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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006

-OR-



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from  to

Commission
file number 001-15775



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GLOBAL EPOINT, INC.

(Name of small business issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|NEVADA                                                         |  | 33-0423037                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer identification No.)

339 S. Cheryl Lane, City of Industry, California 91789

(Address of principal executive offices)

(909) 869-1688

(Issuers telephone number)



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Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve months, 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 shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No  x

As of August 7, 2006, there were 19,377,047 shares of Common Stock ($.03 par value) outstanding.

Transitional Small Business Disclosure Format. Yes ̈No  x



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##### Table of Contents

LOGO

GLOBAL EPOINT, INC.

QUARTERLY REPORT ON FORM 10-QSB

FOR THE PERIOD ENDED JUNE 30, 2006

TABLE OF CONTENTS



| |  |                                                                                                           |  |     
| |  | --------------------------------------------------------------------------------------------------------- |  | ----
| |  |                                                                                                           |  | Page
| |  | Part I. FINANCIAL INFORMATION                                                                             |  |     
| |  |                                                                                                          
| |  | Item 1. Interim Financial Statements (unaudited):                                                         |  |     
| |  |                                                                                                          
| |  | Condensed Consolidated Balance Sheet as of June 30, 2006                                                  |  | 1   
| |  |                                                                                                          
| |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005 |  | 2   
| |  |                                                                                                          
| |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005           |  | 3   
| |  |                                                                                                          
| |  | Condensed Consolidated Statement of Stockholders Equity for the Six Months Ended June 30, 2006           |  | 4   
| |  |                                                                                                          
| |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 5   
| |  |                                                                                                          
| |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 15  
| |  |                                                                                                          
| |  | Item 3. Controls and Procedures                                                                           |  | 27  
| |  |                                                                                                          
| |  | Part II. OTHER INFORMATION                                                                                |  |     
| |  |                                                                                                          
| |  | Item 6. Exhibits                                                                                          |  | 29  
| |  |                                                                                                          
| |  | SIGNATURES                                                                                                |  | 30  



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

AS OF JUNE 30, 2006



|                                                                                                                         |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | - | ------- | -
|(Thousands of dollars, except per share amounts)                                                                         |  |   |        
|ASSETS                                                                                                                   |  |   |         |  
|CURRENT ASSETS:                                                                                                          |  |   |         |  
|Cash and cash equivalents                                                                                                |  | $ | 3,867   |  
|Accounts receivable, net                                                                                                 |  |   | 5,122   |  
|Accounts receivable - related parties                                                                                    |  |   | 2,107   |  
|Inventories                                                                                                              |  |   | 6,186   |  
|Other current assets                                                                                                     |  |   | 1,095   |  
|                                                                                                                         |  |   |         |  
|Total current assets                                                                                                     |  |   | 18,377  |  
|                                                                                                                         |  |   |         |  
|Property, plant and equipment, net                                                                                       |  |   | 715     |  
|Card dispensing equipment and related parts                                                                              |  |   | 885     |  
|Goodwill                                                                                                                 |  |   | 8,104   |  
|Other intangibles                                                                                                        |  |   | 2,240   |  
|Deposits and other assets                                                                                                |  |   | 1,670   |  
|                                                                                                                         |  |   |         |  
|Total other assets                                                                                                       |  |   | 13,614  |  
|                                                                                                                         |  |   |         |  
|Total assets                                                                                                             |  | $ | 31,991  |  
|                                                                                                                         |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |   |         |  
|CURRENT LIABILITIES:                                                                                                     |  |   |         |  
|Accounts payable                                                                                                         |  | $ | 2,592   |  
|Accounts payable - related parties                                                                                       |  |   | 3,572   |  
|Accrued expenses                                                                                                         |  |   | 522     |  
|Customer deposits                                                                                                        |  |   | 112     |  
|Due to related parties                                                                                                   |  |   | 368     |  
|Due to stockholder                                                                                                       |  |   | 1,269   |  
|Loan payable                                                                                                             |  |   | 965     |  
|                                                                                                                         |  |   |         |  
|Total current liabilities                                                                                                |  |   | 9,400   |  
|                                                                                                                         |  |   |         |  
|NON-CURRENT LIABILITIES                                                                                                  |  |   | 1,938   |  
|                                                                                                                         |  |   |         |  
|Total liabilities                                                                                                        |  |   | 11,338  |  
|                                                                                                                         |  |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                    |  |   |         |  
|Preferred stock, no par value, 2,000,000 aggregate shares authorized                                                     |  |   |         |  
|Series C Preferred stock 1,250,004 shares issued, 594,770 shares outstanding aggregate liquidation preference $1,665,000 |  |   | 1,106   |  
|Series D Preferred stock 120,000 shares issued, 6,000 shares outstanding aggregate liquidation preference $300,000       |  |   | 198     |  
|Series E Preferred stock 127,977 shares issued, 127,977 shares outstanding aggregate liquidation preference $6,399,000   |  |   | 3,561   |  
|Common stock, $.03 par value, 50,000,000 shares authorized and 19,347,612 shares issued and outstanding                  |  |   | 580     |  
|Additional paid-in capital                                                                                               |  |   | 31,168  |  
|Accumulated deficit                                                                                                      |  |   | (15,960 | )
|                                                                                                                         |  |   |         |  
|Total stockholders equity                                                                                               |  |   | 20,653  |  
|                                                                                                                         |  |   |         |  
|Total liabilities and stockholders equity                                                                               |  | $ | 31,991  |  
|                                                                                                                         |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



1



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2006 AND 2005



|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|------------------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                 |  | For the three months ended |        |   | For the six months ended |  
|(Thousands of dollars, except per share amounts) |  | June 30,2006               |        |   | June 30,2005             |   |        | June 30,2006 |  |   | June 30,2005 |  
|Sales                                            |  | $                          | 3,767  |   |                          | $ | 3,585  |              |  | $ | 7,996        |   |  | $ | 8,007  |  
|Sales- related parties                           |  |                            | 4,451  |   |                          |   | 1,591  |              |  |   | 7,541        |   |  |   | 2,645  |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Total net sales                                  |  |                            | 8,218  |   |                          |   | 5,176  |              |  |   | 15,537       |   |  |   | 10,652 |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Cost of sales                                    |  |                            | 2,851  |   |                          |   | 2,868  |              |  |   | 6,416        |   |  |   | 6,180  |  
|Cost of sales- related parties                   |  |                            | 4,281  |   |                          |   | 1,501  |              |  |   | 7,233        |   |  |   | 2,500  |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Total cost of sales                              |  |                            | 7,132  |   |                          |   | 4,369  |              |  |   | 13,649       |   |  |   | 8,680  |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Gross profit                                     |  |                            | 1,086  |   |                          |   | 807    |              |  |   | 1,888        |   |  |   | 1,972  |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Operating expenses:                              |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Selling and marketing                            |  |                            | 712    |   |                          |   | 758    |              |  |   | 1,369        |   |  |   | 1,632  |  
|General and administrative                       |  |                            | 2,220  |   |                          |   | 1,386  |              |  |   | 4,027        |   |  |   | 2,953  |  
|Research and development                         |  |                            | 293    |   |                          |   | 403    |              |  |   | 589          |   |  |   | 681    |  
|Depreciation and amortization                    |  |                            | 113    |   |                          |   | 100    |              |  |   | 221          |   |  |   | 197    |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Total operating expenses                         |  |                            | 3,338  |   |                          |   | 2,647  |              |  |   | 6,206        |   |  |   | 5,463  |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Loss from operations                             |  |                            | (2,252 | ) |                          |   | (1,840 | )            |  |   | (4,318       | ) |  |   | (3,491 | )
|Other income (expense)                           |  |                            | 140    |   |                          |   | (2     | )            |  |   | 131          |   |  |   | (10    | )
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Net loss                                         |  |                            | (2,112 | ) |                          |   | (1,842 | )            |  |   | (4,187       | ) |  |   | (3,501 | )
|Preferred stock dividend                         |  |                            | (4,940 | ) |                          |   | (880   | )            |  |   | (5,076       | ) |  |   | (1,372 | )
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Net loss applicable to common stockholders       |  | $                          | (7,052 | ) |                          | $ | (2,722 | )            |  | $ | (9,263       | ) |  | $ | (4,873 | )
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Loss per share - basic                           |  | $                          | (0.43  | ) |                          | $ | (0.22  | )            |  | $ | (0.58        | ) |  | $ | (0.39  | )
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Loss per share - fully diluted                   |  | $                          | (0.43  | ) |                          | $ | (0.22  | )            |  | $ | (0.58        | ) |  | $ | (0.39  | )
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  
|Weighted average shares and share equivalents    |  |                            | 16,491 |   |                          |   | 12,478 |              |  |   | 15,925       |   |  |   | 12,357 |  
|                                                 |  |                            |        |   |                          |   |        |              |  |   |              |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

