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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006.

or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from             
to            .

Commission File Number 0-27436



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Comtech Group, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 94-3171940                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

Room 1001, Tower C, Skyworth Building

High-Tech Industrial Park

Nanshan,
Shenzhen 5180, PRC

(Address of Principal Executive Offices including zip code)

011-86-755-267-43210

(Registrants Telephone Number, Including Area Code)



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 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. (Check one):

Large accelerated filer ̈Accelerated filler ̈Non-accelerated filer   x

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Securities Exchange Act).    Yes ̈No  x

There were 32,378,771 shares of the Registrants Common Stock
issued and outstanding on August 11, 2006.



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##### Table of Contents

Comtech Group, Inc.

Index to Form 10-Q



|           |  |                                                                                                  |  |   
|---------- |  | ------------------------------------------------------------------------------------------------ |  | --
|Part I.    |  | Financial Information                                                                            |  |   
|           |  |                                                                                                 
|           |  | Item 1. Condensed Financial Statements (unaudited)                                               |  | 1 
|           |  |                                                                                                 
|           |  | Condensed Consolidated Balance Sheetsas of June 30, 2006 and December 31, 2005                   |  | 1 
|           |  |                                                                                                 
|           |  | Condensed Consolidated Statements of Operationsfor the three months ended June 30, 2006 and 2005 |  | 2 
|           |  |                                                                                                 
|           |  | Condensed Consolidated Statements of Operationsfor the six months ended June 30, 2006 and 2005   |  | 3 
|           |  |                                                                                                 
|           |  | Condensed Consolidated Statements of Cash Flowsfor the six months ended June 30, 2006 and 2005   |  | 4 
|           |  |                                                                                                 
|           |  | Notes to Condensed Consolidated Financial Statements                                             |  | 5 
|           |  |                                                                                                 
|           |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 14
|           |  |                                                                                                 
|           |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                               |  | 28
|           |  |                                                                                                 
|           |  | Item 4. Controls and Procedures                                                                  |  | 29
|           |  |                                                                                                 
|Part II.   |  | Other Information                                                                                |  |   
|           |  |                                                                                                 
|           |  | Item 1. Legal Proceedings                                                                        |  | 30
|           |  |                                                                                                 
|           |  | Item 1A. Risk Factors                                                                            |  | 30
|           |  |                                                                                                 
|           |  | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                              |  | 30
|           |  |                                                                                                 
|           |  | Item 3. Defaults Upon Senior Securities                                                          |  | 31
|           |  |                                                                                                 
|           |  | Item 4. Submission of Matters to a Vote of Security Holders                                      |  | 31
|           |  |                                                                                                 
|           |  | Item 5. Other Information                                                                        |  | 31
|           |  |                                                                                                 
|           |  | Item 6. Exhibits                                                                                 |  | 31
|           | 
|SIGNATURES |  | 32                                                                                              



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##### Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheet

As of June 30, 2006 and December 31, 2005



|                                                                 |  |             |   |  |             |   |  |             |  
|---------------------------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                                                 |  | Jun 30,2006 |   |  | Jun 30,2006 |   |  | Dec 31,2005 |  
|                                                                 |  | $000       |   |  | RMB000     |   |  | RMB000     |  
|Assets                                                           |  |             |   |  |             |   |  |             |  
|Current assets:                                                  |  |             |   |  |             |   |  |             |  
|Cash                                                             |  | 20,258      |   |  | 161,950     |   |  | 177,098     |  
|Pledged bank deposits                                            |  | 5,111       |   |  | 40,855      |   |  | 40,692      |  
|Trade accounts receivable, net of allowance of doubtful accounts |  | 44,841      |   |  | 358,471     |   |  | 267,543     |  
|Bills receivable                                                 |  | 11,198      |   |  | 89,523      |   |  | 54,905      |  
|Other receivables                                                |  | 2,545       |   |  | 20,349      |   |  | 9,657       |  
|Amount due from a minority shareholder                           |  |            |   |  |            |   |  | 468         |  
|Inventories                                                      |  | 13,576      |   |  | 108,530     |   |  | 110,763     |  
|                                                                 |  |             |   |  |             |   |  |             |  
|Total current assets                                             |  | 97,529      |   |  | 779,678     |   |  | 661,126     |  
|                                                                 |  |             |  
|Property, plant and equipment, net                               |  | 1,456       |   |  | 11,640      |   |  | 6,904       |  
|Other assets                                                     |  | 113         |   |  | 905         |   |  | 905         |  
|                                                                 |  |             |   |  |             |   |  |             |  
|Total Assets                                                     |  | 99,098      |   |  | 792,223     |   |  | 668,935     |  
|                                                                 |  |             |   |  |             |   |  |             |  
|Liabilities and stockholders equity                             |  |             |   |  |             |   |  |             |  
|Current liabilities:                                             |  |             |   |  |             |   |  |             |  
|Trade accounts payable                                           |  | 17,041      |   |  | 136,232     |   |  | 104,308     |  
|Amount due to related parties                                    |  | 227         |   |  | 1,816       |   |  | 1,816       |  
|Bank borrowings                                                  |  | 3,638       |   |  | 29,082      |   |  | 35,779      |  
|Income taxes payable                                             |  | 710         |   |  | 5,677       |   |  | 2,524       |  
|Accrued expenses and other liabilities                           |  | 2,266       |   |  | 18,122      |   |  | 9,350       |  
|                                                                 |  |             |   |  |             |   |  |             |  
|Total current liabilities                                        |  | 23,882      |   |  | 190,929     |   |  | 153,777     |  
|                                                                 |  |             |   |  |             |   |  |             |  
|Minority interests                                               |  | 2,010       |   |  | 16,067      |   |  | 8,599       |  
|                                                                 |  |             |  
|Stockholders equity                                             |  |             |   |  |             |   |  |             |  
|Common stock                                                     |  | 335         |   |  | 2,677       |   |  | 2,602       |  
|Additional paid-in capital                                       |  | 48,179      |   |  | 385,161     |   |  | 358,775     |  
|Retained earnings                                                |  | 25,971      |   |  | 207,616     |   |  | 152,615     |  
|Accumulated other comprehensive loss                             |  | (1,279      | ) |  | (10,227     | ) |  | (7,433      | )
|                                                                 |  |             |   |  |             |   |  |             |  
|Total stockholders equity                                       |  | 73,206      |   |  | 585,227     |   |  | 506,559     |  
|                                                                 |  |             |   |  |             |   |  |             |  
|Total liabilities and stockholders equity                       |  | 99,098      |   |  | 792,223     |   |  | 668,935     |  
|                                                                 |  |             |   |  |             |   |  |             |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

Three months ended June 30, 2006 and 2005



|                                             |  |                                |   |  |                                |   |  |                                |  
|-------------------------------------------- |  | ------------------------------ | - |  | ------------------------------ | - |  | ------------------------------ | -
|                                             |  | Three MonthsEndedJune 30, 2006 |   |  | Three MonthsEndedJune 30, 2006 |   |  | Three MonthsEndedJune 30, 2005 |  
|                                             |  | $000                          |   |  | RMB000                        |   |  | RMB000                        |  
|Revenues                                     |  | 41,588                         |   |  | 332,470                        |   |  | 207,797                        |  
|Cost of revenues                             |  | (33,901                        | ) |  | (271,019                       | ) |  | (171,125                       | )
|                                             |  |                                |   |  |                                |   |  |                                |  
|Gross profit                                 |  | 7,687                          |   |  | 61,451                         |   |  | 36,672                         |  
|Selling, general and administrative expenses |  | (2,468                         | ) |  | (19,731                        | ) |  | (9,387                         | )
|Research and development expenses            |  | (1,213                         | ) |  | (9,698                         | ) |  | (2,861                         | )
|Other net operating expenses                 |  | (7                             | ) |  | (53                            | ) |  |                               |  
|                                             |  |                                |   |  |                                |   |  |                                |  
|Income from operations                       |  | 3,999                          |   |  | 31,969                         |   |  | 24,424                         |  
|Interest expense                             |  | (87                            | ) |  | (695                           | ) |  | (555                           | )
|Interest income                              |  | 199                            |   |  | 1,590                          |   |  | 74                             |  
|                                             |  |                                |   |  |                                |   |  |                                |  
|Income before income tax                     |  | 4,111                          |   |  | 32,864                         |   |  | 23,943                         |  
|Income tax                                   |  | (282                           | ) |  | (2,258                         | ) |  | (1,777                         | )
|                                             |  |                                |   |  |                                |   |  |                                |  
|Income before minority interests             |  | 3,829                          |   |  | 30,606                         |   |  | 22,166                         |  
|Minority interests                           |  | (229                           | ) |  | (1,830                         | ) |  | (961                           | )
|                                             |  |                                |   |  |                                |   |  |                                |  
|Net income                                   |  | 3,600                          |   |  | 28,776                         |   |  | 21,205                         |  
|                                             |  |                                |   |  |                                |   |  |                                |  
|                                             |  |                                |  
|                                             |  | $                              |   |  | RMB                            |   |  | RMB                            |  
|Earnings per share                           |  |                                |   |  |                                |   |  |                                |  
|- Basic                                      |  | 0.11                           |   |  | 0.90                           |   |  | 0.83                           |  
|                                             |  |                                |   |  |                                |   |  |                                |  
|- Diluted                                    |  | 0.11                           |   |  | 0.85                           |   |  | 0.79                           |  
|                                             |  |                                |   |  |                                |   |  |                                |  
|- Basic                                      |  | 32,109,704                     |   |  | 32,109,704                     |   |  | 25,532,898                     |  
|                                             |  |                                |   |  |                                |   |  |                                |  
|- Diluted                                    |  | 33,805,656                     |   |  | 33,805,656                     |   |  | 26,793,683                     |  
|                                             |  |                                |   |  |                                |   |  |                                |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

