##### Table of Contents

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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, 2007.

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 518057, 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  x    Non-accelerated filer ̈

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 38,347,479 shares of the Registrants Common Stock issued and outstanding on August 6, 2007.



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##### Table of Contents

Comtech Group, Inc.

Index to Form 10-Q



|           |  |                                                                                                   |  |     
|---------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                   |  | Page
|Part I.    |  | Financial Information                                                                             |  |     
|           |  |                                                                                                  
|           |  | Item 1. Condensed Financial Statements (unaudited)                                                |  |     
|           |  |                                                                                                  
|           |  | Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                   |  |     
|           |  |                                                                                                  
|           |  | Condensed Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006 |  | 2   
|           |  |                                                                                                  
|           |  | Condensed Consolidated Statements of Operations for the six months ended June 30, 2007 and 2006   |  | 3   
|           |  |                                                                                                  
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006   |  | 4   
|           |  |                                                                                                  
|           |  | Notes to Condensed Consolidated Financial Statements                                              |  | 5   
|           |  |                                                                                                  
|           |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations     |  | 12  
|           |  |                                                                                                  
|           |  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                |  | 24  
|           |  |                                                                                                  
|           |  | Item 4. Controls and Procedures                                                                   |  | 25  
|           |  |                                                                                                  
|           |  | Item 4T. Controls and Procedures                                                                  |  | 25  
|           |  |                                                                                                  
|Part II.   |  | Other Information                                                                                 |  |     
|           |  |                                                                                                  
|           |  | Item 1. Legal Proceedings                                                                         |  | 26  
|           |  |                                                                                                  
|           |  | Item 1A. Risk Factors                                                                             |  | 26  
|           |  |                                                                                                  
|           |  | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                               |  | 26  
|           |  |                                                                                                  
|           |  | Item 3. Defaults Upon Senior Securities                                                           |  | 26  
|           |  |                                                                                                  
|           |  | Item 4. Submission of Matters to a Vote of Security Holders                                       |  | 26  
|           |  |                                                                                                  
|           |  | Item 5. Other Information                                                                         |  | 26  
|           |  |                                                                                                  
|           |  | Item 6. Exhibits                                                                                  |  | 26  
|           | 
|SIGNATURES |  | 27                                                                                               



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##### Table of Contents

PART IFINANCIAL INFORMATION



|Item 1. | CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
|------- | ------------------------------------------

COMTECH GROUP INC.

Unaudited Condensed Consolidated Balance Sheet

As of June 30, 2007 and December 31, 2006



|                                                           |       |               |   |         |               |   |         |              |  
|---------------------------------------------------------- | ----- | ------------- | - | ------- | ------------- | - | ------- | ------------ | -
|                                                           |       | June 30, 2007 |   |         | June 30, 2007 |   |         | Dec 31, 2006 |  
|                                                           | $000 |               |   | RMB000 |               |   | RMB000 |             
|Assets                                                     |       |               |   |         |               |   |         |              |  
|Current assets:                                            |       |               |   |         |               |   |         |              |  
|Cash                                                       |       | 128,049       |   |         | 974,711       |   |         | 375,147      |  
|Pledged bank deposits                                      |       | 7,078         |   |         | 53,878        |   |         | 55,416       |  
|Accounts receivable, net of allowance of doubtful accounts |       | 45,416        |   |         | 345,708       |   |         | 278,589      |  
|Bills receivable                                           |       | 2,471         |   |         | 18,809        |   |         | 31,797       |  
|Prepaid expenses and other receivables                     |       | 2,654         |   |         | 20,204        |   |         | 14,254       |  
|Inventories                                                |       | 12,438        |   |         | 94,677        |   |         | 71,959       |  
|                                                           |       |               |   |         |               |   |         |              |  
|Total current assets                                       |       | 198,106       |   |         | 1,507,987     |   |         | 827,162      |  
|                                                           |       |               |  
|Property and equipment, net                                |       | 2,041         |   |         | 15,537        |   |         | 12,395       |  
|Intangible assets, net                                     |       | 2,099         |   |         | 15,976        |   |         | 19,528       |  
|Investment in an affiliated company                        |       | 55            |   |         | 416           |   |         | 416          |  
|Goodwill                                                   |       | 6,134         |   |         | 46,692        |   |         | 46,692       |  
|Other assets                                               |       | 119           |   |         | 905           |   |         | 905          |  
|                                                           |       |               |   |         |               |   |         |              |  
|Total assets                                               |       | 208,554       |   |         | 1,587,513     |   |         | 907,098      |  
|                                                           |       |               |   |         |               |   |         |              |  
|Liabilities and stockholders equity                       |       |               |   |         |               |   |         |              |  
|Current liabilities:                                       |       |               |   |         |               |   |         |              |  
|Trade accounts payable                                     |       | 19,705        |   |         | 149,989       |   |         | 114,217      |  
|Bank borrowings                                            |       | 2,710         |   |         | 20,629        |   |         | 30,272       |  
|Amount due to related parties                              |       | 195           |   |         | 1,483         |   |         | 1,522        |  
|Income taxes payable                                       |       | 1,083         |   |         | 8,246         |   |         | 9,270        |  
|Accrued expenses and other liabilities                     |       | 3,484         |   |         | 26,522        |   |         | 86,253       |  
|                                                           |       |               |   |         |               |   |         |              |  
|Total current liabilities                                  |       | 27,177        |   |         | 206,869       |   |         | 241,534      |  
|                                                           |       |               |   |         |               |   |         |              |  
|Minority interests                                         |       | 398           |   |         | 3,030         |   |         | 1,646        |  
|                                                           |       |               |  
|Stockholders equity                                       |       |               |   |         |               |   |         |              |  
|Common stock                                               |       | 412           |   |         | 3,139         |   |         | 2,725        |  
|Additional paid-in capital                                 |       | 139,533       |   |         | 1,062,120     |   |         | 402,721      |  
|Retained earnings                                          |       | 45,073        |   |         | 343,097       |   |         | 275,890      |  
|Accumulated other comprehensive loss                       |       | (4,039        | ) |         | (30,742       | ) |         | (17,418      | )
|                                                           |       |               |   |         |               |   |         |              |  
|Total stockholders equity                                 |       | 180,979       |   |         | 1,377,614     |   |         | 663,918      |  
|                                                           |       |               |   |         |               |   |         |              |  
|Total liabilities and stockholders equity                 |       | 208,554       |   |         | 1,587,513     |   |         | 907,098      |  
|                                                           |       |               |   |         |               |   |         |              |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

COMTECH GROUP INC.