FOR THE SIX MONTHS ENDED
JUNE 30, 2006 and 2005



|                                                                                             |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|(Thousands of dollars)                                                                       |  | 2006 |        |   | 2005 |  
|CASH FLOWS (USED)/PROVIDED BY OPERATING ACTIVITIES:                                          |  |      |        |   |      |   |        |  
|Net loss                                                                                     |  | $    | (4,187 | ) |      | $ | (3,501 | )
|Adjustments to reconcile net loss to net cash flows (used)/provided by operating activities: |  |      |        |   |      |   |        |  
|Depreciation and amortization                                                                |  |      | 221    |   |      |   | 197    |  
|Provision for bad debts                                                                      |  |      | 312    |   |      |   | 62     |  
|Stock based compensation                                                                     |  |      | 51     |   |      |   |       |  
|Increase/(decrease) in cash from changes in:                                                 |  |      |        |   |      |   |        |  
|Accounts receivable                                                                          |  |      | (433   | ) |      |   | 470    |  
|Accounts receivable - related parties                                                        |  |      | 460    |   |      |   | (571   | )
|Inventory                                                                                    |  |      | (612   | ) |      |   | (390   | )
|Other current assets                                                                         |  |      | (265   | ) |      |   | 53     |  
|Accounts payable                                                                             |  |      | (804   | ) |      |   | (501   | )
|Accounts payable - related parties                                                           |  |      | 1,196  |   |      |   | 1,706  |  
|Accrued expenses                                                                             |  |      | (137   | ) |      |   | (114   | )
|Customer deposits                                                                            |  |      | 46     |   |      |   | (13    | )
|                                                                                             |  |      |        |   |      |   |        |  
|Net cash used by operating activities                                                        |  |      | (4,152 | ) |      |   | (2,602 | )
|                                                                                             |  |      |        |   |      |   |        |  
|CASH FLOWS PROVIDED/(USED) BY INVESTMENT ACTIVITIES:                                         |  |      |        |   |      |   |        |  
|Additions to property and equipment                                                          |  |      | (22    | ) |      |   | (104   | )
|Goodwill and other intangibles                                                               |  |      | (676   | ) |      |   | (68    | )
|Decrease in /(additions to) other assets                                                     |  |      | 409    |   |      |   | (1,010 | )
|                                                                                             |  |      |        |   |      |   |        |  
|Net cash used by investing activities                                                        |  |      | (289   | ) |      |   | (1,182 | )
|                                                                                             |  |      |        |   |      |   |        |  
|CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES:                                          |  |      |        |   |      |   |        |  
|Loan payable                                                                                 |  |      | 1,597  |   |      |   | 730    |  
|Net borrowings from related parties                                                          |  |      | (485   | ) |      |   | (940   | )
|Advances from stockholder                                                                    |  |      | 32     |   |      |   |       |  
|Proceeds from exercise of stock options                                                      |  |      | 731    |   |      |   | 29     |  
|Net proceeds from preferred stock offerings                                                  |  |      | 3,594  |   |      |   | 3,476  |  
|Net proceeds from the exercise of stock warrants                                             |  |      | 2,466  |   |      |   | 1,141  |  
|Preferred stock dividend payments                                                            |  |      | (295   | ) |      |   |       |  
|Preferred stock redemption                                                                   |  |      | (112   | ) |      |   |       |  
|                                                                                             |  |      |        |   |      |   |        |  
|Net cash provided by financing activities                                                    |  |      | 7,528  |   |      |   | 4,436  |  
|                                                                                             |  |      |        |   |      |   |        |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    |  |      | 3,087  |   |      |   | 652    |  
|CASH AND CASH EQUIVALENTS, beginning of period                                               |  |      | 780    |   |      |   | 937    |  
|                                                                                             |  |      |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, end of period                                                     |  | $    | 3,867  |   |      | $ | 1,589  |  
|                                                                                             |  |      |        |   |      |   |        |  
|SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:                      |  |      |        |   |      |   |        |  
|Beneficial conversion included in preferred stock dividend                                   |  | $    | 1,828  |   |      | $ | 1,372  |  
|                                                                                             |  |      |        |   |      |   |        |  
|Preferred stock dividend                                                                     |  | $    | 2,982  |   |      | $ |       |  
|                                                                                             |  |      |        |   |      |   |        |  
|Increase in preferred stock dividend payable                                                 |  | $    | 5      |   |      | $ |       |  
|                                                                                             |  |      |        |   |      |   |        |  
|Preferred stock reclassified to short term debt                                              |  | $    | 61     |   |      | $ |       |  
|                                                                                             |  |      |        |   |      |   |        |  
|Tops Digital Security, Inc. acquisition                                                      |  | $    | 2,003  |   |      | $ |       |  
|                                                                                             |  |      |        |   |      |   |        |  
|Compensation on consulting agreement                                                         |  | $    | 207    |   |      | $ |       |  
|                                                                                             |  |      |        |   |      |   |        |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(UNAUDITED)

FOR
THE SIX MONTHS ENDED JUNE 30, 2006



|                                                                           |  |                 |   |  |              |        |                           |        |        |                                        |   |     |                           |   |        |   |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------- | - |  | ------------ | ------ | ------------------------- | ------ | ------ | -------------------------------------- | - | --- | ------------------------- | - | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                           |  | Preferred Stock |   |  | Common Stock |        | AdditionalPaid in Capital |        |        | RetainedEarnings/(Accumulated Deficit) |   |     | TotalStockholders Equity |  
|(Thousands of dollars and shares)                                          |  | Shares          |   |  | Amount       |        |                           | Shares |        | Amount                                 |   |     |                          
|Balances- December 31, 2005                                                |  | 976             |   |  | $            | 5,638  |                           |        | 15,327 |                                        | $ | 460 |                           | $ | 21,778 |   |  | $ | (11,770 | ) |  | $ | 16,106 |  
|Common stock issued upon options exercise                                  |  |                |   |  |              |       |                           |        | 586    |                                        |   | 17  |                           |   | 714    |   |  |   |        |   |  |   | 731    |  
|Common stock and option based compensation                                 |  |                |   |  |              |       |                           |        | 100    |                                        |   | 3   |                           |   | 248    |   |  |   |        |   |  |   | 251    |  
|Common stock issued upon warrants exercise                                 |  |                |   |  |              |       |                           |        | 1,096  |                                        |   | 33  |                           |   | 699    |   |  |   |        |   |  |   | 732    |  
|Common stock issued for acquisitions                                       |  |                |   |  |              |       |                           |        | 603    |                                        |   | 18  |                           |   | 1,985  |   |  |   |        |   |  |   | 2,003  |  
|Series E Preferred stock issued May 25, 2006, net of $108 in related costs |  | 128             |   |  |              | 3,561  |                           |        |       |                                        |   |    |                           |   |       |   |  |   | 1,828   |   |  |   | 5,389  |  
|Warrants Issued with Series E                                              |  |                |   |  |              |       |                           |        |       |                                        |   |    |                           |   | 1,114  |   |  |   | 572     |   |  |   | 1,686  |  
|Preferred Stock offering Issued upon conversion of warrants                |  |                |   |  |              |       |                           |        |       |                                        |   |    |                           |   | 1,734  |   |  |   | 1,855   |   |  |   | 3,589  |  
|Preferred stock conversion                                                 |  | (375            | ) |  |              | (4,273 | )                         |        | 1,591  |                                        |   | 48  |                           |   | 3,163  |   |  |   | 552     |   |  |   | (510   | )
|Preferred stock reclassified to short term debt                            |  |                |   |  |              | (61    | )                         |        |       |                                        |   |    |                           |   |       |   |  |   |        |   |  |   | (61    | )
|Net loss from operations                                                   |  |                |   |  |              |       |                           |        |       |                                        |   |    |                           |   |       |   |  |   | (4,187  | ) |  |   | (4,187 | )
|Preferred stock dividend                                                   |  |                |   |  |              |       |                           |        | 44     |                                        |   | 1   |                           |   | (267   | ) |  |   | (4,810  | ) |  |   | (5,076 | )
|                                                                           |  |                 |   |  |              |        |                           |        |        |                                        |   |     |                           |   |        |   |  |   |         |   |  |   |        |  
|Balances- June 30, 2006                                                    |  | 729             |   |  | $            | 4,865  |                           |        | 19,347 |                                        | $ | 580 |                           | $ | 31,168 |   |  | $ | (15,960 | ) |  | $ | 20,653 |  
|                                                                           |  |                 |   |  |              |        |                           |        |        |                                        |   |     |                           |   |        |   |  |   |         |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2006

1. Basis of presentation

The accounting and
reporting policies of Global ePoint, Inc. (Global, or Global ePoint or the Company) conform to accounting principles generally accepted in the United States of America. The condensed consolidated financial
statements as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 are unaudited and do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations
and cash flows. The interim financial statements include all adjustments, consisting only of normal recurring accruals, which in the opinion of management are necessary in order to make the condensed consolidated financial statements not misleading.
These condensed consolidated financial statements should be read in conjunction with the Companys December 31, 2005 audited financial statements, which are included in the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2005. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

2. Summary of significant accounting policies

Nature of business Global ePoint, Inc. was incorporated under the laws of the state of Nevada in March 1990 and is headquartered in the City of Industry, California. The primary areas of our business are operated from
three divisions: our contract manufacturing division, aviation division and our digital technology division. Our contract manufacturing division manufactures customized computing systems for industrial, business and consumer markets, and has the
capability to produce other specialized, custom-manufactured electronic products and systems. Our aviation division provides digital technology and other electrical applications to the airline industry. Our digital technology division designs and
markets digital video technology primarily for surveillance systems.

Principles of consolidation The accompanying
consolidated financial statements include 100% of the accounts of the Company and its wholly-owned subsidiaries, McDigit, Inc., which was incorporated under the laws of the state of California in November 2002, Best Logic LLC (Best
Logic), which was organized in California in November 2000, Global AirWorks, Inc., which was incorporated under the laws of the state of California in May 2003, Tops Digital Security, LLC which was organized in Nevada in April 2006, and Global
Telephony, Inc., which was incorporated under the laws of Nevada in 2001, and are collectively referred to as the Company in these condensed consolidated financial statements. Some of the related parties discussed in Note 7 may be
considered variable interest entities in accordance with FIN 46R Consolidation of Variable Interest Entities, however, the Company is not the primary beneficiary of such entities. Therefore, the related party entities are not included in
the consolidated group. All significant inter-company balances and transactions have been eliminated.

Accounting for stock
options In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment which addresses the accounting for employee stock options. SFAS
No. 123R requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. That cost will be recognized over
the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period).

Effective January 1, 2006 the Company adopted the fair value recognition provisions of SFAS 123R using the modified-prospective transition method. Under the modified-prospective transition method prior periods of
the Companys financial statements are not restated for comparison purposes. In addition, the measurement, recognition and attribution provisions of SFAS No. 123R apply to new grants and grants outstanding on the adoption date. Estimated
compensation expense for outstanding grants at the adoption date will be recognized over the remaining vesting period using the compensation expense calculated for the pro forma disclosure purposes under SFAS 123, Accounting for Stock-Based
Compensation. The Company recorded expenses for stock based compensation of $22 thousand and $44 thousandfor the three and six months ended June 30, 2006, respectively.

Prior to the adoption of SFAS No. 123(R), the Company elected to follow Accounting Principles Board Opinion No. (APB) 25, Accounting for Stock
Issued to Employees and related interpretations in accounting for its employee stock options. No stock-based employee compensation cost for stock options is reflected in net income prior to 2006 as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant.



5



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##### Table of Contents

The following table illustrates the pro forma effect on net income and earnings per share if the fair
value method had been applied to all outstanding and unvested awards for the three and six months ended June 30, 2005:



|                                                                                                     |  |                                        |        |   |                                      |   |        |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ------------------------------------ | - | ------ | -
|                                                                                                     |  | For the three months endedJune 30 2005 |        |   | For the six months endedJune 30 2005 |  
|As reported, net loss attributable to common stockholders                                            |  | $                                      | (2,722 | ) |                                      | $ | (4,873 | )
|Stock-based employee compensation determined under the fair value method, net of related tax effects |  |                                        |       |   |                                      |   |       |  
|                                                                                                     |  |                                        |        |   |                                      |   |        |  
|Pro forma                                                                                            |  | $                                      | (2,722 | ) |                                      | $ | (4,873 | )
|                                                                                                     |  |                                        |        |   |                                      |   |        |  
|Loss per common share, basic and fully diluted:                                                      |  |                                        |        |   |                                      |   |        |  
|As reported                                                                                          |  | $                                      | (0.22  | ) |                                      | $ | (0.39  | )
|Pro forma                                                                                            |  | $                                      | (0.22  | ) |                                      | $ | (0.39  | )

Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings
Per Share requires presentation of basic earnings per share and dilutive earnings per share. The computation of basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of
outstanding common shares during the period. Diluted earnings per share gives the effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on losses. Accordingly shares underlying options, warrants, and preferred stock conversions, aggregating approximately 9.8 million shares, have not been included as they
are anti-dilutive.