Six months ended June 30, 2006 and 2005



|                                             |  |                              |   |  |                              |   |  |                              |  
|-------------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------------- | -
|                                             |  | Six MonthsEndedJune 30, 2006 |   |  | Six MonthsEndedJune 30, 2006 |   |  | Six MonthsEndedJune 30, 2005 |  
|                                             |  | $000                        |   |  | RMB000                      |   |  | RMB000                      |  
|Revenues                                     |  | 75,578                       |   |  | 604,197                      |   |  | 379,798                      |  
|Cost of revenues                             |  | (61,383                      | ) |  | (490,713                     | ) |  | (316,841                     | )
|                                             |  |                              |   |  |                              |   |  |                              |  
|Gross profit                                 |  | 14,195                       |   |  | 113,484                      |   |  | 62,957                       |  
|Selling, general and administrative expenses |  | (3,889                       | ) |  | (31,088                      | ) |  | (15,994                      | )
|Research and development expenses            |  | (2,101                       | ) |  | (16,800                      | ) |  | (4,148                       | )
|Other net operating expenses                 |  | (2                           | ) |  | (13                          | ) |  |                             |  
|                                             |  |                              |   |  |                              |   |  |                              |  
|Income from operations                       |  | 8,203                        |   |  | 65,583                       |   |  | 42,815                       |  
|Interest expense                             |  | (138                         | ) |  | (1,107                       | ) |  | (948                         | )
|Interest income                              |  | 460                          |   |  | 3,674                        |   |  | 103                          |  
|                                             |  |                              |   |  |                              |   |  |                              |  
|Income before income tax                     |  | 8,525                        |   |  | 68,150                       |   |  | 41,970                       |  
|Income tax                                   |  | (737                         | ) |  | (5,891                       | ) |  | (3,264                       | )
|                                             |  |                              |   |  |                              |   |  |                              |  
|Income before minority interests             |  | 7,788                        |   |  | 62,259                       |   |  | 38,706                       |  
|Minority interests                           |  | (908                         | ) |  | (7,258                       | ) |  | (1,690                       | )
|                                             |  |                              |   |  |                              |   |  |                              |  
|Net income                                   |  | 6,880                        |   |  | 55,001                       |   |  | 37,016                       |  
|                                             |  |                              |   |  |                              |   |  |                              |  
|                                             |  |                              |  
|                                             |  | $                            |   |  | RMB                          |   |  | RMB                          |  
|Earnings per share                           |  |                              |   |  |                              |   |  |                              |  
|- Basic                                      |  | 0.22                         |   |  | 1.72                         |   |  | 1.45                         |  
|                                             |  |                              |   |  |                              |   |  |                              |  
|- Diluted                                    |  | 0.21                         |   |  | 1.64                         |   |  | 1.38                         |  
|                                             |  |                              |   |  |                              |   |  |                              |  
|- Basic                                      |  | 31,889,076                   |   |  | 31,889,076                   |   |  | 25,457,793                   |  
|                                             |  |                              |   |  |                              |   |  |                              |  
|- Diluted                                    |  | 33,474,719                   |   |  | 33,474,719                   |   |  | 26,836,779                   |  
|                                             |  |                              |   |  |                              |   |  |                              |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

Six months ended June 30, 2006 and 2005



|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------------- | -
|                                                                                             |  | Six MonthsEndedJune 30, 2006 |   |  | Six MonthsEndedJune 30, 2006 |   |  | Six MonthsEndedJune 30, 2005 |  
|                                                                                             |  | $000                        |   |  | RMB000                      |   |  | RMB000                      |  
|Cash flows from operating activities:                                                        |  |                              |   |  |                              |   |  |                              |  
|Net income                                                                                   |  | 6,880                        |   |  | 55,001                       |   |  | 37,016                       |  
|Adjustment to reconcile net income to net cash (used in) / provided by operating activities: |  |                              |   |  |                              |   |  |                              |  
|Depreciation expense                                                                         |  | 133                          |   |  | 1,066                        |   |  | 390                          |  
|Loss on disposal of fixed assets                                                             |  | 12                           |   |  | 99                           |   |  |                             |  
|Minority interest                                                                            |  | 960                          |   |  | 7,675                        |   |  | 1,690                        |  
|Stock based compensation cost                                                                |  | 688                          |   |  | 5,503                        |   |  | 247                          |  
|Changes in operating assets and liabilities:                                                 |  |                              |   |  |                              |   |  |                              |  
|Trade accounts receviable                                                                    |  | (10,163                      | ) |  | (81,243                      | ) |  | (42,637                      | )
|Bills receivable                                                                             |  | (4,330                       | ) |  | (34,618                      | ) |  | 64,162                       |  
|Inventories                                                                                  |  | 322                          |   |  | 2,574                        |   |  | (11,542                      | )
|Other receivables                                                                            |  | (1,313                       | ) |  | (10,500                      | ) |  | (14,937                      | )
|Trade accounts payable                                                                       |  | 3,943                        |   |  | 31,523                       |   |  | (2,616                       | )
|Amount due to other related party                                                            |  |                             |   |  |                             |   |  | (600                         | )
|Accrued expenses and other liabilities                                                       |  | 557                          |   |  | 4,451                        |   |  | 6,307                        |  
|Income tax payable                                                                           |  | 387                          |   |  | 3,094                        |   |  | 1,023                        |  
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Cash (used in) /provided by operating activities                                             |  | (1,924                       | ) |  | (15,375                      | ) |  | 38,503                       |  
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Cash flows from investing activities:                                                        |  |                              |   |  |                              |   |  |                              |  
|Purchases of property and equipment                                                          |  | (682                         | ) |  | (5,452                       | ) |  | (2,076                       | )
|Proceeds from sale of fixed assets                                                           |  | 1                            |   |  | 5                            |   |  |                             |  
|Bank deposits pledged                                                                        |  | (20                          | ) |  | (163                         | ) |  |                             |  
|Acquisition of subsidiary net of cash required                                               |  | (387                         | ) |  | (3,097                       | ) |  |                             |  
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Cash used in investing activities                                                            |  | (1,088                       | ) |  | (8,707                       | ) |  | (2,076                       | )
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Cash flows from financing activities:                                                        |  |                              |   |  |                              |   |  |                              |  
|Transaction cost from issuance of shares                                                     |  |                             |   |  |                             |   |  | (1,147                       | )
|Proceeds from exercise of stock options and warrants                                         |  | 2,189                        |   |  | 17,503                       |   |  |                             |  
|Repayment of bank borrowings                                                                 |  | (858                         | ) |  | (6,861                       | ) |  | (8,478                       | )
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Cash provided by/ (used in) financing activities                                             |  | 1,331                        |   |  | 10,642                       |   |  | (9,625                       | )
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Effect of exchange rate on cash                                                              |  | (214                         | ) |  | (1,708                       | ) |  | 0                            |  
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Net (decrease) /increase in cash and cash equivalents                                        |  | (1,895                       | ) |  | (15,148                      | ) |  | 26,802                       |  
|                                                                                             |  |                              |  
|Cash at beginning of the period                                                              |  | 22,153                       |   |  | 177,098                      |   |  | 41,444                       |  
|                                                                                             |  |                              |   |  |                              |   |  |                              |  
|Cash at end of the period                                                                    |  | 20,258                       |   |  | 161,950                      |   |  | 68,246                       |  
|                                                                                             |  |                              |   |  |                              |   |  |                              |  



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##### Table of Contents

Note 1 - Basis Of Presentation

The accompanying unaudited condensed consolidated financial statements of Comtech Group, Inc.,
(formerly Trident Rowan Group Inc, (the Parent or the Registrant)) and its subsidiaries (together, we, us or our)) have been prepared in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted. For a summary of
our accounting principles, and other footnote information, reference is made to the Registrants audited consolidated financial statements for the years ended December 31, 2003, 2004 and 2005 included in our Annual Report on Form 10-K (the
10-K) filed with the Securities and Exchange Commission on March 28, 2006. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated
financial statements and notes included in the 10-K. All adjustments necessary for the fair presentation of the results of operations for the interim periods covered by this report have been included. All such adjustments are of a normal and
recurring nature. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the operating results for the full year.

The accompanying unaudited condensed consolidated financial statements are expressed in Renminbi (RMB), the national currency of the Peoples Republic of China (the PRC). Solely for the convenience of the
reader, the June 30, 2006 unaudited condensed consolidated financial statements have been translated into United States dollars (USD or $) at the closing rate in New York City on June 30, 2006 for cable transfers in
RMB as certified for customers purposes by the Federal Reserve Bank of New York of USD 1.00 = RMB 7.9943. No representation is made that the RMB could have been, or could be, converted into USD at that rate or at any other certain rate on
June 30, 2006, or at any other certain date.

The value of the RMB is subject to changes in the PRCs central government policies and to
international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the
Peoples Bank of China, which are set daily based on the previous days interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable,
but the Chinese government recently announced in July 2005 that it will no longer peg its currency exclusively to the USD but will switch to a managed floating exchange rate based on market supply and demand with reference to a basket of currencies
yet to be named by the Peoples Bank of China, which will likely increase the volatility of RMB as compared to USD.

Note 2  Organization And
Nature Of Business

The Company provides over 500 customized module design solutions and product lines integrating components from many suppliers to
various manufacturers in the mobile handset and telecommunications equipment industries in the PRC and other overseas countries.

Mr. Jeffrey Kang,
our principal shareholder and chief executive officer, directly or through entities he controls, currently has a controlling interest in us. Mr. Kang thus has the ability to control 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.



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##### Table of Contents

Acquisitions and Newly Formed Subsidiaries

On January 11, 2006, we entered into an agreement to invest in 51.12% of Huameng Engineering Services Ltd. (Huameng BVI), a British Virgin Islands
investment holding company, for a cash consideration of RMB44 thousand ($5 thousand) which in turn acquired 100% in Shenzhen Huameng Software Co. Ltd. (Huameng PRC), a PRC company, for a cash contribution of RMB6,769 thousand ($847
thousand) payable in cash. Huameng PRC is engaged in the provision of technology and engineering services, business process outsourcing, network system integration and related training and maintenance services.

