Cogo (COGO) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 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 0-02642

Comtech Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	52-0466460
(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) (Zip Code)

011-86-755-267-43210

(Registrant’s Telephone Number, Including Area Code)

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 Filer  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 38,373,667 shares of the registrant’s Common Stock issued and outstanding on November 7, 2007.

Comtech Group, Inc.

Index to Form 10-Q

		Page
Part I.	Financial Information
	Item 1. Condensed Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	1
	Condensed Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006	2
	Condensed Consolidated Statements of Operations for the nine months ended September 30, 2007 and 2006	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 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	13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4. Controls and Procedures	27
	Item 4T. Controls and Procedures	27
Part II.	Other Information
	Item 1. Legal Proceedings	27
	Item 1A. Risk Factors	27
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 3. Defaults Upon Senior Securities	28
	Item 4. Submission of Matters to a Vote of Security Holders	28
	Item 5. Other Information	28
	Item 6. Exhibits	28
SIGNATURES		29

PART I—FINANCIAL INFORMATION

Item 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheet

As of September 30, 2007 and December 31, 2006

	Sep 30, 2007		Sep 30, 2007		Dec 31, 2006
	$’000		RMB’000		RMB’000
Assets
Current assets:
Cash	114,669		859,192		375,147
Pledged bank deposits	7,231		54,182		55,416
Accounts receivable, net of allowance of doubtful accounts	61,799		463,051		278,589
Bills receivable	2,704		20,257		31,797
Prepaid expenses and other receivables	2,975		22,288		14,254
Inventories	15,394		115,344		71,959
Total current assets	204,772		1,534,314		827,162
Property and equipment, net	2,361		17,690		12,395
Intangible assets, net	15,274		114,444		19,528
Investment in an affiliated company	55		416		416
Goodwill	14,975		112,208		46,692
Other assets	121		905		905
Total Assets	237,558		1,779,977		907,098
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	22,536		168,860		114,217
Bank borrowings	958		7,180		30,272
Amount due to related party	198		1,483		1,522
Income tax payable	1,485		11,125		9,270
Accrued expenses and other liabilities	23,290		174,505		86,253
Total current liabilities	48,467		363,153		241,534
Minority interests	—		—		1,646
Stockholders’ equity
Common stock	419		3,139		2,725
Additional paid-in capital	143,130		1,072,446		402,721
Retained earnings	51,267		384,134		275,890
Accumulated other comprehensive loss	(5,725	)	(42,895	)	(17,418	)
Total stockholders’ equity	189,091		1,416,824		663,918
Total liabilities and stockholders’ equity	237,558		1,779,977		907,098

See accompanying notes to condensed consolidated financial statements.

1

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

Three months ended September 30, 2007 and 2006

	Three Months Ended September 30, 2007		Three Months Ended September 30, 2007		Three Months Ended September 30, 2006
	$’000		RMB’000		RMB’000
Net Sales
Product revenue	53,160		398,319		326,336
Services revenue	2,940		22,029		14,843
	56,100		420,348		341,179
Cost of sales
Cost of goods sold	(43,122	)	(323,106	)	(266,317	)
Cost of services	(2,057	)	(15,409	)	(10,908	)
	(45,179	)	(338,515	)	(277,225	)
Gross profit	10,921		81,833		63,954
Selling, general and administrative expenses	(4,551	)	(34,101	)	(27,496	)
Research and development expenses	(1,432	)	(10,732	)	(8,135	)
Other operating income, net	7		52		203
Income from operations	4,945		37,052		28,526
Other income	—		—		7,285
Interest expense	(47	)	(352	)	(850	)
Interest income	1,207		9,042		1,337
Income before income tax and minority interests	6,105		45,742		36,298
Income tax	(531	)	(3,977	)	(2,628	)
Income before minority interests	5,574		41,765		33,670
Minority interests	(97	)	(727	)	(1,046	)
Net income	5,477		41,038		32,624
	$		RMB		RMB
Earnings per share
- Basic	0.14		1.07		1.01
- Diluted	0.14		1.04		0.97
Weighted average number of shares outstanding
- Basic	38,348,566		38,348,566		32,393,508
- Diluted	39,541,644		39,541,644		33,751,117

See accompanying notes to condensed consolidated financial statements.

