009                                                                             |  |                               | 35,770,025 |   |                    |  | 3,258 |            | 
|Net income                                                                                                  |  |                               | —          |   |                    |  | —     |            | 
|Foreign currency translation
    adjustments                                                                |  |                               | —          |   |                    |  | —     |            | 
|Issuance of common stock
    pursuant to share-based compensation                                           |  |                               | 1,102,193  |   |                    |  | 74    |            | 
|Share-based compensation                                                                                    |  |                               | —          |   |                    |  | —     |            | 
|Decrease in ownership
    interest of Comtech Broadband (note12(f))                                         |  |                               | —          |   |                    |  | —     |            | 
|Purchase of the remaining
    noncontrolling interest of Long Rise (note 7(d))                              |  |                               | —          |   |                    |  | —     |            | 
|Purchase
    of treasury stock                                                                              |  |                               | (1,023,454 | ) |                    |  | —     |            | 
|Balance as of December 31, 2010                                                                             |  |                               | 35,848,764 |   |                    |  | 3,332 |            | 
|Net income / (loss)                                                                                         |  |                               | —          |   |                    |  | —     |            | 
|Foreign currency translation
    adjustments                                                                |  |                               | —          |   |                    |  | —     |            | 
|Issuance of common stock
    pursuant to share-based compensation                                           |  |                               | 1,127,756  |   |                    |  | 8     |            | 
|Share-based compensation                                                                                    |  |                               | —          |   |                    |  | —     |            | 
|Purchase
    of treasury stock                                                                              |  |                               | (3,416,053 | ) |                    |  | —     |            | 
|Balance as of December 31, 2011                                                                             |  |                               | 33,560,467 |   |                    |  | 3,340 |            | 
|Balance as of December 31,
    2011 (in USD)                                                                |  |                               |            |   |                    |  | 531   |            | 



See accompanying notes to consolidated financial
statements.



F-7







COGO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                                       |  | Years ended December 31, |        
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                                                       |  | 2011                     |        
|                                                                                                                       |  | USD                      |        
|Cash flows from operating activities:                                                                                  |  |                          |        
|Net income / (loss)                                                                                                    |  |                          | (23,709
|Adjustments to reconcile net income / (loss) to net cash used in operating activities:                                 |  |                          |        
|Depreciation expense                                                                                                   |  |                          | 982    
|Amortization of intangible assets                                                                                      |  |                          | 4,549  
|Impairment loss of goodwill                                                                                            |  |                          | 37,647 
|Deferred income taxes                                                                                                  |  |                          | (750   
|Loss on disposal of property and equipment                                                                             |  |                          | 33     
|Extraordinary item (note 7(d))                                                                                         |  |                          | —      
|Net gain on settlement relating to the acquisition of Long Rise before goodwill impairment (note 7(d))                 |  |                          | —      
|Provision for doubtful accounts                                                                                        |  |                          | 369    
|Share-based compensation                                                                                               |  |                          | 10,601 
|Changes in operating assets and liabilities, net of effects of acquisitions:                                           |  |                          |        
|Accounts receivable, net                                                                                               |  |                          | (44,954
|Bills receivable                                                                                                       |  |                          | (1,412 
|Inventories                                                                                                            |  |                          | (13,399
|Prepaid expenses and other receivables                                                                                 |  |                          | (3,595 
|Income taxes receivable                                                                                                |  |                          | 71     
|Accounts payable                                                                                                       |  |                          | 9,211  
|Income taxes payable                                                                                                   |  |                          | 16     
|Accrued expenses and other liabilities                                                                                 |  |                          | 963    
|Net cash used in operating activities                                                                                  |  |                          | (23,377
|Cash flows from investing activities:                                                                                  |  |                          |        
|Increase in pledged bank deposits                                                                                      |  |                          | (18,097
|Payments for acquisitions of subsidiaries, net of cash acquired                                                        |  |                          | (22,310
|Purchases of property and equipment                                                                                    |  |                          | (1,594 
|Net cash used in investing activities                                                                                  |  |                          | (42,001
|Cash flows from financing activities:                                                                                  |  |                          |        
|Purchase of treasury stock                                                                                             |  |                          | (14,860
|Proceeds from bank borrowings                                                                                          |  |                          | 60,664 
|Proceeds from exercises of stock warrants and options                                                                  |  |                          | —      
|Net cash provided by financing activities                                                                              |  |                          | 45,804 
|Effect of exchange rate changes on cash                                                                                |  |                          | (650   
|                                                                                                                       |  |                          |        
|Net increase / (decrease) in cash                                                                                      |  |                          | (20,224
|Cash at beginning of the year                                                                                          |  |                          | 111,163
|                                                                                                                       |  |                          |        
|Cash at end of the year                                                                                                |  |                          | 90,939 
|Supplementary cash flow information:                                                                                   |  |                          |        
|                                                                                                                       |  |                          |        
|Interest paid                                                                                                          |  |                          | 3,202  
|Income taxes paid                                                                                                      |  |                          | 2,498  
|Non-cash investing activities:                                                                                         |  |                          |        
|Shares issued for Comtech Broadband acquisition consideration payable, included in other liabilities                   |  |                          | —      
|Acquisition of Mega Smart included in accrued expenses and other liabilities (note 7(c))                               |  |                          | —      
|Reduction of intangible assets upon reversal of contingent consideration payable in respect of Keen Awards (note 7(d)) |  |                          | —      
|Gain on settlement relating to the acquisition of Long Rise before goodwill impairment (note 7(d))                     |  |                          | —      



See accompanying notes to consolidated financial
statements.



F-8







COGO GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)



| | 1. | ORGANIZATION AND NATURE OF OPERATIONS AND REDOMESTICATION MERGER
| | -- | ----------------------------------------------------------------
| |    |                                                                 

| | (a) | Organization and nature of operations
| | --- | -------------------------------------



Cogo Group, Inc. (the “Company”)
and its subsidiaries (collectively, the “Group”) are principally engaged in the sale of component parts for
electronic devices and equipment, such as liquid crystal display, cameras, persistent storage and peripheral devices for
wireless handsets and fixed-line telecommunications, industrial business components and medical and healthcare equipment to
customers in the People’s Republic of China (“PRC”) and other overseas countries. The Group also provides
technology and engineering services, business process outsourcing and other related services in the PRC.



As of December 31, 2011, the subsidiaries which
principally affect the results of operations and financial condition of the Company are as follows:



|Name of company                                                                       |  | Place of incorporation or establishment |  | Attributable equity interest held |   | Principal activity |                                                                                                                             |  | 
|------------------------------------------------------------------------------------- |  | --------------------------------------- |  | --------------------------------- | - | ------------------ | --------------------------------------------------------------------------------------------------------------------------- |  | 
|Comloca Technology (Shenzhen) Company Limited (“Comloca”)                             |  | PRC                                     |  | 100                               | % |                    | Location-based search business                                                                                              |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Comtech Broadband Corporation Limited (“Comtech Broadband”)                           |  | Hong Kong                               |  | 70                                | % |                    | Sales of electronics components and related products                                                                        |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Comtech Communication Technology (Shenzhen) Company Limited (“Comtech Communication”) |  | PRC                                     |  | 100                               | % |                    | Sales of electronics components and related products                                                                        |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Comtech International (Hong Kong) Limited (“Comtech Hong Kong”)                       |  | Hong Kong                               |  | 100                               | % |                    | Sales of electronics components and related products                                                                        |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Comtech Software Technology (Shenzhen) Company Limited (“Comtech Software”)           |  | PRC                                     |  | 100                               | % |                    | Sales of electronics components and related products and research and development of software products                      |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Epcot Multimedia Technology (SZ) Co. Ltd. (“Epcot”)                                   |  | PRC                                     |  | 100                               | % |                    | Provision of media communication and collaboration platforms and solutions                                                  |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Keen Awards Limited (“Keen Awards”)                                                   |  | Hong Kong                               |  | 100                               | % |                    | Sales of technology components and provision of design and engineering services for integrated display technology solutions |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Shenzhen Comtech International Limited (“Shenzhen Comtech”)                           |  | PRC                                     |  | 100                               | % |                    | Sales of electronics components and related products (note a)                                                               |  | 
|                                                                                      |  |                                         |  |                                   |   |                    |                                                                                                                             |  | 
|Shanghai E&T System Company Limited (“Shanghai E & T”)                                |  | PRC                                     |  | 100                               | % |                    | Sales of electronics components and related products (note a)                                                               |  | 



F-9







|Name of company                                                    |  | Place of incorporation or establishment |  | Attributable equity interest held |   | Principal activity |                                                                                                                                            |  | 
|------------------------------------------------------------------ |  | --------------------------------------- |  | --------------------------------- | - | ------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|Shenzhen Huameng Software Company Limited (“Huameng PRC”)          |  | PRC                                     |  | 100                               | % |                    | Provision of technology and engineering services, outsourcing, network system integration and related training and maintenance services    |  | 
|                                                                   |  |                                         |  |                                   |   |                    |                                                                                                                                            |  | 
|Viewtran Technology (Shenzhen) Co., Limited (“Viewtran PRC”)       |  | PRC                                     |  | 100                               | % |                    | Provision of media communication and collaboration platforms and solutions                                                                 |  | 
|                                                                   |  |                                         |  |                                   |   |                    |                                                                                                                                            |  | 
|Comtech Digital Technology (Hong Kong) Limited (“Comtech Digital”) |  | Hong Kong                               |  | 60                                | % |                    | Sales and development of digital and industrial applications, microcontrollers and complementary products                                  |  | 
|                                                                   |  |                                         |  |                                   |   |                    |                                                                                                                                            |  | 
|Comtech Industrial (Hong Kong) Limited (“Comtech Industrial”)      |  | Hong Kong                               |  | 100                               | % |                    | Sales and development of industrial applications, microcontrollers and complementary products                                              |  | 
|                                                                   |  |                                         |  |                                   |   |                    |                                                                                                                                            |  | 
|Mega Sky (Shenzhen) Limited (“Mega Sky SZ”)                        |  | PRC                                     |  | 100                               | % |                    | Provision of industrial and microcontroller based system solutions and research and development of software products                       |  | 
|                                                                   |  |                                         |  |                                   |   |                    |                                                                                                                                            |  | 
|Mega Smart (Shenzhen) Limited (“Mega Smart SZ”)                    |  | PRC                                     |  | 100                               | % |                    | Provision of industrial and microcontroller based system solutions on customer, industrial, automotive, smart meter and smart grid markets |  | 



Note a The
Company exercises its control over Shenzhen Comtech, which in turn, has 95% equity interest in Shanghai E&T, through legal
arrangements between Comtech (China) Holding Limited (“Comtech China”), a wholly-owned subsidiary of the Company, and
Shenzhen Comtech’s legal shareholders (“Legal Shareholders”), Jeffrey Kang, CEO of the Group, Huimo Chen, the
mother of Jeffrey Kang, and Honghui Li, the Vice President of the Group. In 2006, Jeffrey Kang executed an agreement to transfer
his 99% equity interest in Shenzhen Comtech to Honghui Li. The Legal Shareholders agreed to hold the equity interest in Shenzhen
Comtech on behalf of Comtech China, and waived their full rights and risks of ownership of the equity interests in favor of Comtech
China.



The legal shareholders of Shanghai E&T is Shenzhen
Comtech and Honghui Li with equity interests of 95% and 5% respectively. Honghui Li entered into and is bound by similar legal
arrangements with Comtech China relating to his holding of 5% equity interest in Shanghai E&T on behalf of Comtech China waiving
his full rights and risks of ownership of the equity interests in favor of Comtech China.



| | (b) | Redomestication merger
| | --- | ----------------------



The Company was incorporated in the Cayman Islands
on April 12, 2011under the name of “Cogo Group Cayman, Inc.” for the sole purpose of effectuating the redomestication
of the Company’s predecessor, Cogo Group, Inc., a Maryland corporation (“Cogo Maryland”).



F-10







The redomestication merger was approved by the shareholders
of Cogo Maryland on July 25, 2011, pursuant to which each new ordinary share in the common stock of the Company was issued in exchange
for one share of common stock of Cogo Maryland held by the shareholders. The redomestication became effective August 4, 2011. After
the closing of the redomestication merger, the Company changed its name to Cogo Group, Inc. and Cogo Maryland ceased to exist.



The Company’s consolidated financial position,
results of operations and cash flows included in the accompanying consolidated financial statements for periods before August 4,
2011 relate to those of the Company’s predecessor, Cogo Maryland.



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



The accompanying consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).



| | (a) | Principle of Consolidation
| | --- | --------------------------



The consolidated financial statements include the
accounts of Cogo Group, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated
upon consolidation.



| | (b) | Use of estimates
| | --- | ----------------



The preparation of the consolidated financial statements
in conformity with U.S. GAAP requires management of the Group to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and
assumptions include the recoverability of the carrying amount of property and equipment, goodwill and intangible assets; the allocation
of the purchase price for the Company’s acquisitions; the collectibility of accounts receivable; the realizability of deferred
tax assets and inventories; fair value of share-based compensation; the useful lives and salvage values of property and equipment;
and amounts recorded for contingencies. These estimates are often based on complex judgments and assumptions that management believes
to be reasonable but are inherently uncertain and unpredictable. Actual results may differ from those estimates.



| | (c) | Foreign Currency Transactions and Translation
| | --- | ---------------------------------------------



The Group’s reporting currency is the Renminbi
(“RMB”). The functional currency of the Company is the U.S. dollar (“USD”), whereas the functional currency
of the Company’s subsidiaries in the PRC and Hong Kong is the RMB and Hong Kong dollar (“HKD”), respectively.
Prior to cessation of Cogo Maryland, the functional currency of Cogo Maryland was USD. Transactions denominated in currencies other
than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the transaction.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional
currency using the applicable exchange rates at each balance sheet date. The net foreign currency exchange gain / (loss) amounted
to RMB(3,352) (USD(533)), RMB(2,954) and RMB14,381 for the years ended December 31, 2011, 2010 and 2009, respectively, are
included in ‘Selling, general and administrative expenses’ in the consolidated statements of income and comprehensive
income.