Unaudited Condensed Consolidated Statements of Operations

Three months ended June 30, 2007 and 2006



|                                                |       |                                |   |         |                                |   |         |                                |  
|----------------------------------------------- | ----- | ------------------------------ | - | ------- | ------------------------------ | - | ------- | ------------------------------ | -
|                                                |       | Three MonthsEndedJune 30, 2007 |   |         | Three MonthsEndedJune 30, 2007 |   |         | Three MonthsEndedJune 30, 2006 |  
|                                                | $000 |                                |   | RMB000 |                                |   | RMB000 |                               
|Net sales                                       |       |                                |   |         |                                |   |         |                                |  
|Product revenue                                 |       | 48,843                         |   |         | 371,794                        |   |         | 320,663                        |  
|Services revenue                                |       | 1,711                          |   |         | 13,023                         |   |         | 11,807                         |  
|                                                |       |                                |   |         |                                |   |         |                                |  
|                                                |       | 50,554                         |   |         | 384,817                        |   |         | 332,470                        |  
|Cost of sales                                   |       |                                |   |         |                                |   |         |                                |  
|Cost of goods sold                              |       | (39,601                        | ) |         | (301,439                       | ) |         | (260,588                       | )
|Cost of services                                |       | (1,184                         | ) |         | (9,014                         | ) |         | (10,431                        | )
|                                                |       |                                |   |         |                                |   |         |                                |  
|                                                |       | (40,785                        | ) |         | (310,453                       | ) |         | (271,019                       | )
|Gross profit                                    |       | 9,769                          |   |         | 74,364                         |   |         | 61,451                         |  
|Selling, general and administrative expenses    |       | (3,443                         | ) |         | (26,209                        | ) |         | (19,731                        | )
|Research and development expenses               |       | (1,378                         | ) |         | (10,487                        | ) |         | (9,698                         | )
|Other net operating income/(loss)               |       | 43                             |   |         | 326                            |   |         | (53                            | )
|                                                |       |                                |   |         |                                |   |         |                                |  
|Income from operations                          |       | 4,991                          |   |         | 37,994                         |   |         | 31,969                         |  
|Interest expense                                |       | (129                           | ) |         | (984                           | ) |         | (695                           | )
|Interest income                                 |       | 926                            |   |         | 7,049                          |   |         | 1,590                          |  
|                                                |       |                                |   |         |                                |   |         |                                |  
|Income before income tax and minority interests |       | 5,788                          |   |         | 44,059                         |   |         | 32,864                         |  
|Income tax                                      |       | (470                           | ) |         | (3,580                         | ) |         | (2,258                         | )
|                                                |       |                                |   |         |                                |   |         |                                |  
|Income before minority interests                |       | 5,318                          |   |         | 40,479                         |   |         | 30,606                         |  
|Minority interests                              |       | (236                           | ) |         | (1,794                         | ) |         | (1,830                         | )
|                                                |       |                                |   |         |                                |   |         |                                |  
|Net income                                      |       | 5,082                          |   |         | 38,685                         |   |         | 28,776                         |  
|                                                |       |                                |   |         |                                |   |         |                                |  
|                                                |       |                                |  
|Earnings per share                              |       | $                              |   |         | RMB                            |   |         | RMB                            |  
|- Basic                                         |       | 0.14                           |   |         | 1.05                           |   |         | 0.90                           |  
|                                                |       |                                |   |         |                                |   |         |                                |  
|- Diluted                                       |       | 0.13                           |   |         | 1.02                           |   |         | 0.85                           |  
|                                                |       |                                |   |         |                                |   |         |                                |  
|Weighted average number of shares outstanding   |       |                                |   |         |                                |   |         |                                |  
|- Basic                                         |       | 36,772,864                     |   |         | 36,772,864                     |   |         | 32,109,704                     |  
|                                                |       |                                |   |         |                                |   |         |                                |  
|- Diluted                                       |       | 38,041,918                     |   |         | 38,041,918                     |   |         | 33,805,656                     |  
|                                                |       |                                |   |         |                                |   |         |                                |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

COMTECH GROUP INC.

Unaudited Condensed Consolidated Statements of Operations

Six months ended June 30, 2007 and 2006



|                                               |  |                              |   |  |                              |   |  |                              |  
|---------------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------------- | -
|                                               |  | Six MonthsEndedJune 30, 2007 |   |  | Six MonthsEndedJune 30, 2007 |   |  | Six MonthsEndedJune 30, 2007 |  
|                                               |  | $000                        |   |  | RMB000                      |   |  | RMB000                      |  
|Net Sales                                      |  |                              |   |  |                              |   |  |                              |  
|Product revenue                                |  | 92,600                       |   |  | 704,871                      |   |  | 584,485                      |  
|Services revenue                               |  | 3,165                        |   |  | 24,089                       |   |  | 19,712                       |  
|                                               |  |                              |   |  |                              |   |  |                              |  
|                                               |  | 95,765                       |   |  | 728,960                      |   |  | 604,197                      |  
|Cost of sales                                  |  |                              |   |  |                              |   |  |                              |  
|Cost of goods sold                             |  | (75,149                      | ) |  | (572,037                     | ) |  | (476,576                     | )
|Cost of services                               |  | (2,200                       | ) |  | (16,744                      | ) |  | (14,137                      | )
|                                               |  |                              |   |  |                              |   |  |                              |  
|                                               |  | (77,349                      | ) |  | (588,781                     | ) |  | (490,713                     | )
|Gross Profit                                   |  | 18,416                       |   |  | 140,179                      |   |  | 113,484                      |  
|Selling, general and administrative expenses   |  | (6,888                       | ) |  | (52,428                      | ) |  | (31,088                      | )
|Research and development expenses              |  | (2,502                       | ) |  | (19,044                      | ) |  | (16,800                      | )
|Other net operating income/(loss)              |  | 51                           |   |  | 386                          |   |  | (13                          | )
|                                               |  |                              |   |  |                              |   |  |                              |  
|Income from operations                         |  | 9,077                        |   |  | 69,093                       |   |  | 65,583                       |  
|Interest expense                               |  | (230                         | ) |  | (1,753                       | ) |  | (1,107                       | )
|Interest income                                |  | 1,149                        |   |  | 8,749                        |   |  | 3,674                        |  
|                                               |  |                              |   |  |                              |   |  |                              |  
|Income before income tax and minority interest |  | 9,996                        |   |  | 76,089                       |   |  | 68,150                       |  
|Income tax                                     |  | (860                         | ) |  | (6,544                       | ) |  | (5,891                       | )
|                                               |  |                              |   |  |                              |   |  |                              |  
|Income before minority interests               |  | 9,136                        |   |  | 69,545                       |   |  | 62,259                       |  
|Minority interests                             |  | (307                         | ) |  | (2,338                       | ) |  | (7,258                       | )
|                                               |  |                              |   |  |                              |   |  |                              |  
|Net income                                     |  | 8,829                        |   |  | 67,207                       |   |  | 55,001                       |  
|                                               |  |                              |   |  |                              |   |  |                              |  
|                                               |  |                              |  
|Earnings per share                             |  | $                            |   |  | RMB                          |   |  | RMB                          |  
|- Basic                                        |  | 0.25                         |   |  | 1.92                         |   |  | 1.72                         |  
|                                               |  |                              |   |  |                              |   |  |                              |  
|- Diluted                                      |  | 0.24                         |   |  | 1.86                         |   |  | 1.64                         |  
|                                               |  |                              |   |  |                              |   |  |                              |  
|Weighted average number of shares outstanding  |  |                              |   |  |                              |   |  |                              |  
|- Basic                                        |  | 34,925,417                   |   |  | 34,925,417                   |   |  | 31,889,076                   |  
|                                               |  |                              |   |  |                              |   |  |                              |  
|- Diluted                                      |  | 36,185,980                   |   |  | 36,185,980                   |   |  | 33,474,719                   |  
|                                               |  |                              |   |  |                              |   |  |                              |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

COMTECH GROUP INC.