2

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

Nine months ended September 30, 2007 and 2006

	Nine Months Ended September 30, 2007		Nine Months Ended September 30, 2007		Nine Months Ended September 30, 2006
	$’000		RMB’000		RMB’000
Net Sales
Product revenue	147,233		1,103,190		910,821
Services revenue	6,155		46,118		34,555
	153,388		1,149,308		945,376
Cost of sales
Cost of goods sold	(119,467	)	(895,144	)	(744,893	)
Cost of services	(4,291	)	(32,153	)	(25,045	)
	(123,758	)	(927,297	)	(769,938	)
Gross profit	29,630		222,011		175,438
Selling, general and administrative expenses	(11,548	)	(86,529	)	(59,219	)
Research and development expenses	(3,974	)	(29,776	)	(22,300	)
Other operating income, net	58		438		190
Income from operations	14,166		106,144		94,109
Other income	—		—		7,285
Interest expense	(281	)	(2,105	)	(1,956	)
Interest income	2,374		17,791		5,010
Income before income tax and minority interests	16,259		121,830		104,448
Income tax	(1,404	)	(10,521	)	(8,519	)
Income before minority interests	14,855		111,309		95,929
Minority interests	(409	)	(3,065	)	(8,304	)
Net income	14,446		108,244		87,625
	$		RMB		RMB
Earnings per share
- Basic	0.40		3.00		2.73
- Diluted	0.39		2.91		2.61
Weighted average number of shares outstanding
- Basic	36,079,006		36,079,006		32,051,551
- Diluted	37,246,314		37,246,314		33,537,876

See accompanying notes to condensed consolidated financial statements.

3

COMTECH GROUP INC. and SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

Nine months ended September 30, 2007 and 2006

	Nine months Ended Sept 30, 2007		Nine months Ended Sept 30, 2007		Nine Months Ended Sept 30, 2006
	$ ‘000		RMB ‘000		RMB ‘000
Cash flows from operating activities:
Net income	14,447		108,244		87,625
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
Depreciation of property and equipment	453		3,396		1,660
Loss on disposal of property and equipment	—		—		99
Gain on disposal of subsidiary	—		—		(7,285	)
Amortization of intangible assets	774		5,802		—
Minority interests	409		3,065		8,304
Stock-based compensation	3,443		25,795		10,902
Change in operating assets and liabilities
Inventories	(4,654	)	(34,876	)	19,128
Accounts receivable	(21,966	)	(164,585	)	(65,140	)
Bill receivables	1,540		11,540		(32,830	)
Prepaid expenses and other receivables	(1,168	)	(8,751	)	(7,630	)
Accounts payable	4,725		35,402		38,221
Amount due to related party	—		—		(294	)
Accrued expenses and other liabilities	(1,790	)	(13,413	)	(1,536	)
Income tax payable	(81	)	(606	)	3,204
Net cash (used in)/provided by operating activities	(3,868	)	(28,987	)	54,428
Cash flows from investing activities:
Purchase of property and equipment	(945	)	(7,080	)	(6,512	)
Proceeds from disposal of property and equipment	—		—		5
Placement of pledged deposits	(133	)	(999	)	(231	)
Sale of a subsidiary net of cash disposed	—		—		27,742
Payment for acquisition of subsidiaries	(10,394	)	(77,877	)	—
Acquisition of subsidiaries, net of cash acquired	773		5,797		(13,097	)
Distribution to Shareholders	—		—		(2,802	)
Investment in an affiliated company	—		—		(421	)
Net cash (used in)/provided by investing activities	(10,699	)	(80,159	)	4,684
Cash flows from financing activities:
Proceeds from issuance of new shares, net of offering costs	85,665		641,868		—
Proceeds from exercise of stock warrants and options	332		2,490		15,981
Proceeds from bank borrowings	—		—		21,668
Repayment of bank borrowings	(2,988	)	(22,386	)	—
Net cash provided by financing activities	83,009		621,972		37,649
Effect of foreign currencies on cash flows	(3,841	)	(28,781	)	(6,400	)
Net increase in cash	64,601		484,045		90,361
Cash at beginning of the period	50,068		375,147		177,098
Cash at end of period	114,669		859,192		267,459

See accompanying notes to condensed consolidated financial statements.