The table below summarizes the preliminary purchase price allocation of the fair value of assets acquired and liabilities assumed in connection with the acquisition of
Huameng PRC that was consummated during the six months ended June 30, 2006.



|                              |  |         |      
|----------------------------- |  | ------- | -----
|                              |  | RMB000
|Cash and cash equivalents     |  | $       | 206  
|Other current assets          |  |         | 6,983
|Property, plant and equipment |  |         | 409  
|                              |  |         |      
|Total assets acquired         |  |         | 7,598
|                              |  |         |      
|Current liabilities           |  |         | 829  
|                              |  |         |      
|Net assets acquired           |  | $       | 6,769
|                              |  |         |      

Note 3 - Summary Of Principal Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (US GAAP).

Revenue recognition

Sales of components

Sales of components for
telecommunication system equipment, mobile handset, network protection devices and data storage are recognized when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable, and
collection of the related receivable is probable, which is generally at the time of shipment.

Sales of services

Provision of technology and engineering services, business process outsourcing, network system integration and related training and maintenance services
are recognized as revenue when the services are rendered.

Revenue is recorded net of value added tax incurred. Value added taxes amounted to
(i) RMB21,544 thousand ($2,695 thousand) and RMB12,223 thousand, for the three months ended June 30, 2006 and 2005, respectively, and (ii) RMB36,366 thousand ($4,549 thousand) and RMB33,817 thousand for the six months ended
June 30, 2006 and 2005, respectively.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R), which addresses the accounting for transactions



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in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which
an entity obtains employee services in share-based payment transactions. This Statement is a revision to Statement 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This
Statement will require measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock options. Incremental compensation cost arising from subsequent modifications of
awards after the grant date must be recognized. We adopted this Statement with effect from January 1, 2006 under the modified prospective method of application (see note 5). Under that method, we recognize compensation costs for new grants of
share-based awards, awards modified after the effect date, and the remaining portion of the fair value of the unvested awards at the adoption date.

In
December 2004, the FASB issued FASB Statement No. 151, Inventory Costs  An Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 clarifies that abnormal amounts of idle facility expenses,
freight, handling costs and spoilage should be expensed as incurred and not included in inventory cost as a component of overhead. Further, SFAS No. 151 requires that the allocation of fixed and production facilities overhead to conversion
costs should be based on normal capacity of the production facilities. The provisions in SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 had no
significant impact on our financial position or results of operations.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error
Corrections (SFAS No. 143). SFAS No. 154 establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements
specific to a newly adopted accounting principle. This statement will be effective for us for all accounting changes and any error corrections occurring after January 1, 2006. The Company did not have any changes in accounting principle other
than the adoption of SFAS No. 123R discussed above, which has its own adoption transition provision and is therefore not in the scope of SFAS No. 154. The impact of this statement on our consolidated financial statements will depend on new
pronouncements that are subsequently issued.



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Note 4  Financing Arrangements

Certain of our customers enter into arrangements with their respective banks for purposes of settling their invoices with us. Under such arrangements, we are entitled to collect the amounts owed directly from the
customers banks when the invoice becomes due. These amounts are recorded as bills receivable on the consolidated balance sheets. We, in certain circumstances, have arranged to transfer with recourse certain of our bills receivable to our bank.
Under this discounting arrangement, the bank pays in advance a discounted amount to us and collects the amounts owed from the customers banks on the due date. The discount typically ranges between 0.6% to 0.9% of the balance transferred, which
is recorded as interest expense. As of June 30, 2006 and 2005, we had discounted bills receivable amounting to approximately RMB14,500 thousand ($1,814 thousand) and RMB7,808 thousand, respectively.

According to paragraph 9 of FAS No. 140, the transfer of bills receivable to the bank should be accounted for as a sale (i.e., the Group has surrendered control
over the bills receivables) if and only if all of the following criteria are met:



| |  |  | The transferred bills receivables have been isolated from the Group (i.e., put presumptively beyond the reach of the Group and its creditors, even in bankruptcy or other
receivership).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The bank has the right to pledge or exchange bills receivables (or beneficial interests) it received, and no condition both constrains the bank from taking advantage of its right to
pledge or exchange and provides more than trivial benefit to the Group.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Group does not maintain effective control over the transferred bills receivables through either (1) and agreement that both entitles and obligates the Group to repurchase
or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To the extent that
the above criteria are met, bills receivable are de-recognized.

Note 5 - Stock-Based Compensation

In 1995, the Parent Board of Directors adopted, and the stockholders approved, the 1995 Stock Option Plan for Outside Directors (the Directors Plan),
pursuant to which 5 thousand options would be granted annually to each non-employee director of Parent for each full fiscal year of service on the Board. As part of the share exchange transaction with Parent in July 2004, the Company assumed
fully vested options under the Directors Plan to purchase 115 thousand shares of the Companys common stock. In addition to the options under the Directors Plan, the Company also assumed 925,417 fully exercisable common stock
warrants. Each warrant represents the right to receive 1 share of the Companys common stock. The Directors Plan expired on December 31, 2005 while the options exercisable under the Directors Plan will terminate on July 1
2009. The Company does not intend to issue any additional options under the Directors Plan.

On August 3, 2004, the Board of Directors adopted
the Comtech Group, Inc. 2004 Stock Incentive Plan (the Incentive Plan) pursuant to which 2,500 thousand shares of 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. As at June 30, 2006, 142 thousand shares (December 31, 2005: 142 thousand shares) of common stock are remaining available for future issuance under the Incentive Plan. The
purpose of the Incentive Plan is to provide additional incentive to employees, directors, advisors and consultants by facilitating their acquisition of the Companys common stock. The 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



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the Incentive Plan is early terminated by the Board. Options granted under the Incentive Plan are either incentive stock
options (i.e. options that afford favorable tax treatment to recipients upon compliance with certain restriction pursuant to Section 422 of the Internal Revenue Code and that do not result in tax deductions to participants unless they fail to
comply with Section 422 of the Internal Revenue Code) or options that do not so qualify.

The Directors Plan and the Incentive Plan are
administered by the Compensation Committee of the Board of Directors. The Compensation Committee selects the employees to whom awards are to be granted, the number of shares to be subject to such awards, and the terms and conditions of such awards
(provided that any discretion exercised by the Compensation Committee must be consistent with resolutions adopted by the Board of Directors and the terms of the Incentive Plan).

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R). SFAS No.123R supersedes our previous accounting under
Accounting Principles Board Opinion No.25, Accounting for Stock issued to Employees (APB 25), for periods beginning in fiscal 2006. Under APB 25, we accounted for stock options under the intrinsic value method. Under the intrinsic
method, we did not recognize expense related to employee stock options to the extent the exercise price of such options equaled the fair value of the underlying stock on the grant date. As permitted under the provisions of Statement of Financial
Accounting Standards No. 23, Accounting for Stock Based Compensation (SFAS No. 123), we previously elected to continue to apply the intrinsic value method of accounting described above and disclosed the fair value of
stock option grants.

We adopted SFAS No. 123R using the modified prospective transition method, which requires the application of this accounting
standard as of January 1, 2006.

The following table presents details of stock-based compensation expense by functional line item:



|                                                                                                                            |  |                             |  |                             |  |                           |  |                          
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | --------------------------- |  | ------------------------- |  | -------------------------
|                                                                                                                            |  | ThreeMonthsEndedJune 302006 |  | ThreeMonthsEndedJune 302006 |  | SixMonthsEndedJune 302006 |  | SixMonthsEndedJune 302006
|                                                                                                                            |  | US$000                     |  | RMB000                     |  | US$000                   |  | RMB000                  
|Selling, general and administrative expenses                                                                                |  | 268                         |  | 2,146                       |  | 448                       |  | 3,586                    
|Research and development expenses                                                                                           |  | 120                         |  | 957                         |  | 240                       |  | 1,917                    
|                                                                                                                            |  |                             |  |                             |  |                           |  |                          
|Stock-based compensation expense related to employee stock options and employee stock grants included in operating earnings |  | 388                         |  | 3,103                       |  | 688                       |  | 5,503                    
|Tax benefit                                                                                                                 |  |                            |  |                            |  |                          |  |                         
|                                                                                                                            |  |                             |  |                             |  |                           |  |                          
|Stock-based compensation expense related to employee stock options and employee stock grants, net of tax                    |  | 388                         |  | 3,103                       |  | 688                       |  | 5,503                    
|Decrease in Basic earnings per share                                                                                        |  | 0.01                        |  | 0.09                        |  | 0.02                      |  | 0.18                     
|Decrease in Diluted earnings per share                                                                                      |  | 0.01                        |  | 0.09                        |  | 0.02                      |  | 0.17                     

Under SFAS No. 123R, we recognized RMB7,103 thousand ($388 thousand) and RMB11,392 thousand ($656 thousand)
of compensation expense related to stock options in the three months and six months ended June 30, 2006, respectively. In accordance with the modified prospective transition method, our unaudited condensed consolidated statements of operations
for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R. No options were granted in the three months and six months ended June 30, 2006.



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Stock options activity for the six months ended June 30, 2006 was as follows:



|                                         |  |                                         |   |  |                        |      |                                            |     |                                        |       
|---------------------------------------- |  | --------------------------------------- | - |  | ---------------------- | ---- | ------------------------------------------ | --- | -------------------------------------- | ------
|                                         |  | Shares subjectto Options (in thousands) |   |  | Wtd. Avg.exerciseprice |      | Wtd. Avg.remainingcontractuallife (in yrs) |     | AggregateIntrinsicValue (in thousands)
|Options outstanding at January 1, 2006   |  | 2,473                                   |   |  | $                      | 3.91 |                                            | 9.0 |                                        | 5,688 
|Options granted                          |  |                                        |   |  |                        |     |                                            |     |                                        |      
|Options exercised                        |  | (416                                    | ) |  |                        | 3.66 |                                            |     |                                        | 3,037 
|Options terminated, cancelled or expired |  | (107                                    | ) |  |                        | 3.74 |                                            |     |                                        | 264   
|Options outstanding at June 30, 2006     |  | 1,950                                   |   |  |                        | 3.97 |                                            | 8.5 |                                        | 13,962
|Options exercisable at June 30, 2006     |  | 848                                     |   |  |                        | 3.94 |                                            | 8.5 |                                        | 6,096 

At June 30, 2006, 142 thousand shares were available for future grants under the terms of these plans.