Gains and losses resulting from translation of the
financial statements of the Company and the Company’s subsidiaries in Hong Kong into the RMB reporting currency are recorded
as a separate component of accumulated other comprehensive loss within equity.



For the convenience of the readers, the December 31,
2011 RMB amounts, included in the accompanying consolidated financial statements have been translated into USD at the rate of USD1.0000
= RMB6.2939, representing the rate quoted by the People’s Bank of China at the close of business on December 31, 2011.
No representation is made that the RMB amounts could have been, or could be, converted into USD at that rate or at any particular
rate or at all.



F-11







| | (d) | Cash and Pledged Bank Deposits
| | --- | ------------------------------



Cash consists of cash on hand, cash in bank accounts
and interest-bearing savings accounts. Cash deposits that are restricted as to withdrawal or pledged as security, are disclosed
separately on the face of the consolidated balance sheet, and not included in the total cash for the purpose of the consolidated
statements of cash flows.



| | (e) | Accounts Receivable
| | --- | -------------------



Accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for doubtful accounts is the Group’s best estimate of the amount of probable
credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on a review of specifically
identified accounts and aging data. The Group reviews its allowance for doubtful accounts monthly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis.



Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is considered remote. The Company’s subsidiaries
in the PRC are required to comply with local tax requirements on the write-offs of doubtful accounts, which allow for the deductibility
of such write-offs only when sufficient evidence is available to prove the debtors’ inability to make payments. For financial
reporting purposes, the Group generally records write-offs of doubtful accounts at the same time the local tax requirements for
the write-offs are met. As a result, there are generally time lags between the time when a provision for doubtful accounts is provided
and the time the doubtful accounts and the related allowance are written off.



Apart from those disclosed in note 16(d) and 16(e),
the Group does not have any off balance-sheet credit exposure related to its customers.



| | (f) | Inventories
| | --- | -----------



Inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out method. Cost of inventories comprises direct materials.



| | (g) | Long-lived Assets
| | --- | -----------------



Property and Equipment and Intangible Assets



Property and equipment is stated at cost less depreciation
and if applicable, impairment. Depreciation is calculated on a straight-line method over the estimated useful lives of the assets.
The estimated useful lives are as follows:



|Property                                                                                                                  |  | 20 years      
|------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Furniture and office equipment                                                                                            |  | 1 to 5 years  
|Machinery                                                                                                                 |  | 5 years       
|Motor vehicles                                                                                                            |  | 5 years       
|                                                                                                                         
|Intangible assets that are subject to amortization are amortized over their respective estimated useful lives as follows:
|                                                                                                                          | 
|Customer relationships                                                                                                    |  | 5 to 12 years 
|Supplier relationships                                                                                                    |  | 11.5 years    
|Proprietary technology                                                                                                    |  | 3 to 6.5 years
|Proprietary designs                                                                                                       |  | 3 years       
|Website and software assets                                                                                               |  | 3 years       
|Non-compete agreements                                                                                                    |  | 1 to 6 years  
|License agreements                                                                                                        |  | 2 years       
|Order backlog                                                                                                             |  | 1 month       



F-12







Property and equipment and intangible assets subject
to depreciation/amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the estimated fair value of the asset. Assets to be disposed of are separately presented in the balance sheet
and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.



Goodwill



Goodwill represents the excess of the aggregate
purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is not amortized, but
instead tested for impairment at the reporting unit level at least annually and whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. The goodwill impairment test is a two-step test. Under the first step, the fair
value of a reporting unit is compared with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds
its carrying value, step two does not need to be performed. However, if the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the reporting unit and the Group must perform step two of the impairment
test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair
value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. Fair value of each of the Group’s reporting units is determined using
a combination of the market and income approaches. For the years ended December 31, 2011 and 2010, impairment loss amounted
to RMB236,945 (USD37,647) and RMB21,422, respectively. For the year ended December 31, 2009, no impairment loss was recorded.
See note 8.



| | (h) | Income Taxes
| | --- | ------------



Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss
and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in consolidated statements of income and comprehensive income in the period
that includes the enactment date or date of change in tax rate. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.



The Group recognizes in the consolidated financial
statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on
the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50%
likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Group has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component
of income tax expense in the consolidated statements of income and comprehensive income.



| | (i) | Revenue Recognition
| | --- | -------------------



Product Sales



The Company recognizes revenue at the point in time
when the components are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable
is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.



Sales of components represent the invoiced value
of goods, net of value added taxes (“VAT”), sales returns, trade discounts and allowances.



In the PRC, VAT at a general rate of 17% on invoice
amount is collected on behalf of tax authorities in respect of the sales of products and is not recorded as revenue. VAT collected
from customers, net of VAT paid for purchases, is recorded as a liability in the consolidated balance sheets until it is paid to
the authorities.



F-13







Service Revenue



Revenue for services is generally
recognized when services are performed.



| | (j) | Research and Development and Advertising
| | --- | ----------------------------------------



Research and development and advertising costs are
expensed as incurred. Research and development costs amounted to RMB101,639 (USD16,149), RMB77,888 and RMB67,504 for the years
ended December 31, 2011, 2010 and 2009, respectively. Advertising costs amounted to RMB334 (USD53), RMB157 and RMB59 for the
years ended December 31, 2011, 2010 and 2009, respectively.



| | (k) | Shipping and Handling Fees and Costs
| | --- | ------------------------------------



Costs incurred by the Group for shipping and handling,
including costs paid to third-party transportation companies, to transport and deliver products to customers, are included in “selling,
general and administrative expenses”. Shipping and handling fees and costs amounted to RMB12,432 (USD1,975), RMB9,798 and
RMB7,749 for the years ended December 31, 2011, 2010 and 2009, respectively.



| | (l) | Share-based Compensation
| | --- | ------------------------



The Group applies ASC 718, Compensation- Stock
Compensation to measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award and recognizes the costs over the period the employee is required to provide service in exchange
for the award, which generally is the vesting period. For awards with performance conditions, the compensation expense is based
on the grant-date fair value of the award, the number of shares ultimately expected to vest and the vesting period.



Share-based compensation expense amounted to RMB66,723
(USD10,601), RMB100,930 and RMB59,045 for the years ended December 31, 2011, 2010 and 2009, respectively.



The Group currently uses authorized
shares and shares of a subsidiary to satisfy share award exercises.



| | (m) | Earnings / (loss) per Share
| | --- | ---------------------------



Basic earnings / (loss) per share is computed by
dividing net income / (loss) by the weighted average number of common stock outstanding during the year, including contingently
issuable shares when all necessary conditions for the issuance have been satisfied. Diluted earnings / (loss) per share is computed
by dividing net income / (loss) by the weighted average number of common and, if applicable, dilutive potential common shares outstanding
during the year. Dilutive potential common shares consist of common shares issuable upon the exercise of stock options, non-vested
equity share units, including performance shares, warrants using the treasury stock method. Dilutive potential common shares also
includes common shares issuable in connection with a business combination upon resolution of contingencies based on the number
of such shares that would be issuable at the end of the year assuming it was the end of the contingency period.



| | (n) | Commitments and Contingencies
| | --- | -----------------------------



Liabilities for loss contingencies arising from
claims, assessments, litigation, fines and other sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment can be reasonably estimated.



| | (o) | Recently Issued Accounting Pronouncements
| | --- | -----------------------------------------



Accounting Standards Update (“ASU”)
2011-11, an update to ASC 210, Balance sheet



In December 2011, the Financial Accounting Standards
Board (“FASB”) issued ASU 2011-11, an update to ASC 210, Balance Sheet - Disclosures about Offsetting Assets and
Liabilities. The FASB issued this ASU in conjunction with the International Accounting Standards Board’s (“IASB”)
issuance of amendments to Disclosures – Offsetting Financial Assets and Financial Liabilities (Amendments to International
Financial Reporting Standards (“IFRS”)7). ASU 2011-11 requires disclosures to allow investors to better compare financial
statements prepared under U.S. GAAP with financial statements prepared under IFRS while retaining the existing offsetting models
under U.S. GAAP and IFRS. For the Company, ASU 2010-11 is effective for annual periods beginning January 1, 2013 and interim periods
within those annual periods. Retrospective application is required. Since this standard impacts disclosure requirements only, its
adoption will not have a material impact on the Company’s consolidated results of operations or financial condition.



F-14







ASU 2011-05, an update to ASC 220, Comprehensive
Income



In June 2011, the FASB issued ASU 2011-05, an update
to ASC 220, Comprehensive Income - Presentation of Comprehensive Income. ASU 2011-05 increases the prominence of other comprehensive
income in financial statements. ASU 2011-05 permits entity to present the components of net income and comprehensive income in
either one or two consecutive financial statements and eliminates the option in U.S. GAAP to present other comprehensive income
in the statement of changes in equity. For the Company, ASU 2011-05 is effective for fiscal years, and interim periods within those
years beginning after December 15, 2011. Retrospective application is required and early adoption is permitted. Since the standard
impacts presentation and disclosure requirements only, the adoption is not expected to have a material impact on the Company’s
consolidated results of operations or financial condition.



ASU 2011-04, an update to ASC820, Fair Value
Measurements and Disclosures



In May 2011, the FASB issued ASU 2011-04, an update
to ASC 820, Fair Value Measurements and Disclosures – Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. ASU 2011-04 is issued to provide largely identical guidance about fair value measurement and
disclosure requirements with the IASB’s new IFRS 13, Fair Value Measurement. ASU 2011-04 provides guidance about how
fair value should be applied where it already is required or permitted under U.S. GAAP and most of changes are clarifications of
existing guidance or wording changes to align with IFRS 13. ASU 2011-04 requires a reporting entity to disclose a change, if any,
in valuation technique and related inputs that result from applying the ASU and to quantify the total effect, if practicable in
period of adoption. For the Company, ASU 2011-04 is effective prospectively for interim and annual periods beginning after December
15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s consolidated results of
operations or financial condition.



ASU 2010-29, an update to ASC 805, Business
Combination



In December 2010, the FASB issued ASU 2010-29, Business
Combination (ASC 805): Disclosure of Supplementary Pro Forma Information for Business Combination. ASU 2010-29 requires disclosure
about pro forma information including revenues and earnings of the combined entity within the notes to the financial statements
and pro forma information be presented as if business combination occurred at the beginning of the prior annual reporting period
for purposes of calculating both the current and prior reporting period pro forma financial information. ASU 2010-29 also requires
that the disclosure be accompanied by narrative description of the amount and nature of material nonrecurring pro forma adjustment.
For the Company, ASU 2010-29 is effective for business combinations with effective dates on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. Prospective application is required with early adoption permitted.
The Company adopted the provisions of this standard prospectively to business combinations with effective dates on or after January
1, 2011. Since this standard impacts disclosure requirements only, its adoption did not have a material impact on the Company’s
consolidated results of operations or financial condition.



F-15







| | 3. | ACCOUNTS RECEIVABLE, NET
| | -- | ------------------------



Accounts receivable consist of the following:



|                                      |  | 2011 |         |   | 2011 |  |           | 2010 | 
|------------------------------------- |  | ---- | ------- | - | ---- |  | --------- | ---- | 
|                                      |  | USD  |         |   | RMB  |  |           | RMB  | 
|Accounts receivable                   |  |      | 161,651 |   |      |  | 1,017,415 |      | 
|                                      |  |      |         |   |      |  |           |      | 
|Less: allowance for doubtful accounts |  |      | (12,014 | ) |      |  | (75,617   | )    | 
|                                      |  |      | 149,637 |   |      |  | 941,798   |      | 



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



|                                                                             |  | 2011 |        |   | 2011 |  |        | 2010 |  |  | 2009   |  
|---------------------------------------------------------------------------- |  | ---- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | -
|                                                                             |  | USD  |        |   | RMB  |  |        | RMB  |  |  | RMB    |  
|Balance at the beginning of year                                             |  |      | 11,645 |   |      |  | 73,292 |      |  |  | 73,306 |  
|Additional allowance for doubtful accounts                                   |  |      | 477    |   |      |  | 3,000  |      |  |  | 2      |  
|Write-off of accounts receivable against the allowance for doubtful accounts |  |      | —      |   |      |  | —      |      |  |  | (16    | )
|Write back on allowance for doubtful accounts                                |  |      | (108   | ) |      |  | (675   | )    |  |  | —      |  
|Balance at the end of year                                                   |  |      | 12,014 |   |      |  | 75,617 |      |  |  | 73,292 |  



The Group has a credit policy in place and the exposure
to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain
amount.



In 2010, the Group entered into a factoring agreement
with Bank of China (Hong Kong) Limited (“BOC”) (see note 9) in which certain accounts receivable were transferred with
recourse to BOC. Under the factoring agreement, BOC pays an amount net of discount to the Group and collects the factored accounts
receivable balances directly from customers. The discount costs 2.7% to 3.1% of the balance transferred and is included in “interest
expense”. The Group records the transfers of accounts receivable pursuant to the factoring agreement as sales when it is
considered to have surrendered control of such receivables under the provisions of ASC 860, Transfers and Servicing. As
of December 31, 2011 and 2010, the Group has not accrued a recourse liability since the estimated fair value of the recourse
obligation was immaterial.