4

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 nine months ended September 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 September 30, 2007 unaudited condensed consolidated financial statements have been translated into United States dollars (“USD” or “$”) at the rate of 1.00 = RMB7.4928, representing the rate quoted by the People’s Bank of China at the close of business on September 28, 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”).

5

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. Value added taxes amounted to RMB12,811 thousand ($1,710 thousand) and RMB19,402 thousand, for the three months ended September 30, 2007 and 2006, respectively, and RMB42,899 thousand ($5,725 thousand) and RMB55,768 thousand, for the nine months ended September 30, 2007 and 2006, respectively.

Services

Revenue for services is generally recognized when services are performed.

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 September 30, 2007.

6

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 the 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 derecognized 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 September 30, 2007 and December 31, 2006 we have derecognized discounted bills receivable amounting to RMB45,944 thousand ($6,132 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 nine months ended September 30, 2007 and 2006. As of September 30, 2007, the aggregate intrinsic value of the outstanding exercisable options was $1,749 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 nine months ended September 30, 2007 and 2006, 145,105 and 541,446 stock warrants with a weighted average exercise price per stock warrant of $2.62 and $2.74 each were exercised respectively. As of September 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 $396 thousand respectively.

(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.

7

Stock options

A summary of stock option activity is as follows:

	Number of options	Weighted average exercise price	Weighted average remaining contractual term	Aggregate intrinsic value
		USD	Years	USD ‘000
Balance as of December 31, 2006	1,313,519	4.01	7.99	18,632
Granted	—	—	—	—
Exercised	105,000	3.12	—	—
Forfeited	—	—	—	—
Balance as of September 30, 2007	1,208,519	4.08	7.27	17,073
Exercisable as of September 30, 2007	1,005,741	4.05	7.27	14,237

Non-vested equity share unit

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

	Shares		Weighted average Grant-date fair value
			USD
Balance as of December 31, 2006	62,738		9.89
Vested	(59,149	)	9.94
Balance as of September 30, 2007	3,589		9.14

The total fair value of non-vested equity share units vested during the nine months ended September 30, 2007 was $587 thousand. As of September 30, 2007, the aggregate unamortized fair value of all non-vested equity share units was $33 thousand, which is expected to be amortized on a straight-line basis over a weighted average period of approximately seventeen months.

Performance shares

A summary of performance shares activity is as follows:

	Shares		Weighted average Grant-date fair value
			USD
Balance as of December 31, 2006	69,334		10.12
Vested	(69,334	)	10.12
Balance as of June 30, 2007	—		—

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

8

Non-vested equity share unit

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

	Shares		Weighted average Grant-date fair value
			USD
Balance as of December 31, 2006	—		—
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
Granted on August 1, 2007 (note iv)	140,000		13.90
Vested	(104,379	)	14.51
Balance as of September 30, 2007	113,126		14.24

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.

Note iv The non-vesting equity share units vest 20% on August 31, September 30, October 31, November 30, December 30, 2007, respectively.

The total fair value of non-vested equity share units vested during the nine months ended September 30, 2007 was $1,514 thousand. As of September 30, 2007, the aggregate unamortized fair value of all non-vested equity share units was $1,611 thousand, which is expected to be amortized on a straight-line basis over a weighted average period of approximately four 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 month period ended Sept. 30, 2007	Three month period ended Sept. 30, 2006	Nine month period ended Sept. 30, 2007	Nine month period ended Sept. 30, 2006
Weighted average number of shares outstanding–basic	38,348,566	32,393,508	36,079,006	32,051,551
Effect of diluted securities	1,193,078	1,357,609	1,167,308	1,486,325
Weighted average number of shares outstanding–diluted	39,541,644	33,751,117	37,246,314	33,537,876

Note 7—Operating Segment Information

The 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). The 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.