Unaudited Condensed Consolidated Statements of Cash Flows

Six months ended June 30, 2007 and 2006



|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|------------------------------------------------------------------------------------------- |  | ---------------------------- | - |  | ---------------------------- | - |  | ---------------------------- | -
|                                                                                            |  | Six MonthsEndedJune 30, 2007 |   |  | Six MonthsEndedJune 30, 2007 |   |  | Six MonthsEndedJune 30, 2006 |  
|                                                                                            |  | $ 000                       |   |  | RMB 000                     |   |  | RMB 000                     |  
|Cash flows from operating activities:                                                       |  |                              |   |  |                              |   |  |                              |  
|Net income                                                                                  |  | 8,829                        |   |  | 67,207                       |   |  | 55,001                       |  
|Adjustments to reconcile net income to net cash provided by/(used in) operating activities: |  |                              |   |  |                              |   |  |                              |  
|Depreciation of fixed assets                                                                |  | 254                          |   |  | 1,935                        |   |  | 1,066                        |  
|Loss on disposal of fixed assets                                                            |  |                             |   |  |                             |   |  | 99                           |  
|Amortization of intangible assets                                                           |  | 467                          |   |  | 3,552                        |   |  |                             |  
|Minority interests                                                                          |  | 307                          |   |  | 2,338                        |   |  | 7,675                        |  
|Stock-based compensation                                                                    |  | 2,059                        |   |  | 15,675                       |   |  | 5,503                        |  
|                                                                                            |  |                              |  
|Change in operating assets and liabilities                                                  |  |                              |   |  |                              |   |  |                              |  
|Inventories                                                                                 |  | (3,062                       | ) |  | (23,307                      | ) |  | 2,574                        |  
|Accounts receivable                                                                         |  | (8,817                       | ) |  | (67,119                      | ) |  | (81,243                      | )
|Bill receivables                                                                            |  | 1,706                        |   |  | 12,988                       |   |  | (34,618                      | )
|Prepaid expenses and other receivables                                                      |  | (966                         | ) |  | (7,354                       | ) |  | (10,500                      | )
|Trade accounts payable                                                                      |  | 4,699                        |   |  | 35,772                       |   |  | 31,523                       |  
|Accrued expenses and other liabilities                                                      |  | (314                         | ) |  | (2,392                       | ) |  | 4,451                        |  
|Income tax payable                                                                          |  | (107                         | ) |  | (815                         | ) |  | 3,094                        |  
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Net cash provided by/(used in) operating activities                                         |  | 5,055                        |   |  | 38,480                       |   |  | (15,375                      | )
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Cash flows from investing activities:                                                       |  |                              |   |  |                              |   |  |                              |  
|Purchase of property and equipment                                                          |  | (496                         | ) |  | (3,777                       | ) |  | (5,452                       | )
|Proceeds from disposal of property and equipment                                            |  |                             |   |  |                             |   |  | 5                            |  
|Release/(placement) of pledged deposits                                                     |  | 23                           |   |  | 176                          |   |  | (163                         | )
|Payment for acquisition of subsidiaries                                                     |  | (7,507                       | ) |  | (57,140                      | ) |  |                             |  
|Acquisition of a subsidiary, net of cash acquired                                           |  |                             |   |  |                             |   |  | (3,097                       | )
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Net cash used in investing activities                                                       |  | (7,980                       | ) |  | (60,741                      | ) |  | (8,707                       | )
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Cash flows from financing activities:                                                       |  |                              |   |  |                              |   |  |                              |  
|Proceeds from issuance of new shares, net of offering costs                                 |  | 84,323                       |   |  | 641,868                      |   |  |                             |  
|Proceeds from exercise of stock warrants and options                                        |  | 300                          |   |  | 2,284                        |   |  | 17,503                       |  
|Proceeds from bank borrowings                                                               |  | 7,696                        |   |  | 58,580                       |   |  |                             |  
|Repayment of bank borrowings                                                                |  | (8,881                       | ) |  | (67,601                      | ) |  | (6,861                       | )
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Net cash provided by financing activities                                                   |  | 83,438                       |   |  | 635,131                      |   |  | 10,642                       |  
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Effect of foreign currencies on cash flows                                                  |  | (1,748                       | ) |  | (13,306                      | ) |  | (1,708                       | )
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Net increase/(decrease) in cash                                                             |  | 78,765                       |   |  | 599,564                      |   |  | (15,148                      | )
|                                                                                            |  |                              |  
|Cash at beginning of the period                                                             |  | 49,284                       |   |  | 375,147                      |   |  | 177,098                      |  
|                                                                                            |  |                              |   |  |                              |   |  |                              |  
|Cash at end of period                                                                       |  | 128,049                      |   |  | 974,711                      |   |  | 161,950                      |  
|                                                                                            |  |                              |   |  |                              |   |  |                              |  

See accompanying notes to condensed consolidated financial statements.



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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 Company)) 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 Companys 2006 audited consolidated financial statements included in our Annual Report on Form 10-K (the 10-K) filed with the Securities and Exchange Commission on
March 16, 2007. 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 that 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,
2007 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, 2007 unaudited condensed consolidated financial statements have
been translated into United States dollars (USD or $) at the rate of 1.00 = RMB 7.6120, representing the rate quoted by the Peoples Bank of China at the close of business on June 29, 2007. No representation is made
that the RMB amounts could have been, or could be, converted into USD at that rate or at any particular rate, or at all.

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

Note 2
 Organization And Nature Of Business

The Company and its subsidiaries are principally engaged in the sale of component parts for electronic
devices and equipment such as liquid crystal display, cameras, persistent storage, and peripheral devices for wireless handsets and fixed-line telecommunications to manufacturers in the PRC and other overseas countries. The Company and its
subsidiaries also provide technology and engineering, business process outsourcing and other services in the PRC.

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).



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Revenue recognition

Sales of components

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

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

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

Certain PRC subsidiaries of the Company are eligible to receive a refund of a
portion of the VAT paid to the local tax authority. The refund is reported as other revenue in the consolidated statements of income, as it is akin to a government operating subsidy, and is recognized upon receipt since the refund amount is
discretionary and the amount varies year to year based on the availability of government funds as determined by the local tax authority.

Services

Revenue for services is generally recognized when services are performed.

Revenue is recorded net of value added tax incurred. Value added taxes amounted to RMB14,422 thousand ($1,895 thousand) and RMB21,544 thousand, for the three months ended June 30, 2007 and 2006, respectively, and
RMB30,088 thousand ($3,953 thousand) and RMB36,366 thousand, for the six months ended June 30, 2007 and 2006, respectively.

Recently Issued
Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), which
defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements and does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by us in fiscal year 2008. Although we will continue to evaluate the application of SFAS
No. 157, we do not currently believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial statements.

In
February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 permits companies to measure certain
financial instruments and certain other items at fair value. The Standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Group on
January 1, 2008, although earlier adoption is permitted. Management is currently evaluating whether to elect the fair value option, as permitted under SFAS No. 159.

Recently Adopted Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Companys financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition
threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have an effect on
our results of operations or financial condition. We did not have any unrecognized tax benefits as of January 1, 2007 or June 30, 2007.



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Note 4  Financing Arrangements

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

The Companys subsidiaries, in certain circumstances,
have arranged to transfer with recourse certain of its bills receivable to banks. Under this discounting arrangement, the bank pays a discounted amount to the Companys subsidiaries and collects the amounts owed from the customers banks.
The discount typically ranges from 0.6% to 0.8% of the balance transferred, which is recorded as interest expense.

For certain bills receivable sold to
banks for which the Companys subsidiaries have surrendered control, the Companys subsidiaries derecognised the discounted bills receivable pursuant to the provisions of SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS No. 140). As at June 30, 2007 and December 31, 2006 we have derecognized discounted bills receivable amounting to RMB44,029 thousand ($5,784 thousand) and
RMB58,531 thousand ($7,500 thousand), respectively.