For the years ended December 31, 2011 and 2010,
the Group received proceeds from the sale of accounts receivable amounting to RMB660,230 (USD104,900) and RMB455,437, respectively.
There was no sale of accounts receivable for the year ended December 31, 2009. In addition, the Group recorded interest expense
amounting to RMB4,720 (USD750) and RMB1,852 in respect of the accounts receivable factored for the years ended December 31,
2011 and 2010. As of December 31, 2011 and 2010, the Group has derecognized factored accounts receivable amounting to RMB259,309
(USD41,200) and RMB188,042, respectively, in accordance with ASC 860.



| | 4. | BILLS RECEIVABLE
| | -- | ----------------



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



In certain circumstances, the Group has arranged
to transfer with recourse certain of its bills receivable to banks. Under this discounting arrangement, the bank pays a discounted
amount to the Group and collects the amounts owed from the customers’ banks. The discount costs 1.0% to 4.5% of the balance
transferred, which is recorded as “interest expense”.



For the years ended December 31, 2011, 2010
and 2009, the Group received proceeds from the sale of bills receivable amounting to RMB51,737 (USD8,220), RMB22,911 and RMB72,613,
respectively. In addition, the Group recorded discounts amounting to RMB1,187 (USD189), RMB210 and RMB479 in respect of the bills
receivable sold for the years ended December 31, 2011, 2010 and 2009, respectively.



For bills receivable sold to banks that the Group
has surrendered control, the Group derecognized the discounted bills receivable pursuant to the provisions of ASC 860. As of December 31,
2011 and 2010, the Group has derecognized discounted bills receivable amounting to RMB12,162 (USD1,932) and RMB2,158, respectively
in accordance with ASC 860.



F-16







| | 5. | INVENTORIES
| | -- | -----------



Inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out method. Cost of inventories comprises direct materials.



Inventories by major categories are as follows:



|               |  | 2011 |        |  | 2011 |  |         | 2010 | 
|-------------- |  | ---- | ------ |  | ---- |  | ------- | ---- | 
|               |  | USD  |        |  | RMB  |  |         | RMB  | 
|Raw materials  |  |      | 117    |  |      |  | 733     |      | 
|Finished goods |  |      | 51,915 |  |      |  | 326,749 |      | 
|Total          |  |      | 52,032 |  |      |  | 327,482 |      | 



Inventories amounting to RMB63 (USD10), RMB9,600
and RMB6,365 were written off during the years ended December 31, 2011, 2010 and 2009, respectively.



| | 6. | PROPERTY AND EQUIPMENT, NET
| | -- | ---------------------------



Property and equipment is stated at cost less depreciation
and if applicable, impairment.



Property and equipment consists of the following:



|                               |  | 2011 |        |   | 2011 |  |         | 2010 | 
|------------------------------ |  | ---- | ------ | - | ---- |  | ------- | ---- | 
|                               |  | USD  |        |   | RMB  |  |         | RMB  | 
|Property                       |  |      | 266    |   |      |  | 1,671   |      | 
|Machinery                      |  |      | 600    |   |      |  | 3,780   |      | 
|Furniture and office equipment |  |      | 5,382  |   |      |  | 33,874  |      | 
|Motor vehicles                 |  |      | 2,010  |   |      |  | 12,649  |      | 
|Total                          |  |      | 8,258  |   |      |  | 51,974  |      | 
|Less: accumulated depreciation |  |      | (5,415 | ) |      |  | (34,083 | )    | 
|Property and equipment, net    |  |      | 2,843  |   |      |  | 17,891  |      | 



Depreciation expense for the years ended December 31,
2011, 2010 and 2009 is as follows:



|                                             |  | 2011 |     |  | 2011 |  |       | 2010 |  |  | 2009  | 
|-------------------------------------------- |  | ---- | --- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                             |  | USD  |     |  | RMB  |  |       | RMB  |  |  | RMB   | 
|Cost of sales                                |  |      | 7   |  |      |  | 41    |      |  |  | 36    | 
|Selling, general and administrative expenses |  |      | 746 |  |      |  | 4,697 |      |  |  | 4,418 | 
|Research and development expenses            |  |      | 229 |  |      |  | 1,441 |      |  |  | 1,690 | 
|Total                                        |  |      | 982 |  |      |  | 6,179 |      |  |  | 6,144 | 



| | 7. | ACQUISITIONS AND EXTRAORDINARY ITEM
| | -- | -----------------------------------



| | (a) | 2011 Acquisition
| | --- | ----------------



MDC Tech International Holdings Limited (“MDC”)



On January
31, 2011, the acquisition date, the Group acquired 100% of the outstanding shares of MDC and thereby obtained control of MDC and
its subsidiary for a consideration of USD22,000 (equivalent to RMB145,237 as of the acquisition date). The purchase consideration
would be paid over twelve months in four equal installments on or before the last business day of each of the four fiscal quarters
of the Company for the year ended December 31, 2011, and was fully settled during the year. In light of the installment schedule,
the Group has recorded the purchase consideration on a discounted basis, which amounted to USD21,869 (equivalent to RMB144,372
as of the acquisition date).



F-17







The principal activities of MDC and its subsidiary
are the distribution of medical and healthcare equipment in the PRC, and the development of industrial applications on energy saving
modules in the PRC.



The acquisition of MDC was accounted for by the Group
as a purchase business combination in accordance with ASC 805, Business Combinations. The acquisition of MDC resulted in
the recognition of goodwill of RMB61,509 and the recording of net identifiable assets of RMB82,863 at the date of acquisition.
Recognized intangible assets relate to order backlog, customer relationships, non-compete agreements and proprietary technology
which have a total weighted-average useful life of 8.9 years from the date of acquisition. Goodwill and the amortization of these
intangible assets are not deductible for tax purposes.



The acquisition is expected to support the expansion
of the Company’s industrial business in the PRC and the medical equipment and system sales in the PRC. Goodwill recorded
in connection with the acquisition was attributed by (1) synergy to expand MDC’s operation and business on the established
platform, industry knowledge and experience of the Group and the experience of the Group in providing module reference design and
solutions of industrial applications on energy saving modules to customers; (2) expected future additional sales orders from
new customers approachable by MDC after the acquisition, but for which MDC alone do not have sufficient resources to carry out
such businesses; and (3) the expected outlook in the PRC medical and healthcare equipment and industrial application market
with the PRC government stimulus package.



The purchase price allocation is as follows:



|                         |  | USD |        |   | RMB | 
|------------------------ |  | --- | ------ | - | --- | 
|Intangible assets        |  |     |        |   |     | 
|– order backlog          |  |     | 652    |   |     | 
|– customer relationships |  |     | 7,700  |   |     | 
|– non-compete agreements |  |     | 6,500  |   |     | 
|– proprietary technology |  |     | 180    |   |     | 
|Goodwill                 |  |     | 9,317  |   |     | 
|Deferred tax liabilities |  |     | (2,480 | ) |     | 
|                         |  |     |        |   |     | 
|Net asset acquired       |  |     | 21,869 |   |     | 



The amount of revenue for MDC since the acquisition date included
in the consolidated income statement from January 31, 2011 to December 31, 2011 is RMB115,296 (USD18,319).



Unaudited proforma financial information



The following unaudited proforma financial information represents
the combined results of operations of the Group as if the acquisition of MDC had occurred as of January 1, 2010. The unaudited
proforma information is not necessarily indicative of what the Company’s consolidated results of operations actually would
have been had it completed the acquisition as of January 1, 2010. In addition, the unaudited proforma financial information does
not attempt to project the future results of operations of the Group.



F-18







|                                                             |  | Year ended December 31 |        
|------------------------------------------------------------ |  | ---------------------- | -------
|                                                             |  | 2011                   |        
|                                                             |  | USD (unaudited)        |        
|Net revenue                                                  |  |                        | 564,737
|Income / (loss) from operations                              |  |                        | (21,264
|Net income / (loss) attributable to Cogo Group, Inc.         |  |                        | (25,065
|Earnings / (loss) per share attributable to Cogo Group, Inc. |  |                        |        
|Basic                                                        |  |                        | (0.68  
|Diluted                                                      |  |                        | (0.68  



(b) 2010 Acquisition



The Group made no acquisitions during the year ended December
31, 2010.



(c) 2009 Acquisition



Mega Smart Group Limited (“Mega Smart”)



On May 30, 2009, the acquisition date, the
Group acquired 100% of the outstanding shares of Mega Smart and thereby obtained control of Mega Smart and its subsidiary for a
consideration of RMB122,866. The purchase consideration would be paid in thirteen installments. The first installment was RMB40,955,
which was payable within three months of May 30, 2009. The subsequent amount of RMB81,911 is payable over twelve equal monthly
installments of RMB6,826 one month following the first installment. In light of the installment schedule, the borrowing rate adopted
reflects the normal borrowing rate that the Group can obtain for transactions with similar terms over the payment period and calculated
the fair value of the purchase consideration as RMB122,415.



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



The acquisition of Mega Smart was accounted for
by the Group as a purchase business combination in accordance with ASC 805. The acquisition of Mega Smart resulted in the recognition
of goodwill of RMB83,647 and the recording of net identifiable assets of RMB38,768 at the date of acquisition. Recognized intangible
assets relate to supplier relationships, customer relationships, non-compete agreements and proprietary technology which have a
total weighted-average useful life of 7.5 years from the date of acquisition. Goodwill and the amortization of these intangible
assets are not deductible for tax purposes.



The acquisition was expected to support the expansion
of the Company’s industrial applications component business in China. Goodwill is attributed by (1) synergy to expand
Mega Smart’s operation and business on the established platform, industry knowledge and experience of the Group; (2) assembled
workforce including engineers and management; and (3) the expected outlook in the PRC industrial application market with the
PRC government stimulus package.



Management increased the fair value of acquired
proprietary technology from RMB2,048 as of May 30, 2009 (the “acquisition date”) to RMB6,145 due to the refinement
of the valuation for the year ended December 31, 2009. Accordingly, the related deferred tax liabilities were increased by
RMB676. The impact of all changes were charged to goodwill and resulted in the reduction of goodwill by RMB3,421 for the year ended
December 31, 2009.



F-19







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



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



Unaudited proforma financial information



The following unaudited proforma financial information
represents the combined results of operations of the Group as if the acquisition of Mega Smart had occurred as of January 1,
2009. The unaudited proforma information is not necessarily indicative of what the Company’s consolidated results of operations
actually would have been had it completed the acquisition as of January 1, 2009. In addition, the unaudited proforma financial
information does not attempt to project the future results of operations of the Group.



|                                                    |  | 2009            |          
|--------------------------------------------------- |  | --------------- | ---------
|                                                    |  | RMB (unaudited) |          
|Net revenue                                         |  |                 |          
|Product sales                                       |  |                 | 2,107,743
|Services revenue                                    |  |                 | 29,401   
|                                                    |  |                 | 2,137,144
|Income from operations                              |  |                 | 75,806   
|Net Income attributable to Cogo Group, Inc.         |  |                 | 82,475   
|Earnings per share attributable to Cogo Group, Inc. |  |                 |          
|Basic                                               |  |                 | 2.26     
|Diluted                                             |  |                 | 2.19     



(d) Other acquisitions, net gain and extraordinary income



Long Rise



On July 31, 2008, the Group entered into a
share purchase agreement (the “Original Agreement”) to purchase 70% of the outstanding shares of Long Rise Holdings
Limited (“Long Rise”) and its subsidiary, Rise Year, for a consideration of RMB60,921 payable in cash, none of which
is contingent. The purchase agreement did not include a fixed payment schedule, and as a result the acquisition price was deemed
to be payable on demand. The Company and the selling shareholders of Long Rise agreed that the consideration could be held back
by the Company to settle any claims that might arise for contractual warranties and for any misrepresentations made to the Company.
The Company paid approximately RMB3,485, RMB476 and RMB550 in 2008, 2009 and 2010, respectively. In 2010, the Company entered into
a supplementary agreement as stated below and the remaining consideration payable was discharged as of December 31, 2010. Therefore,
the Company did not make any payment from 2011 onwards.



The acquisition of Long Rise was accounted for by
the Group as a purchase business combination in accordance with Statements of Financial Accounting Standards (“SFAS”)
No. 141, Business Combinations(“SFAS No.141”). The acquisition of Long Rise resulted in the recognition
of goodwill of RMB21,422 and recording net identifiable assets of RMB39,499 at the date of acquisition. Recognized intangible assets
relate to customer relationships, non-compete agreements and proprietary technology which have a weighted-average useful life of
3.9 years from the date of acquisition. Goodwill and the amortization of these intangible assets are not deductible for tax purposes.
Purchased in-process research and development of RMB4,390 was also recognized as an intangible asset and was expensed upon acquisition
because technological feasibility had not been established and no future alternative uses exist. This amount is included in research
and development expense.