9

Segment information is summarized as follows:

	Three month period ended September 30, 2007		Three month period ended September 30, 2006		Nine month period ended September 30, 2007		Nine month period ended September 30, 2006
	RMB’000		RMB’000		RMB’000		RMB’000
Net revenue
Component Solutions
Mobile handset	173,146		130,257		466,843		378,704
Telecommunications equipment	123,224		117,913		351,688		329,426
Digital media and others	101,949		78,166		284,659		202,691
	398,319		326,336		1,103,190		910,821
Services	22,029		14,843		46,118		34,555
Total net revenue	420,348		341,179		1,149,308		945,376
Income from operations
Component Solutions	48,803		52,731		142,664		126,338
Services	779		4,470		1,967		5,689
Unallocated	(12,530	)	(28,675	)	(38,487	)	(37,918	)
Total income from operations	37,052		28,526		106,144		94,109
Other income	—		7,285		—		7,285
Interest expense	(352	)	(850	)	(2,105	)	(1,956	)
Interest income	9,042		1,337		17, 791		5,010
Income before income taxes and minority interests	45,742		36,298		121,830		104,448

10

	September 30, 2007	December 31, 2006
	RMB’000	RMB’000
Total assets
Component Solutions	1,639,958	747,577
Services	137,072	150,519
Unallocated	2,947	9,002
	1,779,977	907,098

Note 8: Comprehensive income

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

	Three month period ended September 30, 2007 RMB’000		Three month period ended September 30, 2006 RMB’000		Nine month period ended September 30, 2007 RMB’000		Nine month period ended September 30, 2006 RMB’000
Net income	41,038		32,624		108,244		87,625
Other comprehensive loss
Foreign currency translation	(12,153	)	(4,164	)	(25,477	)	(6,958	)
Comprehensive income	(28,885	)	28,460		82,767		80,667

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 RMB641.9 million ($85.6 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: Acquisition

Keen Awards

On August 1, 2007, the Company entered into a stock purchase agreement dated August 1, 2007 to acquire all outstanding shares of Keen Awards Limited (“Keen Awards”) and all of the business of Shenzhen Hui Cheng Yun Tong Company Limited (“Hui Cheng”) for consideration of approximately $20 million of which is contingent upon achieving certain earnings levels over the next two years. The principal activities of Keen Awards and Hui Cheng are the provision of design and engineering services for integrated display technology solutions. The Company acquired these operations to enhance its market share in the digital media sector and to offer end-to-end capability with long-term growth prospects.

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The Group is in the process of finalizing the purchase price allocations; thus, the allocation of the purchase price is subject to refinement. The acquisition of Keen Awards resulted in the Company recording net identifiable assets of RMB59.9 million ($8.0 million) at the date of the acquisition. No goodwill was recognized by the Company as the contingent nature of the consideration has not been resolved. As at September 30, 2007, the Company has recorded a liability in respect of the contingent consideration of RMB56.9 million (7.6 million), which is included in the Company’s expenses and other liabilities.

No supplemental financial information on a pro forma basis as if the consummation had occurred on January 1, 2006 is provided since the effect would not be material to the Company’s consolidated financial condition or results of operations.

Comtech Broadband

On August 27, 2007, Comtech Group (Comtech-Cayman”), a wholly owned subsidiary of the Company, entered into a stock purchase agreement pursuant to which Comtech-Cayman acquired the remaining 45% minority interests of Comtech Broadband Corporation Limited (“Comtech Broadband”) for cash consideration of RMB75.6 million (10.0 million) and shares of the common stock of the Company of RMB37.7 million ($5.0 million). The acquisition of the remaining 45% of Comtech Broadband was accounted for by the Group as a step purchase transaction. The fair value of the assets acquired and liabilities assumed (on a proportionate share) was allocated to Comtech Broadband’s purchase price on the acquisition date. The acquisition of 45% of Comtech Broadband resulted in the recognition of goodwill of RMB60.4 million ($8.0 million) and an intangible asset of RMB48.6 million ($6.4 million). The Company expected a high growth on Broadband business in the coming future and the acquisition of the remaining 45% minority interests of Comtech Broadband was able to benefit the Group’s results.

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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

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multinational companies 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 nine months ended September 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, consisting of the provision of technology and engineering services, business process outsourcing, network system integration and 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

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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.

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.

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 September 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

After March 26, 2007, but prior to August 31, 2007, minority interests consisted of 45% of the outstanding equity interest in Comtech Broadband. For the three and nine months ended September 30, 2007, approximately 33.1% and 28.7% respectively, of our total net sales was generated through this subsidiary. On August 31, 2007 Comtech-Cayman purchased the minority interest in Comtech Broadband.