At June 30, 2006, we had approximately RMB13,640 thousand ($1,706 thousand) of total unrecognized compensation expense, net of estimated forfeitures,
related to stock option plans that will be recognized over the weighted average period of approximately 1.7 years. Cash received from stock option exercises was approximately RMB6,011 thousand ($752 thousand) and RMB17,503 thousand ($2,189 thousand)
during the three months and six months ended June 30, 2006, respectively.

In addition to stock options, we also have outstanding warrants that were
granted in previous years. Each warrant represents the right to receive 1 share of our common stock. Stock warrants activity for the six months ended June 30, 2006 was as follows:



|                                          |  |                                          |   |  |                        |      |                                            |     |                                        |      
|----------------------------------------- |  | ---------------------------------------- | - |  | ---------------------- | ---- | ------------------------------------------ | --- | -------------------------------------- | -----
|                                          |  | Shares subjectto Warrants (in thousands) |   |  | Wtd. Avg.exerciseprice |      | Wtd. Avg.remainingcontractuallife (in yrs) |     | AggregateIntrinsic Value(in thousands)
|Warrants outstanding at January 1, 2006   |  | 958                                      |   |  | $                      | 2.72 |                                            | 8.6 |                                        | 3,343
|Warrants granted                          |  |                                         |   |  |                        |     |                                            |     |                                        |     
|Warrants exercised                        |  | (557                                     | ) |  |                        | 2.75 |                                            |     |                                        | 4,573
|Warrants terminated, cancelled or expired |  |                                         |   |  |                        |     |                                            |     |                                        |     
|Warrants outstanding at June 30, 2006     |  | 401                                      |   |  |                        | 2.68 |                                            | 8.1 |                                        | 3,388
|Warrants exercisable at June 30, 2006     |  | 401                                      |   |  |                        | 2.68 |                                            | 8.1 |                                        | 3,388

Restricted stock (RS) consists of shares of our common stock which are awarded to employees. The
grants are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. Upon the occurrence of a change in control, the restrictions on all shares of RS outstanding on
the date on which the change in control occurs will lapse.

A summary of changes in RS balance during the quarter ended
June 30, 2006 is presented below:



|                                 |  |                   |   |  |                                |      |                                        |   
|-------------------------------- |  | ----------------- | - |  | ------------------------------ | ---- | -------------------------------------- | --
|                                 |  | RS (in thousands) |   |  | Wtd. Avg. GrantDate Fair value |      | AggregateIntrinsic Value(in thousands)
|RS balance at January 1, 2006    |  |                  |   |  |                                |     |                                        |  
|Granted                          |  | 58                |   |  | $                              | 9.14 |                                        |   
|Vested                           |  | (17               | ) |  |                                | 9.14 |                                        |   
|Terminated, cancelled or expired |  |                  |   |  |                                |     |                                        |   
|RS balance at June 30, 2006      |  | 41                |   |  |                                | 9.14 |                                        | 82



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At June 30, 2006, we had approximately RMB2,998 thousand ($375 thousand) of total unrecognized compensation expense
related to RS grants that will be recognized over the weighted average period of 1.1 years. We recognized RMB959 thousand ($120 thousand) and RMB1,207 thousand ($151 thousand) of expense related to RS during the three months and six months ended
June 30, 2006, respectively.

In accordance with the requirements of the disclosure-only alternative of SFAS No. 123, set forth below is a pro
forma illustration of the effect on net income and net income per share computed as if we had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the intrinsic value method provided by APB 25
in the three months and six months ended June 30, 2005, respectively:



|                                                                                  |  |                                    |   |  |                                |  
|--------------------------------------------------------------------------------- |  | ---------------------------------- | - |  | ------------------------------ | -
|                                                                                  |  | Three Months Ended June 30 RMB000 |   |  | Six MonthsEnded June 30RMB000 |  
|                                                                                  |  | (except pershare numbers)          |   |  | (except pershare numbers)      |  
|Net income, as reported                                                           |  | 21,205                             |   |  | 37,016                         |  
|Less: Stock based compensation costs under fair value based method for all awards |  | (2,636                             | ) |  | (5,005                         | )
|Net income, pro forma                                                             |  | 18,569                             |   |  | 32,011                         |  
|Earnings per share  basic As reported                                            |  | 0.83                               |   |  | 1.45                           |  
|Pro forma                                                                         |  | 0.73                               |   |  | 1.26                           |  
|Earnings per share  diluted As reported                                          |  | 0.79                               |   |  | 1.38                           |  
|Pro forma                                                                         |  | 0.69                               |   |  | 1.19                           |  

The weighted average fair value of options granted for our common stock in the three month and six month period
ended June 30, 2005 were RMB14.30 per share respectively, using the Black-Scholes option-pricing model based on the following assumptions:



|                         |  |                   
|------------------------ |  | ------------------
|                         |  | 2005              
|Risk- free interest rate |  | 4.69% to 4.99%    
|Expected life in years   |  | 5.25 to 6.50 years
|Expected volatility      |  | 36% to 42%        
|Expected dividend yield  |  |                  

We used a blended volatility rate using a combination of historical stock price volatility and market implied
volatility in accordance with SFAS No. 123 for purposes of the pro forma information. The risk-free interest rate assumption is based upon the average daily closing rates during the quarter for U.S. treasury notes that have a life which
approximates the expected life of the option. The dividend yield assumption is based on our history and expectation of dividend payouts. The expected life of employee stock options represents the weighted-average period the stock options are
expected to remain outstanding. These expected life assumptions are established through the review of annual historical employee exercise behavior of option grants with similar vesting periods. Prior to 2006, the Company used the actual forfeiture
method allowed under SFAS No. 123, which assumed that all options would vest and pro forma expense was adjusted when options were forfeited prior to the vesting dates. In applying SFAS No. 123R, we estimated that the forfeiture rate
approximated zero percent as there were no history of significant forfeiture and we expect our future forfeiture to be minimal. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.



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Note 6 - Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share are computed by dividing net income by the sum of (a) the
weighted average number of shares of common stock outstanding during the period and (b) the dilutive effect of potential common stock equivalents during the period. The weighted average number of shares used for the computation of diluted
earnings per share is as follows:



|                                                        |  |                                      |  |                                      |  |                                    |  |                                   
|------------------------------------------------------- |  | ------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ----------------------------------
|                                                        |  | Three monthperiod endedJune 30, 2006 |  | Three monthperiod endedJune 30, 2005 |  | Six monthperiod endedJune 30, 2006 |  | Six monthperiod endedJune 30, 2005
|Weighted average number of shares outstanding  basic   |  | 32,109,704                           |  | 25,532,898                           |  | 31,889,076                         |  | 25,457,793                        
|Dilutive effect of stock options and warrants           |  | 1,695,952                            |  | 1,260,785                            |  | 1,585,643                          |  | 1,378,986                         
|Weighted average number of shares outstanding  diluted |  | 33,805,656                           |  | 26,793,683                           |  | 33,474,719                         |  | 26,836,779                        

Note 7: Operating Segment Information

As part of our strategy to expand our business from providing customized design solutions and selling components to a more comprehensive organization providing engineering services and business services to our
existing customer base, we acquired Huameng PRC in January, 2006 (see note 2). Huameng PRC, is an emerging provider of technology, engineering and business services to established telecommunication equipment vendors in the PRC.

Apart from the previously reported Component Solutions as a reportable operating segment, Engineering Services became a second reportable operating segment during the
period ended March 31, 2006 since our acquisition of Huameng PRC.

Component Solutions operating segment products primarily consist of the sale of
mobile handset components, telecommunication system equipment, consumer electronics and other components (such as network protection devices and data storage components). Engineering Services operating segment primarily consist of the provision of
technology and engineering services, business process outsourcing, network system integration and related training and maintenance services. There is no inter-segment revenue during the periods reported.



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Segment information is summarized as follows:



|                                |  |                                      |  |                                      |  |                                    |  |                                   
|------------------------------- |  | ------------------------------------ |  | ------------------------------------ |  | ---------------------------------- |  | ----------------------------------
|                                |  | Three monthperiod endedJune 30, 2006 |  | Three monthperiod endedJune 30, 2005 |  | Six monthperiod endedJune 30, 2006 |  | Six monthperiod endedJune 30, 2005
|                                |  | RMB000                              |  | RMB000                              |  | RMB000                            |  | RMB000                           
|Net revenue                     |  |                                      |  |                                      |  |                                    |  |                                   
|Component Solutions             |  |                                      |  |                                      |  |                                    |  |                                   
|Mobile handset                  |  | 128,425                              |  | 109,346                              |  | 248,447                            |  | 211,765                           
|Telecommunications equipment    |  | 116,329                              |  | 83,196                               |  | 211,513                            |  | 144,901                           
|Consumer electronics and others |  | 75,909                               |  | 15,255                               |  | 124,525                            |  | 23,132                            
|                                |  |                                      |  |                                      |  |                                    |  |                                   
|                                |  | 320,663                              |  | 207,797                              |  | 584,485                            |  | 379,798                           
|Engineering Services            |  | 11,807                               |  |                                     |  | 19,712                             |  |                                  
|                                |  |                                      |  |                                      |  |                                    |  |                                   
|Total net revenue               |  | 332,470                              |  | 207,797                              |  | 604,197                            |  | 379798                            
|                                |  |                                      |  |                                     
|Income from operations          |  |                                      |  |                                      |  |                                    |  |                                   
|Component Solutions             |  | 30,191                               |  | 24,424                               |  | 60,497                             |  | 42,815                            
|Engineering Services            |  | 1,778                                |  |                                     |  | 5,086                              |  |                                  
|                                |  |                                      |  |                                      |  |                                    |  |                                   
|Total income from operations    |  | 31,969                               |  | 24,424                               |  | 65,583                             |  | 42,815                            



|                     |  |               |  |                  
|-------------------- |  | ------------- |  | -----------------
|                     |  | June 30, 2006 |  | December 31, 2005
|                     |  | RMB000       |  | RMB000          
|Total assets         |  |               |  |                  
|Component Solutions  |  | 765,954       |  | 668,935          
|Engineering Services |  | 26,269        |  |                 
|                     |  |               |  |                  
|                     |  | 792,223       |  | 668,935          
|                     |  |               |  |                  