The computations for basic and fully diluted loss per share are as follows (in thousands, except per share amounts):



|                                          |  |                 |        |   |                     |        |                 |   |       |  
|----------------------------------------- |  | --------------- | ------ | - | ------------------- | ------ | --------------- | - | ----- | -
|                                          |  | Loss(Numerator) |        |   | Shares(Denominator) |        | Per-shareAmount |  
|For the three months ended June 30, 2006: |  |                 |        |   |                     |        |                 |   |       |  
|Basic and fully diluted loss per share    |  |                 |        |   |                     |        |                 |   |       |  
|Loss available to common stockholders     |  | $               | (7,052 | ) |                     | 16,491 |                 | $ | (0.43 | )
|For the three months ended June 30, 2005: |  |                 |        |   |                     |        |                 |   |       |  
|Basic and fully diluted loss per share    |  |                 |        |   |                     |        |                 |   |       |  
|Loss applicable to common stockholders    |  | $               | (2,722 | ) |                     | 12,478 |                 | $ | (0.22 | )
|For the six months ended June 30, 2006:   |  |                 |        |   |                     |        |                 |   |       |  
|Basic and fully diluted loss per share    |  |                 |        |   |                     |        |                 |   |       |  
|Loss available to common stockholders     |  | $               | (9,263 | ) |                     | 15,925 |                 | $ | (0.58 | )
|For the six months ended June 30, 2005:   |  |                 |        |   |                     |        |                 |   |       |  
|Basic and fully diluted income per share  |  |                 |        |   |                     |        |                 |   |       |  
|Loss applicable to common stockholders    |  | $               | (4,873 | ) |                     | 12,357 |                 | $ | (0.39 | )



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##### Table of Contents

3. Inventories

Inventories consisted of the following as of June 30, 2006 (in thousands):



|                                                                  |  |   |      
|----------------------------------------------------------------- |  | - | -----
|Computer component parts                                          |  | $ | 2,082
|Video and data recording component parts                          |  |   | 2,589
|Cockpit door surveillance system and wire harness component parts |  |   | 1,515
|                                                                  |  |   |      
|Total                                                             |  | $ | 6,186
|                                                                  |  |   |      

4. Property and equipment

Property and equipment consisted of the following as of June 30, 2006 (in thousands):



|                                |  |   |       |  
|------------------------------- |  | - | ----- | -
|Furniture and equipment         |  | $ | 456   |  
|Computer equipment and software |  |   | 363   |  
|Building improvements           |  |   | 410   |  
|Tooling and demo units          |  |   | 34    |  
|Vehicles                        |  |   | 38    |  
|                                |  |   |       |  
|Totals                          |  |   | 1,301 |  
|Less accumulated depreciation   |  |   | (586  | )
|                                |  |   |       |  
|Property and equipment, net     |  | $ | 715   |  
|                                |  |   |       |  

5. Goodwill and Intangible Assets

The Company has a significant amount of goodwill and intangible assets on its balance sheet related to acquisitions. At June 30, 2006 the net amount
of $10.3 million of goodwill and intangible assets represented 32% of total assets. Goodwill represents the excess of costs over fair value of assets of businesses acquired. We adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

The Company has accumulated a total
of $8.1 million of goodwill; $3.2 million resulted from the reverse acquisition involving McDigit, Inc., Best Logic LLC, and the Company (the Merger), $2.8 million from the acquisition of assets of Airworks, in April 2004, $300,000 from
the acquisition of the assets of Perpetual, in April 2004 and effective April 2006, $1.8 million from the acquisition of the assets of Tops Digital Security which may be adjusted upon final allocation of the purchase price. Of the total goodwill
$3.8 million has been allocated to the digital technology division, $2.8 million to the aviation division, and $1.5 million to the contract manufacturing division. The goodwill arising from the Merger and the foregoing acquisitions, excluding Tops,
was subject to the annual impairment test in August 2005. The goodwill arising from Airworks and Perpetual acquisitions was subject to the annual impairment test as of June 30, 2006. Application of the discounted cash flow methodology to
management assumptions did not identify any impairment to the goodwill. No impairment to goodwill was identified; therefore, no loss was charged to operations. The Company continually monitors its operations for any potential indicators of
impairment of goodwill and intangible assets and has determined that no such indicators have arisen to date. Any impairment loss could have a material adverse impact on the Companys financial condition and results of operations.

6. Business concentrations

Sales and purchases For the three
months ended June 30, 2006 and 2005, two and three customers accounted for 60% and 65% of the Companys sales, respectively. For the six months ended June 30, 2006 and 2005 two and three customers accounted for 60% and 66% of the
Companys sales, respectively, and 25% of the accounts receivable as of June 30, 2006. For the three months ended June 30, 2006 and 2005, two and three vendors, respectively, accounted for 72% and 53% of the Companys purchases,
respectively. For the six months ended June 30, 2006 and 2005, two and three vendors, respectively, accounted for 62% and 43% of the Companys purchases, respectively, and 58% of the accounts payable as of June 30, 2006. A substantial
amount of the above sales and purchase transactions are conducted with related parties, as discussed in Note 7.



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##### Table of Contents

7. Related party transactions

Rent agreement Mr. John Pan, the Companys Chairman, Chief Financial Officer, President and principal stockholder, leases a facility to the Company and to Avatar Technologies, Inc. (Avatar), a Related Party (as
defined below). Facility rental costs, including additional square footage to accommodate more offices for administrative staff, equipment for production and assembly, and warehouse space, totaled $108,000 and $107,000 for the three months ended
June 30, 2006 and 2005, respectively, and $216,000 and $214,000 for the six months ended June 30, 2006, respectively. Rental costs for manufacturing and assembly equipment were approximately $21,000 for the three months ended June 30,
2006 and 2005, and $48,000 for the six months ended June 30, 2006 and 2005.

Loans Payable In June 2004, the Company borrowed $1,000,000
from Mr. John Pan, the Companys Chairman, Chief Financial Officer, President, and principal stockholder. Interest accrues on the unpaid principal balance of this loan at a rate equal to the prime rate at Bank of the West, plus 0.25%. The
aggregate interest rate was 8.25% as of June 30, 2006. The Company is required to accrue interest payments each month until the principal balance is paid in full, which must occur no later than December 15, 2006. Additionally,
Mr. Pan, has other loans totaling $145,000 to the Company. The loans are unsecured and, currently, payable on demand. However, the Company intends to replace these loans with convertible promissory notes, the terms of which will be subject to
Board approval.

Other arrangements The Company had various sales and purchase transactions with companies that are owned or controlled by the
Companys Chairman, Chief Financial Officer, President and principal stockholder, Mr. John Pan (Related Parties). There can be no assurances that these arrangements will continue given that the Related Parties are not obligated
to continue dealing with the Company. Substantially all of our related party transactions are through our contract manufacturing division. One of those transactions, a subcontracted purchase order, allowed the Company to manufacture computers for
distribution into Latin America through one of the Related Parties. Another ongoing transaction allows the Company to use Related Parties to globally source computer components for the Companys manufacturing business. The Related Parties can
generally purchase components in greater quantity than the Company can on its own and therefore, can provide the Company with more favorable pricing due to volume discounts.

The outstanding balances due from and to Related Parties as of June 30, 2006 were as follows:



|                                                   |  |                   |      
|-------------------------------------------------- |  | ----------------- | -----
|(Thousands of dollars)                             |  | As ofJune 30,2006
|Balances due from Related Parties were as follows: |  |                   |      
|(B) (100% owned by CFO/Chairman)                   |  | $                 | 994  
|(C) (100% owned by CFO/Chairman)                   |  |                   | 35   
|(D) (95% owned by CFO/Chairman)                    |  |                   | 1,078
|                                                   |  |                   |      
|Total                                              |  | $                 | 2,107
|                                                   |  |                   |      
|Balances due to Related Parties were as follows:   |  |                   |      
|(B) (100% owned by CFO/Chairman)                   |  | $                 | 558  
|(C) (100% owned by CFO/Chairman)                   |  |                   | 1    
|(D) (95% owned by CFO/Chairman)                    |  |                   | 3,381
|                                                   |  |                   |      
|Total                                              |  | $                 | 3,940
|                                                   |  |                   |      



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##### Table of Contents

|                                                        |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|------------------------------------------------------- |  | ---------------------------------- | ----- | -------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                                        |  | For the three months endedJune 30, |       | For the six months endedJune 30,
|(Thousands of dollars)                                  |  | 2006                               |       | 2005                             |   | 2006  |  | 2005
|Product purchases from Related Parties were as follows: |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|(B) (100% owned by CFO/Chairman)                        |  | $                                  | 3,031 |                                  | $ | 754   |  | $    | 5,197 |  | $ | 1,245
|(C) (100% owned by CFO/Chairman)                        |  |                                    |      |                                  |   |      |  |      |      |  |   |     
|(D) (95% owned by CFO/Chairman)                         |  |                                    | 1,094 |                                  |   | 839   |  |      | 2,072 |  |   | 1,283
|                                                        |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|Total                                                   |  | $                                  | 4,125 |                                  | $ | 1,593 |  | $    | 7,269 |  | $ | 2,528
|                                                        |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|Product sales to Related Parties were as follows:       |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|(B) (100% owned by CFO/Chairman)                        |  | $                                  | 4,053 |                                  | $ | 1,591 |  | $    | 7,143 |  | $ | 2,645
|(C) (100% owned by CFO/Chairman)                        |  |                                    |      |                                  |   |      |  |      |      |  |   |     
|(D) (95% owned by CFO/Chairman)                         |  |                                    | 398   |                                  |   |      |  |      | 398   |  |   |     
|                                                        |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|Total                                                   |  | $                                  | 4,451 |                                  | $ | 1,591 |  | $    | 7,541 |  | $ | 2,645
|                                                        |  |                                    |       |                                  |   |       |  |      |       |  |   |      

8. Pending and Completed Acquisitions

On May 27, 2005, the Company entered into a non-binding letter of intent to acquire Astrophysics, Inc. (Astrophysics), a leading designer
and manufacturer of X-ray scanning security systems. Pursuant to the letter of intent, the Company proposed to acquire all of the assets, subject to all of the liabilities, of Astrophysics in exchange for $10 million of cash and issuance of a
controlling block of the Companys common stock. Upon the execution of the letter of intent, the Company paid Astrophysics a non-refundable deposit of $500,000 and loaned Astrophysics $500,000. The letter of intent expired on June 30,
2005. The loan to Astrophysics has matured and in February 2006 the principal balance was returned to the Company. The non-refundable deposit is included in other assets of the accompanying consolidated balance sheet. Notwithstanding the termination
of the letter of intent, the parties continue to engage in discussions in the hope of reaching a definitive agreement for the acquisition. At this time, there can be no assurance the parties will enter into another letter of intent or reach a
definitive agreement concerning the Companys acquisition of Astrophysics.