Note 5  Stock-Based Compensation

(a) Options and stock warrants assumed under the Share Exchange Agreement

Prior to the share exchange transaction between Trident Rowan Group Inc. (Trident) and the Company (the Share Exchange Agreement), the Board of Directors of Trident adopted, and the then
stockholders of Trident approved, the 1995 Stock Option Plan for Outside Directors (the Directors Plan) under which 5,000 options would be granted annually to each non-employee director of Trident for each full year of service on
the Board of Trident. As part of the Share Exchange Agreement, the Company assumed fully vested options under the Directors Plan to purchase 115,000 shares of the Companys common stock. The options granted under the Directors Plan
have a weighted average exercise price per option of $3.00 and expire on July 1, 2009. Since the Share Exchange Agreement, the Company has not granted additional options under the Directors Plan. None of the options exercisable under the
Directors Plan was exercised in the six months ended June 30, 2007 or 2006. As of June 30, 2007, the aggregate intrinsic value of the outstanding exercisable options was $1,554 thousand.

Prior to the Share Exchange Agreement, Trident granted fully exercisable stock warrants to purchase up to 925,417 shares of its common stock which were assumed by the
Company as a part of the Share Exchange Agreement. The stock warrants assumed by the Company have a weighted average exercisable price per stock warrant of $2.76 each and expire on July 1, 2009. During the six months ended June 30, 2007
and 2006, 145,105 and 524,870 stock warrants with a weighted average exercise price per stock warrant of $2.62 and $2.74 each were exercised respectively. As of June 30, 2007, 25,923 exercisable stock warrants remained outstanding with a
weighted average exercise price per stock warrant and aggregate intrinsic value of $2.94 each and $352 thousand respectively.



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(b) 2004 Incentive Plan

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

Stock options

A summary of stock option activity is
as follows:



|                                |  |                  |  |                               |  |                                         |  |                        
|------------------------------- |  | ---------------- |  | ----------------------------- |  | --------------------------------------- |  | -----------------------
|                                |  | Number ofoptions |  | Weightedaverageexercise price |  | Weightedaverageremainingcontractualterm |  | Aggregateintrinsicvalue
|                                |  |                  |  | USD                           |  | Years                                   |  | USD 000               
|Balance as of December 31, 2006 |  | 1,313,519        |  | 4.01                          |  | 7.99                                    |  | 18,632                 
|                                |  |                  |  |                               |  |                                         |  |                        
|Granted                         |  |                 |  |                              |  |                                        |  |                       
|Exercised                       |  | 100,000          |  | 3.00                          |  |                                        |  |                       
|Forfeited                       |  |                 |  |                              |  |                                        |  |                       
|Balance as of June 30, 2007     |  | 1,213,519        |  | 4.09                          |  | 7.53                                    |  | 15,074                 
|                                |  |                  |  |                               |  |                                         |  |                        
|Exercisable as of June 30, 2007 |  | 859,214          |  | 4.08                          |  | 7.53                                    |  | 10,680                 

Non-vested equity share unit

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



|                              |  |         |   |  |                                      
|----------------------------- |  | ------- | - |  | -------------------------------------
|                              |  | Shares  |   |  | Weighted averageGrant-date fair value
|                              |  |         |   |  | USD                                  
|Balance as of January 1, 2007 |  | 62,738  |   |  | 9.89                                 
|Vested                        |  | (58,524 | ) |  | 9.94                                 
|                              |  |         |   |  |                                      
|Balance as of June 30, 2007   |  | 4,214   |   |  | 9.14                                 
|                              |  |         |   |  |                                      

The total fair value of non-vested equity share units vested during the six months ended June 30, 2007 was
$582 thousand. As of June 30, 2007, the aggregate unamortized fair value of all non-vested equity share units was $38 thousand, which is expected to be amortized on a straight-line basis over a weighted average period of approximately 3.19
months.

Performance shares

A summary of performance
shares activity is as follows:



|                              |  |         |   |  |                                      
|----------------------------- |  | ------- | - |  | -------------------------------------
|                              |  | Shares  |   |  | Weighted averageGrant-date fair value
|                              |  |         |   |  | USD                                  
|Balance as of January 1, 2007 |  | 69,334  |   |  | 10.12                                
|Vested                        |  | (69,334 | ) |  | 10.12                                
|                              |  |         |   |  |                                      
|Balance as of June 30, 2007   |  |        |   |  |                                     
|                              |  |         |   |  |                                      



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The total fair value of non-vested performance shares vested during the six months ended June 30, 2007 was $702
thousand. All performance shares have been vested as of June 30, 2007.

(c) 2006 Incentive Plan

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

Non-vested equity share unit

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



|                                      |  |         |   |  |                                      
|------------------------------------- |  | ------- | - |  | -------------------------------------
|                                      |  | Shares  |   |  | Weighted averageGrant-date fair value
|                                      |  |         |   |  | USD                                  
|Balance as of January 1, 2007         |  |        |   |  |                                     
|Granted on February 14, 2007 (note i) |  | 6,505   |   |  | 15.37                                
|Granted on March 14, 2007 (note ii)   |  | 55,000  |   |  | 15.20                                
|Granted on March 14, 2007 (note iii)  |  | 16,000  |   |  | 15.20                                
|Vested                                |  | (33,003 | ) |  | 15.22                                
|                                      |  |         |   |  |                                      
|Balance as of June 30, 2007           |  | 44,502  |   |  | 15.21                                
|                                      |  |         |   |  |                                      

---

|Note i | The non-vesting equity share units vest 50% on June 30, 2007, 25% on September 30, 2007 and 25% on December 31, 2007.
|------ | ---------------------------------------------------------------------------------------------------------------------

|Note ii | The non-vesting equity share units vest in equal quarterly installments over a period of one year from the date of grant.
|------- | -------------------------------------------------------------------------------------------------------------------------

|Note iii | The non-vesting equity share units were fully vested on the date of grant.
|-------- | --------------------------------------------------------------------------

The total fair value of non-vested equity share units vested during the six months ended June 30, 2007 was $502 thousand. As of June 30, 2007, the aggregate unamortized fair value of all non-vested equity share units was $677
thousand, which is expected to be amortized on a straight-line basis over a weighted average period of approximately 8.21 months.

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, 2007 |  | Three monthperiod endedJune 30, 2006 |  | Six monthperiod endedJune 30, 2007 |  | Six monthperiod endedJune 30, 2006
|Weighted average number of shares outstanding  basic   |  | 36,772,864                           |  | 32,109,704                           |  | 34,925,417                         |  | 31,889,076                        
|Effect of diluted securities                            |  | 1,269,054                            |  | 1,695,952                            |  | 1,260,563                          |  | 1,585,643                         
|                                                        |  |                                      |  |                                      |  |                                    |  |                                   
|Weighted average number of shares outstanding  diluted |  | 38,041,918                           |  | 33,805,656                           |  | 36,185,980                         |  | 33,474,719                        
|                                                        |  |                                      |  |                                      |  |                                    |  |                                   



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Note 7  Operating Segment Information

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). 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.