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Note 8: Comprehensive income

A reconciliation of net income to comprehensive income is presented in the table below.



|                             |  |                                      |   |  |                                      |  |                                    |   |  |                                   
|---------------------------- |  | ------------------------------------ | - |  | ------------------------------------ |  | ---------------------------------- | - |  | ----------------------------------
|                             |  | Three monthperiod endedJune 30, 2006 |   |  | Three monthperiod endedJune 30, 2005 |  | Six monthperiod endedJune 30, 2006 |   |  | Six monthperiod endedJune 30, 2005
|                             |  | RMB000                              |   |  | RMB000                              |  | RMB000                            |   |  | RMB000                           
|Net income                   |  |                                      |   |  |                                      |  |                                    |   |  |                                   
|Other comprehensive loss     |  | 28,776                               |   |  | 21,205                               |  | 55,001                             |   |  | 37,016                            
|Foreign currency translation |  | (806                                 | ) |  |                                     |  | (2,794                             | ) |  |                                  
|                             |  |                                      |   |  |                                      |  |                                    |   |  |                                   
|Comprehensive income         |  | 27,970                               |   |  | 21,205                               |  | 52,207                             |   |  | 37,016                            
|                             |  |                                      |   |  |                                      |  |                                    |   |  |                                   

Note 9: Subsequent Events

On August 6, 2006, Comtech (China) Holding Ltd. (Comtech China), a British Virgin Islands company and our wholly-owned subsidiary, entered into a Shares Acquisition Agreement whereby Comtech China
agreed to acquire 40% of the outstanding shares of Shanghai E&T System Company Limited (Shanghai E&T), a company formed under the laws of the Peoples Republic of China, from Duckworth Investments Limited, a British Virgin
Islands company. Pursuant to this Agreement, Comtech China will pay an aggregate of RMB16,000,000 (US$2,005,000) for these shares as follows: (i) RMB 10,000,000 (US$1,253,000) to Duckworth within one month of the execution of this Agreement;
and (ii) RMB 6,000,000 (US$752,000) to Duckworth no later than 18 months from such execution. Shenzhen Comtech International Limited (Shenzhen Comtech), a company formed under the laws of the Peoples Republic of China and our
wholly owned subsidiary, currently owns the remaining 60% of the outstanding shares of Shanghai E&T. After the transaction, Shanghai E&T will become our wholly owned subsidiary by virtue of our shareholdings in Shenzhen Comtech and Comtech
China.

In addition, on August 6, 2006, Comtech Group (Comtech-Cayman), a Cayman Islands company and our wholly owned subsidiary, entered into
an agreement to sell to an independent third party, all of the issued and outstanding shares of United Information Technology Co., Ltd. (UIT-BVI), a British Virgin Islands company and a wholly-owned subsidiary of Comtech-Cayman. In
consideration for the shares of UIT-BVI, the independent third party will pay Comtech-Cayman $1,250,000, and will repay all loans and debts due and owing by UIT-BVI and its subsidiaries to Comtech-Cayman in an amount of $2,500,000. This transaction
is scheduled to close on or before August 25, 2006, subject to the satisfaction of certain conditions of closing, including the execution of a termination agreement whereby the previous Share Purchase Agreement entered into on May 12, 2005 is to be
terminated.

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Portions of the discussion and analysis below contain 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 plans and objectives for future expansion, including into our new digital consumer electronic and storage solution
products; expectations for the domestic wireless handset, telecommunications equipment, consumer electronic and storage solution end-markets in the PRC; anticipated margins for our solutions; general and cyclical economic and business conditions,
and, in



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particular, those in the PRCs wireless handset, telecommunications equipment and consumer electronics industries;
our ability to enter into and renew key corporate and strategic relationships with our customers and suppliers; changes in the favorable tax incentives enjoyed by our PRC operating companies; and other statements containing forward looking
terminology such as may, expects, believes, anticipates, intends, projects, looking forward or similar terms, variations of such terms or the negative of such terms.
Such information is based upon various assumptions made by, and expectations of, our management that were reasonable when made but may prove to be incorrect. All of 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. Accordingly, there can be no assurance that actual results will meet expectations and actual results may vary (perhaps materially) from certain
of the results anticipated herein. For a further description of these and other risks and uncertainties, see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and our subsequent SEC filings. The
following discussion of our financial condition and results of operations should also be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form
10-Q.

Overview

We operate primarily in two distinct
business segments: (i) providing customized module design solutions and the sale of mobile handset components, telecommunication system equipment, consumer electronics and other components (such as network protection devices) in the PRC
(Component Solutions) and (ii) providing technology and engineering services, business process outsourcing, network system integration and related training and maintenance services (Engineering Services). We historically
have focused our Component Solutions business on the mobile handset and telecommunications equipment end-markets, but have recently expanded our market scope to include the consumer electronics end-market. We work closely with leading manufacturers
in these end-markets to develop solutions to meet their needs for customized module designs. Our customized module design solutions allow our customers to use enabling technology components from established technology component suppliers in a timely
and cost-effective manner, reducing their time-to-market and lowering their overall costs. Over the last three years, we have worked with over 200 customers, including a majority of the largest and best-known manufacturers in the mobile handset and
telecommunications equipment end-markets in the PRC. In addition to these original equipment manufacturers (OEMs), our other customers include industry participants which support these OEMs, such as subsystem designers and manufacturers. In
developing customized module design solutions for use in our customers products, we work closely with over 30 suppliers of enabling technology components, including many large multinational companies such as Broadcom, JDS Uniphase and
Matsushita. On January 11, 2006, our wholly owned subsidiary Comtech Cayman entered into an agreement to invest in a 51.12% interest in Huameng Engineering Services Co. Ltd., which in turn acquired a 100% interest in Shenzhen Huameng Software
Co. Ltd. (Huameng PRC). As a result of this acquisition, we have entered and expect to expand our Engineering Services business in the provision of technology and engineering services, business process outsourcing, 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 two years, consumer electronics module related sales, which have higher profit margins than our mobile handset
and telecom equipment modules related sales, have increasingly constituted a significantly greater portion of our total net revenue. Starting from the first quarter of 2006 after the acquisition of Huameng PRC, total net revenue has continuously
grown and total gross margins have increased.



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Growth in end-market industries. The rapid growth of the domestic mobile handset, telecommunications
equipment and consumer electronics products end-markets have been important drivers of growth of the PRCs electronics manufacturing industries. Specific business areas that we expect to continue growing are data communications, consisting of
asymmetric digital subscriber line (ADSL) modems and Voice over Internet Protocol (VoIP) equipment; the routers and network security equipment segments; the optical transmission systems; and the line telecommunications network. The growth in these
markets have 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 mobile handset and telecommunications
equipment products would 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 the PRCs domestic mobile handset and telecommunications equipment manufacturers to be competitive in the global marketplace. As an example, Huawei has become a major supplier of
telecommunications equipment to international customers, while 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 mobile handset
clients.

Growth by entering new end-markets, strengthening in-house capabilities and leveraging our customer base.We recently began targeting
the consumer electronics end-market and, over time, we intend to develop integrated circuit and application software design capabilities and provide solutions based on our own proprietary technology. We anticipate that sales related to the consumer
electronics end-market that we recently entered will initially have higher profit margins than our mobile handset and telecommunications equipment modules related sales, though such higher margins may decline over time as the industry matures. Our
success in the consumer electronics end-market will depend, in significant part, on our ability to leverage our existing customer base. We expect to incur significant 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 consumer electronics end-market.

Demand for engineering services.We have begun providing engineering services to our customers and generating recurring engineering service revenue. As many
of our existing customers have been outsourcing engineering functions, we expect to build and expand our engineering services platform to capitalize on this potential market, both in technical areas such as wireless business services and geographic
regions such as Southeast Asia countries to accommodate this growth.

Net Revenue

Component Solutions

We provide module design solutions to our customers and generate revenue when
our customers purchase from us certain specific components required in our module designs. Our net revenue is revenue net of a 17% value-added tax, or VAT.

Over the last three years, we have worked with over 200 customers. In addition to many of the largest China-based manufacturers of mobile handsets, telecommunications equipment and consumer electronics products, our
customers include industry participants supporting these OEMs, such as subsystem designers and manufacturers in China, as well as international manufacturers who have begun to manufacture end-products in China for the domestic and international
market.



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##### Table of Contents

Engineering Services

We provide technology and engineering services, business process outsourcing, network system integration and related training and maintenance services to our customers and generate revenue when our services are
rendered and acknowledged by our customers.

Cost Of Revenue

Component Solutions

Cost of revenue for sales of component solutions primarily consists of the purchase of components from
suppliers. We develop our customized module design solutions based on specific enabling technology components purchased from key and other suppliers in our target end-markets. Our list of over 30 key suppliers includes Broadcom (DTV), JDS Uniphase
(optoelectronic components), M-Systems (Flash memory, DiskOnChip), Matsushita (switches), NAIS (connectors, Relay), Pixelplus (CMOS sensors) and Sambu (speakers). We typically issue purchase orders to our suppliers only after we receive customer
orders, enabling us to maintain low inventory levels and, in turn, minimize risks typically associated with holding inventory. 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.

Engineering Services

Cost of revenue for the provision of engineering services primarily comprises
of direct staff costs and other direct related costs for training.

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 expenses 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.

General and administrative expenses include compensation and benefits for our general and administrative staff, professional fees, 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 increased costs of complying with U.S. rules and regulations necessary to maintain
our listing in the United States and comply with Section 404 of the Sarbanes-Oxley Act of 2002.



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##### Table of Contents

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 June 30, 2006, we had over 300 engineers and other technical employees engaged in research and
development related activities to develop new customized module design solutions targeted at the mobile handset, telecommunications equipment and consumer electronics industries. Research and development expenses were significantly higher in the
second quarter of 2006 than they were in the same period of 2005, 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 such as consumer electronics.