On March 31, 2006, the Company entered into an
Agreement and Plan of Reorganization (the Purchase Agreement) with Tops Digital Security, Inc. (Tops) a privately held total solutions provider of large enterprise video surveillance systems that are designed primarily for
high quality video capture and central monitoring security operations in the high-end commercial, industrial, and government electronic security markets. Pursuant to the Purchase Agreement the Company acquired substantially all of the assets and
certain liabilities of Tops solely in exchange for shares of its common stock. The shares of common stock, valued at $4.00 per share, comprising the purchase price are issuable in two installments. The first



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##### Table of Contents

installment of 603,421 shares was issued at the closing date. The second installment of up to 375,000 shares is based on an earnout formula and is issuable
on the 15 month anniversary of the closing of the acquisition, which will be July 1, 2007. The number of shares issuable pursuant to the Purchase Agreement is subject to adjustment based on (i) the amount of liabilities assumed by the
Company, (ii) the amount by which the net income generated by the Tops assets for the first 12 months following the closing date is less than $2,500,000, and (iii) the amount by which the volume-weighted average trading price of the
Companys common stock exceeds $4.00 per share for the 10 trading days preceding the 15 month anniversary of the closing date

The
following table summarizes the estimated fair values of the assets acquired at the date of acquisition. The fair value of the Tops acquisition is $2.1 million as detailed in the table below. The fair value is derived based on 603,421 common shares
issued to close the transaction at a market price on March 31, 2006 of $3.32 per share plus $55,000 of acquisition costs. Global ePoint is in the process of obtaining valuations of certain assets and accordingly; the allocation of the purchase
price, particularly as it relates to goodwill and other identifiable intangible assets is subject to refinement.



|                          |  |      |      
|------------------------- |  | ---- | -----
|                          |  | Tops
|Current assets            |  | $    | 510  
|Property and equipment    |  |      | 72   
|Goodwill                  |  |      | 1,776
|                          |  |      |      
|Total assets acquired     |  |      | 2,358
|                          |  |      |      
|Current liabilities       |  |      | 300  
|Long term debt            |  |      |     
|                          |  |      |      
|Total liabilities assumed |  |      | 300  
|                          |  |      |      
|Net assets acquired       |  | $    | 2,058
|                          |  |      |      

9. Segment reporting

The Company operates in three business segments; marketing, developing and distributing advanced digital technology products related to digital video, audio and data transmission and recording products (digital
technology), flight support business including aircraft electronics and communications systems (aviation) and the assembly and distribution of computer systems, digital video recorders and computer related components (contract manufacturing). The
Corporate category primarily relates to activities associated with income and expense of non-core continuing business of the pre-merged public entity. The Company evaluates segment performance based on income from operations and total assets. All
inter-company transactions between segments have been eliminated. Information with respect to the Companys operating (loss) income by segment is as follows:

For the three months ended June 30, 2006



|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | -------- | - | ------ | --------------------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|($ in thousands)                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |      
|                                 |  | DigitalTechnology |        |   | Aviation |   |        | ContractManufacturing |  |   | Corporate |   |  | Total |      
|Net sales                        |  | $                 | 420    |   |          | $ | 1,620  |                       |  | $ | 6,178     |   |  | $     |      |   |  | $ | 8,218  |  
|Cost of sales                    |  |                   | 238    |   |          |   | 1,243  |                       |  |   | 5,651     |   |  |       |      |   |  |   | 7,132  |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Gross profit                     |  |                   | 182    |   |          |   | 377    |                       |  |   | 527       |   |  |       |      |   |  |   | 1,086  |  
|Operating expenses               |  |                   | 1,230  |   |          |   | 703    |                       |  |   | 603       |   |  |       | 802   |   |  |   | 3,338  |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Income (loss) from operations    |  |                   | (1,048 | ) |          |   | (326   | )                     |  |   | (76       | ) |  |       | (802  | ) |  |   | (2,252 | )
|Other income (expense)           |  |                   | (14    | ) |          |   |       |                       |  |   | (26       | ) |  |       | 180   |   |  |   | 140    |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Net income/(loss)                |  | $                 | (1,062 | ) |          | $ | (326   | )                     |  | $ | (102      | ) |  | $     | (622  | ) |  | $ | (2,112 | )
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Total assets as of June 30, 2006 |  | $                 | 10,729 |   |          | $ | 10,179 |                       |  | $ | 5,618     |   |  | $     | 5,465 |   |  | $ | 31,991 |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  



10



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For the three months ended June 30, 2005



|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|-------------------------------- |  | ----------------- | ----- | - | -------- | - | ----- | --------------------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|                                 |  | DigitalTechnology |       |   | Aviation |   |       | ContractManufacturing |  |   | Corporate |   |  | Total |      
|Net sales                        |  | $                 | 372   |   |          | $ | 344   |                       |  | $ | 4,460     |   |  | $     |      |   |  | $ | 5,176  |  
|Cost of sales                    |  |                   | 251   |   |          |   | 302   |                       |  |   | 3,816     |   |  |       |      |   |  |   | 4,369  |  
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Gross profit                     |  |                   | 121   |   |          |   | 42    |                       |  |   | 644       |   |  |       |      |   |  |   | 807    |  
|Operating expenses               |  |                   | 956   |   |          |   | 518   |                       |  |   | 697       |   |  |       | 476   |   |  |   | 2,647  |  
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Income (loss) from operations    |  |                   | (835  | ) |          |   | (476  | )                     |  |   | (53       | ) |  |       | (476  | ) |  |   | (1,840 | )
|Other income (expense)           |  |                   | 11    |   |          |   |      |                       |  |   | (13       | ) |  |       |      |   |  |   | (2     | )
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Net income/(loss)                |  | $                 | (824  | ) |          | $ | (476  | )                     |  | $ | (66       | ) |  | $     | (476  | ) |  | $ | (1,842 | )
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Total assets as of June 30, 2005 |  | $                 | 6,131 |   |          | $ | 4,467 |                       |  | $ | 9,063     |   |  | $     | 5,605 |   |  | $ | 25,266 |  
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  

For the six months ended June 30, 2006



|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | -------- | - | ------ | --------------------- |  | - | --------- | - |  | ----- | ------ | - |  | - | ------ | -
|($ in thousands)                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       
|                                 |  | DigitalTechnology |        |   | Aviation |   |        | ContractManufacturing |  |   | Corporate |   |  | Total |       
|Net sales                        |  | $                 | 625    |   |          | $ | 3,322  |                       |  | $ | 11,590    |   |  | $     |       |   |  | $ | 15,537 |  
|Cost of sales                    |  |                   | 419    |   |          |   | 2,760  |                       |  |   | 10,470    |   |  |       |       |   |  |   | 13,649 |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Gross profit                     |  |                   | 206    |   |          |   | 562    |                       |  |   | 1,120     |   |  |       |       |   |  |   | 1,888  |  
|Operating expenses               |  |                   | 2,036  |   |          |   | 1,422  |                       |  |   | 1,265     |   |  |       | 1,483  |   |  |   | 6,206  |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Income (loss) from operations    |  |                   | (1,830 | ) |          |   | (860   | )                     |  |   | (145      | ) |  |       | (1,483 | ) |  |   | (4,318 | )
|Other income (expense)           |  |                   | (29    | ) |          |   |       |                       |  |   | (26       | ) |  |       | 186    |   |  |   | 131    |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Net income/(loss)                |  | $                 | (1,859 | ) |          | $ | (860   | )                     |  | $ | (171      | ) |  | $     | (1,297 | ) |  | $ | (4,187 | )
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Total assets as of June 30, 2006 |  | $                 | 10,729 |   |          | $ | 10,179 |                       |  | $ | 5,618     |   |  | $     | 5,465  |   |  | $ | 31,991 |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  

For the six months ended June 30, 2005



|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | -------- | - | ----- | --------------------- |  | - | --------- | - |  | ----- | ------ | - |  | - | ------ | -
|($ in thousands)                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |       
|                                 |  | DigitalTechnology |        |   | Aviation |   |       | ContractManufacturing |  |   | Corporate |   |  | Total |       
|Net sales                        |  | $                 | 742    |   |          | $ | 786   |                       |  | $ | 9,124     |   |  | $     |       |   |  | $ | 10,652 |  
|Cost of sales                    |  |                   | 494    |   |          |   | 610   |                       |  |   | 7,576     |   |  |       |       |   |  |   | 8,680  |  
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Gross profit                     |  |                   | 248    |   |          |   | 176   |                       |  |   | 1,548     |   |  |       |       |   |  |   | 1,972  |  
|Operating expenses               |  |                   | 1,874  |   |          |   | 1,073 |                       |  |   | 1,461     |   |  |       | 1,055  |   |  |   | 5,463  |  
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Income (loss) from operations    |  |                   | (1,626 | ) |          |   | (897  | )                     |  |   | 87        |   |  |       | (1,055 | ) |  |   | (3,491 | )
|Other income (expense)           |  |                   | 3      |   |          |   |      |                       |  |   | (13       | ) |  |       |       |   |  |   | (10    | )
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Net income/(loss)                |  | $                 | (1,623 | ) |          | $ | (897  | )                     |  | $ | 74        |   |  | $     | (1,055 | ) |  | $ | (3,501 | )
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Total assets as of June 30, 2005 |  | $                 | 6,131  |   |          | $ | 4,467 |                       |  | $ | 9,063     |   |  | $     | 5,605  |   |  | $ | 25,266 |  
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  



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10. Preferred Stock and Common Stock Warrants

Series C Preferred Stock

On June 8, 2005, the Company completed the private placement sale to
ten institutional investors of units consisting of shares of Series C Convertible Preferred Stock and warrants to purchase shares of common stock for aggregate gross proceeds of $3.5 million. Related issuance costs of approximately $237,000 resulted
in net proceeds of approximately $3.3 million. Pursuant to the Securities Purchase Agreement, the Company collectively issued to the investors 1,250,004 shares of Series C preferred stock at a price of $2.80 per share. The Series C preferred stock
is convertible into shares of common stock at $2.80 per share. The Company also granted to the investors warrants to purchase 625,004 shares of common stock over a three year period at an exercise price of $3.50 per share. The $3.50 per share
purchase price, the conversion ratio of the Series C preferred stock, and the exercise price of the warrants are not subject to adjustment, except for standard anti-dilution relating to stock splits, combinations and the like. In accordance with
applicable accounting guidelines, management allocated the net proceeds based on the relative fair values of the equity instruments. Management used the Black-Scholes model to compute the fair value of the warrants assuming 85.6% volatility and
3.60% risk free rate which resulted in an $869,000 fair value for the 687,504 warrants issued. The warrants have an exercise price $3.50 per share. The remaining $2.4 million was allocated to the Series C preferred stock resulting in an effective
conversion price for the embedded options contained within the Series C preferred stock of $2.10 per share. The effective conversion price resulted in the embedded options being in-the-money at issuance creating a $575,000 beneficial conversion to
the holders of the Series C preferred stock. The beneficial conversion was treated as a non-cash preferred stock dividend.