Prior to March 26, 2007, 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 S.p.A., 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 (“Comloca”) 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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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 International (Hong Kong) Limited, Comtech Broadband and Keen Awards 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 International Limited (“Shenzhen Comtech”) , Comtech Communication Technology (Shenzhen) Company Limited (“Comtech Communication”) and Comtech Software Technology (Shenzhen) Company Limited (“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 Technology (Shenzhen) Co., Limited (“Viewtran”), Shenzhen Huameng Software Company Limited (“Huameng”) and Comloca, which are also located in the Shenzhen Special Economic Zone, have no taxable profit for the third 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 8.7% and 7.2% in the third 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.

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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 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 September 30, 2007 compared to three month period ended September 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 September 30:

	2007		2006
	RMB’000		RMB’000
Component Solutions
Net revenue		398,319		326,336
Services
Net revenue		22,029		14,843
Total
Net revenue	$	420,348	$	341,179

Total net revenue increased RMB79,169 thousand, or 23.2%, in the third quarter of 2007 when compared to the third quarter of 2006. The increase was mainly attributable to an increase in revenue from the Component Solutions segment by RMB71,983 thousand. The increased revenues resulted from an increase in product variety and the growth of all markets within the Component Solutions segment.

Gross margin

Overall gross profit was RMB81,833 thousand in the third quarter 2007, an increase of RMB17,879 thousand, or 28.0%, when compared to RMB63,954 thousand in the third quarter of 2006. Overall gross margin percentage was 19.5% in the third quarter of 2007, as compared to 18.7% in the third quarter of 2006. The increase in gross margin was due to the increase in revenue from the Services segment, which has a relatively higher gross profit.

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Component Solutions

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

	2007	2006
	RMB’000	RMB’000
Component Solutions:
Mobile handset	173,146	130,257
Telecommunications equipment	123,224	117,913
Digital media and others	101,949	78,166
Net revenue	398,319	326,336

Component Solutions net revenue increased RMB71,983 thousand, or 22.1%, in the third quarter of 2007 when compared to the third quarter of 2006. The increase resulted from the growth in mobile handset, telecommunications equipment, and digital media and other components, which increased, revenue by RMB42,889 thousand, RMB5,311 thousand and RMB23,783 thousand, 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 third quarter of 2007 when compared to the same period of 2006. Increases in sales orders from some existing customers, such as ZTE, also contributed to the increase. 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 September 30, 2007 and 2006 were as follows:

	2007	2006
	RMB’000	RMB’000
Net revenue	22,029	14,843

Services net revenue increased RMB7,186 thousand, or 48.4%, in the third quarter of 2007 when compared to the third quarter of 2006. The increase was mainly attributable to higher revenue from technology software design services and additional services revenue contributed to the Company after the acquisition of Keen Awards on August 1, 2007, as described below.

Selling, R&D, general and administrative expenses

Selling, research and development, and general and administrative expenses of RMB44,833 thousand were RMB9,202 thousand, or 25.8%, higher than those of the same period last year. The details of the expenses for the three month period ended September 30 are as follows:

	2007	2006
	RMB’000	RMB’000
Selling expenses	17,108	13,748
R&D expenses	10,732	8,135
General and administrative expenses	16,993	13,748
	44,833	35,631

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The increase in the selling expenses by RMB3,360 thousand or approximately 24.4% was mainly attributable to the provision for additional bad debt of RMB9.2 million for the quarter ended September 30, 2007 compared to RMB4.5 million during the same period last year. The increase was offset in part by decrease in sales-related expenses of RMB1.6 million.

Research and development expenses increased by RMB2,597thousand, or approximately 31.9%. The increase was primarily attributable to an increase in research and development personnel and facilities for developing handset and digital media products. The increase in overall staff compensation and benefits also contributed to the increase in research and development expenses.

The increase in general and administrative expenses of RMB3,245 thousand, or approximately 23.6%, was mainly attributable to the amortization of intangible assets of RMB2.2 million and an increase in stock-based compensation cost of RMB1.2 million.

Interest expense

Interest expense in the third quarter of 2007 amounted to RMB352 thousand as compared to RMB850 thousand in the same period of 2006. The decrease in interest expense was attributable to the decrease in average bank borrowing balance.

Interest income

Interest income in the third quarter of 2007 amounted to RMB9,042 thousand, compared to RMB1,337 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 September 30, 2007 was 8.7% compared to 7.2% 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 September 30, 2007 was RMB41,038 thousand compared to a net income of RMB32,624 thousand in the corresponding period of 2006.

