(2)    Included in the Q3 2012 net income attributable to Cogo Group, Inc. was $2.7 million of share-based compensation expenses recognized in accordance with Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation and $0.8 million of amortization of intangible assets and related deferred taxation. Non-GAAP net income attributable to Cogo Group, Inc. was $4.0 million.

Revenue Review

Revenue for the third quarter was $216.4 million, an increase of 47.8% compared to $146.4 million reported for the same period in 2011. The revenue breakdown includes: $82.3 million, or 38.0% of total sales for digital media, representing a 40.7% increase year-over-year; $94.7 million, or 43.8% of total sales for telecommunications equipment, representing a 63.6% increase year-over-year; and $39.4 million, or 18.2% of total sales relating to industrial business, representing a 31.3% increase year-over-year. The Company did not record any services revenue in the third quarter of 2012 or 2011. The Company is currently participating in what management believes to be some of the fastest growing industrial end-markets in China, including the smart grid, wind power, smart meter, automotive, high-speed railway and medical equipment sectors. Over time, the Company expects to expand into other verticals in the industrial business end-market, such as electronic security.

Customers Update

In the third quarter of 2012, blue-chip customers accounted for approximately 72% of the Company’s total revenue, down from approximately 74% for the same period in 2011. Small and medium enterprise (“SME”) customers accounted for the remaining approximately 28% of total revenue in the quarter. Management’s goal is to achieve 50% of total sales from SME customers in the longer term. It is expected that gross margins in our SME business will remain higher than our blue-chip customers in the future.

Cost of sales, which includes the aggregate purchase of components from suppliers, was $202.9 million compared to $131.3 million in the third quarter of 2011, representing an increase of 54.6% year-over-year. Gross profit for the third quarter was $13.5 million, down 10.9%, compared to $15.2 million during the third quarter of last year. Gross margin for the third quarter of 2012 was 6.2%, compared to 10.4% reported for the third quarter of 2011.

Operating expenses, including selling, general and administrative, and research and development expenses, totaled $10.9 million, down 7.9%, compared to $11.8 million reported for the third quarter of 2011.

Income from operations was $2.6 million, a decrease of 21.5% from $3.3 million reported in the same period of 2011. Operating margin for the third quarter of 2012 was 1.2% compared to 2.3% for the third quarter of 2011. Excluding the effects of share-based compensation expenses and amortization of intangible assets and related deferred taxation, operating margin would have been 2.9% for the third quarter of 2012, compared to 4.8% for the same period in 2011. The effective tax rate for the third quarter of 2012 was 13.0%, compared to 14.4% for the same period in 2011.  Noncontrolling interests’ share of income was $1.3 million for the third quarter of 2012 as compared with $0.3 million for the third quarter of 2011.

Net income attributable to Cogo Group, Inc. for the third quarter of 2012 was $0.5 million or Diluted EPS attributable to Cogo Group, Inc. of $0.01 on a U.S. GAAP basis, compared to net income of $2.3 million, or Diluted EPS attributable to Cogo Group, Inc. of $0.06, in the third quarter of 2011. Included in the third quarter of 2012 was $2.6 million attributable to share-based compensation expenses and $0.8 million attributable to amortization of intangible assets and related deferred taxation. Excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation, the Non-GAAP net income would have been $4.0 million, or $0.11 Non-GAAP Diluted EPS attributable to Cogo Group, Inc. for the third quarter of 2012. The weighted average number of shares used in the calculation of diluted EPS was 36.8 million compared to 36.3 million in the third quarter of 2011.

For the nine-month period ended September 30, 2012, the Company reported revenue of $581.1 million, an increase of 49.0% as compared to the $390.0 million reported during the nine-month period ended September 30, 2011. Gross profit was $38.9 million, a decrease of 17.6% from the $47.2 million reported during the nine-month period ended September 30, 2011. Gross margin was 6.7% of sales, compared to a gross margin of 12.1% for the same period last year. Net operating expenses were $30.1 million, a decrease of 9.6% as compared to $33.3 million for the same period last year. Income from operations was $8.8 million, a decrease of 36.7% from the $13.9 million reported during the prior year period. The Non-GAAP operating margin, excluding share-based compensation expense and amortization of intangible assets, was 3.4%, as compared to 6.7% for the same period last year, as a result of decreased gross margin. The Company had an effective tax rate of 12.2% compared to 11.5% during the prior year period. Non-controlling interests’ share of income was $3.0 million as compared to $1.2 million during the same period last year. Net income attributable to Cogo Group, Inc. for the nine-month period was down 66.6% at $3.6 million from the same period last year.