F-20







The following table summarizes the amounts assigned
to each major asset acquired and liability assumed at the date of acquisition.



|                                       |  | RMB |       
|-------------------------------------- |  | --- | ------
|Cash                                   |  |     | 8,753 
|Accounts receivable                    |  |     | 16,807
|Inventories                            |  |     | 8,010 
|Property and equipment                 |  |     | 17    
|Intangible assets                      |  |     |       
|– customer relationships               |  |     | 10,671
|– non-compete agreements               |  |     | 13,527
|– in-process research and development  |  |     | 4,390 
|– proprietary technology               |  |     | 5,959 
|Goodwill                               |  |     | 21,422
|Bank borrowings                        |  |     | (9,314
|Income taxes payable                   |  |     | (1,584
|Accrued expenses and other liabilities |  |     | (8,506
|Deferred tax liabilities               |  |     | (4,976
|Noncontrolling interest                |  |     | (4,255
|Purchase price allocated               |  |     | 60,921



In 2010, the Company and the selling shareholders
of Long Rise renegotiated certain clauses in the Original Agreement. On December 31, 2010, the Company and the selling shareholders
of Long Rise signed a supplementary agreement (the “Supplementary Agreement”) in which the selling shareholders of
Long Rise discharged the Group’s obligation to pay the outstanding payable for the acquisition of Long Rise of RMB54,178
and transferred the remaining 30% equity interest in Long Rise to the Group for no consideration and the Group agreed to release
the selling shareholders of Long Rise from the non-compete agreements. As a result of the Supplementary Agreement, the Company
recognized a net gain on settlement relating to the acquisition of Long Rise before goodwill impairment of RMB43,676 in the consolidated
statement of income and comprehensive income for the year ended December 31, 2010 summarized as follows:



|                                                                                           |  | RMB |       
|------------------------------------------------------------------------------------------ |  | --- | ------
|Adjustment to the purchase consideration                                                   |  |     | 54,178
|Disposal of the non-compete agreements                                                     |  |     | (2,630
|Impairment losses of customer relationships and proprietary technology                     |  |     | (7,872
|Net gain on settlement relating to the acquisition of Long Rise before goodwill impairment |  |     | 43,676



As a result of the above arrangements, the Company
compared the carrying value of the customer relationships and proprietary technology to the undiscounted cash flows expected to
be generated from those assets. For those customer relationships and proprietary technology for which the carrying amount was larger
than its estimated undiscounted cash flow, the Company recorded an impairment charge to the extent the carrying amounts of customer
relationships and proprietary technology exceeded their respective fair values. As a result, the carrying amount of RMB7,872 of
customer relationships and proprietary technology were fully impaired during the year ended December 31, 2010.



In addition, as a result of the above arrangements,
management revised its future cash flow expectations for its business in the reporting unit relating to Long Rise. Since the carrying
value exceeded the fair value of this reporting unit, which was determined by a discounted cash flow model, a second step of the
goodwill impairment test was performed to measure the impairment loss based on any excess of the carrying value of the reporting
unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill was determined by allocating
the fair value of the reporting unit in a manner similar to a purchase price allocation. Accordingly, the Company recognized an
impairment loss of RMB21,422 in relation to the reporting unit relating to Long Rise during the year ended December 31, 2010. As
a result, the carrying amount of the goodwill relating to Long Rise was fully impaired.



F-21







Keen Awards



The Group entered into a share purchase agreement
on August 1, 2007 to purchase all the outstanding common shares of Keen Awards, for a consideration of approximately RMB150,924
payable in cash, common stock of the Company and the common stock of Keen Awards, all of which were contingently payable at various
dates upon achieving certain agreed earnings levels over the two year period following the acquisition. The sum of the fair market
values of the identifiable assets acquired less liabilities assumed which amounted to RMB63,032 exceeded the acquisition cost,
excluding the contingent consideration by RMB63,032, resulting in negative goodwill. Since the contingent consideration could result
in recognition of additional purchase price in a future period, the Company recognized, as if it were a liability, an amount equal
to the lesser of the maximum of the amount of the contingent consideration and the total amount of negative goodwill. Accordingly,
the amount of the negative goodwill of RMB63,032 was recognized as if it were a liability at the date of acquisition.



Subsequent to the initial recognition, the Company
made total cash payments in relation to the contingent consideration for the acquisition of Keen Awards of RMB33,914. The consideration
recognized of RMB63,032 for the Keen Awards acquisition was contingently payable in cash. In addition to the contingent cash payment
recognized, the agreement includes additional contingent payments of:



| | · | an additional RMB27,522 in cash;
| | - | --------------------------------



| | · | 287,770 shares with an assigned fair value of RMB30,185 at acquisition date; and
| | - | --------------------------------------------------------------------------------



| | · | a 20% equity interest in Keen Awards with an assigned fair value of RMB30,185 at acquisition date.
| | - | --------------------------------------------------------------------------------------------------



Based on the terms of the Keen Awards acquisition
agreement, the Company was first required to settle the cash contingent consideration until all cash payments are settled, followed
by the issuance of the shares of the Company and finally, the issuance of 20% of the shares in Keen Awards. However, the contingent
consideration recognized was restricted to the lesser of the maximum of the amount of the contingent consideration and the total
amount of negative goodwill. Therefore, the Company was not required to recognize the fair value of any of the shares contingently
issuable for the acquisition of Keen Awards.



On August 28, 2009, the Company and the seller
of Keen Awards agreed that the contingency in respect of the acquisition for Keen Awards was resolved and it was also determined
that no further consideration was payable. Therefore, because the amount of contingent consideration recognized, as if it were
a liability, exceeded the amount settled, the excess of RMB29,118 was first allocated to reduce the assets acquired being the intangibles
asset of RMB26,803 net of deferred taxation of RMB4,422 and remaining amount of RMB6,737 was recognized as an extraordinary gain
in the consolidated statements of income and comprehensive income.



| | 8. | GOODWILL AND INTANGIBLE ASSETS
| | -- | ------------------------------



| | (a) | Goodwill
| | --- | --------



The changes in the carrying amount of our goodwill,
by segment, for the years ended December 31, 2011, 2010 and 2009 are as follows:



|                                              |  | Product sales |          |   | Service revenue |  |         | Total | 
|--------------------------------------------- |  | ------------- | -------- | - | --------------- |  | ------- | ----- | 
|                                              |  | RMB           |          |   | RMB             |  |         | RMB   | 
|Balance as of January 1, 2009                 |  |               |          |   |                 |  |         |       | 
|Goodwill                                      |  |               | 73,247   |   |                 |  | 47,649  |       | 
|Accumulated impairment losses                 |  |               | (4,264   | ) |                 |  | —       |       | 
|                                              |  |               | 68,983   |   |                 |  | 47,649  |       | 
|Acquisition of Mega Smart                     |  |               | 83,647   |   |                 |  | —       |       | 
|Adjustment on goodwill of Mega Smart (note a) |  |               | (3,421   | ) |                 |  | —       |       | 
|Balance as of December 31, 2009               |  |               |          |   |                 |  |         |       | 
|Goodwill                                      |  |               | 153,473  |   |                 |  | 47,649  |       | 
|Accumulated impairment losses                 |  |               | (4,264   | ) |                 |  | —       |       | 
|                                              |  |               | 149,209  |   |                 |  | 47,649  |       | 
|Impairment loss of Long Rise (note 7(d))      |  |               | (21,422  | ) |                 |  | —       |       | 
|Balance as of December 31, 2010               |  |               |          |   |                 |  |         |       | 
|Goodwill                                      |  |               | 153,473  |   |                 |  | 47,649  |       | 
|Accumulated impairment losses                 |  |               | (25,686  | ) |                 |  | —       |       | 
|                                              |  |               | 127,787  |   |                 |  | 47,649  |       | 
|Acquisition of MDC (note 7(a))                |  |               | 61,509   |   |                 |  | —       |       | 
|Impairment loss (note 8(c))                   |  |               | (189,296 | ) |                 |  | (47,649 | )     | 
|Balance as of December 31, 2011               |  |               |          |   |                 |  |         |       | 
|Goodwill                                      |  |               | 214,982  |   |                 |  | 47,649  |       | 
|Accumulated impairment losses                 |  |               | (214,982 | ) |                 |  | (47,649 | )     | 
|                                              |  |               | —        |   |                 |  | —       |       | 
|Balance as of December 31, 2011 (in USD)      |  |               | —        |   |                 |  | —       |       | 



|Note a | Goodwill arising from the acquisition of Mega Smart was adjusted in 2009
    on completion of the assessment of the estimated discounted cash flows in relation to the proprietary technology acquired.
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-22







| | (b) | Intangible Assets
| | --- | -----------------



The Company reviews long-lived assets, including
its intangible assets subject to amortization, which for the Company are its customer relationships, supplier relationships, proprietary
technology, proprietary designs, website and software asset, non-compete agreements, license agreement and order backlog, for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability
of long-lived assets is measured by a comparison of the carrying amount of the asset group to the future undiscounted net cash
flows expected to be generated by those assets. If such assets are considered to be impaired, the impairment charge recognized
is the amount by which the carrying amounts of the assets exceed the fair value of the assets.



As of December 31, 2011 and 2010, the Company’s
intangible assets related to the Company’s acquisitions consisted of the following:



|                           |  | As of December 31, 2011 |        
|-------------------------- |  | ----------------------- | -------
|                           |  | Gross carrying amount   |        
|                           |  | RMB                     |        
|Customer relationships     |  |                         | 189,259
|Supplier relationships     |  |                         | 8,876  
|Proprietary technology     |  |                         | 17,542 
|Proprietary designs        |  |                         | 1,627  
|Website and software asset |  |                         | 575    
|Non-compete agreements     |  |                         | 81,940 
|License agreement          |  |                         | 1,249  
|Order backlog              |  |                         | 4,305  
|                           |  |                         |        
|Total                      |  |                         | 305,373
|Total (in USD)             |  |                         | 48,519 



F-23







|                           |  | As of December 31, 2010 |        
|-------------------------- |  | ----------------------- | -------
|                           |  | Gross  carrying amount  |        
|                           |  | RMB                     |        
|Customer relationships     |  |                         | 143,939
|Supplier relationships     |  |                         | 8,876  
|Proprietary technology     |  |                         | 18,713 
|Proprietary designs        |  |                         | 1,627  
|Website and software asset |  |                         | 575    
|Non-compete agreements     |  |                         | 41,659 
|License agreement          |  |                         | 1,249  
|                           |  |                         |        
|Total                      |  |                         | 216,638



Amortization expense for intangible assets for the
years ended December 31, 2011, 2010 and 2009 of RMB28,631 (USD4,549), RMB21,803 and RMB28,521 was included in selling, general
and administrative expenses, respectively. Estimation amortization expense for the next five years is: RMB22,595 in 2012, RMB25,295
in 2013, RMB25,295 in 2014, RMB24,154 in 2015 and RMB20,263 in 2016.



|(c) | Impairment of goodwill
|--- | ----------------------



As a result of the continued significant decline
in the price of the Company’s shares of common stock in 2011, the Company’s aggregate market value was significantly
lower than the aggregate carrying value of the Company’s reporting units. Accordingly, the Company determined that the carrying
amounts of goodwill exceeded their respective implied fair values of nil and recorded a goodwill impairment charge of RMB236,945
(USD37,647). The goodwill impairment charge did not impact debt covenants compliance under the Company’s existing credit
facility.



|9. | PLEDGED BANK DEPOSITS, BANK BORROWINGS AND BANKING FACILITIES
|-- | -------------------------------------------------------------



The Group entered into several banking facilities
with Standard Chartered Bank (Hong Kong) Limited (“SCB”), BOC, Guangdong Development Bank Holdings Company Limited
(“GDB”) and the Hong Kong and Shanghai Banking Corporation Limited (“HSBC”). As of December 31, 2011
and 2010, the aggregate credit limit of these facilities amounted to RMB1,431,862 (USD227,500) and RMB886,233, respectively. These
facilities include letters of guarantee, bank loans and irrevocable letters of credit. The banking facility with BOC also included
an accounts receivable factoring agreement as disclosed in note 3. The credit limit and the respective secured deposits for the
accounts receivable factoring agreement shares the same credit limit with the banking facility with BOC.



The Group’s banking facilities contain various
covenants, including the Group’s consolidated net borrowing ratio not exceeding 0.25 times and the Company maintaining a
tangible net worth of not less than RMB1,000,000 (USD158,884). Other conditions include the Company’s Chief Executive Officer
remaining as the single largest beneficial owner of the Company and Chairman of the Board of Directors and actively involving in
the management of the Group, the Company remaining as listed in NASDAQ and retaining at least 50% equity interest in those subsidiaries
which entered into the banking facilities with the banks. As of December 31, 2011, the Group was in compliance with all covenants.



As of December 31, 2011 and 2010, the total
outstanding bank borrowings amounted to RMB854,234 (USD135,724) and RMB505,888, respectively. The weighted average interest rate
on outstanding bank borrowings as of December 31, 2011 was 2.2% (2010: 2.1%). The aggregate amount of funds secured as pledged
deposits with the respective banks as of December 31, 2011 and 2010 amounted to RMB431,695 (USD68,589) and RMB332,050, respectively.



As of December 31, 2011 and 2010, the aggregate
amount of unutilized banking facilities (including the unutilized facility amount under the accounts receivable factoring agreement
with BOC) amounted to RMB318,319 (USD50,576) and RMB192,303, respectively.



F-24







|10. | INCOME TAXES
|--- | ------------



The Company and its subsidiaries file separate income
tax returns.



USA



The Company is incorporated in the Cayman Islands.
After the completion of the redomestication merger on August 4, 2011, the Company is deemed to have taken up the tax status of
Cogo Maryland for United States federal income tax purposes, and is, accordingly, subject to United States federal income tax at
a tax rate of 34%.



Cayman Islands and British Virgin Islands



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



Hong Kong



The Company’s subsidiaries that are incorporated
in Hong Kong are subject to Hong Kong Profits Tax. The applicable profits tax rate is 16.5% for 2009, 2010 and 2011. The payments
of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.