Earnings per share

We reported basic per share earnings of RMB1.07 for the third quarter of 2007 and diluted per share earnings of RMB1.04, compared to basic per share earnings of RMB1.01 for the same period of 2006, and diluted per share earnings of RMB0.97.

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Nine month period ended September 30, 2007 compared to nine month period ended September 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 nine months ended September 30:

	2007	2006
	RMB’000	RMB’000
Component Solutions
Net revenue	1,103,190	910,821
Services
Net revenue	46,118	34,555
Total
Net revenue	1,149,308	945,376

Total net revenue increased RMB203,932 thousand, or 21.6%, in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006. The increase was mainly attributable to an increase in revenue from the Component Solutions segment by RMB192,369 thousand. In addition, revenues from the services segment increased as a result of the acquisition of Viewtran and Keen Awards.

Gross margin

Overall gross profit was RMB222,011 thousand in the nine months ended September 30, 2007, an increase of RMB46,573 thousand, or 26.5%, when compared to RMB175,438 thousand in the nine months ended September 30, 2006. Overall gross margin percentage was 19.3% in the nine months ended September 30, 2007, as compared to 18.6% in the nine months ended September 30, 2006.

Component Solutions

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

	2007	2006
	RMB’000	RMB’000
Component Solutions:
Mobile handset	466,843	378,704
Telecommunications equipment	351,688	329,426
Digital media and others	284,659	202,691
Net revenue	1,103,190	910,821

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Component Solutions net revenue increased RMB192,369 thousand, or 21.1%, in the nine months ended September 30, 2007 when compared to the nine months ended September 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 RMB88,139 thousand, RMB22,262 thousand and RMB81,968 thousand, 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 when compared to 2006. Increase in sales orders from some existing customers, such as ZTE, also contributed to the increase. 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 nine months ended September 30, 2007 and 2006 were as follows:

	2007	2006
	RMB’000	RMB’000
Net revenue	46,118	34,555

Services net revenue increased RMB11,563 thousand, or 33.5%, in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006. The increase was mainly attributable to greater sales generated from software design services.

Selling, R&D, general and administrative expenses

Selling, research and development, and general and administrative expenses of RMB116,305 thousand were RMB34,786 thousand, or 42.7%, higher than those of the same period last year. The details of the expenses for the nine month period ended September 30 are as follows:

	September 30, 2007	September 30, 2006
	RMB’000	RMB’000
Selling expenses	37,340	30,476
R&D expenses	29,776	22,300
General and administrative expenses	49,189	28,743
	116,305	81,519

The increase in the selling expenses by RMB6,864 thousand, or approximately 22.5% was mainly attributable to the provision for additional bad debt of RMB15.3 million for the nine months ended September 30, 2007 compared to RMB7.7 million during the same period last year. The increase was offset in part by the decrease in sales-related expenses of RMB1.1 million.

Research and development expenses increased by RMB7,476 thousand, or approximately 33.5%. The increase was primarily attributable to an increase in staff stock-based compensation of RMB5.9 million in the third quarter when compared to the same period of 2006. An increase in expenses for research and development personnel and facilities of approximately RMB1.6 million also contributed to the increase.

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The increase in general and administrative expenses of RMB20,446 thousand or approximately 71.1% was mainly attributable to an increase of approximately RMB15 million in staff compensation and benefits (including stock-based compensation) and the increased amortization of intangible assets of approximately RMB5.8 million.

Interest expense

Interest expense in the nine months ended September 30, 2007 amounted to RMB2,105 thousand as compared to RMB1,956 thousand in the same period of 2006. The increase in interest expense was attributable to an increase in the average interest rate and average bank borrowing balance.

Interest income

Interest income in the nine months ended September 30, 2007 amounted to RMB17,791 thousand, compared to RMB5,010 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 nine months ended September 30, 2007 was 8.6% compared to 8.2% for the comparable period in 2006. The increase in effective tax rate was mostly due to the increase in corporate expenses, such as amortization of intangible assets, 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 nine months ended September 30, 2007 was RMB108,244 thousand compared to a net income of RMB87,625 thousand in the corresponding period of 2006.