Taxation

We are a holding company incorporated in the State of Maryland and conduct substantially all our operations
through our PRC operating companies. Although we are subject to United States taxation, we do not anticipate incurring significant United States income tax liability for the foreseeable future because:



| |  |  | we do not conduct any material business in the United States,
| | - |  | -------------------------------------------------------------



| |  |  | the earnings generated from our non-U.S. operating companies are generally eligible for a deferral from United States taxation until such earnings are repatriated to the United
States, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we believe that we will not generate any significant amount of income for inclusion under the income imputation rules applicable to a United States company that owns
controlled foreign corporations for United States federal income tax purposes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our subsidiaries that are
incorporated in the Cayman Islands and the British Virgin Islands are not subject to income taxes in those jurisdictions.

The usual
statutory tax rate applicable to PRC companies is 33%, while the statutory tax rate applicable to PRC companies in the Shenzhen Special Economic Zone in China is 15%. Since three of our PRC operating companies, Shenzhen Comtech, Comtech
Communication and Comtech Software, are established in the Shenzhen Special Economic Zone and have agreed to operate for a minimum of ten years in China, Shenzhen Comtech was and Comtech Communication and Comtech Software have been and will continue
to be, entitled to preferential income tax treatment under PRC law as follows:



| |  |  | Shenzhen Comtech enjoyed a preferential tax rate of 7.5% in 2002, 2003 and 2004 and is subject to a tax rate of 15% from 2005 onwards;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comtech Communication operated under a zero-tax exemption in 2003 and 2004, and will be subject to a three-year preferential tax rate of 7.5% in 2005, 2006 and 2007; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Comtech Software has been operating under a zero-tax exemption in 2005 and 2006, and will be subject to a three-year preferential tax rate of 7.5% in 2007, 2008 and 2009.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Following expiration of the preferential tax treatment described above, our PRC operating companies
located in the Shenzhen Special Economic Zone will be subject to the statutory tax rate of 15%. In addition, Shanghai E&T, our PRC operating company located in the Shanghai Qingpu Zone, has elected to be taxed on a deemed basis at 0.5% of its
net revenue in accordance with guidelines issued by the local tax authority in the Shanghai Qingpu Zone in 2004.

As a result of the
incentives above, our operations have been subject to relatively low tax liabilities. Our effective tax rate for the second quarter of 2006 was 6.9% whereas that for the same period of 2005 was 7.4%. Our decrease in the effective tax rate was mostly
due to the commencement of the preferential income tax period for Comtech Software.

Three month period ended June 30, 2006 compared to three month
period ended June 30, 2005

Overview

We have two reportable operating segments: Component Solutions, for which we provide customized module design solutions in the PRC focusing primarily in the mobile handset components, telecommunication system equipment and consumer
electronics and other components (such as network protection devices and data storage components), and Engineering Services for which we provide technology and engineering services, business process outsourcing, network system integration and
related training and maintenance services.

The following table sets forth information regarding the breakdown of revenues and income from
operations between our Component Solutions segment and Engineering Services segment for the three months ended June 30:



|                       |  |         |  |        
|---------------------- |  | ------- |  | -------
|                       |  | 2006    |  | 2005   
|                       |  | RMB000 |  | RMB000
|Component Solutions    |  |         |  |        
|Net revenue            |  | 320,663 |  | 207,797
|Income from operations |  | 30,191  |  | 24,424 
|                       |  |        
|Engineering Services   |  |         |  |        
|Net revenue            |  | 11,807  |  |       
|Income from operations |  | 1,778   |  |       
|Total                  |  |         |  |        
|Net revenue            |  | 332,470 |  | 207,797
|Income from operations |  | 31,969  |  | 24,424 

Total net revenue increased RMB124,673 thousand, or 60.0% in the second quarter of 2006 when
compared to the second quarter of 2005. The increase was mainly contributed by an increase in Component Solutions sales by approximately RMB113 million. Total income from operations increased RMB7,545 thousand, or 30.9% in the second quarter of 2006
when compared to the second quarter of 2005. The increase was mainly due to higher net revenue from all business segments, and partly offset by increases in operating expenses.

Gross margin

Overall gross margin amount was RMB61,451 thousand in the second quarter 2006, an
increase of RMB24,779 thousand, or 67.6% when compared to RMB36,672 thousand in the second quarter of 2005. Overall gross margin percentage was 18.5% in the second quarter of 2006, as compared to 17.6% in the



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##### Table of Contents

second quarter of 2005. The increase in both gross margin amount and percentage is primarily attributed to a change in
product mix. Consumer electronics module related sales have a higher average margin than the other two market sales. The launch of the new engineering services, which also has a higher average margin than the current blended margin, also contributed
to the increase in overall gross margin.

Component Solutions

Net revenue and income from operations for Component Solutions for the quarters ended June 30, 2006 and 2005 were as follows:



|                                |  |         |  |        
|------------------------------- |  | ------- |  | -------
|                                |  | 2006    |  | 2005   
|                                |  | RMB000 |  | RMB000
|Component Solutions:            |  |         |  |        
|Mobile handset                  |  | 128,425 |  | 109,346
|Telecommunications equipment    |  | 116,329 |  | 83,196 
|Consumer electronics and others |  | 75,909  |  | 15,255 
|                                |  |         |  |        
|Net revenue                     |  | 320,663 |  | 207,797
|Income from operations          |  | 30,191  |  | 24,424 

Component Solutions net revenue increased RMB112,866 thousand, or 54.3% in the second quarter of
2006 when compared to the second quarter of 2005. The increase was primarily due to the higher revenue from the sales of consumer electronics components, which increased more than RMB60.6 million, as well as the continued growth in the sales of both
mobile handset and telecommunications equipment markets, which increased revenue by RMB19.1 million and RMB33.1 million respectively. The continued growth was driven by the expanding Chinese economy, particularly the increase in Chinese consumer
disposable income and the further expansion of domestic Chinese telecom vendors into new and emerging international markets.

The increase
in mobile handset and telecommunications equipment component sales were due to the stable growth in both the customer base and product types in the second quarter of 2006 when compared to the second quarter of 2005. The increase in consumer
electronics and other components sales was due to more variety of business lines, such as digital TV products.

Component Solutions income
from operations increased RMB5,767 thousand, or 23.6% in the second quarter of 2006 when compared to the second quarter of 2005. The increase was mainly attributed to a significant increase in net revenue from all markets in the Component Solutions
segment, and the higher gross margin of Component Solutions products. This increase in income from operations was partly offset by an increase in operating expenses, which resulted from an increase in cost for higher sales volumes, and for
additional offices and employees.

Engineering Services

Net revenue and income from operations for Engineering Services for the quarters ended June 30, 2006 and 2005 were as follows:



|                       |  |         |  |        
|---------------------- |  | ------- |  | -------
|                       |  | 2006    |  | 2005   
|                       |  | RMB000 |  | RMB000
|Net revenue            |  | 11,807  |  |       
|Income from operations |  | 1,778   |  |       



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##### Table of Contents

Engineering Services net revenue and income from operations were derived from the provision of technology
and engineering services, business process outsourcing, network system integration and related training and maintenance services after the acquisition of the Huameng PRC in January 2006.

Selling, R&D, general and administrative expenses

Selling, research and development, and general
and administrative expenses of RMB29,429 thousand were RMB17,181 thousand or 140.3% higher than those of the same period last year. The details of the expenses for the three month period ended June 30 are as follows:



|                                    |  |         |  |        
|----------------------------------- |  | ------- |  | -------
|                                    |  | 2006    |  | 2005   
|                                    |  | RMB000 |  | RMB000
|Selling expenses                    |  | 9,754   |  | 4,530  
|R&D expenses                        |  | 9,698   |  | 2,861  
|General and administrative expenses |  | 9,977   |  | 4,857  
|                                    |  |         |  |        
|                                    |  | 29,429  |  | 12,248 

The increase in the selling expenses by RMB5,224 thousand or approximately 115.3% was mainly
attributed to an increase in additional costs of RMB545 thousand for product logistics and transportation, additional bad debt provision of approximately RMB2,000 thousand for the three months ended June 30, 2006 compared to RMB1,200 thousand
during the same period last year, RMB2,000 thousand in inventory provisions where no such reserves were made during the same period last year and an increase in other direct selling expenses by approximately RMB1,900 thousand as a result of an
increase in the number of sales staff and sales offices, and cost of stock-based compensation.

Research and development expenses increased
by RMB6,837 thousand or approximately 239.0%. The increase was primarily attributable to a significant increase in research and development personnel and engineers, in which the related staff costs (including stock-based compensation) were increased
by RMB4,900 thousand, an increase in research and development facilities and related costs of RMB1,600 thousand, and expenditures of approximately RMB300 thousand related to research for potential new markets.

The increase in general and administrative expenses of RMB5,120 thousand or approximately 105.4% was mainly attributable to an increase in staff costs of
RMB3,100 thousand for all supporting departments, including RMB2,000 thousand stock-based compensation cost. General administrative costs also increased by RMB2,000 thousand.

Interest expense

Interest expense in the second quarter of 2006 amounted to RMB695 thousand as
compared to RMB555 thousand in the same period of 2005. The slight increase in interest expense was attributable to the increase in the average interest rate.

Interest income

Interest income in the second quarter of 2006 amounted to RMB1,590 thousand, compared to RMB74 thousand in
the same period of 2005. The significant increase was attributed to higher average deposit balances resulting from the proceeds received in the public offering in July 2005.



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##### Table of Contents

Income tax

The effective tax rate for the three months ended June 30, 2006 was 6.9% compared to 7.4% for the comparable period in 2005. The decrease in the effective tax rate was mostly due to the commencement of the preferential tax period for
one of our subsidiaries, Comtech Software.

Net income

As a result of the above items, net income for the quarter ended June 30, 2006 was RMB28,776 thousand compared to a net income of RMB21,205 thousand in the corresponding period of 2005. Included in the second
quarter 2006 net income was an amount of RMB3,103 thousand ($388 thousand) for share-based compensation cost as a result of the adoption of SFAS 123R, effective January 1, 2006. Excluding the non cash stock based compensation, net income for
the quarter ended June 30, 2006 would have been RMB31,879 thousand ($3,988 thousand).