Holders of the
Series C preferred stock are entitled to receive dividends in the amount of six percent (6%) per annum, payable semiannually starting December 31, 2005. The dividends may be paid in cash or, at the Companys option, in shares of its
common stock. The Company was required to redeem the Series C preferred stock on a monthly basis beginning in March 2006, at a rate of 1/30th of the outstanding shares per month. The redemption price is equal to the purchase price of the shares
being redeemed, plus all related accrued and unpaid dividends and is payable in cash or, at the Companys option, shares of its common stock. In addition, the Company may choose to redeem the Series C preferred stock at any time at a price
equal to 105% of the purchase price, plus all related accrued and unpaid dividends. In accordance with SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity the Series C
preferred stock subject to mandatory redemption has been classified as short term debt as of June 30, 2006. Additionally, in accordance with SFAS No. 150, $61 thousand of preferred shares subject to mandatory redemption were reclassified
as liabilities and are included in other payables on the accompanying consolidated balance sheet. As of June 30, 2006, 655,234 shares of the Series C preferred stock have been converted into common stock or redeemed. H.C. Wainwright &
Co., a NASD registered broker dealer, acted as placement agent in connection with the private placement. The Company agreed to pay H.C. Wainwright placement agent fees consisting of $175,000 in cash, plus warrants to purchase up to 62,500 shares of
its common stock over a three year period at an exercise price of $3.50 per share.

Series D Preferred Stock

On November 7, 2005 the Company completed the sale of its Series D convertible preferred stock and warrants to purchase common stock to five
institutional investors for gross proceeds to the Company of $6 million. Related issuance costs of approximately $258,000 resulted in net proceeds of approximately $5.7 million. The shares of Series D Preferred Stock are convertible into shares of
the Companys common stock at the rate of $4.16 per share. The Company also issued warrants (A warrants) to purchase 721,157 shares of the Companys common stock at $4.33 per share. Neither the $4.16 per share conversion price
in the Series D Preferred Stock nor the exercise price of the warrants are subject to adjustment, except for standard anti-dilution relating stock splits, combinations and the like. Holders of the Series D Preferred Stock are



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entitled to receive dividends in the amount of six percent (6%) per year. The dividends may be paid in cash or, at the Companys option, in shares
of its common stock. In addition, the Company is required to begin redeeming the Series D Preferred Stock in August 2006. The redemption price may be paid in cash, or, at the Companys option, in shares of its common stock, and will be equal to
the purchase price of the shares being redeemed, plus all related accrued and unpaid dividends. In accordance with SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity the
Series D preferred stock has been classified as equity. Additionally, in accordance with SFAS No. 150, those preferred shares subject to mandatory redemption, beginning August 2006, will be reclassified as liabilities. The Company also granted
the investors the right to purchase, during the 90 business days following the registration of the common shares underlying the Series D Preferred Stock, 1,442,311 additional shares of common stock (B warrants) at the purchase price of
$5.25 per share along with warrants (C warrants) to purchase 721,157 shares of the Companys common stock at $6.00 per share. The C warrants were only exercisable upon the exercise of the B warrants. The B and C warrants have
expired unexercised. The Company has the right to redeem the Series D Preferred Stock at a price equal to 105% of the purchase price of the shares of Series D Preferred Stock. Management used the Black-Scholes model to compute the fair value of the
warrants assuming 94.5% volatility and 4.46% risk free rate which resulted in an $1.8 million fair value for the warrants and options issued. No value was assigned to the C warrants given the contingent nature of such warrants. The remaining $3.9
million was allocated to the Series D preferred stock resulting in an effective conversion price for the embedded options contained within the Series D preferred stock of $2.85 per share. The effective conversion price resulted in the embedded
options being in-the-money at issuance creating a $692,000 beneficial conversion to the holders of the Series D preferred stock. The beneficial conversion was treated as a non-cash preferred stock dividend.

Holders of the Series D preferred stock are entitled to receive dividends in the amount of six percent (6%) per annum, payable semiannually starting
December 31, 2005. The dividends may be paid in cash or, at the Companys option, in shares of its common stock. The Company must redeem the Series D preferred stock, on a quarterly basis, beginning in August 2006, at a rate of 8.333% of
the preferred shares originally issued per quarter. The redemption price is equal to the purchase price of the shares being redeemed, plus all related accrued and unpaid dividends and is payable in cash or, at the Companys option, shares of
its common stock. In addition, the Company may choose to redeem the Series D preferred stock at any time at a price equal to 105% of the purchase price, plus all related accrued and unpaid dividends. As of June 30, 2006 114,000 of the 120,000
shares of Series D preferred stock have been converted to common stock. The rights of the holders of the Series D preferred stock are pari passu to the rights of the holders of the Series C preferred stock. H.C. Wainwright & Co., a NASD
registered broker dealer, acted as placement agent in connection with the private placement. The Company agreed to pay H.C. Wainwright placement agent fees consisting of $150,000 in cash, plus warrants to purchase up to 36,058 shares of our common
stock over a three year period at an exercise price of $4.33 per share.

Series E Preferred Stock

On May 25, 2006, the Company completed the sale of Series E convertible preferred stock and warrants to purchase common stock to five institutional
investors for gross proceeds to the Company of $3.8 million. Related issuance costs of approximately $188,000 resulted in net proceeds of approximately $3.6 million. At the same time, the investors agreed to convert into shares of the Companys
common stock all 114,000 shares of the Series D preferred stock held by them at the conversion price of $4.16 per share. The Series E preferred stock has an initial conversion price of $2.76 per share and is initially convertible into a total of
2,318,424 shares of the Companys common stock. In connection with the sale of the Series E preferred stock, the Company issued warrants to purchase an aggregate of 1,159,208 shares of common stock at an exercise price of $3.58 per share. In
addition to standard anti-dilution adjustments for stock splits, combinations and the like, the exercise prices of the warrants and the conversion price of the Series E preferred stock are subject to adjustment if the Company issues shares of common
stock, or securities convertible into shares of common stock, at an effective price less than $3.58 or $2.76, respectively. The Company has the right to redeem the Series E preferred stock at a price equal to 105% of the stated value of the shares
of Series E preferred stock. Holders of the Series E preferred stock are entitled to receive dividends payable semi-annually, beginning June 30, 2006. The dividends are calculated on a floating rate of London Interbank Offer Rate
(Libor) plus 3.00% such rate to be set two business days prior to the beginning of the applicable dividend period. The initial dividend rate was established at 8.0813%. The dividends may be paid in cash or, at the Companys option,
in shares of its common stock. In addition, the Company is required to begin redeeming the Series E preferred stock on a quarterly basis in September 2006 at a rate of 8.333% of the preferred shares originally issued per quarter. The redemption
price may be paid in cash, or, at the Companys option, in shares of its common stock, and will be equal to the purchase price of the shares being redeemed, plus all related accrued and unpaid dividends. The Company is subject to 1% liquidated
damages to the extent the registration statement for the underlying shares is not declared effective by the SEC as of August 21, 2006. The liquidated damages, if any, are payable monthly until such time as the registration statement is declared
effective or the shares may be sold without restriction pursuant to Rule 144(k) under the Securities Act. The rights of the holders of the Series E preferred stock are senior to the rights of the holders of the Series C and D preferred stock.



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The conversion of the Series D preferred stock and issuance of the Series E preferred stock and warrants
was accounted for according to EITF Topic No. D-42 The Effect on the calculation of EPS for the redemption of induced conversion of preferred stock. Consequently, the fair value of all securities and other consideration transferred in
the issuance of the Series E convertible preferred stock over the fair value of securities issuable pursuant to the original conversion terms of the Series D preferred stock was subtracted from net earnings to arrive at net earnings available to
common shareholders. Management used the Black-Scholes model to compute the fair value of the warrants assuming 84.6% volatility and 4.95% risk free rate which resulted in a $1.7 million fair value for the warrants. The non-cash charge of $3.0
million, of which $1.8 million is considered a beneficial conversion the holders of the Series E preferred stock, is included in preferred stock dividends in the consolidated statement of operations for the six months ended June 30, 2006.

In accordance with SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity the Series D preferred stock has been classified as equity. Additionally, in accordance with SFAS No. 150, those preferred shares subject to mandatory redemption, beginning September 2006, will be reclassified as liabilities.
Additionally, in accordance with the guidelines from the SECs Current Accounting and Disclosure Issues in the Division of Corporate Finance on December 1, 2005, the warrants have been classified as equity in the condensed consolidated
balance sheet.

Warrants

On
May 25, 2006, we instituted a voluntary offer of conversion to certain of our existing warrant holders to exercise all of their existing warrants issued to them in the Series C and D preferred stock transactions. A total of 685,099 warrants
with a strike price of $4.33 and 410,716 warrants with a strike price of $3.50 were exercised resulting in the issuance of 1,095,815 shares of the Companys common stock under the terms of such warrants for gross proceeds of approximately $4.3
million. In exchange for the conversion of the warrants the Company issued warrants (warrant C) to purchase an aggregate of 1,095,815 shares of the Companys common stock at an exercise price of $2.76 per share and a floating number
of shares of common stock at an exercise price of $0.01 per share (warrant B), with the exact aggregate number of shares to be determined by dividing $1,938,403 by the lowest of (A) $2.76 (as adjusted for stock splits, stock
dividends, stock combinations and other similar events), (B) the closing price of our common stock on the trading day prior to the effective date of a registration statement covering the resale of the shares, (C) the closing price of our
common stock on the trading day prior to the day shareholder approval is obtained pursuant to the terms of the Series E preferred stock, or (D) if the registration statement is not declared effective, the trading day prior to the day any shares
of common stock issuable pursuant to such warrant can be sold under Rule 144. The warrants will expire on the fifth anniversary of the date that a registration statement covering the resale of the shares of our common stock issuable upon exercise of
the warrants and conversion of the Series E preferred stock is declared effective. The exercise prices of warrant B and warrant C are subject to adjustment if the Company issues shares of common stock, or securities convertible into shares of common
stock, at an effective price less than the then-current exercise price of such warrants.

The conversion of the warrants and issuance of
the warrants B and C was accounted for according to EITF Topic No. D-42 The Effect on the calculation of EPS for the redemption of induced conversion of preferred stock. Consequently, the fair value of the issuance of the warrants B and
C over the fair value of securities issuable pursuant to the original conversion terms of the converted warrants was subtracted from net earnings to arrive at net earnings available to common shareholders. Management used the Black-Scholes model to
compute the fair value of the warrant C assuming 84.6% volatility and 4.95% risk free rate which resulted in a $1.7 million fair value for the warrants. The warrant B was valued at its fixed dollar amount of $1.9 million. The non-cash charge of $1.8
million is included in preferred stock dividends in the consolidated statement of operations for the six months ended June 30, 2006.