Segment information is summarized as follows:



|                                                  |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|------------------------------------------------- |  | ------------------------------------ | - |  | ------------------------------------ | - |  | ---------------------------------- | - |  | ---------------------------------- | -
|                                                  |  | Three monthperiod endedJune 30, 2007 |   |  | Three monthperiod endedJune 30, 2006 |   |  | Six monthperiod endedJune 30, 2007 |   |  | Six monthperiod endedJune 30, 2006 |  
|                                                  |  | RMB000                              |   |  | RMB000                              |   |  | RMB000                            |   |  | RMB000                            |  
|Net revenue                                       |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Component Solutions                               |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Mobile handset                                    |  | 155,763                              |   |  | 128,425                              |   |  | 293,697                            |   |  | 248,447                            |  
|Telecommunications equipment                      |  | 118,600                              |   |  | 116,329                              |   |  | 228,464                            |   |  | 211,513                            |  
|Digital media and others                          |  | 97,431                               |   |  | 75,909                               |   |  | 182,710                            |   |  | 124,525                            |  
|                                                  |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|                                                  |  | 371,794                              |   |  | 320,663                              |   |  | 704,871                            |   |  | 584,485                            |  
|Services                                          |  | 13,023                               |   |  | 11,807                               |   |  | 24,089                             |   |  | 19,712                             |  
|                                                  |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Total net revenue                                 |  | 384,817                              |   |  | 332,470                              |   |  | 728,960                            |   |  | 604,197                            |  
|                                                  |  |                                      |   | 
|Income from operations                            |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Component Solutions                               |  | 50,557                               |   |  | 39,416                               |   |  | 93,862                             |   |  | 73,607                             |  
|Services                                          |  | 958                                  |   |  | (2,089                               | ) |  | 1,188                              |   |  | 1,219                              |  
|Unallocated                                       |  | (13,521                              | ) |  | (5,358                               | ) |  | (25,957                            | ) |  | (9,243                             | )
|                                                  |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Total income from operations                      |  | 37,994                               |   |  | 31,969                               |   |  | 69,093                             |   |  | 65,583                             |  
|Interest income                                   |  | 7,049                                |   |  | 1,590                                |   |  | 8,749                              |   |  | 3,674                              |  
|Interest expense                                  |  | (984                                 | ) |  | (695                                 | ) |  | (1,753                             | ) |  | (1,107                             | )
|                                                  |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Income before income taxes and minority interests |  | 44,059                               |   |  | 32,864                               |   |  | 76,089                             |   |  | 68,150                             |  
|                                                  |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  



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|                    |  |              |  |                 
|------------------- |  | ------------ |  | ----------------
|                    |  | June 30,2007 |  | December 31,2006
|                    |  | RMB000      |  | RMB000         
|Total assets        |  |              |  |                 
|Component Solutions |  | 1,476,461    |  | 747,577         
|Services            |  | 108,239      |  | 150,519         
|Unallocated         |  | 2,813        |  | 9,002           
|                    |  |              |  |                 
|                    |  | 1,587,513    |  | 907,098         
|                    |  |              |  |                 

Note 8: Comprehensive income

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



|                             |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|---------------------------- |  | ------------------------------------ | - |  | ------------------------------------ | - |  | ---------------------------------- | - |  | ---------------------------------- | -
|                             |  | Three monthperiod endedJune 30, 2007 |   |  | Three monthperiod endedJune 30, 2006 |   |  | Six monthperiod endedJune 30, 2007 |   |  | Six monthperiod endedJune 30, 2006 |  
|                             |  | RMB000                              |   |  | RMB000                              |   |  | RMB000                            |   |  | RMB000                            |  
|Net income                   |  | 38,685                               |   |  | 28,776                               |   |  | 67,207                             |   |  | 55,001                             |  
|Other comprehensive loss     |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Foreign currency translation |  | (10,963                              | ) |  | (806                                 | ) |  | (13,324                            | ) |  | (2,794                             | )
|                             |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  
|Comprehensive income         |  | 27,722                               |   |  | 27,970                               |   |  | 53,883                             |   |  | 52,207                             |  
|                             |  |                                      |   |  |                                      |   |  |                                    |   |  |                                    |  

Note 9: Sale of Securities

On April 23, 2007, the Company and certain of its stockholders (the Selling Stockholders) entered into an underwriting agreement (the Underwriting Agreement) with Lehman Brothers Inc., as
representative of the several underwriters named therein (the Underwriters) pursuant to which the Company agreed to issue and sell 4,400,000 shares of the Companys common stock, par value $0.01 per share, and the Selling
Stockholders agreed to sell 1,100,000 shares of the Companys common stock (together, the Firm Stock) to the Underwriters at a price per share of $16.6688. In addition, the Company and the Selling Stockholders have granted the
Underwriters an option to purchase up to an additional 825,000 shares (Over-Allotment Shares) to cover over-allotments, if any, at the same price per share as the Firm Stock.

The Company completed the sale of the Firm Stock on April 27, 2007. On May 9, 2007, the Underwriters exercised their over-allotment option and the Company completed the sale of the Over-Allotment Shares upon
exercise of the over-allotment. Net proceeds to the Company from the offering, after deducting underwriting discounts and commissions and estimated offering expenses was approximately $83.3 million, including the sale of the Firm Stock and the
Over-Allotment Shares. The Company did not receive any proceeds from the sale of shares by the Selling Stockholders.

Note 10: Subsequent Events

On August 1, 2007, the Company entered into a stock purchase agreement (the Agreement) dated August 1, 2007 with
First King International Limited (the Seller), Keen Awards Limited (Keen), Shenzhen Hui Cheng Yun Tong Company Limited (Shenzhen) and certain persons listed on Schedule I to the Agreement, to acquire all of the
outstanding shares of Keen and all of the business of Shenzhen for a consideration of approximately $20 million in cash and stock over the next two years, in accordance with certain business milestones. The principal activities of Keen and Shenzhen
are the provision of design and engineering service for integrated display technology solutions.



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|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 products; expectations for the domestic wireless handset, telecommunications equipment, digital consumer electronic end-markets in the PRC; anticipated margins for our solutions; general and
cyclical economic and business conditions, and, in 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 provide customized module design solutions for a diverse set of applications and end
markets, serving as a gateway for our technology component suppliers to access leading electronics manufacturers in China. Our customized module design solutions allow our customers to take advantage of technology components from reputable suppliers
in an efficient and cost-effective manner, thus reducing their time-to-market and lowering their overall costs. Our close collaboration with our customers product development teams provides us with a unique understanding of their needs,
enabling us to customize our suppliers technology components with module designs that meet our customers needs. In addition, in 2006, we began offering technology and engineering services, network system integration and related training
and maintenance services to telecom equipment vendors in China and in Southeast Asia.

We are focused on the mobile handset, telecom
equipment and digital media end-markets in China. In the mobile handset end-market, we provide module solutions for functionalities such as LCD, camera, power supply and Bluetooth; in the telecom equipment end-market, we provide solutions for PSTN
switching, optical transmitters, electrical signal processing and optical signal amplification; and in the digital media end-market, we provide solutions for digital set-top boxes and GPS applications. Over the course of our operating history, we
have worked with over 200 customers, including a majority of the most established manufacturers in the mobile handset, telecom equipment and digital media end-markets in China such as ZTE, Huawei and Lenovo. In addition to these original equipment
manufacturers, or OEMs, our other customers include industry participants that support these OEMs, such as subsystem designers and contract manufacturers. In developing customized module design solutions for use in our customers products, we
collaborate closely with over 30 suppliers of technology components, including many large multinational companies



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such as Broadcom, JDS Uniphase and Matsushita. In addition, in October 2006, we became one of the first China-based companies to license software technology
and have access to selected source codes directly from Microsoft.

For the six months ended June 30, 2007, we have two reportable
operating segments: Component Solutions, consisting of revenues generated from the sales of components relating to our customized module design solutions focusing primarily in the mobile handset, telecommunications equipment and digital media
end-markets, and services revenue, generated by providing technology and engineering services, network system integration and related training and maintenance services.

Principal Factors Affecting Our Results Of Operations

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

Revenue mix. Our net sales and gross profit are affected by our product mix. Over the
last year, digital media components sales, which have generally higher profit margins than our mobile handset module components sales and our telecom equipment module components sales, have constituted a significantly greater portion of our total
net sales as compared to previous years.

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

Increase in exports. We believe that the development of a highly-skilled, low-cost
manufacturing base has also enabled Chinas domestic mobile handset, telecom equipment and digital consumer electronics manufacturers to be competitive in the global marketplace. As an example, Huawei has become a major supplier of telecom
equipment to international customers, while ZTE, a major manufacturer of mobile handset and telecom equipment in China, as well as other telecom 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 and digital media clients.