PRC



On March 16, 2007, the National People’s
Congress passed the Corporate Income Tax law (the “CIT law”) which revised the PRC statutory income tax rate to 25%.
The CIT law was effective on January 1, 2008. Accordingly, the Company’s PRC subsidiaries are subject to income tax
at 25% effective from January 1, 2008 unless otherwise specified.



Prior to January 1, 2008, Shenzhen Comtech,
Comtech Communication, Comtech Software, Comloca, Epcot, Huameng PRC and Viewtran PRC (collectively the “Shenzhen Subsidiaries”),
being entities located in the Shenzhen Special Economic Zone, were entitled to the preferential tax rate of 15%. In addition, the
Shenzhen Subsidiaries, being production oriented foreign investment enterprises, were each entitled to a tax holiday of two-year
tax exemption followed by three-year 50% tax reduction starting from the first profit making year from the PRC tax perspective
(“2+3 tax holiday”) under the then effective tax regulations.



The CIT law and its relevant regulations provide
a five-year transition period from January 1, 2008 for those companies which were established before March 16, 2007 and
were entitled to preferential tax rates under the then effective tax regulations, as well as grandfathering certain tax holidays.
The transitional tax rates are 20%, 22%, 24%, 25% for 2009, 2010, 2011 and 2012 onwards, respectively.



Accordingly, the Shenzhen Subsidiaries are entitled
to enjoy the transitional rates and continue their tax holidays until they expire. Comloca and Huameng PRC had not commenced their
respective tax holidays as of



December 31, 2007 and the CIT law and its relevant
regulations require their tax holidays to begin on January 1, 2008.



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



| | • |  | Shenzhen Comtech and Comtech Communication are subject to income tax at 20%, 22%, 24% and 25% for 2009, 2010, 2011 and 2012 onwards, respectively.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | Comtech Software is subject to income tax at 10%, 22%, 24% and 25% for 2009, 2010, 2011 and 2012 onwards, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| | • |  | Comloca and Huameng PRC were tax exempt for 2009. They are subject to income tax at 11%, 12%, 12.5% and 25% for 2010, 2011, 2012 and 2013 onwards, respectively.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | Viewtran PRC and Epcot are subject to income tax at 10%, 11%, 12% and 25% for 2009, 2010, 2011 and 2012 onwards, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



Further,
Mega Sky SZ and Mega Smart SZ, being software and integrated circuit design enterprises, are each granted a 2+3 tax holiday during
2010. As a result, they are tax exempt for 2010 and 2011, and are subject to income tax at 12.5% from 2012 to 2014 and at 25%
from 2015 onwards.



F-25













|(a) | Income / (loss) before Income Taxes and Provision for Income Taxes
|--- | ------------------------------------------------------------------



The Group’s earnings / (loss) before
income taxes and extraordinary item consists of the following:



|                            |  | 2011 |         |   | 2011 |  |           | 2010 |  |  | 2009    |  
|--------------------------- |  | ---- | ------- | - | ---- |  | --------- | ---- |  |  | ------- | -
|                            |  | USD  |         |   | RMB  |  |           | RMB  |  |  | RMB     |  
|U.S.                        |  |      | (2,337  | ) |      |  | * (14,708 | )    |  |  | (13,254 | )
|PRC, excluding Hong Kong    |  |      | 8,011   |   |      |  | 50,418    |      |  |  | 145,418 |  
|Hong Kong                   |  |      | (27,476 | ) |      |  | (172,931  | )    |  |  | (6,990  | )
|Other foreign jurisdictions |  |      | (71     | ) |      |  | (445      | )    |  |  | (270    | )
|                            |  |      |         |   |      |  |           |      |  |  |         |  
|                            |  |      | (21,873 | ) |      |  | (137,666  | )    |  |  | 124,904 |  



* The amount includes RMB7,008 losses incurred subsequent
to the redomestication merger on August 4, 2011, which is considered subject to United States federal income tax.



The provision for income taxes consists of the following:



|                         |  | 2011 |       |   | 2011 |  |        | 2010 |  |  | 2009   |  
|------------------------ |  | ---- | ----- | - | ---- |  | ------ | ---- |  |  | ------ | -
|                         |  | USD  |       |   | RMB  |  |        | RMB  |  |  | RMB    |  
|Current tax              |  |      |       |   |      |  |        |      |  |  |        |  
|PRC, excluding Hong Kong |  |      | 1,308 |   |      |  | 8,228  |      |  |  | 13,361 |  
|Hong Kong                |  |      | 1,278 |   |      |  | 8,048  |      |  |  | 3,819  |  
|Deferred tax             |  |      |       |   |      |  |        |      |  |  |        |  
|PRC, excluding Hong Kong |  |      | —     |   |      |  | —      |      |  |  | —      |  
|Hong Kong                |  |      | (750  | ) |      |  | (4,723 | )    |  |  | (5,331 | )
|                         |  |      |       |   |      |  |        |      |  |  |        |  
|Income tax expense       |  |      | 1,836 |   |      |  | 11,553 |      |  |  | 11,849 |  



Reconciliation between income tax expense and the
amount that result by applying the PRC statutory tax rate to earnings / (loss) before income taxes and extraordinary item is as
follows:



|                                                                                                                            |  | 2011 |         |   | 2011 |  |          | 2010 |  |  | 2009    |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- |  | -------- | ---- |  |  | ------- | -
|                                                                                                                            |  | USD  |         |   | RMB  |  |          | RMB  |  |  | RMB     |  
|Earnings / (loss) before income taxes and extraordinary item                                                                |  |      | (21,873 | ) |      |  | (137,666 | )    |  |  | 124,904 |  
|                                                                                                                            |  |      |         |   |      |  |          |      |  |  |         |  
|PRC statutory tax rate                                                                                                      |  |      |         |   |      |  | 25       | %    |  |  | 25      | %
|Computed “expected” income tax expense / (benefit)                                                                          |  |      | (5,468  | ) |      |  | (34,417  | )    |  |  | 31,226  |  
|Effect of PRC preferential income tax rate                                                                                  |  |      | (75     | ) |      |  | (471     | )    |  |  | (2,123  | )
|Effect of PRC tax holiday                                                                                                   |  |      | (5,394  | ) |      |  | (33,947  | )    |  |  | (26,511 | )
|PRC R&D bonus deduction                                                                                                     |  |      | (257    | ) |      |  | (1,617   | )    |  |  | —       |  
|Tax rate differential for U.S and Hong Kong entities                                                                        |  |      | 2,125   |   |      |  | 13,375   |      |  |  | (599    | )
|Entities of other foreign jurisdictions not subject to income tax                                                           |  |      | 18      |   |      |  | 112      |      |  |  | 68      |  
|Change in valuation allowance                                                                                               |  |      | (245    | ) |      |  | (1,544   | )    |  |  | 5,982   |  
|Non-taxable items:                                                                                                          |  |      |         |   |      |  |          |      |  |  |         |  
|Interest income                                                                                                             |  |      | (10     | ) |      |  | (63      | )    |  |  | (12     | )
|Foreign exchange gain                                                                                                       |  |      | (9      | ) |      |  | (56      | )    |  |  | (112    | )
|Adjustment of consideration payable, net of disposal / impairment of respective intangible assets for Long Rise (note 7(d)) |  |      | —       |   |      |  | —        |      |  |  | (8,939  | )
|Non-deductible items:                                                                                                       |  |      |         |   |      |  |          |      |  |  |         |  
|Impairment loss of goodwill                                                                                                 |  |      | 6,856   |   |      |  | 43,146   |      |  |  | 3,535   |  
|Provision for inventory write-down                                                                                          |  |      | —       |   |      |  | —        |      |  |  | 2,112   |  
|Allowance for doubtful accounts                                                                                             |  |      | 61      |   |      |  | 384      |      |  |  | —       |  
|Share-based compensation                                                                                                    |  |      | 2,650   |   |      |  | 16,679   |      |  |  | 7,144   |  
|Professional fees                                                                                                           |  |      | 391     |   |      |  | 2,462    |      |  |  | —       |  
|Other non-deductible items                                                                                                  |  |      | 95      |   |      |  | 595      |      |  |  | 63      |  
|Deemed income for income tax purposes                                                                                       |  |      | 1,098   |   |      |  | 6,915    |      |  |  | 15      |  
|                                                                                                                            |  |      |         |   |      |  |          |      |  |  |         |  
|Income tax expense                                                                                                          |  |      | 1,836   |   |      |  | 11,553   |      |  |  | 11,849  |  



F-26







The PRC tax rate has been used because the Company’s
principle operations are in the PRC. The effects of the tax holiday are RMB33,947 (USD5,394), RMB26,511 and RMB29,501 for the years
ended December 31, 2011, 2010, and 2009, respectively (equivalent to basic earnings per share amount of RMB0.92 (USD0.15),
RMB0.71 and RMB0.81 and a diluted earnings per share amount of RMB0.92 (USD0.15), RMB0.69 and RMB0.78 for the years ended December 31,
2011, 2010 and 2009, respectively.



|(b) | Deferred Tax Assets and Liabilities
|--- | -----------------------------------



The tax effects of the Group’s temporary differences
that give rise to significant portions of the deferred tax assets and liabilities are as follows:



|                           |  | 2011 |        |   | 2011 |  |         | 2010 | 
|-------------------------- |  | ---- | ------ | - | ---- |  | ------- | ---- | 
|                           |  | USD  |        |   | RMB  |  |         | RMB  | 
|Deferred tax assets:       |  |      |        |   |      |  |         |      | 
|Tax loss carryforwards     |  |      | 1,570  |   |      |  | 9,880   |      | 
|Valuation allowance        |  |      | (1,570 | ) |      |  | (9,880  | )    | 
|                           |  |      |        |   |      |  |         |      | 
|Net deferred tax asset     |  |      | —      |   |      |  | —       |      | 
|                           |  |      |        |   |      |  |         |      | 
|Deferred tax liabilities:  |  |      |        |   |      |  |         |      | 
|Intangible assets          |  |      | (4,040 | ) |      |  | (25,427 | )    | 
|                           |  |      |        |   |      |  |         |      | 
|Net deferred tax liability |  |      | (4,040 | ) |      |  | (25,427 | )    | 



The (decrease) increase in valuation allowance during
the years ended December 31, 2011, 2010 and 2009 were RMB(1,544) (USD(245)), RMB5,646 and RMB4,320, respectively. Full valuation
allowances were provided for entities with cumulative losses as of December 31, 2011 and 2010.



As of December 31, 2011, for United States
federal income tax purposes, the Company had net tax loss carryforwards of approximately USD340 which will expire at various dates
through 2031.



As of December 31, 2011, the Company’s
PRC and Hong Kong subsidiaries had tax loss carryforwards of approximately RMB31,542 (USD5,012) and RMB7,886 (USD1,253), respectively.
The tax losses for the PRC subsidiaries amounting to RMB4,015, RMB5,160, RMB2,331 and RMB20,036 will expire in 2013, 2014, 2015
and 2016 respectively. The tax loss for the Hong Kong subsidiary does not expire under the current Hong Kong tax legislation.



According to the prevailing PRC income tax law and
its relevant regulations, non-PRC-resident enterprises are levied withholding tax at 10%, unless reduced by tax treaties or similar
arrangements, on dividends from their PRC-resident investees for earnings accumulated beginning on January 1, 2008, and undistributed
earnings generated prior to January 1, 2008 are exempt from such withholding tax. Further, the Company’s distributions
from its non-U.S. subsidiaries are subject to the U.S. federal income tax at 34%, less any applicable qualified foreign tax credits.
Due to the Company’s plan of reinvesting permanently its earnings in its non-U.S. business, the Company has not provided
for deferred income tax liabilities of RMB390,129 (USD61,985) and RMB320,987 (which does not include any potential qualified foreign
tax credits or potential PRC dividend withholding taxes), for U.S. federal income tax purposes on its overseas subsidiaries’
undistributed earnings of RMB1,147,438 (USD182,310) and RMB944,078 as of December 31, 2011 and 2010, respectively.



F-27







|(c) | Accounting for unrecognized tax benefits
|--- | ----------------------------------------



As of January 1, 2009 and for each of the years
ended December 31, 2009, 2010 and 2011, the Group did not have unrecognized tax benefits, and it does not expect that the
amount of unrecognized tax benefits will change significantly within the next 12 months. Accordingly, no interest or penalties
related to unrecognized tax benefits were accrued.