Additionally in accordance with the guidelines from the SECs Current Accounting and Disclosure Issues in the Division of Corporate Finance on December 1, 2005 and SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity the warrant B has been classified as long term debt and the warrant C has been classified as equity in the condensed consolidated balance sheet.

11. Other Financing Transactions

Effective
June 15, 2006 the Companys wholly-owned subsidiary, Best Logic, LLC, extended a loan agreement with Far East National Bank pursuant to which the bank has agreed to loan Best Logic up to $1,000,000. Pursuant to a promissory note, dated
March 9, 2005, executed in connection with the loan agreement, interest on the outstanding principal balance of the loan will accrue at a variable rate equal to the lenders prime rate plus 2%. The initial interest rate is 10.25% per
annum, subject to change each time the lenders prime rate changes. Interest is payable monthly with all outstanding principal and accrued and unpaid interest due and payable in full on December 15, 2006. As of June 30, 2006, a total
of $965,000 is outstanding by Best Logic pursuant to the loan agreement.



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In connection with the loan agreement, and as collateral for the loan, Best Logic executed a security
agreement granting Far East National Bank a security interest in certain assets of Best Logic, including all inventory, accounts, equipment and general intangibles. In addition, the loan is secured by a personal guaranty executed by John Pan, the
Companys Chairman, Chief Financial Officer, President and principal stockholder.

12. Subsequent Events

On July 19, 2006, we received a letter from the Nasdaq Stock Market indicating that our securities are subject to delisting from the Nasdaq Capital
Market based upon shareholder approval issues arising from the Staffs determination to aggregate our Series C, D, and E financings, our failure to file listing of additional shares forms on a timely basis, and public interest
concerns related to the foregoing violations. We have requested a hearing before a Nasdaq Listing Qualifications Panel to appeal the Staffs delisting determination and request continued listing on the Nasdaq Capital Market. The Listing
Qualifications Panel has assigned us a September 7, 2006 hearing date. Our hearing request stays the delisting process and our common stock will therefore remain listed on the Nasdaq Capital Market until the Listing Qualifications Panel renders
a final written decision on our appeal, sometime after the hearing date.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

Our operations currently consist of three divisions:



| |  |  | Digital technology, which focuses on designing, developing, manufacturing, and distributing complete secure network digital video systems and total solutions for law
enforcement, military, homeland security, commercial, industrial, and consumer markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Aviation, which primarily provides surveillance and safety products and aircraft modification products and services to the commercial airline industry; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Contract manufacturing, which focuses on the manufacturing and sale of digital video recorders and customized computing systems for the commercial, industrial, and consumer
sectors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our business strategy includes developing a full line of high value security products deploying the latest
technologies. We have spent significant resources with our research and development team developing a base platform for our security surveillance product line. Using this platform we hired additional offshore specialty engineers to supplement our
existing core research and development team to enable faster, more cost effective product development programs focused on security application solutions. In 2005, we launched the first phase of our new digital video recorder product line, a four
channel mobile digital video recorder and have begun marketing the product through several channels. We expect to launch several new products in the fourth quarter of 2006.

To implement planned technology advances and new product development, we continue to focus resources on new, proprietary digital compression technology,
Internet protocol applications, and database management applications. We believe these elements are keys to developing the secure network digital video technology that is expected to drive the development of our next generation of digital video
surveillance products. High-end software for intelligent management of data transmitted from secure digital video networks is also planned as a component of our total digital video technology solutions. Our strategy is to use our research and
development expertise to create new proprietary technologies for digital video applications, and also seek to create intellectual properties for contract manufacturing customers, thereby enabling us to engage in both original equipment manufacturing
and original design manufacturing. We are also looking for strategic acquisition candidates providing digital video technologies and systems to expand and or enhance our product offerings and services.

We believe our competitive advantages in parts and components pricing, quality control, just-in-time production capabilities, customer service, and
scalable production processes will support a planned extension of the operations of our contract manufacturing divisionprimarily the manufacture of specialized, custom-designed computers for industrial and commercial useto include
designing and manufacturing a broad range of products and systems, including digital video technology products. We intend to leverage our current contract manufacturing facilities to generate production-cost efficiencies for our digital video
technology division.



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RESULTS OF OPERATIONSCOMBINED

The following is a schedule showing the combined operations for our digital technology, aviation and contract manufacturing divisions, with a corporate category primarily relating to activities associated with income
and expense of non-core continuing business of the pre-merged public entity, as well as general overall corporate expenses.

For the three months ended
June 30, 2006



|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | -------- | - | ------ | --------------------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|($ in thousands)                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |      
|                                 |  | DigitalTechnology |        |   | Aviation |   |        | ContractManufacturing |  |   | Corporate |   |  | Total |      
|Net sales                        |  | $                 | 420    |   |          | $ | 1,620  |                       |  | $ | 6,178     |   |  | $     |      |   |  | $ | 8,218  |  
|Cost of sales                    |  |                   | 238    |   |          |   | 1,243  |                       |  |   | 5,651     |   |  |       |      |   |  |   | 7,132  |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Gross profit                     |  |                   | 182    |   |          |   | 377    |                       |  |   | 527       |   |  |       |      |   |  |   | 1,086  |  
|Operating expenses               |  |                   | 1,230  |   |          |   | 703    |                       |  |   | 603       |   |  |       | 802   |   |  |   | 3,338  |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Income (loss) from operations    |  |                   | (1,048 | ) |          |   | (326   | )                     |  |   | (76       | ) |  |       | (802  | ) |  |   | (2,252 | )
|Other income (expense)           |  |                   | (14    | ) |          |   |       |                       |  |   | (26       | ) |  |       | 180   |   |  |   | 140    |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Net income/(loss)                |  | $                 | (1,062 | ) |          | $ | (326   | )                     |  | $ | (102      | ) |  | $     | (622  | ) |  | $ | (2,112 | )
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Total assets as of June 30, 2006 |  | $                 | 10,729 |   |          | $ | 10,179 |                       |  | $ | 5,618     |   |  | $     | 5,465 |   |  | $ | 31,991 |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       |   |  |   |        |  

For the three months ended June 30, 2005



|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|-------------------------------- |  | ----------------- | ----- | - | -------- | - | ----- | --------------------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|                                 |  | DigitalTechnology |       |   | Aviation |   |       | ContractManufacturing |  |   | Corporate |   |  | Total |      
|Net sales                        |  | $                 | 372   |   |          | $ | 344   |                       |  | $ | 4,460     |   |  | $     |      |   |  | $ | 5,176  |  
|Cost of sales                    |  |                   | 251   |   |          |   | 302   |                       |  |   | 3,816     |   |  |       |      |   |  |   | 4,369  |  
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Gross profit                     |  |                   | 121   |   |          |   | 42    |                       |  |   | 644       |   |  |       |      |   |  |   | 807    |  
|Operating expenses               |  |                   | 956   |   |          |   | 518   |                       |  |   | 697       |   |  |       | 476   |   |  |   | 2,647  |  
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Income (loss) from operations    |  |                   | (835  | ) |          |   | (476  | )                     |  |   | (53       | ) |  |       | (476  | ) |  |   | (1,840 | )
|Other income (expense)           |  |                   | 11    |   |          |   |      |                       |  |   | (13       | ) |  |       |      |   |  |   | (2     | )
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Net income/(loss)                |  | $                 | (824  | ) |          | $ | (476  | )                     |  | $ | (66       | ) |  | $     | (476  | ) |  | $ | (1,842 | )
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  
|Total assets as of June 30, 2005 |  | $                 | 6,131 |   |          | $ | 4,467 |                       |  | $ | 9,063     |   |  | $     | 5,605 |   |  | $ | 25,266 |  
|                                 |  |                   |       |   |          |   |       |                       |  |   |           |   |  |       |       |   |  |   |        |  

For the six months ended June 30, 2006



|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | -------- | - | ------ | --------------------- |  | - | --------- | - |  | ----- | ------ | - |  | - | ------ | -
|($ in thousands)                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |       
|                                 |  | DigitalTechnology |        |   | Aviation |   |        | ContractManufacturing |  |   | Corporate |   |  | Total |       
|Net sales                        |  | $                 | 625    |   |          | $ | 3,322  |                       |  | $ | 11,590    |   |  | $     |       |   |  | $ | 15,537 |  
|Cost of sales                    |  |                   | 419    |   |          |   | 2,760  |                       |  |   | 10,470    |   |  |       |       |   |  |   | 13,649 |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Gross profit                     |  |                   | 206    |   |          |   | 562    |                       |  |   | 1,120     |   |  |       |       |   |  |   | 1,888  |  
|Operating expenses               |  |                   | 2,036  |   |          |   | 1,422  |                       |  |   | 1,265     |   |  |       | 1,483  |   |  |   | 6,206  |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Income (loss) from operations    |  |                   | (1,830 | ) |          |   | (860   | )                     |  |   | (145      | ) |  |       | (1,483 | ) |  |   | (4,318 | )
|Other income (expense)           |  |                   | (29    | ) |          |   |       |                       |  |   | (26       | ) |  |       | 186    |   |  |   | 131    |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Net income/(loss)                |  | $                 | (1,859 | ) |          | $ | (860   | )                     |  | $ | (171      | ) |  | $     | (1,297 | ) |  | $ | (4,187 | )
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Total assets as of June 30, 2006 |  | $                 | 10,729 |   |          | $ | 10,179 |                       |  | $ | 5,618     |   |  | $     | 5,465  |   |  | $ | 31,991 |  
|                                 |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |        |  



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For the six months ended June 30, 2005



|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | -------- | - | ----- | --------------------- |  | - | --------- | - |  | ----- | ------ | - |  | - | ------ | -
|($ in thousands)                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |       
|                                 |  | DigitalTechnology |        |   | Aviation |   |       | ContractManufacturing |  |   | Corporate |   |  | Total |       
|Net sales                        |  | $                 | 742    |   |          | $ | 786   |                       |  | $ | 9,124     |   |  | $     |       |   |  | $ | 10,652 |  
|Cost of sales                    |  |                   | 494    |   |          |   | 610   |                       |  |   | 7,576     |   |  |       |       |   |  |   | 8,680  |  
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Gross profit                     |  |                   | 248    |   |          |   | 176   |                       |  |   | 1,548     |   |  |       |       |   |  |   | 1,972  |  
|Operating expenses               |  |                   | 1,874  |   |          |   | 1,073 |                       |  |   | 1,461     |   |  |       | 1,055  |   |  |   | 5,463  |  
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Income (loss) from operations    |  |                   | (1,626 | ) |          |   | (897  | )                     |  |   | 87        |   |  |       | (1,055 | ) |  |   | (3,491 | )
|Other income (expense)           |  |                   | 3      |   |          |   |      |                       |  |   | (13       | ) |  |       |       |   |  |   | (10    | )
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Net income/(loss)                |  | $                 | (1,623 | ) |          | $ | (897  | )                     |  | $ | 74        |   |  | $     | (1,055 | ) |  | $ | (3,501 | )
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  
|Total assets as of June 30, 2005 |  | $                 | 6,131  |   |          | $ | 4,467 |                       |  | $ | 9,063     |   |  | $     | 5,605  |   |  | $ | 25,266 |  
|                                 |  |                   |        |   |          |   |       |                       |  |   |           |   |  |       |        |   |  |   |        |  

RESULTS OF OPERATIONSDIGITAL TECHNOLOGY DIVISION

For the Three Months Ended June 30, 2006 Compared to June 30, 2005

The focus of our digital technology division is on the development of digital products and technologies for law enforcement, commercial and industrial
security applications.