Earnings per share

We reported basic per share earnings of RMB3.00 for the nine months ended September 30, 2007 and diluted per share earnings of RMB2.91, compared to basic per share earnings of RMB2.73 for the same period of 2006 and diluted per share earnings of RMB2.61.

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 September 30, 2007, we had no material commitments for capital expenditures.

As of September 30, 2007, we had working capital of RMB1,171,161 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.

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Cash used in operating activities for the nine months ended September 30, 2007 was RMB28,987 thousand compared to cash provided by operating activities of RMB54,428 thousand in the corresponding period of 2006. Cash used in operating activities increased as compared to the prior period due to an increase in trade accounts receivable of RMB164,585 thousand and an increase in inventory of RMB34,876 thousand. Trade accounts receivable increased due to an increase in sales in the first nine months of 2007 which have not yet been paid. Cash used in operating activities was offset in part due to an increase in trade accounts payable of RMB35,402 thousand, which resulted from tight payment control and a decrease in bills receivable of RMB11,540 thousand.

Cash used in investing activities of RMB80,159 thousand during the first nine months of 2007 was mainly for settlement of amounts payable for acquisitions of subsidiaries that were consummated in 2006 and 2007 of RMB77,877 thousand and the purchases of fixed assets of RMB7,080 thousand. The cash used in investing activities was partly offset by the cash held by subsidiaries that were acquired of RMB5,797 thousand.

Net cash provided by financing activities was RMB621,972 thousand during the first nine 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.

Repayment of bank borrowing during the first nine months of 2007 was RMB22,386 thousand.

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 RMB7,180 thousand ($958 thousand), leaving RMB105,212 thousand ($14,042 thousand) in availability. This facility

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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 nine months ended September 30, 2007, we discounted bills receivable amounting to approximately RMB82,125 thousand ($10,961 thousand).

Acquisitions

On August 1, 2007, the Company entered into a stock purchase agreement dated August 1, 2007 with First King International Limited, Keen Awards, Hui Cheng and certain persons listed on Schedule I to the Agreement, to acquire all of the outstanding shares of Keen Awards and all of the business of Hui Cheng 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 Awards and Hui Cheng are the provision of design and engineering service for integrated display technology solutions.

On August 27, 2007, Comtech-Cayman entered into a Stock Purchase Agreement dated as of August 27, 2007, by and among Comtech-Cayman, Broadwell Group Ltd. (“Broadwell Group”), Broad Wise Holdings Limited (“BroadWise”) and Comtech Broadband. Prior to the transactions contemplated by the Agreement, Comtech-Cayman owned 55% of Comtech Broadband’s outstanding equity securities and Broadwise, a wholly owned subsidiary of Broadwell Group, owned 45% of Comtech Broadband’s outstanding equity securities. Pursuant to the Agreement, Comtech-Cayman purchased all of the outstanding equity securities on August 31, 2007, resulting in Comtech-Cayman directly and indirectly owning all of the issued and outstanding equity securities of Comtech Broadband. Consideration for the acquisition was $10,000,000 in cash and $5,000,000 in shares of the common stock of the Company.

Future liquidity needs

As of September 30, 2007, the Company had approximately RMB859,192 thousand ($114,669 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

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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 September 28, 2007, the exchange rate between RMB and U.S. dollar was $1 to RMB7.4928.

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.

We recognized a foreign currency translation adjustment of approximately RMB(12,153 million) ($(1,622 million)) for the quarter ended September 30, 2007 and RMB(25,477 million) ($(3,400 million)) for the nine months ended September 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 RMB7.2 million ($1.0 million) as of September 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 RMB0.07 million ($0.01 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.

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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

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.

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Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

(b) Exhibits

10.1	Stock Purchase Agreement dated August 27, 2007 (incorporated by reference to the Current Report on Form 8-K dated August 27, 2007)
10.2	Stock Purchase Agreement dated August 1, 2007 (incorporated by reference to the Current Report on Form 8-K dated August 1, 2007)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	COMTECH GROUP, INC.
November 9, 2007	By:	/s/ Jeffrey Kang
		Jeffrey Kang
		Chief Executive Officer and President (Principal Executive Officer)
November 9, 2007	By:	/s/ Hope Ni
		Hope Ni
		Chief Financial Officer (Principal Financial Officer)

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