Growth by entering new end-markets, strengthening in-house capabilities and leveraging our customer base. In 2005, we began targeting the digital
media 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. In the first quarter of 2005, we began generating sales from
customized module design solutions for digital home entertainment products, primarily for digital set-top boxes, through sales to our existing end-customers. We anticipate that sales related to the digital media end-markets will generally have
higher profit margins than our mobile handset and telecom equipment modules related sales, though such higher margins may decline over time as this industry mature. We will also look for opportunities to expand into new end markets that we believe
represent significant growth opportunities.



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

Net Revenue

Product Revenue

We do not charge our
customers an independent design fee for our solutions. Instead, our business model is to generate revenue by reselling a limited number of specific components required in our module reference design. The difference between the purchase price we pay
our suppliers for these components and our sales price to the customers for these components compensates us for our design, technical support and distribution services. Our net sales include a 17% value-added tax, or VAT.

Our broad and diversified customer base includes many of the major domestic mobile handset, telecom equipment and digital consumer electronics
manufacturers in China. In addition, our customers include industry participants supporting these OEMs, such as subsystem designers and contract manufacturers in China, as well as international manufacturers who have begun to manufacture
end-products in China for the domestic and international market.

Services Revenue

We provide technology and engineering services, and related training and maintenance services to our customers. We generate revenue when our services are
rendered and acknowledged by our customers. Since beginning this service in early 2006, Huawei has accounted for substantially all of our services revenue.

Cost of Sales

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

Cost of Goods Sold

Cost of goods
sold primarily consists of the purchase of components from suppliers. We develop our customized module design solutions based on specific technology components purchased from suppliers in our target end-markets. Our list of over 30 key suppliers
includes Broadcom (integrated circuit and Bluetooth), JDS Uniphase (optoelectronic components), M-Systems (flash memory, DiskOnChip), Matsushita (switches), 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.



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Cost of Services

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

Operating Expenses

Selling, General and
Administrative Expenses

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

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 continuing costs of complying with U.S. rules and regulations necessary to maintain our listing in the United States.

Research and Development Expenses

Research and development expenses consist primarily of salaries and related costs of the employees engaged in research, design and development activities; the costs for design and testing; the cost of parts for
prototypes; equipment depreciation; and third party development expenses. We expense research and development expenses as they are incurred. As of June 30, 2007, we had approximately 350 engineers and 200 other technical employees engaged in
research and development related activities to develop new customized module design solutions targeted at the mobile handset, telecom equipment and digital media industries. As a result of additional costs incurred in developing new customized
module design solutions, and an increasing headcount in our R&D department, we expect that our research and development expenses, including those relating to the planned hiring of additional research and development personnel, will increase in
the future as we seek to expand our business by developing new customized module design solutions and penetrating new end-markets, and as we seek to grow our engineering services business.

Minority Interests

Minority interests consist of 45%
of the outstanding equity interest in Comtech Broadband. For the three and six months ended June 30, 2007, approximately 16.3% and 15.1%, respectively, of our total net sales was generated through this subsidiary.

Previously, 40% of the outstanding equity interest in Comtech Wireless, 48.9% of the outstanding equity interest in Huameng and 1.4% of the outstanding
equity interest in OAM, a non-operating Italian subsidiary, was held by minority shareholders of these entities. On March 26, 2007, COGO Engineering Services Limited (previously, Huameng Engineering Services Limited) and Comloca Technology
(Shenzhen) Company Limited became wholly owned subsidiaries of the Company. In January 2007, we sold our interest in OAM S.p.A., a non operating Italian subsidiary



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##### Table of Contents

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

Our subsidiaries
incorporated in Hong Kong, Comtech Hong Kong and Comtech Broadband, are subject to taxes on their profits in Hong Kong at 17.5% for 2007 and 2006.

The general 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, which are established in the Shenzhen Special Economic Zone, have agreed to operate for a minimum of 10 years in China and more than 50% of their revenues will be derived from their manufacturing
operations, 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 was subject to a three-year preferential tax rate of 7.5% in 2002, 2003 and 2004 and a tax rate of 15% in 2005, 2006 and 2007;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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



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

Our acquired PRC operating companies, Viewtran PRC, Huameng PRC and Comloca PRC, which are also located in the Shenzhen
Special Economic Zone, have no taxable profit for the second quarter of 2007. 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%. As a result of the incentives above, our operations have been subject to low tax rates. Our effective tax rate was 8.1% and 6.9% in the second quarter of 2007 and 2006, respectively. The increase in our effective tax rate
was mostly due to the increase in corporate expenses which could not be allocated to operating subsidiaries as tax deductible expenses.

On
March 16, 2007, the National Peoples Congress of China passed the PRC Enterprise Income Tax Law, which will take effect as of January 1, 2008. In accordance with the new law, a unified enterprise income tax rate of 25% and unified
tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises. Effective from January 1, 2008, this 25% unified tax rate will replace the 33% tax rate currently in effect through 2007. In
addition, enterprises established prior



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##### Table of Contents

to March 16, 2007 eligible for certain preferential tax treatment in accordance with currently prevailing tax laws and administrative regulations shall,
under the regulations of the State Council, gradually become subject to the new 25% tax rate over a five-year transition period starting from January 1, 2008, the effective date of the new law. We expect details of the transitional arrangement
for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007 to be set out in more detailed implementation rules to be issued in the near future.

Three month period ended June 30, 2007 compared to three month period ended June 30, 2006

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, telecommunications equipment and digital media end-markets; and 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 Services segment for the three months ended June 30:



|                    |  |             |  |            
|------------------- |  | ----------- |  | -----------
|                    |  | 2007RMB000 |  | 2006RMB000
|Component Solutions |  |             |  |            
|Net revenue         |  | 371,794     |  | 320,663    
|                    |  |            
|Services            |  |             |  |            
|Net revenue         |  | 13,023      |  | 11,807     
|                    |  |            
|Total               |  |             |  |            
|Net revenue         |  | 384,817     |  | 332,470    

Total net revenue increased RMB52,347 thousand, or 15.7%, in the second quarter of 2007 when
compared to the second quarter of 2006. The increase was mainly attributable to an increase in revenue from the Component Solutions segment by RMB51 million. The increase resulted from the growth in mobile handset, telecommunications equipment, and
digital media and other component markets.

Gross margin

Overall gross profit was RMB74,364 thousand in the second quarter 2007, an increase of RMB12,913 thousand, or 21.0%, when compared to RMB61,451 thousand in the second quarter of 2006. Overall gross margin percentage
was 19.3% in the second quarter of 2007, as compared to 18.5% in the second quarter of 2006.

Component Solutions

Net revenue and income from operations for Component Solutions for the three months ended June 30, 2007 and 2006 were as follows:



|                             |  |             |  |            
|---------------------------- |  | ----------- |  | -----------
|                             |  | 2007RMB000 |  | 2006RMB000
|Component Solutions:         |  |             |  |            
|Mobile handset               |  | 155,763     |  | 128,425    
|Telecommunications equipment |  | 118,600     |  | 116,329    
|Digital media and others     |  | 97,431      |  | 75,909     
|                             |  |             |  |            
|Net revenue                  |  | 371,794     |  | 320,663    



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Component Solutions net revenue increased RMB51,131 thousand, or 15.9%, in the second quarter of 2007
when compared to the second quarter of 2006. The increase resulted from the growth in mobile handset, telecommunications equipment, and digital media and other components, which increased, revenue by RMB27.3 million, RMB2.3 million and RMB21.5
million, respectively.