The Company and its subsidiaries file income tax
returns in the United States, PRC and Hong Kong. The Company could be subject to U.S. federal income tax examination by tax authorities
for years beginning in 2008. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years
if the underpayment of taxes is due to computational errors made by the taxpayer or the withholding agent. The statute of limitations
is extended to five years under special circumstances where the underpayment of taxes is more than RMB100 (USD16). In the case
of transfer pricing issues, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.
Accordingly, the PRC tax returns for the Company’s PRC subsidiaries are open to examination by the PRC state and local tax
authorities for the tax years beginning in 2006. The tax returns for the Company’s Hong Kong subsidiaries are currently open
to examination by the Hong Kong tax authorities for the tax years beginning in 2005.



|11. | ACCRUED EXPENSES AND OTHER LIABILITIES
|--- | --------------------------------------



Accrued expenses and other liabilities consist of
the following:



|                            |  | 2011 |       |  | 2011 |  |        | 2010 | 
|--------------------------- |  | ---- | ----- |  | ---- |  | ------ | ---- | 
|                            |  | USD  |       |  | RMB  |  |        | RMB  | 
|Legal and professional fees |  |      | 388   |  |      |  | 2,438  |      | 
|Accrued staff related costs |  |      | 1,924 |  |      |  | 12,109 |      | 
|Other accruals              |  |      | 1,278 |  |      |  | 8,046  |      | 
|                            |  |      |       |  |      |  |        |      | 
|                            |  |      | 3,590 |  |      |  | 22,593 |      | 



|12. | SHARE-BASED COMPENSATION
|--- | ------------------------



|(a) | Options and stock warrants assumed under the redomestication merger
|--- | -------------------------------------------------------------------



On August 4, 2011, upon completion of the redomestication
merger, the Company assumed the obligations to provide for the issuance of the Company’s ordinary shares rather than the
common stock of Cogo Maryland upon the exercise of all outstanding options to purchase shares of Cogo Maryland common stock and
all other outstanding equity awards granted under equity plans to directors, employees and consultants under Cogo Maryland’s
2004 Incentive Plan, 2006 Incentive Plan and the 2009 Incentive Plan.



|(b) | Options and stock warrants assumed under the Share Exchange Agreement
|--- | ---------------------------------------------------------------------



Under the Company’s 1995 Stock Option Plan
for Outside Directors (the “Directors’ Plan”), the Company issued options to non-employee director of Trident
Rowan Group Inc. (“Trident”) to purchase 115,000 shares of the Company’s common stock. As of January 1,
2009, 100,000 options remained outstanding and were all exercised in 2009 before their expiry date of July 1, 2009. The options
granted under the Directors’ Plan had a weighted average exercise price per option of USD3.00.



The Company granted fully exercisable stock warrants
to non-employee director of Trident to purchase up to 925,417 shares of its common stock. As of January 1, 2009, 19,999 stock warrants
with a weighted average exercise price per stock warrant of USD2.76 each remained outstanding and expired on July 1, 2009.



F-28







|(c) | 2004 Incentive Plan
|--- | -------------------



On August 3, 2004, the Board of Directors adopted
the 2004 Stock Incentive Plan (the “2004 Incentive Plan”) pursuant to which 2,500,000 shares of the Company’s
common stock are reserved for issuance upon exercise of stock options, and for the issuance of stock appreciation rights, non-vested
shares and performance shares. The purpose of the 2004 Incentive Plan is to provide additional incentive to employees, directors,
advisors and consultants. The 2004 Incentive Plan provides for a term of 10 years from the date of its adoption by the Board of
Directors, after which no awards may be made, unless the 2004 Incentive Plan is early terminated by the Board.



Stock options



A summary of stock options activity is as follows:



|                                |  |  | Number of options outstanding |           |   | Weighted average exercise price |  |      | Weighted average remaining contractual term |  |  | Aggregate intrinsic value | 
|------------------------------- |  |  | ----------------------------- | --------- | - | ------------------------------- |  | ---- | ------------------------------------------- |  |  | ------------------------- | 
|                                |  |  |                               |           |   | USD                             |  |      | Years                                       |  |  | USD                       | 
|Balance as of January 1, 2009   |  |  |                               | 1,192,269 |   |                                 |  | 4.09 |                                             |  |  |                           | 
|Exercised                       |  |  |                               | —         |   |                                 |  | —    |                                             |  |  |                           | 
|                                |  |  |                               |           |   |                                 |  |      |                                             |  |  |                           | 
|Balance as of December 31, 2009 |  |  |                               | 1,192,269 |   |                                 |  | 4.09 |                                             |  |  |                           | 
|Exercised                       |  |  |                               | (7,500    | ) |                                 |  | 5.53 |                                             |  |  |                           | 
|                                |  |  |                               |           |   |                                 |  |      |                                             |  |  |                           | 
|Balance as of December 31, 2010 |  |  |                               | 1,184,769 |   |                                 |  | 4.08 |                                             |  |  |                           | 
|Exercised                       |  |  |                               | —         |   |                                 |  | —    |                                             |  |  |                           | 
|                                |  |  |                               |           |   |                                 |  |      |                                             |  |  |                           | 
|Balance as of December 31, 2011 |  |  |                               | 1,184,769 |   |                                 |  | 4.08 |                                             |  |  | 3.01                      | 
|                                |  |  |                               |           |   |                                 |  |      |                                             |  |  |                           | 



The intrinsic value of options exercised during
the year ended December 31, 2010 was USD12.



Non-vested equity share unit



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



|                                               |  |  | Shares |      |   | Weighted average grant-date fair value | 
|---------------------------------------------- |  |  | ------ | ---- | - | -------------------------------------- | 
|                                               |  |  |        |      |   | USD                                    | 
|Balance as of January 1, 2009                  |  |  |        | 464  |   |                                        | 
|Vested                                         |  |  |        | (464 | ) |                                        | 
|                                               |  |  |        |      |   |                                        | 
|Balance as of December 31, 2009, 2010 and 2011 |  |  |        | —    |   |                                        | 
|                                               |  |  |        |      |   |                                        | 



The total fair value of equity share units
vested during the year ended December 31, 2009 was USD4. The equity share units were fully vested and exercised as of December 31,
2010 and 2011.



|(d) | 2006 Incentive Plan
|--- | -------------------



On December 20, 2006, the Board of Directors
adopted the 2006 Equity Incentive Plan (the “2006 Incentive Plan”) pursuant to which 4,800,000 shares of the Company’s
common stock are reserved for issuance upon exercise of stock options, and for the issuance of stock appreciation rights, restricted
stock awards and performance shares. The purpose of the 2006 Incentive Plan is to provide additional incentive to employees, directors,
advisors and consultants. The 2006 Incentive Plan provides for a term of 10 years from the date of its adoption by the Board of
Directors, after which no awards may be made, unless the 2006 Incentive Plan is early terminated by the Board.



F-29







Non-vested equity share unit



A summary of non-vested equity share units issued
under the 2006 Incentive Plan is as follows:



|                                      |  | Shares |            |   | Weighted average
    Grant-date fair value | 
|------------------------------------- |  | ------ | ---------- | - | ------------------------------------------ | 
|                                      |  |        |            |   | USD                                        | 
|                                      |  |        |            |   |                                            | 
|Balance as of January 1, 2009         |  |        | 2,281,437  |   |                                            | 
|Granted on January 14, 2009 (note i)  |  |        | 500,000    |   |                                            | 
|Vested                                |  |        | (1,472,273 | ) |                                            | 
|                                      |  |        |            |   |                                            | 
|Balance as of December 31, 2009       |  |        | 1,309,164  |   |                                            | 
|Granted on January 29, 2010 (note ii) |  |        | 932,763    |   |                                            | 
|Vested                                |  |        | (1,455,462 | ) |                                            | 
|                                      |  |        |            |   |                                            | 
|Balance as of December 31, 2010       |  |        | 786,465    |   |                                            | 
|Vested                                |  |        | (397,812   | ) |                                            | 
|Balance as of December 31, 2011       |  |        | 388,653    |   |                                            | 



| | Note i | The stock awards vest in equal quarterly installments
over a period of one year from the date of grant.
| | ------ | -------------------------------------------------------------------------------------------------------



| | Note ii | The stock awards vest in equal quarterly installments
over a period of three years from the date of grant.
| | ------- | ----------------------------------------------------------------------------------------------------------



The total fair value of the above equity share units
vested during the years ended December 31, 2011 and 2010 and 2009 were USD2,826, USD8,094 and USD7,986, respectively. As of
December 31, 2011 and 2010, the aggregate fair value of all non-vested equity share units were USD2,472 and USD5,297, respectively,
which is expected to be amortized on a straight-line basis over a weighted average period of approximately 13 months (2010: 24
months).



Performance shares



A summary of performance shares activity is as follows:



|                                         |  |  | Shares |          |   | Weighted average Grant-date fair value | 
|---------------------------------------- |  |  | ------ | -------- | - | -------------------------------------- | 
|                                         |  |  |        |          |   | USD                                    | 
|Balance as of January 1, 2009            |  |  |        | 425,000  |   |                                        | 
|Vested                                   |  |  |        | (5,000   | ) |                                        | 
|                                         |  |  |        |          |   |                                        | 
|Balance as of December 31, 2009          |  |  |        | 420,000  |   |                                        | 
|Vested                                   |  |  |        | (5,000   | ) |                                        | 
|Expired                                  |  |  |        | (415,000 | ) |                                        | 
|Balance as of December 31, 2010 and 2011 |  |  |        | —        |   |                                        | 
|                                         |  |  |        |          |   |                                        | 

The grant-date fair value of performance shares vested
was USD80 for each of the years ended December 31, 2010 and 2009.



F-30







|(e) | 2009 Incentive Plan
|--- | -------------------



On November 9, 2009, the Board of Directors
adopted the 2009 Omnibus Securities and Incentive Plan (the “2009 Incentive Plan”) pursuant to which 6,000,000 shares
of the Company’s common stock are reserved for issuance upon exercise of stock options, and for the issuance of stock appreciation
rights, restricted stock awards and performance shares. The purpose of the 2009 Incentive Plan is to provide additional incentive
to employees, directors, advisors and consultants. The 2009 Incentive Plan provides for a term of 10 years from the date of its
adoption by the Board of Directors, after which no awards may be made, unless the 2009 Incentive Plan is early terminated by the
Board.



Non-vested equity share unit

A summary of non-vested equity share units issued
under the 2009 Incentive Plan is as follows:



|                                       |  | Shares |            |   | Weighted average Grant-date fair value | 
|-------------------------------------- |  | ------ | ---------- | - | -------------------------------------- | 
|                                       |  |        |            |   | USD                                    | 
|Balance as of January 1, 2010          |  |        | —          |   |                                        | 
|Granted on January 29, 2010 (note i)   |  |        | 1,167,237  |   |                                        | 
|Granted on September 23, 2010 (note i) |  |        | 750,000    |   |                                        | 
|Granted on October 31, 2010 (note ii)  |  |        | 53,025     |   |                                        | 
|Vested                                 |  |        | (354,310   | ) |                                        | 
|Balance as of December 31, 2010        |  |        | 1,615,952  |   |                                        | 
|Granted on January 1, 2011 (note i)    |  |        | 210,000    |   |                                        | 
|Granted on March 21, 2011 (note i)     |  |        | 1,000,000  |   |                                        | 
|Granted on April 1, 2011 (note i)      |  |        | 150,000    |   |                                        | 
|Granted on June 24, 2011 (note iii)    |  |        | 50,000     |   |                                        | 
|Vested                                 |  |        | (1,073,091 | ) |                                        | 
|Balance as of December 31, 2011        |  |        | 1,952,861  |   |                                        | 



| | Note i | The stock awards vest in equal quarterly installments
over a period of three years from the date of grant.
| | ------ | ----------------------------------------------------------------------------------------------------------



| | Note ii | The stock awards vest in equal quarterly installments
over a period of two years from the date of grant.
| | ------- | --------------------------------------------------------------------------------------------------------



| | Note iii | The stock awards were fully vested on the date of grant.
| | -------- | --------------------------------------------------------



The total fair value of the above equity share units
vested during the years ended December 31, 2011 and 2010 were USD7,351 and USD2,233, respectively. As of December 31,
2011 and 2010, the aggregate fair value of all non-vested equity share units were USD14,022 and USD10,124, respectively, which
is expected to be amortized on a straight-line basis over a weighted average period of approximately 21 months and 28 months, respectively.



Shares with performance and market conditions



A summary of shares activity is as follows:



|                                     |  | Shares |         |   | Weighted average Grant-date fair value | 
|------------------------------------ |  | ------ | ------- | - | -------------------------------------- | 
|                                     |  |        |         |   | USD                                    | 
|Balance as of January 1, 2011        |  |        | —       |   |                                        | 
|Granted on January 1, 2011 (note i)  |  |        | 360,000 |   |                                        | 
|Granted on January 1, 2011 (note ii) |  |        | 300,000 |   |                                        | 
|Vested                               |  |        | (20,000 | ) |                                        | 
|Balance as of December 31, 2011      |  |        | 640,000 |   |                                        | 



F-31







| | Note i | The performance awards which were granted on January
1, 2011 vest in equal annual installments over a period of three years from January 1, 2011 to December 31, 2013 and are subject
to meeting certain earnings or other performance measures in 2011, 2012 and 2013.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Note ii | During the year ended December 31, 2011, the Company
has granted share awards that contain service and market conditions. For share awards with market conditions, the market conditions
are considered in the grant date fair value using a binomial model and will be recognized over the requisite service period regardless
of whether the market condition is satisfied, provided that the requisite service period has been completed. The share awards
which were granted on January 1, 2011 vest in equal annual installments over a period of three years from January 1, 2011 to December
31, 2013 and are subject to meeting the specified market condition in 2011, 2012 and 2013.
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The grant-date fair value of performance shares vested
was USD177 for the year ended December 31, 2011.



|(f) | Share-based compensation of Comtech Broadband
|--- | ---------------------------------------------



On December 31, 2010, the Group entered into
an agreement to award 6,000,000 shares of Comtech Broadband’s common stock (“Equity Shares”) to an employee of
Comtech Broadband (the “Comtech Broadband Stock Grant”). The purpose of the Comtech Broadband Stock Grant is to provide
additional incentive to the employee. The Comtech Broadband Stock Grant was immediately vested upon grant.