Balance Sheets and Cash Flows

Total cash, including pledged bank deposits, was $162.7 million at the end of the third quarter of 2012, up from $159.5 million as of December 31, 2011. Bank borrowings increased to $137.1 million as of September 30, 2012, up from $135.7 million as of December 31, 2011. The Company has a current ratio of 2.5 to 1 and generated negative operating cash flow of $8.2 million during the third quarter of 2012, largely due to an increase in accounts receivable and inventory necessary to drive expected future business growth opportunities.

Inventories increased from $52.0 million as of December 31, 2011 to $59.4 million as of September 30, 2012 as the Company prepares for seasonal order strength in the second half of 2012 from its rapidly growing customer base. Inventory turnover days was 27 days in the third quarter of 2012 compared to 31 days in the fourth quarter of 2011. Accounts receivable decreased from $149.6 million as of December 31, 2011 to $143.5 million as of September 30, 2012 and the Days Sales Outstanding decreased from 80 days as of December 31, 2011 to 61 days.  Accounts payable decreased from $19.3 million at the end of 2011 to $16.4 million as of September 30, 2012 and Days Payable Outstanding decreased significantly from 11 to 7 days sequentially. Cogo’s cash conversion cycle decreased from 100 days in the fourth quarter of 2011 to 81 days in the third quarter of 2012.

Total equity was $256.4 million as of September 30, 2012, an increase of 6.2% from $241.5 million as of December 31, 2011.  During the third quarter of 2012, the Company repurchased 38,935 shares. The Company continues to view share buybacks as a strategic use of cash.

About Cogo Group, Inc.:
Cogo Group, Inc. (Nasdaq: COGO) is one of the leading gateways for global semiconductor companies to access the rapidly growing Industrial and Technology sectors in China. Through its unique business-to-business services platform, Cogo designs customized embedded solutions using technology from suppliers including Intel, Broadcom, Xilinx, SanDisk, Freescale, Atmel and others for a customer base of 2,100 Chinese OEMs/ODMs. Cogo’s customer list includes approximately 100 blue-chip companies, including ZTE, BYD and NARI, as well as nearly 2,000 Small and Medium Enterprises (“SMEs”). The Company serves a broad list of rapidly growing end-markets in China, including 3G Smart phones, Tablets, Automotives, High-Speed Railway, Smart Meter/Smart Grid, Healthcare and High Definition Television (“HDTV”).

Safe Harbor Statement:
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our proposed discussions related to our business or growth strategy such as growth in digital media, telecommunications and industrial applications businesses, as well as our potential acquisitions which are subject to change. Such information is based upon expectations of our management that were reasonable when made, but may prove to be incorrect. All such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions, which are subject to change. For further descriptions of other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 20-F, and our subsequent SEC filings. Copies of filings made with the SEC are available through the SEC’s electronic data gathering analysis retrieval system (EDGAR) at www.sec.gov.

About Non-GAAP Financial Measures:
To supplement Cogo’s unaudited consolidated financial results presented in accordance with GAAP, Cogo uses the following measures defined as Non-GAAP financial measures by the SEC: 1) Non-GAAP net income attributable to Cogo Group, Inc. which is net income attributable to Cogo Group, Inc. excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation, and 2) Non-GAAP diluted EPS attributable to Cogo Group, Inc., which is diluted EPS excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation. The presentation of these Non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these Non-GAAP financial measures, please see the table captioned “Unaudited Reconciliation of Non-GAAP measures to the most comparable GAAP measures” set forth at the end of this release.

Cogo believes that these Non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding share-based compensation expenses and amortization of intangible assets and related deferred taxation that may not be indicative of its operating performance from a cash perspective. Cogo believes that both management and investors benefit from referring to these Non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These Non-GAAP financial measures also facilitate management’s internal comparisons to Cogo’s historical performance and liquidity. Cogo computes its Non-GAAP financial measures using the same consistent method from quarter to quarter.

Cogo believes these Non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of using Non-GAAP net income attributable to Cogo Group, Inc., Non-GAAP diluted Earnings Per Share attributable to Cogo Group, Inc., Non-GAAP income from operation and Non-GAAP operating margin is that these Non-GAAP measures exclude share-based compensation expenses and amortization of intangible assets and related deferred taxation that have been and will continue to be for the foreseeable future a recurring expense in our business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each Non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are most directly comparable to Non-GAAP financial measures.

Tables Attached