Earnings per share

We reported basic per share earnings of RMB0.90 for the second quarter of 2006 based on 32,109,704 outstanding weighted average shares and diluted per
share earnings of RMB0.85 based on 33,805,656 outstanding weighted average shares and potential common stock equivalents, compared to basic per share earnings of RMB0.83 for the same period of 2005, based on 25,532,898 outstanding weighted average
shares, and diluted per share earnings of RMB0.79 based on 26,793,683 outstanding weighted average shares and potential common stock equivalents. Excluding the non cash stock based compensation, we would have reported basic per share earnings of
RMB0.99 and diluted per share earnings of RMB0.94 for the second quarter of 2006.

Six month period ended June 30, 2006 compared to six month
period ended June 30, 2005

The following table sets forth information regarding the breakdown of revenues and income from
operations between our Component Solutions segment and Engineering Services segment for the six months ended June 30:



|                       |  |         |  |        
|---------------------- |  | ------- |  | -------
|                       |  | 2006    |  | 2005   
|                       |  | RMB000 |  | RMB000
|Component Solutions    |  |         |  |        
|Net revenue            |  | 584,485 |  | 379,798
|Income from operations |  | 60,497  |  | 42,815 
|                       |  |        
|Engineering Services   |  |         |  |        
|Net revenue            |  | 19,712  |  |       
|Income from operations |  | 5,086   |  |       
|Total                  |  |         |  |        
|Net revenue            |  | 604,197 |  | 379,798
|Income from operations |  | 65,583  |  | 42,815 

Total net revenue increased RMB224,399 thousand, or 59.1% in the six months ended June 30,
2006 when compared to the same period in 2005. The increase was mainly contributed by an increase in Component Solutions sales by approximately RMB205 million. Total income from operations increased RMB22,768 thousand, or 53.2% in the six months
ended June 30, 2006 when compared to the same period last year. The increase was mainly due to higher net revenues and gross margins from all business segments, and partly offset by increases in operating expenses.



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Gross margin

Overall gross margin amount was RMB113,484 thousand in the six months ended June 30, 2006, an increase of RMB50,527 thousand, or 80.3% when compared to RMB62,957 thousand in the six months ended June 30, 2005. Overall gross margin
percentage was 18.8% in the six months ended June 30, 2006, as compared to 16.6% in the six months ended June 30, 2005. The increase in both gross margin amount and percentage is primarily attributed to a change in product mix. Consumer
electronics module related sales have a higher average margin (20% to 30%) than the mobile handset and telecommunications sales. In addition, the launch of the new engineering services, which also has a higher gross margin than the current blended
margin, also contributed to the increase in overall gross margin.

Component Solutions

Net revenue and income from operations for Component Solutions for the six months ended June 30, 2006 and 2005 were as follows:



|                                |  |         |  |        
|------------------------------- |  | ------- |  | -------
|                                |  | 2006    |  | 2005   
|                                |  | RMB000 |  | RMB000
|Component Solutions:            |  |         |  |        
|Mobile handset                  |  | 248,447 |  | 211,765
|Telecommunications equipment    |  | 211,513 |  | 144,901
|Consumer electronics and others |  | 124,525 |  | 23,132 
|                                |  |         |  |        
|Net revenue                     |  | 584,485 |  | 379,798
|Income from operations          |  | 60,497  |  | 42,815 

Component Solutions net revenue increased RMB204,687 thousand, or 53.9% in the six months ended
June 30, 2006 when compared to the same period in 2005. The increase was primarily due to the higher revenue from the sales of consumer electronics components, which increased more than RMB101.4 million, as well as the continued growth in the
sales of both mobile handset and telecommunications equipment components, which increased revenue by RMB36.7 million and RMB66.6 million respectively. The continued growth was driven by the expanding Chinese economy, particularly the increase in
Chinese consumer disposable income and the further expansion of domestic Chinese telecom vendors into new and emerging international markets.

The increase in mobile handset and telecommunications equipment component sales were due to the stable growth in both the customer base and product types for the six months ended June 30, 2006 when compared to same period in 2005. The
increase in consumer electronics and other components sales was due to more variety of business lines such as digital TV products.

Component Solutions income from operations increased RMB17,682 thousand, or 41.3% for the six months ended June 30, 2006 when compared to the same period in 2005. The increase was mainly attributed to a significant increase in net
revenue from all products in the Component Solutions segment, and the higher gross margin of Component Solutions products. This increase in income from operations was partly offset by an increase in operating expenses, which resulted from an
increase in cost for higher sales volumes, and for additional offices and employees.

Engineering Services

Net revenue and income from operations for Engineering Services for the six months ended June 30, 2006 and 2005 were as follows:



|                       |  |         |  |        
|---------------------- |  | ------- |  | -------
|                       |  | 2006    |  | 2005   
|                       |  | RMB000 |  | RMB000
|Net revenue            |  | 19,712  |  |       
|Income from operations |  | 5,086   |  |       



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##### Table of Contents

Engineering Services net revenue and income from operations were derived from the provision of technology
and engineering services, business process outsourcing, network system integration and related training and maintenance services after the acquisition of the Huameng PRC in January 2006.

Selling, R&D, general and administrative expenses

Selling, research and development, and general
and administrative expenses of RMB47,888 thousand were RMB27,746 thousand or 137.75% higher than those of the same period last year. The details of the expenses for the six month period ended June 30 are as follows:



|                                    |  |         |  |        
|----------------------------------- |  | ------- |  | -------
|                                    |  | 2006    |  | 2005   
|                                    |  | RMB000 |  | RMB000
|Selling expenses                    |  | 16,093  |  | 6,494  
|R&D expenses                        |  | 16,800  |  | 4,148  
|General and administrative expenses |  | 14,995  |  | 9,500  
|                                    |  |         |  |        
|                                    |  | 47,888  |  | 20,142 

The increase in the selling expenses by RMB9,599 thousand or approximately 147.8% was mainly
attributed to additional costs of RMB1,000 thousand associated with product logistics and transportation, additional bad debt provision of approximately RMB2,000 thousand, and an increase in other indirect selling expenses by approximately RMB4,600
thousand as a result of increase in the number of sales staff and sales offices (including the cost of stock-based compensation) and RMB2,000 thousand in inventory provisions made during the six months ended June 30, 2006.

Research and development expenses increased by RMB12,652 thousand or approximately 305.0%. The increase was primarily attributable to a significant
increase in research and development personnel and engineers, in which the related staff costs (including stock-based compensation) were increased by RMB9,500 thousand, an increase in research and development facilities and related costs of RMB1,900
thousand, and expenditures of approximately RMB1,300 thousand related to research for potential new markets.

The increase in general and
administrative expenses of RMB5,495 thousand or approximately 57.8% was mainly attributable to an increase in staff costs of RMB4,000 thousand due to an increase in staff for all supporting departments of the Company, including RMB3,000 thousand
attributable to stock-based compensation cost, and RMB1,500 thousand increase in general administrative costs.

Interest expense

Interest expense in six months ended of 2006 amounted to RMB1,107 thousand as compared to RMB948 thousand in the same period of 2005. The slight increase
in interest expense was attributable to the increase in the average interest rate.

Interest income

Interest income in the six months ended 2006 amounted to RMB3,674 thousand, compared to RMB103 thousand in the same period of 2005. The significant
increase was attributed to higher average deposit balances resulting from the proceeds received in the public offering in July 2005.



24



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##### Table of Contents

Income tax

The effective tax rate for the six months ended June 30, 2006 was 8.6% compared to 7.8% for the comparable period in 2005. The increase in the effective tax rate was mostly due to the profit generated from other non-PRC operating
subsidiaries where the statutory tax rates are higher. The increase was compensated by the commencement of the preferential income tax period for Comtech Software.

Net income

As a result of the above items, net income for the six months ended June 30, 2006 was RMB55,001 thousand
compared to a net income of RMB37,016 thousand in the corresponding period of 2005. Included in the net income for the six months ended June 30, 2006 was an amount of RMB5,502 thousand ($687 thousand) for share-based compensation cost as a
result of the adoption of SFAS 123R, effective January 1, 2006. Excluding the non cash stock based compensation, net income for the six months ended June 30, 2006 would have been RMB60,503 thousand (7,568 thousand).

Earnings per share

We reported basic per share
earnings of RMB1.72 for the six months ended June 30, 2006 based on 31,889,076 outstanding weighted average shares and diluted per share earnings of RMB1.64 based on 33,474,719 outstanding weighted average shares and potential common stock
equivalents, compared to basic per share earnings of RMB1.45 for the same period of 2005, based on 25,457,793 outstanding weighted average shares, and diluted per share earnings of RMB1.38 based on 26,836,779 outstanding weighted average shares and
potential common stock equivalents. Excluding the non cash stock based compensation, we would have reported basic per share earnings of RMB1.90 and diluted per share earnings of RMB1.81 for the six months ended June 30, 2006.

Liquidity and Capital Resources

Cash flows and working capital

Our accounts payable cycle typically averages approximately one month, whereas our receivables cycle typically averages approximately
three months. Accordingly, additional working capital is needed to fund this time difference.

As at June 30, 2006, we had no material
commitments for capital expenditures.

We regularly review our cash funding requirements and attempt to meet those requirements through a
combination of cash on hand, cash provided by operations, and available borrowings under bank lines of credit and factoring facilities. 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 existing cash position, operating cash flows and credit facility arrangements, 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 June 30, 2006, we had working capital of RMB588,749 thousand as compared with working capital of RMB507,349
thousand at December 31, 2005.



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##### Table of Contents

Cash used in operating activities of RMB15,375 thousand for the six months ended June 30, 2006
compared to cash provided by operating activities of RMB38,503 thousand in the corresponding period of 2005. Cash used in operating activities as compared to prior period was primarily due to an increase in trade accounts receivable of RMB81,243
thousand and an increase in bills receivable payable of RMB34,618 thousand. Trade accounts receivable increased due to a higher proportion of sales occurring in the first half year of 2006. Bills receivable increased due to a general increase in the
level of sales activity where settlement is in the form of bills receivables. Bills receivables can be discounted to banks for cash at any time, but this would give rise to certain financial expenses since these bills are discounted before the
maturity date. Had the Company chosen to discount bills receivables at the end of the quarter, cash flows for the quarter would have been positive. Cash used in operating activities was partly off-set by an increase in trade accounts payable of
RMB31,523 thousand which was due to tight payment control.