The fair value of the above equity shares vested during
the year ended December 31, 2010 was USD4,800. The Group performed a contemporaneous valuation of the equity by an unrelated
valuation specialist using the income approach. The fair value is based on a discounted future cash flow that uses the Group’s
estimates of revenue, driven by assumed market growth rates, and estimated costs as well as appropriate discount rates. Since Comtech
Broadband is a private company, the Group applied a 20% marketability discount in carrying out the valuation. These estimates are
consistent with the plans and estimates that the Group use to manage the business. Determining the fair value of the above Equity
Shares requires making complex and subjective judgments and there is inherent uncertainty in making these estimates.



|13. | EARNINGS / (LOSS) PER SHARE
|--- | ---------------------------



The following table sets forth the computation of
basic and diluted earnings per share for the year ended December 31:



|                                                                                           |  | 2011 |         |   | 2011 |  |            | 2010 |  |  | 2009       | 
|------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- |  | ---------- | ---- |  |  | ---------- | 
|                                                                                           |  | USD  |         |   | RMB  |  |            | RMB  |  |  | RMB        | 
|Numerator for basic and diluted earnings per share:                                        |  |      |         |   |      |  |            |      |  |  |            | 
|Income / (loss) before extraordinary item                                                  |  |      | (24,883 | ) |      |  | (156,605   | )    |  |  | 112,375    | 
|Extraordinary item                                                                         |  |      | —       |   |      |  | —          |      |  |  | —          | 
|                                                                                           |  |      |         |   |      |  |            |      |  |  |            | 
|Net income / (loss) attributable to Cogo Group, Inc.                                       |  |      | (24,883 | ) |      |  | (156,605   | )    |  |  | 112,375    | 
|Denominator:                                                                               |  |      |         |   |      |  |            |      |  |  |            | 
|Basic weighted average shares                                                              |  |      |         |   |      |  | 37,094,995 |      |  |  | 37,275,427 | 
|Effect of dilutive non-vested equity share units, performance shares, options and warrants |  |      |         |   |      |  | —          |      |  |  | 913,387    | 
|                                                                                           |  |      |         |   |      |  |            |      |  |  |            | 
|Diluted weighted average shares                                                            |  |      |         |   |      |  | 37,094,995 |      |  |  | 38,188,814 | 
|                                                                                           |  |      |         |   |      |  |            |      |  |  |            | 
|Income / (loss) before extraordinary item                                                  |  |      | (0.67   | ) |      |  | (4.22      | )    |  |  | 3.01       | 
|Extraordinary item                                                                         |  |      | —       |   |      |  | —          |      |  |  | —          | 
|                                                                                           |  |      |         |   |      |  |            |      |  |  |            | 
|Basic earnings / (loss) per share                                                          |  |      | (0.67   | ) |      |  | (4.22      | )    |  |  | 3.01       | 
|                                                                                           |  |      |         |   |      |  |            |      |  |  |            | 
|Income / (loss) before extraordinary item                                                  |  |      | (0.67   | ) |      |  | (4.22      | )    |  |  | 2.94       | 
|Extraordinary item                                                                         |  |      | —       |   |      |  | —          |      |  |  | —          | 
|                                                                                           |  |      |         |   |      |  |            |      |  |  |            | 
|Diluted earnings / (loss) per share                                                        |  |      | (0.67   | ) |      |  | (4.22      | )    |  |  | 2.94       | 



F-32







As
of December 31, 2011, no potential common shares were dilutive because of the net loss, therefore basic and dilutive EPS are
the same.Non-vested equity share units, performance shares, and options and warrants amounting to 234 thousand and
661 thousand, as of December 31, 2010 and 2009, respectively are excluded from the Company’s dilutive computation
as their effect would be anti-dilutive.



|14. | OPERATING SEGMENT INFORMATION
|--- | -----------------------------



ASC 280, Segment Reporting, establishes standards
for reporting information about operating segments in financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision
maker, or decision making group, in deciding how to allocate resources and in assessing performance.



The Company determined it has two operating segments:
Product Sales and Service Revenue.



The Product Sales segment primarily consists of the
sale of components for digital media (such as network protection devices and data storage), telecommunication system equipment
and industrial applications end-markets. The Service Revenue segment primarily include the provision of technology and engineering
services, business process outsourcing, network system integration and related training and maintenance services. Segment revenue
from external customers does not include intra-segment revenue. Unallocated expenses include items such as corporate staff costs
and overheads. Unallocated assets mainly include cash for corporate use.



Substantially all of the Group’s operations
are in the PRC. Consequentially, no geographic information is presented.







F-33







The following is the segment information for the
year ended December 31, 2011:



|                                                             |  | Product Sales RMB |           |   | Service Revenue RMB |  |         | Unallocated RMB |  |  | Total  RMB |  
|------------------------------------------------------------ |  | ----------------- | --------- | - | ------------------- |  | ------- | --------------- |  |  | ---------- | -
|Net revenue                                                  |  |                   |           |   |                     |  |         |                 |  |  |            |  
|Segment revenue from external customers                      |  |                   | 3,554,401 |   |                     |  | —       |                 |  |  | —          |  
|Inter-segment revenue                                        |  |                   | —         |   |                     |  | 11,861  |                 |  |  | —          |  
|                                                             |  |                   | 3,554,401 |   |                     |  | 11,861  |                 |  |  | —          |  
|                                                             |  |                   |           |   |                     |  |         |                 |  |  |            |  
|                                                             |  |                   |           |   |                     |  |         |                 |  |  |            |  
|Income / (Loss) from operations                              |  |                   | (10,731   | ) |                     |  | (38,939 | )               |  |  | (82,772    | )
|Interest expense                                             |  |                   | (20,152   | ) |                     |  | —       |                 |  |  | —          |  
|Interest income                                              |  |                   | 14,802    |   |                     |  | 126     |                 |  |  | —          |  
|                                                             |  |                   |           |   |                     |  |         |                 |  |  |            |  
|Earnings / (loss) before income taxes and extraordinary item |  |                   | (16,081   | ) |                     |  | (38,813 | )               |  |  | (82,772    | )
|                                                             |  |                   |           |   |                     |  |         |                 |  |  |            |  
|Income tax expense                                           |  |                   | 10,492    |   |                     |  | 1,061   |                 |  |  | —          |  
|Significant non-cash items:                                  |  |                   |           |   |                     |  |         |                 |  |  |            |  
|– Depreciation and amortization                              |  |                   | 34,248    |   |                     |  | 562     |                 |  |  | —          |  
|– Provision for inventory write-down                         |  |                   | 63        |   |                     |  | —       |                 |  |  | —          |  
|– Provision for doubtful accounts                            |  |                   | 2,325     |   |                     |  | —       |                 |  |  | —          |  
|– Share-based compensation cost                              |  |                   | —         |   |                     |  | —       |                 |  |  | 66,723     |  
|– Impairment loss of goodwill (Note 8)                       |  |                   | 189,296   |   |                     |  | 47,649  |                 |  |  | —          |  
|                                                             |  |                   |           |   |                     |  |         |                 |  |  |            |  
|Segment assets                                               |  |                   | 2,544,840 |   |                     |  | 12,739  |                 |  |  | 2,409      |  
|                                                             |  |                   |           |   |                     |  |         |                 |  |  |            |  
|Total expenditures for additions to long-lived assets        |  |                   |           |   |                     |  |         |                 |  |  |            |  
|– Property and equipment                                     |  |                   | 9,932     |   |                     |  | 103     |                 |  |  | —          |  
|– Intangible assets (Note 7)                                 |  |                   | 98,527    |   |                     |  | —       |                 |  |  | —          |  
|– Goodwill (Note 7)                                          |  |                   | 61,509    |   |                     |  | —       |                 |  |  | —          |  



The following is the segment information for the year ended
December 31, 2010:



|                                                                                                         |  | Product Sales RMB |           |   | Service Revenue RMB |  |        | Unallocated RMB |  |  | Total  RMB |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ------------------- |  | ------ | --------------- |  |  | ---------- | -
|Net revenue                                                                                              |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Segment revenue from external customers                                                                  |  |                   | 2,554,991 |   |                     |  | 34,527 |                 |  |  | —          |  
|Inter-segment revenue                                                                                    |  |                   | —         |   |                     |  | 18,780 |                 |  |  | —          |  
|                                                                                                         |  |                   |           |   |                     |  |        |                 |  |  |            |  
|                                                                                                         |  |                   | 2,554,991 |   |                     |  | 53,307 |                 |  |  | —          |  
|                                                                                                         |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Income from operations                                                                                   |  |                   | 196,986   |   |                     |  | 6,437  |                 |  |  | (83,805    | )
|Interest expense                                                                                         |  |                   | (9,407    | ) |                     |  | —      |                 |  |  | —          |  
|Interest income                                                                                          |  |                   | 14,597    |   |                     |  | 66     |                 |  |  | 30         |  
|                                                                                                         |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Earnings before income taxes and extraordinary item                                                      |  |                   | 202,176   |   |                     |  | 6,503  |                 |  |  | (83,775    | )
|                                                                                                         |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Income tax expense                                                                                       |  |                   | 9,770     |   |                     |  | 2,079  |                 |  |  | —          |  
|Significant non-cash items:                                                                              |  |                   |           |   |                     |  |        |                 |  |  |            |  
|– Depreciation and amortization                                                                          |  |                   | 27,275    |   |                     |  | 672    |                 |  |  | —          |  
|– Provision for inventory write-down                                                                     |  |                   | 9,600     |   |                     |  | —      |                 |  |  | —          |  
|– Provision for doubtful accounts                                                                        |  |                   | 2         |   |                     |  | —      |                 |  |  | —          |  
|– Share-based compensation cost                                                                          |  |                   | 31,680    |   |                     |  | —      |                 |  |  | 69,250     |  
|– Impairment loss of goodwill and intangible assets (Note 7(d) and 8)                                    |  |                   | 21,422    |   |                     |  | —      |                 |  |  | —          |  
|– Net gain on settlement relating to the acquisition of Long Rise before goodwill impairment (Note 7(d)) |  |                   | (43,676   | ) |                     |  | —      |                 |  |  | —          |  
|                                                                                                         |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Segment assets                                                                                           |  |                   | 2,298,459 |   |                     |  | 21,995 |                 |  |  | 1,563      |  
|                                                                                                         |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Total expenditures for additions to long-lived assets                                                    |  |                   |           |   |                     |  |        |                 |  |  |            |  
|– Property and equipment                                                                                 |  |                   | 6,356     |   |                     |  | 539    |                 |  |  | —          |  



F-34







The following is the segment information for the year ended
December 31, 2009:



|                                                      |  | Product Sales RMB |           |   | Service Revenue RMB |  |        | Unallocated RMB |  |  | Total  RMB |  
|----------------------------------------------------- |  | ----------------- | --------- | - | ------------------- |  | ------ | --------------- |  |  | ---------- | -
|Net revenue                                           |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Segment revenue from external customers               |  |                   | 2,066,815 |   |                     |  | 29,401 |                 |  |  | —          |  
|Inter-segment revenue                                 |  |                   | 513       |   |                     |  | 5,978  |                 |  |  | —          |  
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|                                                      |  |                   | 2,067,328 |   |                     |  | 35,379 |                 |  |  | —          |  
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Income from operations                                |  |                   | 145,881   |   |                     |  | 531    |                 |  |  | (73,300    | )
|Interest expense                                      |  |                   | (1,963    | ) |                     |  | —      |                 |  |  | —          |  
|Interest income                                       |  |                   | 14,482    |   |                     |  | 8      |                 |  |  | —          |  
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Earnings before income taxes and extraordinary item   |  |                   | 158,400   |   |                     |  | 539    |                 |  |  | (73,300    | )
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|– Income tax expense                                  |  |                   | 6,846     |   |                     |  | 2,361  |                 |  |  | —          |  
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Significant non-cash items:                           |  |                   |           |   |                     |  |        |                 |  |  |            |  
|– Depreciation and amortization                       |  |                   | 31,347    |   |                     |  | 3,000  |                 |  |  | —          |  
|– Provision for inventory write-down                  |  |                   | 3,588     |   |                     |  | 2,777  |                 |  |  | —          |  
|– Provision for doubtful accounts                     |  |                   | 35,992    |   |                     |  | —      |                 |  |  | —          |  
|– Share-based compensation cost                       |  |                   | —         |   |                     |  | —      |                 |  |  | 59,045     |  
|– Extraordinary item (Note 7(d))                      |  |                   | 6,737     |   |                     |  | —      |                 |  |  | —          |  
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Segment assets                                        |  |                   | 1,851,356 |   |                     |  | 66,444 |                 |  |  | 3,727      |  
|                                                      |  |                   |           |   |                     |  |        |                 |  |  |            |  
|Total expenditures for additions to long-lived assets |  |                   |           |   |                     |  |        |                 |  |  |            |  
|– Property and equipment                              |  |                   | 2,094     |   |                     |  | 335    |                 |  |  | —          |  
|– Intangible assets (Note 7)                          |  |                   | 50,526    |   |                     |  | —      |                 |  |  | —          |  
|– Goodwill (Note 7)                                   |  |                   | 80,226    |   |                     |  | —      |                 |  |  | —          |  



Revenues from external customers by product category are summarized
as follows:



|                             |  | 2011 |         |  | 2011 |  |           | 2010 |  |  | 2009      | 
|---------------------------- |  | ---- | ------- |  | ---- |  | --------- | ---- |  |  | --------- | 
|                             |  | USD  |         |  | RMB  |  |           | RMB  |  |  | RMB       | 
|Net revenue                  |  |      |         |  |      |  |           |      |  |  |           | 
|Product Sales                |  |      |         |  |      |  |           |      |  |  |           | 
|Digital media                |  |      | 238,816 |  |      |  | 1,503,082 |      |  |  | 1,474,238 | 
|Telecommunications equipment |  |      | 209,436 |  |      |  | 1,318,176 |      |  |  | 630,149   | 
|Industrial Business          |  |      | 116,485 |  |      |  | 733,143   |      |  |  | 450,604   | 
|                             |  |      |         |  |      |  |           |      |  |  |           | 
|                             |  |      | 564,737 |  |      |  | 3,554,401 |      |  |  | 2,554,991 | 
|Service Revenue              |  |      | —       |  |      |  | —         |      |  |  | 34,527    | 
|                             |  |      |         |  |      |  |           |      |  |  |           | 
|Total net revenue            |  |      | 564,737 |  |      |  | 3,554,401 |      |  |  | 2,589,518 | 



F-35







|15. | STATUTORY RESERVES
|--- | ------------------



According to laws applicable to the foreign investment
enterprises in the PRC and the Articles of Association of certain subsidiaries of the Company in the PRC (the “PRC subsidiaries”),
the PRC subsidiaries are required to appropriate part of their net profits as determined in accordance with the accounting principles
and the relevant financial regulations applicable to enterprises limited by shares as established by the Ministry of Finance of
the PRC (“PRC GAAP”) to various reserves. These include general reserves, statutory surplus reserve and statutory public
welfare fund.



