123 (revised 2004), Share-Based Payment ("SFAS 123R") and $0.9 millionacquisition related costs including amortization of purchased intangibleassets and recognized deferred taxation. Non-GAAP net income attributableto Cogo Group, Inc., excluding the effects of share-based compensationexpense and acquisition related costs, was $4.5 million or $0.12 Non-GAAPEPS Diluted attributable to Cogo Group, Inc. Included in the Q1 2008 netincome was an amount of $1.6 million for share-based compensation expensein accordance with SFAS 123R and $0.8 million acquisition related costsincluding amortization of purchased intangible assets and recognizeddeferred taxation.Recent DevelopmentsThe Company is currently finalizing the acquisition of Mega Smart, a pioneerin China's developing industrial applications market in the electric grid and"smart meter" segments. Management expects the acquisition to significantlyenhance the Company's product offerings and fuel its growth in China's rapidlyexpanding industrial sector, which is currently benefiting from a large,broad-based government infrastructure stimulus plan. Cogo expects a smoothintegration of Mega Smart's sales team once the acquisition is finalized. Thenewly combined workforce is expected to be able to immediately leverage thecompany's current customer base, which consists of over 1,200 companies.Jeffrey Kang, Chairman & Chief Executive Officer, Cogo Group, Inc.
said, "Weexpect this transaction to close in the second quarter of 2009, and we areexcited to integrate the Mega Smart team into the Cogo sales platform. We areincreasingly convinced that this acquisition will be a very cost effective andefficient way to benefit from the rapidly growing industrial business marketwithin China." Financial ResultsNet revenue for the first quarter was $63.3 million, an increase of 5.1%compared to $60.2 million reported for the first quarter of last year. The netrevenue breakdown is as follows: $21.8 million, or 34.5% of total revenue formobile handsets, representing a 10.7% decrease year-over-year; $16.2 million,or 25.6% of total revenue for telecommunications equipment, representing a0.8% increase year-over-year; and $17.7 million, or 27.9% of total revenue fordigital media products, representing an increase of 1.8% year-over-year. TheCompany's service business contributed $0.7 million in net revenues for thefirst quarter and accounted for approximately 1.1% of total net revenue.
Alsoduring the quarter, the Company generated $6.9 million in revenue, or 10.9% oftotal revenue, from component sales relating to industrial business, whichincludes industrial solutions targeted at the electrical grid and railwaysectors.Cost of sales, which includes the aggregate purchase of components fromsuppliers and the direct cost of services, was $54.3 million compared to $48.4million, representing an increase of 12.1% year-over-year. Gross profit forthe first quarter was $9.0 million, down 23.5% compared to the $11.8 millionduring the first quarter of last year. Gross margin for the first quarterdecreased to 14.2%, compared to 19.5% reported during the first quarter of2008, due to the unfavorable product mix reflecting growing demands in thelower gross margin, low-end segment of the handset market.Selling, general and administrative expenses totaled $5.2 million, down 7.8%,compared to $5.7 million reported for the first quarter of last year. Thedecrease was attributable to a reduction in the charge of allowance fordoubtful accounts and share-based compensation expense of $0.2 million and$0.4 million, respectively. Research and development (R&D) expenses increasedby 70.9% to $2.3 million compared to $1.4 million in the first quarter of2008. The increase was mainly attributable to share-based compensation awardsgranted during the first quarter of 2009 which increased share-basedcompensation cost of $0.8 million as compared to the corresponding period in2008.Income from operations was $1.4 million, down 69.9% as compared to $4.7million for the first quarter of 2008.
Operating margin for the first quarterwas 2.2% versus 7.8% for the first quarter of 2008. Excluding the effects ofshare-based compensation and acquisition-related costs including amortizationof purchased intangible assets, operating margin would have been 7.3% for thefirst quarter of 2009, compared to 12.0% for the same period in 2008. Theeffective tax rate for the first quarter of 2009 was 11.3%, compared to 8.2%for the same period in 2008. Included in the income tax expense for thequarter ended March 31, 2009 was a deferred income tax benefit of $0.2 millionas a result of the amortization of purchased intangible assets of $1.1million. Noncontrolling interests' share of income was $0.04 million ascompared to $nil during the same period in 2008.Net income attributable to Cogo Group, Inc. for the first quarter was $1.6million or EPS Diluted attributable to Cogo Group, Inc.
of $0.04 on a U.S.GAAP basis, compared to net income attributable to Cogo Group, Inc. of $5.3million, or EPS Diluted attributable to Cogo Group, Inc of $0.13 in the firstquarter of 2008. Included in the first quarter 2009 net income attributable toCogo Group, Inc. was an amount of $2.1 million for share-based compensationexpense and $0.9 million for acquisition-related costs including amortizationof purchased intangible assets and recognized deferred taxation.