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 2007 when compared to the second quarter of 2006. The increase in digital media and other components sales was due to greater variety of products.

Services

Net revenue and income from operations for Services for the
three months ended June 30, 2007 and 2006 were as follows:



|            |  |             |  |            
|----------- |  | ----------- |  | -----------
|            |  | 2007RMB000 |  | 2006RMB000
|Net revenue |  | 13,023      |  | 11,807     

Services net revenue increased RMB1,216 thousand, or 10.3%, in the second quarter of 2007 when
compared to the second quarter of 2006. The increase was mainly attributable to higher revenue from technology software design services.

Selling,
R&D, general and administrative expenses

Selling, research and development, and general and administrative expenses of RMB36,696
thousand were RMB7,267 thousand, or 24.7%, 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:



|                                    |  |             |  |            
|----------------------------------- |  | ----------- |  | -----------
|                                    |  | 2007RMB000 |  | 2006RMB000
|Selling expenses                    |  | 10,593      |  | 9,754      
|R&D expenses                        |  | 10,487      |  | 9,698      
|General and administrative expenses |  | 15,616      |  | 9,977      
|                                    |  |             |  |            
|                                    |  | 36,696      |  | 29,429     

The increase in the selling expenses by RMB839 thousand or approximately 8.6% was mainly
attributed to higher stock-based compensation cost and increase in product logistics such as transportation expenses and sales-related expenses resulting from more product being sold.



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##### Table of Contents

Research and development expenses increased by RMB789 thousand, or approximately 8.1%. The increase was
primarily attributable to an increase in staff compensation and benefits (including stock-based compensation).

The increase in general and
administrative expenses of RMB5,639 thousand, or approximately 56.5% was mainly attributable to an increase in staff compensation and benefits (including stock-based compensation) and other general administrative expenses of approximately RMB4
million, and the amortization of intangible assets of RMB1.8 million.

Interest expense

Interest expense in the second quarter of 2007 amounted to RMB984 thousand as compared to RMB695 thousand in the same period of 2006. The increase in
interest expense was attributable to an increase in average interest rate and average bank borrowing balance.

Interest income

Interest income in the second quarter of 2007 amounted to RMB7,049 thousand, compared to RMB1,590 thousand in the same period of 2006. The significant
increase was mainly attributable to the net proceeds of approximately $83.3 million from the underwritten offering described below.

Income tax

The effective tax rate for the three months ended June 30, 2007 was 8.1% compared to 6.9% for the comparable period in 2006. The
increase in the effective tax rate was mostly due to the increase in corporate expenses which could not be allocated to operating subsidiaries as tax deductible expenses.

Net income

As a result of the above items, net income for the three months ended June 30, 2007
was RMB38,685 thousand compared to a net income of RMB28,776 thousand in the corresponding period of 2006.

Earnings per share

We reported basic per share earnings of RMB1.05 for the second quarter of 2007 and diluted per share earnings of RMB1.02, compared to basic per share
earnings of RMB0.90 for the same period of 2006, and diluted per share earnings of RMB0.85.

Six month period ended June 30, 2007 compared to six
month period ended June 30, 2006

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, telecommunications equipment and digital
media end-markets; and Services for which we provide technology and engineering services, business process outsourcing, network system integration and related training and maintenance services.



19



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##### Table of Contents

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



|                     |  |             |  |            
|-------------------- |  | ----------- |  | -----------
|                     |  | 2007RMB000 |  | 2006RMB000
|Component Solutions  |  |             |  |            
|Net revenue          |  | 704,871     |  | 584,485    
|                     |  |            
|Engineering Services |  |             |  |            
|Net revenue          |  | 24,089      |  | 19,712     
|Total                |  |             |  |            
|Net revenue          |  | 728,960     |  | 604,197    

Total net revenue increased RMB124,763 thousand, or 20.6%, in the six months ended June 30,
2007 when compared to the six months ended June 30, 2006. The increase was mainly attributable to an increase in revenue from the Component Solutions segment by RMB120 million. Increase in sales from services segment by RMB4 million also
contributed to the increase in net revenue.

Gross margin

Overall gross profit was RMB140,179 thousand in the six months ended June 30, 2007, an increase of RMB26,695 thousand, or 23.5%, when compared to RMB113,484 thousand in the six months ended June 30, 2006.
Overall gross margin percentage was 19.2% in the six months ended June 30, 2007, as compared to 18.8% in the six months ended June 30, 2006.

Component Solutions

Net revenue and income from operations for Component Solutions for the six months ended June 30, 2007 and 2006
were as follows:



|                             |  |             |  |            
|---------------------------- |  | ----------- |  | -----------
|                             |  | 2007RMB000 |  | 2006RMB000
|Component Solutions:         |  |             |  |            
|Mobile handset               |  | 293,697     |  | 248,447    
|Telecommunications equipment |  | 228,464     |  | 211,513    
|Digital media and others     |  | 182,710     |  | 124,525    
|                             |  |             |  |            
|Net revenue                  |  | 704,871     |  | 584,485    
|                             |  |             |  |            

Component Solutions net revenue increased RMB120,386 thousand, or 20.6%, in the six months ended
June 30, 2007 when compared to the six months ended June 30, 2006. The increase was primarily due to the expanding Chinese economy, which drove the growth in all markets of Component Solutions. Revenues from mobile handsets,
telecommunications equipment, and digital media and other components increased by RMB45.3 million, RMB17.0 million and RMB58.2 million, respectively.



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##### Table of Contents

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 six months ended June 30, 2007 when compared to the six months ended June 30, 2006. The increase in digital media and other components sales was due to more variety of products.

Services

Net revenue and income from operations for
Services for the six months ended June 30, 2007 and 2006 were as follows:



|            |  |              |  |             
|----------- |  | ------------ |  | ------------
|            |  | 2007 RMB000 |  | 2006 RMB000
|            |  |             
|Net revenue |  | 24,089       |  | 19,712      

Services net revenue increased RMB4,377 thousand, or 22.2%, in the six months ended June 30,
2007 when compared to the six months ended June 30, 2006. The increase was mainly attributable to greater sales generated from engineering and software design services.

Selling, R&D, general and administrative expenses

Selling, research and development, and general
and administrative expenses of RMB71,472 thousand were RMB23,584 thousand, or 49.2%, 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:



|                                    |  |                      |  |                     
|----------------------------------- |  | -------------------- |  | --------------------
|                                    |  | June 30,2007 RMB000 |  | June 30,2006 RMB000
|                                    |  |                     
|Selling expenses                    |  | 20,232               |  | 16,093              
|R&D expenses                        |  | 19,044               |  | 16,800              
|General and administrative expenses |  | 32,196               |  | 14,995              
|                                    |  |                      |  |                     
|                                    |  | 71,472               |  | 47,888              

The increase in the selling expenses by RMB4,139 thousand, or approximately 25.7% was mainly
attributable to additional bad debt provision of approximately RMB6.2 million for the six months ended June 30, 2007 compared to RMB3.2 million during the same period last year, and an increase in other selling expenses by approximately RMB1.0
million as a result of an increase in stock-based compensation and other sales-related expenses.

Research and development expenses
increased by RMB2,244 thousand, or approximately 13.4%. The increase was primarily attributable to an increase in research and development staff compensation and benefits (including stock-based compensation).

The increase in general and administrative expenses of RMB17,201 thousand or approximately 114.7% was mainly attributable to an increase of RMB13.5
million in staff compensation and benefits, including stock-based compensation, and an increase in corporate expenses and SEC related expenses of approximately RMB9.8 million.



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Interest expense

Interest expense in the six months ended June 30, 2007 amounted to RMB1,753 thousand as compared to RMB1,107 thousand in the same period of 2006. The increase in interest expense was attributable to increase in
average interest rate and average bank borrowing balance.