For general reserve, appropriation to general reserve
is at the discretion of the board of directors of the relevant PRC subsidiaries. The reserve can only be used for specific purposes
and is not distributable as cash dividends.



For statutory surplus reserve, 10% of the net profit,
as determined in accordance with PRC GAAP, of the relevant PRC subsidiaries is transferred to the statutory surplus reserve until
the reserve balance reaches 50% of the registered capital of the relevant PRC companies. The transfer to this reserve must be made
before distribution of dividends to shareholders can be made. The statutory surplus reserve can be used to make good previous years’
losses, if any, and may be converted into share capital by the issue of new shares to shareholders in proportion to their existing
shareholders or by increasing the par value of the shares currently held by the shareholders, provided that the balance after such
issue is not less than 25% of the registered capital.



For statutory public welfare fund, 5% to 10% of
the net profit, as determined in accordance with PRC GAAP, of the relevant PRC subsidiaries is transferred to the statutory public
welfare fund. This fund can only be utilized on capital items for the collective benefit of the employees such as the construction
of dormitories, canteen and other staff welfare facilities. The fund is non-distributable other than on liquidation. The transfer
to this fund must be made before distribution of dividends to shareholders can be made.



The accumulated balance of these statutory reserves
maintained at the Company’s PRC subsidiaries as of December 31, 2011 and 2010 were RMB55,298 (USD8,786) and RMB51,542,
respectively.



|16. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------



|(a) | Acquisition on Goldshare Holdings Limited (“Goldshare”)
        
        On April 1, 2011, the Group entered into a note
        subscription         and share purchase agreement to acquire 3,142,857 shares (representing 44% of the outstanding shares)
        of         Goldshare for a cash consideration         of RMB22,000; and to subscribe to a convertible note to be issued by
        Goldshare for         RMB20,000. The note can be convertible into         2,857,143 new shares of Goldshare at the option of
        the Group. If the         Group exercises the conversion option of the convertible note,         the Group will hold a total
        of 60% of the outstanding         shares of Goldshare and Goldshare will become a subsidiary of the Group.         The Group
        has not completed the acquisition         of Goldshare because the closing conditions that required Goldshare to
        transfer          certain businesses to be required by the Group to newly incorporated entities is not yet
        completed.
        
        Goldshare engages in the business of distribution of chassis,
        capacitors, resistors and enclosures with most of its operations in the PRC. The purchase consideration will be contingently payable
        at various dates upon achieving certain agreed future earnings levels of Goldshare.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | The Group leases its office facilities under non-cancellable operating leases. The leases have remaining terms up to thirty months. Rental expense was RMB11,197 (USD1,779), RMB10,491 and RMB9,682 for the years ended December 31, 2011, 2010, and 2009, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







F-36







Future minimum lease payments under non-cancellable
operating leases as of December 31, 2011 were as follows:



|                         |  |  | USD |       |  | RMB | 
|------------------------ |  |  | --- | ----- |  | --- | 
|Year ending December 31, |  |  |     |       |  |     | 
|2012                     |  |  |     | 1,707 |  |     | 
|2013                     |  |  |     | 943   |  |     | 
|2014                     |  |  |     | 109   |  |     | 
|                         |  |  |     |       |  |     | 
|Total                    |  |  |     | 2,759 |  |     | 
|                         |  |  |     |       |  |     | 



|(c) | As of December 31, 2011, the Group has outstanding purchase orders for components from suppliers in the amount of approximately RMB643,876 (USD102,302). The Group does not have any minimum purchase obligations with these suppliers. Other than as disclosed above, the Group had no other contractual obligations, off-balance sheet guarantees or arrangements as of December 31, 2011.                                                                                          
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | As of December 31, 2011, outstanding accounts receivable factored with banks for which the Group has retained a recourse obligation amounting to RMB259,309 (USD41,200).                                                                                                                                                                                                                                                                                                              
|(e) | As of December 31, 2011, outstanding bills discounted with banks for which the Group has retained a recourse obligation amounting to RMB12,162 (USD1,932).                                                                                                                                                                                                                                                                                                                            
|(f) | As of December 31, 2011, the Group has entered into a land use right agreement with the PRC government in Shenzhen. The Group has paid RMB19,307 (USD3,068) as deposit for the purchase of land use right. Pursuant to the land use right agreement, the Group is required to develop on the piece of land a new headquarter for research and development purposes for the Group and the Group is required to contribute a minimum of RMB500,000 (USD79,442) for the land development.



|17. | CONCENTRATION OF RISK
|--- | ---------------------



Revenue concentration



A substantial percentage of the Group’s sales
are made to the following customers. Details of the customers accounting for 10% or more of total net revenue are as follows:



|           |  | 2011 |    |   | 2010 |  |    | 2009 | 
|---------- |  | ---- | -- | - | ---- |  | -- | ---- | 
|Customer A |  |      | 29 | % |      |  | 26 | %    | 
|Customer B |  |      | *  |   |      |  | *  |      | 



The total amount of revenues from each customer accounting for
10% or more of total net revenue is as follow:



|           |  | 2011 |         |  | 2011 |  |           | 2010 |  |  | 2009    | 
|---------- |  | ---- | ------- |  | ---- |  | --------- | ---- |  |  | ------- | 
|           |  | USD  |         |  | RMB  |  |           | RMB  |  |  | RMB     | 
|Customer A |  |      | 165,223 |  |      |  | 1,039,896 |      |  |  | 672,641 | 
|Customer B |  |      | *       |  |      |  | *         |      |  |  | *       | 



All of the Group’s customers with sales over 10% are within
the Product Sales segment.



Details of the accounts receivable from the two customers with
the largest receivable balances as of December 31, 2011 and 2010 are as follows:



|           |  | % of accounts receivable |   
|---------- |  | ------------------------ | --
|           |  | 2011                     |   
|Customer A |  |                          | 13
|Customer B |  |                          | * 
|           |  |                          | 13










|* | Accounted for less than 10% of total net revenue in the respective year.
|- | ------------------------------------------------------------------------







F-37







Dependence on suppliers



The Group typically rely on a limited number of key
suppliers, and many customized module design solutions that are developed by the Group are designed around technology components
provided by these suppliers. The Group typically does not have long-term supply agreements or other forms of exclusive arrangements
with these suppliers. If the Group loses a key supplier or a supplier reduces the quantity of products it sells to the Group, it
does not maintain a sufficient inventory level of products required or is otherwise unable to meet the demand for its components,
the Group may have to expend significant time, effort and other resources to locate a suitable alternative supplier and secure
replacement components. If suitable replacement components are unavailable, the Group may be forced to redevelop certain of its
solutions, which ultimately may not be accepted by the customers.



A substantial percentage of the Group’s purchases
are made from the following suppliers. Details of the major suppliers are as follows:



|           |  | 2011 |      |   | 2010 |  |      | 2009 | 
|---------- |  | ---- | ---- | - | ---- |  | ---- | ---- | 
|Supplier A |  |      | 41.1 | % |      |  | 37.7 | %    | 
|Supplier B |  |      | 8.1  | % |      |  | 9.3  | %    | 
|Supplier C |  |      | 7.8  | % |      |  | 8.2  | %    | 
|Supplier D |  |      | 7.8  | % |      |  | 7.1  | %    | 



|18. | EMPLOYEE BENEFIT PLANS
|--- | ----------------------



Certain employees of the Group in the PRC are entitled
to retirement benefits based on their salaries and length of service upon retirement in accordance with a PRC government-managed
retirement plan. The PRC government is directly responsible for the payments of the benefits to these retired employees. The Group
is required to make contributions to the government-managed retirement plan at 6.5% to 9% of the monthly basic salaries of certain
employees. The contribution expense for the years ended December 31, 2011, 2010 and 2009 was RMB11,792 (USD1,874), RMB7,770
and RMB5,354, respectively.



The Group operates a Mandatory Provident Fund Scheme
(“the MPF scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the
jurisdiction of the Hong Kong Employment Ordinance. The assets of the MPF scheme are held by independent trustees and are separated
from those of the Group’s assets. Under the MPF scheme, the employer and its employees are each required to make contributions
to the plan at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HKD20. Contributions
to the plan by the employee vest immediately. The contributions paid by the Group for the years ended December 31, 2011, 2010
and 2009 were RMB340 (USD54), RMB321 and RMB285, respectively.



|19. | FAIR VALUE MEASUREMENTS
|--- | -----------------------



The fair values of pledged bank deposits, accounts
receivable, accounts payable, bank borrowings, and accrued expenses and other liabilities approximated the respective carrying
amounts because of the short maturity of these instruments. The Group adopted ASC 820-10, Fair Value Measurements and Disclosures
for the nonfinancial assets and liabilities that are remeasured at fair value on a nonrecurring basis.



Level 1



Observable inputs, such as quoted market prices in
active markets for the identical asset or liability that are accessible at the measurement date.



Level 2



Inputs, other than quoted market prices included
in Level 1, that are observable either directly or indirectly for the asset or liability.



Level 3



Unobservable inputs that reflect the entity’s
own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market
data for the asset or liability at the measurement date.



F-38







In calculating the goodwill impairment (note 8(c)),
the Company adopted the combination of market and income approach with level 3 inputs and determined that the carrying amounts
of goodwill are impaired to their respective implied fair values of nil as of December 31, 2011. In calculating goodwill impairment
for Long Rise (note 7(d)), the Company adopted the income approach. The Company’s goodwill of Long Rise as measured and disclosed
as a level 3 input at fair value on a nonrecurring basis was nil as of December 31, 2010.



The Company also applied the income approach with
level 3 inputs in measuring and disclosing the fair value of the share-based compensation of Comtech Broadband (note 12(f)).



|20. | FOREIGN CURRENCY RISK
|--- | ---------------------



The RMB is not a freely convertible currency. The
State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of
RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic
and political developments affecting supply and demand in the China Foreign Exchange Trading System market.



The PRC subsidiaries conduct their business substantially
in the PRC, and their financial performance and position are measured in terms of RMB. Any devaluation of the RMB against the USD
would consequently have an adverse effect on the financial performance and asset values of the Group when measured in terms of
USD. The PRC subsidiaries’ products are primarily procured, sold and delivered in the PRC for RMB. Thus, their revenues and
profits are predominantly denominated in RMB.



|21. | INTEREST RATE RISK
|--- | ------------------



The Group is exposed to interest rate risk arising
from short-term variable rate borrowings from time to time. The Group’s future interest expense will fluctuate in line with
any change in borrowing rates. The Group does not have any derivative financial instruments as of December 31, 2011 and 2010
and believes its exposure to interest rate risk is not material.



|22. | SUBSEQUENT EVENTS
|--- | -----------------



| | (a) | Credit facility
| | --- | ---------------



Effective March 2, 2012, the Group entered into
an amendment (the “Amendment”), dated December 19, 2011, to its factoring agreement with Bank of China (Hong Kong)
Limited (“BOC”) dated April 28, 2010, as amended effective December 31, 2010 (the “Factoring Agreement”).
See note 3.

Pursuant to the terms of the Amendment, the line
of credit granted by BOC in the Factoring Agreement was increased to RMB472,043 (USD75,000). The factoring facility bears an interest
rate of 2.5% per annum above the HIBOR or USD LIBOR, depending on the currency in which the borrowings are denominated.



| | (b) | Proposed acquisition of certain subsidiaries of the Group by the Chief Executive Officer and Chairman
| | --- | -----------------------------------------------------------------------------------------------------



On March 15, 2012, Chief Executive Officer and Chairman
of the Company, Jeffrey Kang, proposed to the Company’s Board of Directors that he would purchase a series of operating entities
of the Group, including Comtech (China) Holding, Comtech Communication Technology (Shenzhen) Company Limited, Comtech Communication
Technology (Hong Kong) Company Limited, Comtech Software Technology (Shenzhen) Company Limited, Comtech (HK) Holding, Comtech International
(HK) Company Limited, Hong Kong JJT Limited, Alphalink Global Limited and Epcot Multimedia Technology (Shenzhen) Limited. Under
the proposal, the total purchase price is to be based on the results of an appraisal by an independent appraisal firm. The Company’s
Board of Directors has authorized the audit committee which is comprised of the independent directors to review the proposed transaction.



F-39