Our mobile digital products are currently targeting law enforcement, commercial/industrial and military
applications. Digital technology offers considerable advantages over the analog tape technology currently in use by some police departments, and we believe our products offer major advantages over competing digital systems. For example, our wireless
technology automatically uploads recordings into the police departments central computer when the officer returns the patrol car to the station. This feature avoids having the officer handle recording disks or devices, thereby preserving the
integrity of valuable trial evidence. Our products have been adopted by several local police departments and are currently being evaluated by a number of other law enforcement customers, but have not generated significant revenues to date. We
believe the same advantages of digital technology, and our products in particular, are relevant in other mobile applications, including but not limited to fire trucks, ambulances, mass transit, on-highway shipping and package delivery. We believe
that the potential for terrorist attacks on subway systems and other forms of public transportation will result in government mandates for the installation of surveillance systems, although such mandates have not yet materialized and these markets
have not yet developed.

We are also developing additional stationary applications for our digital surveillance technology within the
retail and commercial/industrial sectors, and in other markets. We believe that demand in many of these markets will be driven by government mandates to install surveillance systems for anti-terrorism or law enforcement measures, or as a result of
cost savings available to business owners arising out of theft or loss reduction, lower insurance premiums, or other savings. We believe that new markets will be available for our digital surveillance products in support of homeland security
initiatives. Such new markets may include oil refineries, chemical plants, nuclear power plants, electric power transmission lines, oil,



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gas, chemical and water pipelines, and other critical facilities. We are also developing products for retail establishments, manufacturing facilities,
commercial locations, and small businesses. We believe the commercial and industrial sector to be a multi-billion dollar annual market that may provide us with an excellent growth opportunity.

Our digital technology division is in its early stages of growth, and continues to concentrate on developing and acquiring new products and technologies
with an emphasis on security applications to target these high growth, high margin markets. We acquired substantially all of the assets of Tops Digital Security, Inc. (Tops), as of April 1, 2006, as a means of continuing our
commitment to expand our product offerings. Tops is a solutions provider for large enterprise video surveillance systems that are designed primarily for high quality video capture and central monitoring security operations in the high-end
commercial, industrial, and government electronic security markets. The developmental nature of this division requires that we make regular investments in new products, staff our sales team and infrastructure, establish our distribution channels,
build relationships with customers and potential customers, market our products, and commit other resources to growing this business. Because we have continued to make such investments, our financial results continue to show losses and we expect
that such losses will continue in the short term due to the costs associated with integrating new businesses and products with our existing infrastructure.

Revenues for the digital technology division for the three months ended June 30, 2006 totaled $420,000, which compared to $372,000 for the three months ended June 30, 2005. Revenues increased $142,000 as a
result of the acquisition of Tops, offset by a decline of $94,000 for our other digital video surveillance products. Gross margins for the three months ended June 2006 were 43% compared to 33% for the three months ended June 2005. The increase in
gross margins is due to the Tops and mobile digital products which provide higher margins.

Operating expenses increased to $1.2 million
for the three months ended June 30, 2006 from $1.0 million for the three months ended June 30, 2005. Operating expenses increased $320,000 due to the acquisition of Tops consisting of $57,000 selling expenses, $226,000 general and
administrative expenses and $36,000 for research and development costs. Continuing our emphasis on product development, we established an R&D facility in Korea to facilitate the development of the high end Tops product line. Additionally,
expenses for facility security and maintenance services increased $50,000, and rent expense increased $23,000. This increase is offset by a $146,000 decrease in other research and development costs.

The net result of the foregoing is that the digital technology division incurred a loss from operations of $1.1 million for the quarter ended
June 30, 2006 compared to a loss from operations of $.8 million for the quarter ended June 30, 2005.

For the Six Months Ended
June 30, 2006 Compared to June 30, 2005

Revenues for the digital technology division for the six months ended June 30,
2006 totaled $625,000, which compared to $742,000 for the six months ended June 30, 2005. Gross margins were 33% for each of the six month periods ended June 30, 2006 and 2005.

Operating expenses increased to $2.0 million for the six months ended June 30, 2006 from $1.9 million for the six months ended June 30, 2005.
Operating expenses increased $320,000 due to the acquisition of Tops consisted of $57,000 selling expenses, $226,000 general and administrative expenses and $36,000 for research and development costs. Continuing our emphasis on product development,
we established an R&D facility in Korea to facilitate the development of the high end Tops product line. Excluding Tops, other personnel and related selling expenses decreased $103,000 for the six months ended June 30, 2006 to $656,000 from
$759,000 for the same period of the prior year. Additionally, expenses for facility security and maintenance services increased $50,000, and rent expense increased $44,000. This increase is offset by a $128,000 decrease in other research and
development costs.

The net result of the foregoing is that the digital technology division incurred a loss from operations of $1.9 million
for the six months ended June 30, 2006 compared to a loss from operations of $1.6 million for the six months ended June 30, 2005.

RESULTS OF
OPERATIONSAVIATION DIVISION

For the Three Months Ended June 30, 2006 Compared to June 30, 2005

Our aviation division, known as Global AirWorks, is an aviation service company specializing in commercial aircraft surveillance systems and interior
modification, serving both domestic and international carriers as well as original equipment manufacturers and suppliers. Our products and services primarily relate to airline surveillance and security systems, new or upgraded communication systems,
in flight entertainment systems, and comfort and convenience systems. Our current products include Cockpit Door Surveillance Systems (CDSS) which uses digital video technology to allow the pilot to view activity behind the secured cockpit door from
the cockpit. We have also developed an Electronic Flight Bag that uses digital technology to store and retrieve flight manuals and procedures. In addition, we provide smoke detection and fire suppression systems, wire and harness solutions for
various electrical applications within an aircraft and interior/exterior modification products and services.



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We are positioned to take advantage of the market opportunities that will be presented by the expected
release of mandates from both the Federal Aviation Administration (FAA) and the European aviation regulatory authorities, including the European Aviation Safety Agency (EASA) and the Joint Aviation Authority (JAA). The FAA has issued a Notice of
Proposed Rule Making (NPRM) which, if enacted, would mandate CDSS systems for all commercial passenger aircraft operating in the United States of America. The comment period on this NPRM closed on November 21, 2005, and we believe a final rule
could be adopted in 2006. The FAA estimates that the market for CDSS systems is $185 million in the United States and we believe the international market to be larger than that for the United States. The FAA identified Global ePoint as one of only
five vendors with products currently certified by the FAA. We believe that our product has several key advantages over competing systems, including that it is the only system to have its display screen in front of the pilot, and we have a rapid
installation schedule designed to avoid revenue loss for the airline. We have captured majority market shares in Germany and England, and believe that we are well positioned to capture a significant share of the United States market when and if the
opportunity becomes available.

We have obtained all FAA Supplemental Type Certificates (STC) for the installation of CDSS on a majority of
the Boeing aircraft types and all Airbus aircraft (except the A380, their latest aircraft model). Therefore, any new orders will not require any engineering or certification work, but simply manufacturing and shipping. We have developed and are
marketing digital technology solutions such as our Electronic Flight Bag (EFB) and In Flight Entertainment (IFE) systems. Generally, these systems provide increased aircraft operating efficiency and significant weight savings by replacing old,
heavier technology. Since one of the major costs for the airlines is fuel costs, these new solutions provide a return on investment to the airlines as significant weight reduction leads to substantial savings by decreasing the fuel burn of the
aircraft. Our EFB product provides electronic weather mapping, finds favorable wind patterns, and optimizes the trim of the aircraft to make weight and balance adjustments, all of which contribute to fuel savings. Our system automates flight
information and is easier for pilots to use than paper records and supplemental calculations. In addition to these advantages, our EFB eliminates over 70 pounds of charts and records carried on board, representing a considerable annual fuel savings
for a typical jetliner. In addition to commercial passenger and cargo air transport, we believe the EFB is also attractive in private aviation applications, where pilots generally have less automation available to them and where the ease and speed
of accessing electronic records may offer safety advantages.

We believe that our IFE product is attractive to airlines due to the
elimination of hundreds of pounds of weight in replacing old cathode ray tube monitors with modern flat panel display systems. We believe the payback to the airline in fuel savings alone for the installation of our IFE and EFB systems is less than
one year. With the significant rise in fuel costs for airlines, we believe the cost savings offered by these products will provide an important marketing advantage for these products going forward.

We have expanded our aircraft modification and maintenance services for interior cabin refurbishment and exterior painting. Although these services have
a lower profit margin relative to our other product lines, we believe these maintenance services can provide Global ePoint with an attractive value added sales opportunity for surveillance and/or EFB and IFE products to the customer for installation
while maintenance work is being performed.

We received purchase orders for $12.2 million from a major Latin American airline for aircraft
modification, maintenance and retrofit services in 2005. Our backlog, as of June 30, 2006, was $9 million. Substantially all of this backlog relates to the modification and retrofit services for the Latin American airline. A substantial amount
of our backlog relates to IFE equipment which requires FAA certification prior to shipment. We have completed a significant amount of the engineering and testing required to complete and deliver the IFE equipment. We are in the process of completing
our prototype installations and pending FAA certification. We expect to complete the necessary changes and obtain certification and deliver a substantial amount of equipment by the end of 2006.

Revenues for the three months ended June 30, 2006 totaled $1.6 million compared to $.3 million for the three month period ended June 30, 2005.
The increase in sales is the result of an increase in aircraft maintenance services of $1.3 million. Cost of goods sold was $1.2 million for the three months ended June 30, 2006 compared to $.3 million for the three months ended June 30,
2005. Gross margins for the quarter ended June 30, 2006 were 23% compared to 12% for the quarter ended June 30, 2005. The increase in margins was due to the improvement in operation efficiencies in maintenance services. Maintenance
services are a new business line begun in the fourth quarter of 2005 and our gross margins for maintenance services have improved as the inefficiencies and costs relating to starting a new business line have declined. Additionally, we believe our
overall gross margins will improve as our mix of business moves to equipment deliveries which have a higher margin.



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Operating expenses totaled $703,000 for the three months ended June 30, 2006 compared to $518,000
for the three months ended June 30, 2005. The increase in operating expenses is due to $30,000 increase in administrative personnel to support the increased sales, $31,000 increase in travel expenses, $90,000 increase in operating expenses
related our Tulsa facility which was established in the fourth quarter of 2005. Additionally, we moved the aviation corporate operations to a new facility beginning June 2006 which resulted in a $19,000 increase in rent expense due to rent related
to our previous facility whose lease was cancelled in August 2006.