Interest income

Interest income in the six months ended June 30, 2007 amounted to RMB8,749 thousand, compared to RMB3,674 thousand in the same period of 2006. The
significant increase was mainly attributable to the net proceeds of approximately $83.3 million from the underwritten offering described below.

Income
tax

Both the effective tax rate for the six months ended June 30, 2007 and 2006 was 8.6%.

Net income

As a result of the above items, net
income for the six months ended June 30, 2007 was RMB67,207 thousand compared to a net income of RMB55,001 thousand in the corresponding period of 2006.

Earnings per share

We reported basic per share earnings of RMB1.92 for the six months ended June 30, 2007 and diluted
per share earnings of RMB1.86, compared to basic per share earnings of RMB1.72 for the same period of 2006 and diluted per share earnings of RMB1.64.

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, working capital is needed to fund this time difference.

As at June 30, 2007, we had no material commitments for capital
expenditures.

As of June 30, 2007, we had working capital of RMB1,301,118 thousand as compared with working capital of RMB585,628
thousand at December 31, 2006. This increase in working capital was primarily attributable to the sale of our securities on a firm-commitment basis, as described below.

Cash provided by operating activities for the six months ended June 30, 2007 was RMB38,480 thousand compared to cash used in operating activities of
RMB15,375 thousand in the corresponding period of 2006. Cash provided by operating activities increased as compared to the prior period was primarily due to an increase in trade accounts payable of RMB35,772 thousand which was due to tight payment
control and a decrease in bills receivable of RMB12,988 thousand, partly off-set by an increase in trade accounts receivable of RMB67,119 thousand and an increase in inventory of RMB23,307 thousand. Trade accounts receivable increased due to an
increase in revenue in the first half of the year of 2007.

Cash used in investing activities of RMB60,741 thousand during the first six
months of 2007 was mainly for settlement of amounts payable for acquisitions of subsidiaries that were consummated in 2006 of RMB57,140 thousand, and purchases of fixed assets of RMB3,777 thousand.



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Net cash provided by financing activities was RMB635,131 thousand during the first six months of 2007. On
April 23, 2007, we and certain of our stockholders (the Selling Stockholders) entered into an underwriting agreement (the Underwriting Agreement) with Lehman Brothers Inc., as representative of the several underwriters
named therein (the Underwriters) pursuant to which we agreed to issue and sell 4,400,000 shares of the our common stock, par value $0.01 per share, and the Selling Stockholders agreed to sell 1,100,000 shares of our common stock
(together, the Firm Stock) to the Underwriters at a price per share of $16.6688. In addition, we and the Selling Stockholders granted the Underwriters an option to purchase up to an additional 825,000 shares (Over-Allotment
Shares) to cover over-allotments, if any, at the same price per share as the Firm Stock.

We completed the sale of the Firm Stock on
April 27, 2007. On May 9, 2007, the Underwriters exercised their over-allotment option and we completed the sale of the Over-Allotment Shares upon exercise of the over-allotment. Net proceeds to us from the offering, after deducting
underwriting discounts and commissions and estimated offering expenses, was approximately $83.3 million, which includes the sale of the Firm Stock and the Over-Allotment Shares. We did not receive any proceeds from the sale of shares by the Selling
Stockholders.

Indebtedness

On
October 7, 2005, Comtech Hong Kong entered into a $5.0 million U.S. dollar denominated credit facility with Standard Chartered Bank (Hong Kong) Limited (SCB), and a $9.0 million U.S. dollar denominated facility with Bank of China
(BOC). In 2006, BOC increased the amount available under the facility to $15.0 million. 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 RMB20,629 thousand ($2,710 thousand), leaving RMB93,551 thousand
($12,290 thousand) in availability. This facility is secured by funds on deposit in an amount of $5,000,000, and bears interest from 1.75% per annum over HIBOR or U.S. prime, 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.

Some of our customers enter into arrangements with their respective banks for the purpose of settling their bills. 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 a discounting 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 0.8% of the balance transferred, which is recorded as interest expense.
During the six months ended June 30, 2007, we discounted bills receivable amounting to approximately RMB64,355 thousand ($8,454 thousand).



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Future liquidity needs

As of June 30, 2007, the Company had approximately RMB974,711 thousand ($128,049 thousand) in cash. We regularly review our cash funding requirements and attempt to meet those requirements through a combination
of cash on hand, cash provided by operations 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.



|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Exchange Risk

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

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

Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although currently the Renminbi exchange rate versus the U.S.
dollar is restricted to a rise or fall of no more than 0.3% per day and the Peoples Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may
appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market. As of the close of business on June 29, 2007, the exchange rate between RMB and U.S. dollar was $1 to RMB7.6120.

We conduct substantially all of our operations through our PRC operating companies, and their financial performance and position are measured in terms of Renminbi. The majority of our net sales and purchases are
denominated in Renminbi.

Any devaluation of the Renminbi against the U.S. dollar would consequently have an adverse effect on our
financial performance and asset values when measured in terms of U.S. dollars. On the other hand, the appreciation of the Renminbi could make our customers products more expensive to purchase because many of our customers are involved in the
export of goods, which may have an adverse impact on their sales. A decrease in sales by our customers could reduce our sales and revenues. In addition, from time to time we may have U.S. dollar denominated borrowings, and therefore a decoupling of
the Renminbi may affect our financial performance in the future.



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We recognized a foreign currency translation adjustment of approximately RMB(11.0 million) ($(1.4
million)) for the quarter ended June 30, 2007 and RMB13.3 million ($(1.7 million)) for the six months ended June 30, 2007. We do not currently engage in hedging activities, as such, we may in the future experience economic loss as a result
of any foreign currency exchange rate fluctuations.

Interest Rate Risk

We are exposed to interest rate risk arising from short-term variable rate borrowings from time to time. Our future interest expense will fluctuate in
line with any change in our borrowing rates. We do not have any derivative financial instruments and believe our exposure to interest rate risk and other relevant market risks is not material. Our bank borrowings amounted to RMB20.6 million ($2.7
million) as of June 30, 2007. Based on the variable nature of the underlying interest rate, the bank borrowings approximated fair value at that date.

If there was a hypothetical 1% change in interest rates, the net impact to earnings would be approximately RMB0.2 million ($0.03 million). The potential change in 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, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations. According
to the National Bureau of Statistics of China, the change in Consumer Price Index in China was 3.9%, 1.8% and 1.5% in 2004, 2005 and 2006, 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 controls and
procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC and to record, process, summarize, and disclose this information within the time periods specified in the rules
of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, our chief executive and chief financial officers have concluded these controls and
procedures are effective to ensure we are able to record, collect, process, and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

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.



|Item 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Not Applicable



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##### Table of Contents

PART IIOTHER INFORMATION



|Item 1. | LEGAL PROCEEDINGS
|------- | -----------------

There have been no material
developments in the Companys legal proceedings from those previously disclosed in the Companys Form 10-K for the year ended December 31, 2006.



|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, 2006.



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

None.



|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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##### Table of Contents

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 9, 2007 |  |  |  | By:                 |  | /s/ Jeffrey Kang                                                   
|               |  |  |  |                     |  | Jeffrey Kang                                                       
|               |  |  |  |                     |  | Chief Executive Officer and President (Principal
Executive Officer)
|               |  |  | 
|August 9, 2007 |  |  |  | By:                 |  | /s/ Hope Ni                                                        
|               |  |  |  |                     |  | Hope Ni                                                            
|               |  |  |  |                     |  | Chief Financial Officer (Principal Financial Officer)              



27