Cash used in investing activities of RMB8,707 thousand during the first two
quarters of 2006 was mainly for purchases of fixed assets of RMB5,452 thousand and acquisition of subsidiary, net of cash acquired, of RMB3,097 thousand.

Net cash provided by financing activities was RMB10,642 thousand during the first two quarters of 2006. The financing net cash flows provided by financing activities was mainly contributed by net proceeds for
exercises of stock options of approximately RMB17,503 thousand and partly offset by repayments of net bank borrowings of RMB6,861 thousand.



|Indebtedness | 
|------------ | 

On October 7, 2005, Comtech Hong Kong entered into a
RMB39,972 thousand ($5,000 thousand) U.S. dollar denominated credit facility with Standard Chartered Bank (Hong Kong) Limited (SCB), and a RMB71,949 thousand ($9,000 thousand) U.S. dollar denominated facility with Bank of China
(BOC). Both of the SCB and BOC facilities are guaranteed by Comtech Group, Inc. Apart from cash generated from operations, these revolving credit facilities serve as our principal source of liquidity to fund our working capital needs.

As of the date of this filing, there was no outstanding loan balance under the SCB facility. This facility is secured by funds on deposit
in an amount of $2,000,000, and bears interest ranging from HIBOR +1.5% to USD Prime per annum, depending on the different kinds of borrowings made. The SCB facility is repayable on demand and SCB may immediately terminate the facility without
our consent or that of any third party. Interest on this facility accrues until payment is demanded by SCB.

As of the date of this filing,
the outstanding loan balance under the BOC facility was RMB14,582 thousand ($1,824 thousand), leaving RMB57,367 thousand ($7,176 thousand) in availability. This facility is secured by funds on deposit in an amount of $3,000,000, and bears interest
from LIBOR plus 2% to 2.25% per annum, depending on the different kinds of borrowings made. The BOC facility is repayable on demand and BOC may increase, reduce and/or cancel the facility by notice to us. Interest on this facility accrues until
payment is demanded by BOC.

Bills receivable. Some of our customers enter into arrangements with their respective banks for the purpose of
settling their invoices with us. Under such arrangements, we are entitled to collect the amounts owed directly from the customers banks when the invoice becomes due. These amounts are recorded as bills receivable on our consolidated balance
sheet. 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 0.6% to 0.9% of the balance transferred, which is recorded as interest expense. As of June 30, 2006, we had discounted bills receivable amounting to approximately RMB14,500 thousand
($1,814 thousand).



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According to paragraph 9 of FAS No. 140, the transfer of bills receivable to the bank should be accounted for as a
sale (i.e., the Group has surrendered control over the bills receivables) if and only if all of the following criteria are met:



| |  |  | The transferred bills receivables have been isolated from the Group (i.e., put presumptively beyond the reach of the Group and its creditors, even in bankruptcy or other
receivership).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The bank has the right to pledge or exchange bills receivables (or beneficial interests) it received, and no condition both constrains the bank from taking advantage of its right to
pledge or exchange and provides more than trivial benefit to the Group.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Group does not maintain effective control over the transferred bills receivables through either (1) and agreement that both entitles and obligates the Group to repurchase
or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To the extent that
the above criteria are met, bills receivable are de-recognized.

Future liquidity needs

As of June 30, 2006, the Company had approximately RMB161,950 thousand ($20,258 thousand) in cash and cash equivalents. We regularly review our cash
funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and available borrowings under bank lines of credit. At times, we evaluate possible acquisitions of, or investments in,
businesses that are complementary to those of ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows and credit facility arrangements, taken together, provide adequate resources to
fund ongoing operating expenditures. 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.

Critical Accounting Policies

The preparation of our unaudited condensed 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:

Revenue recognition.Revenue, net of
VAT, from sales related to our customized module design solutions are recognized when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable, and collection of the related
receivable is probable, which is generally at the time of shipment.. Provision of technology and engineering services, business process outsourcing, network system integration and related training and maintenance services are recognized as revenue
when the services are rendered.



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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 June 30, 2006, our accounts receivable balance was RMB358,471 thousand ($44,841
thousand), net of a RMB10,695 thousand ($1,338 thousand) allowance for doubtful accounts. As our business grows, we expect our accounts receivable balances to increase, as could our allowance for doubtful accounts. If the financial condition of our
customers deteriorates, our uncollectible account receivables could exceed our current or future allowances.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign exchange risk

The functional currency of our major operating entities is the Renminbi (RMB). Transactions in other currencies are recorded in RMB at the rates of
exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are remeasured into RMB 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 PRC State Administration for Foreign Exchange, under the authority
of the Peoples Bank of China, controls the conversion of RMB into foreign currencies. The principal regulation governing foreign currency exchange in the PRC is the Foreign Currency Administration Rules (1996), as amended. Under the Rules,
once various procedural requirements are met, RMB is convertible for current account transactions, including trade and services, but not for capital account transactions, including direct investment, loan or investment in securities outside the PRC,
unless the prior approval of the State Administration of Foreign Exchange of the PRC is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still
remain. Currently, our PRC subsidiaries, Comtech Communication and Comtech Software, may purchase foreign exchange for settlement of current account transactions in accordance with certain procedural requirements under PRC law. A portion of our net
revenue will need to be converted into other currencies to meet our foreign currency obligations, which primarily include debt service on foreign currency-denominated debt and purchases of imported components.

The value of the RMB is subject to changes in the PRCs central government policies and to international economic and political developments
affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the Peoples Bank of China, which are set daily based on
the previous days interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable, but in July 2005 the PRC government announced that it will
no longer peg its currency exclusively to the USD but will switch to a managed floating exchange rate based on market supply and demand with reference to a basket of currencies yet to be named by the Peoples Bank of China, which will likely
increase the volatility of RMB as compared to USD. As of June 30, 2006, the exchange rate was RMB7.9943 to $1.

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

Any devaluation of the RMB against the USD would consequently have an adverse effect on our
financial performance and asset values when measured in terms of USD. On the other hand, the appreciation of the RMB 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



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decrease in sales by our customers could have an adverse effect on our operating results. In addition, from time to time
we may have USD denominated borrowings, and therefore a decoupling of the RMB may affect our financial performance in the future.

In the
past, we have experienced minimal foreign exchange gain and losses to date due to the relative stability of the RMB. We had an accumulated comprehensive loss of RMB10,227 thousand ($1,279 thousand) due to foreign exchange translation of our foreign
subsidiaries as of June 30, 2006. We do not currently engage in hedging activities to reduce our exposure to exchange rate fluctuations.

Interest
rate risk

We are exposed to interest rate risk arising from having short-term variable rate borrowings from time to time. Our future
interest expense would 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,
which include proceeds received from discounted bills receivables, amounted to RMB29,082 thousand ($3,638 thousand) as of June 30, 2006. Based on a variable rate of return, 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 RMB291 thousand ($36
thousand). The potential change in cash flows and earnings is calculated based on the change in the net interest expense over a one year period due to an immediate 1% change in rates.

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 in recent years. According to the National Bureau of Statistics of China, the change in Consumer Price Index in the PRC was 1.2%, 3.9% and 1.8% in 2003, 2004 and 2005, respectively.

Our most liquid assets are cash and cash equivalents. Because of their liquidity, these assets are not directly affected by inflation. Because we
intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not materially affect our operations. However, the rate
of inflation affects our expenses, such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.

Item 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures, as such term
is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing
and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in
reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures



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as of June 30, 2006. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that as of June 30, 2006 our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that material information relating to us is made known to the Chief Executive Officer and
Chief Financial Officer by others within our company during the period in which this report was being prepared.

There were no changes in
our internal controls or in other factors during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We have received a draft complaint threatening an action for damages arising
from alleged breaches of fiduciary duties in connection with transactions involving Centerpoint Corporation and Bion Environmental Technologies, Inc. The transactions took place before the consummation of our share exchange agreement with Trident,
at a time when Trident and our subsidiary, OAM, owned a majority of the shares of Centerpoint. We are named as a potential defendant in the draft complaint, together with OAM, and Mark Hauser and Mark Segall, who are current members of our board of
directors, and other individuals and entities associated with Trident. The draft complaint is said to be on behalf of Centerpoint and a class of Bion shareholders, and alleges that the potential defendants controlled the affairs of Centerpoint, and
used their positions, among other things, to divert Centerpoint assets to themselves. We are investigating the allegations made in the draft complaint, which seeks damages in an unspecified amount. Should any formal legal proceedings be instituted,
we intend to vigorously defend ourselves, although we cannot predict the outcome of any possible legal proceedings.

We claimed several
refunds from the Italian government on corporate taxes paid by OAM, our 98.6% owned Italian subsidiary, during the 1970s and early 1980s. In one instance, the Italian tax authorities have counterclaimed, assessing additional unpaid taxes due by OAM.
We have been successful in two lower courts in our defense of these counterclaims and was informed that the case had been determined in the Companys favor in April 2005. In May, 2006, the Company has received notification from the Italian
counsel that the Italian tax authorities have counterclaimed again against the earlier judgment in April 2005. The Italian counsel also informed the Company that there are grounds under Italian law to appeal this latest determination. The Company
and its Italian counsel are investigating this matter.

Except as described above, we are not currently involved in any material
litigation. From time to time, we may be also involved in litigation arising in the normal course of our business.

Item 1A. RISK FACTORS

There have been no material changes in the Companys risk factors from those
previously disclosed in the Companys Form 10-K for the year ended December 31, 2005.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.



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Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

(b) Exhibits



|     |  |                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



|                |  |                     |  |                                      
|--------------- |  | ------------------- |  | -------------------------------------
|                |  | COMTECH GROUP, INC.
|                |  |                    
|August 14, 2006 |  | By:                 |  | /s/ Jeffrey Kang                     
|                |  |                     |  | Jeffrey Kang                         
|                |  |                     |  | Chief Executive Officer and President
|                |  |                    
|August 14, 2006 |  | By:                 |  | /s/ Hope Ni                          
|                |  |                     |  | Hope Ni                              
|                |  |                     |  | Chief Financial Officer              



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