As a result of the foregoing, the aviation division reduced its loss
from operations to $326,000 for the quarter ended June 30, 2006 from $476,000 loss from operations for the quarter ended June 30, 2005.

For the Six Months Ended June 30, 2006 Compared to June 30, 2005

Revenues for the six months ended June 30,
2006 totaled $3.3 million compared to $.8 million for the six month period ended June 30, 2005. The increase in sales is the result of an increase in aircraft maintenance services of $2.2 million and an increase of $.6 million in sales of
modification equipment. Cost of goods sold was $2.8 million for the six months ended June 30, 2006 compared to $.6 million for the six months ended June 30, 2005. Gross margins for the six months ended June 30, 2006 were 17% compared
to 22% for the six months ended June 30, 2005. The decline in margins was due to the increase in lower margin maintenance services. We believe our overall gross margins will improve as our mix of business moves to equipment deliveries which
have a higher margin.

Operating expenses totaled $1.4 million for the six months ended June 30, 2006 compared to $1.1 million for the
six months ended June 30, 2005. The increase is due to additional costs associated with the Tulsa maintenance facility which was established in the fourth quarter of 2005, including $63,000 in insurance expenses and $215,000 for permanent and
temporary labor and labor related costs to support the new operations.

As a result of the foregoing, the aviation division incurred a loss
from operations of $860,000 for the six months ended June 30, 2006 compared to a loss from operations of $897,000 for the six months ended June 30, 2005.

RESULTS OF OPERATIONSCONTRACT MANUFACTURING DIVISION

For the Three Months Ended June 30, 2006 Compared to
June 30, 2005

Our contract manufacturing division manufactures digital video recorders and customized computing systems for the
industrial, business and consumer markets, with the capability of specialized, custom-manufacture of other electronic products and systems. In addition to custom manufacturing, the division also sources and distributes electronic components and
parts. The high volume we produce in the contract manufacturing division allows us to obtain discounts on our raw materials, which enables us to lower the manufacturing costs of our other divisions. In addition, since we control the manufacturing
process for many of our branded products, we can offer greater speed and flexibility to our customers than otherwise would be the case.

Net sales for the three months ended June 30, 2006 increased to $6.2 million from $4.5 million in the three months ended June 30, 2005. The increase in net sales was primarily due to the increase in sales of consumer computer
products to $4.1 million in the quarter ended June 30, 2006 from $1.6 million in the quarter ended June 30, 2005. Sales of industrial computer products decreased to $1.4 million in the three months ended June 30, 2006 compared to $2.4
million in the three months ended June 30, 2005. Increased lead times on components contributed to the decline in sales of industrial computer products. Additionally, sales to one of our major customers declined. The customers product
line has moved to high end/lower sales volume x-ray machines and discontinued their low end/higher sales volume x-ray machines, resulting in a decline in sales for our industrial PC. Cost of sales was $5.7 million for the three months ended
June 30, 2006, or 91.5%, of sales compared to $3.8 million, or 85.6%, of sales for the corresponding quarter ended June 30, 2005. The increase in the cost of sales and the corresponding cost of sales as a percentage of net sales was due to
the increase in sales of lower margin consumer computer products. As a result, gross margins for the quarter ended June 2006 were 8.5% compared to 14.4% for the quarter ended June 2005.

Operating expenses for the three months ended June 30, 2006 were $603,000, or 9.8% of sales, compared to $697,000, or 15.6% of sales, for the three
months ended June 30, 2005. The decline in operating expenses is primarily due to a $86,000 decrease in commission expenses as a result of lower sales of industrial computer products in the three months ended June 30, 2006 over 2005.

The net result was a loss from operations for the contract manufacturing division of $76,000 for the three months ended June 30, 2006
compared to loss from operations of $53,000 for the three months ended June 30, 2005.



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For the Six Months Ended June 30, 2006 Compared to June 30, 2005

Net sales for the six months ended June 30, 2006 increased to $11.6 million from $9.1 million in the six months ended June 30, 2005. The
increase in net sales was primarily due to the increase in sales of consumer computer products to $7.1 million in the six months ended June 30, 2006 from $2.6 million in the six months ended June 30, 2005. The increase in sales of consumer
computers was offset by a decrease in sales of industrial computer products to $3.3 million in the six months ended June 30, 2006 compared to $5.5 million in the six months ended June 30, 2005. The decline in industrial computer sales is
primarily due to the decline in sales from one of our major customers. The customers product line has moved to high end/lower sales volume x-ray machines and discontinued their low end/higher sales volume x-ray machines, resulting in a decline
in sales for our industrial PC. Cost of sales was $10.4 million for the six months ended June 30, 2006, or 90.3%, of sales compared to $7.6 million, or 83.0%, of sales for the corresponding six months ended June 30, 2005. The increase in
the cost of sales as a percentage of net sales was due to the increase in sales of lower margin consumer computer products. As a result, gross margins for the six months ended June 30, 2006 were 9.7% compared to 17.0% for the six months ended
June 30, 2005.

Operating expenses for the six months ended June 30, 2006 were $1.3 million, or 10.9% of sales, compared to $1.5
million, or 16.0% of sales, for the six months ended June 30, 2005. The decline in operating expenses is due to a $156,000 decrease in commission expenses as a result of lower sales of industrial computer products in the six months ended
June 30, 2006 over 2005. Warehouse supplies declined $32,000 in the six months ended June 30, 2006 from the six months ended June 30, 2005.

The net result was a loss from operations for the contract manufacturing division was $145,000 for the six months ended June 30, 2006 compared to income from operations of $87,000 for the six months ended
June 30, 2005.

RESULTS OF OPERATIONSCORPORATE

Corporate activities primarily relate to activities associated with income and expense of non-core continuing business of the pre- merged public entity, as well as general overall corporate expenses. During the three
and six months ended June 30, 2006, corporate general and administrative costs totaled $.8 million and $1.5 million, respectively, compared to $.5 million and $1.1 million, respectively, for the three and six months ended June 30, 2005,
respectively. The general allowance for doubtful accounts increased $.3 million in the three and six months ended June 30, 2006 from the three and six months ended June 30, 2005. Professional fees and expenses associated with being a
public company were unchanged at $.2 million and $.5 million for the three and six months ended June 30, 2006 and 2005.

Other income
increased $.2 million due to the receipt of uncollected funds from the State of Pennsylvania from the pre-merged public entity.

The net
result for corporate operations was a loss from operations of $.8 and $1.5 million for the three and six months ended June 30, 2006, respectively, compared to a loss from operations of $.5 and $1.1 million for the three and six months ended
June 30, 2005, respectively.

Additionally, on May 23, 2006, we entered into agreements to receive approximately $8.1 million
(after payment of certain fees) from certain institutional investors as a result of (i) such investors exercising certain of their existing warrants to purchase up to 1,095,815 shares of our common stock under the terms of such warrants for
gross proceeds of approximately $4.3 million and (ii) the sale of units consisting of shares of our Series E convertible preferred stock and warrants to purchase shares of our common stock for aggregate gross proceeds of approximately $3.8
million. At the same time, the investors agreed to convert all 114,000 shares of our Series D preferred stock held by them at the conversion price of $4.16 per share. The transactions closed on May 25, 2006. The Series E preferred stock has an
initial conversion price of $2.76 per share and is initially convertible into a total of 2,318,424 shares of our common stock. In connection with the agreements, we issued warrants to purchase (i) an aggregate of 1,095,815 shares of common
stock at an exercise price of $2.76 per share, (ii) an aggregate of 1,159,208 shares of common stock at an exercise price of $3.58 per share, (iii) a floating number of shares of common stock at an exercise price of $0.01 per share, with
the exact aggregate number shares to be determined by dividing $1,938,403 by the lowest of (A) $2.76 (as adjusted for stock splits, stock dividends, stock combinations and other similar events), (B) the closing price of our common stock on
the trading day prior to the effective date of a registration statement covering the resale of the shares, (C) the closing price of our common stock on the trading day prior to the day shareholder approval is obtained pursuant to the terms of
the Series E preferred stock, or (D) if the registration statement is not declared effective, the trading day prior to the day any shares of common stock issuable pursuant to such warrant can be sold under Rule 144. The exercise prices of all
of the warrants are subject to adjustment if we issue shares of common stock, or securities convertible into shares of common stock, at an effective price less than the then-current exercise price of such warrantsThe warrants will expire on the
fifth anniversary of the date that a registration statement covering the resale of the underlying shares of our common stock issuable upon the exercise of the warrants and conversion of the Series E preferred stock is declared effective. A $4.8
million non-cash preferred dividend was incurred as a result of the transaction.



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SUMMARY

As a net result of the combined operations of our digital technology division, aviation division, contract manufacturing division, and corporate activities, Global ePoint incurred a net loss of $2.1 million for the three months ended
June 30, 2006, or $(.13) per share, and a net loss of $4.2 million, or $(.26) per share, for the six months ended June 30, 2006. The conversion of our Series D Preferred Stock and warrant exercise and simultaneous private placement sale of
our Series E preferred stock generated a non-cash preferred dividend of $4.9 million resulting in a net loss applicable to common stockholders of $7.1 million, or $(.43) per share for the three months ended June 30, 2006, and a net loss
applicable to common stockholders of $9.3 million, or $(.58) per share for the six months ended June 30, 2006 compared to non-cash preferred dividends of $.9 and $1.4 million in the three and six months ended June 30, 2005, respectively,
resulting in a net loss applicable to common stockholders of $2.7 million, or $(.22) per share for the three months ended June 30, 2005, and a net loss applicable to common stockholders of $4.9 million, or $(.39) per share for the six months
ended June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used by operations for the six months ended June 30, 2006 was $4.2 million as compared to cash used by operations of $2.6 million for the corresponding period in 2005. In the six months ended
June 30, 2006, the primary use of cash was funding the operating loss. For the six months ended June 30, 2005, the primary use of cash were $3.5 million from the net loss changes which was offset primarily by $1.1 million change in related
party accounts receivable and payables.

Cash used in investing activities for the six months ended June 30, 2006 consisted of $.3
million compared to cash used of $1.2 million for the six months ended June 30, 2005. For the six months ended June 30, 2006 the cash was comprised of the payment of $.5 million on the note provided to Astrophysics, Inc. offset by of $.8
million of cash used for the acquisition of fixed assets and other intangibles. For the six months ended June 30, 2005, cash used for investing activities was comprised of a good faith deposit of $500,000 related to our letter of intent to
purchase Astrophysics and an additional $500,000 note payable to Astrophysics as per the terms of the letter of intent.

The Companys
wholly-owned subsidiary, Best Logic, LLC, extended a loan agreement with Far East National Bank pursuant to which the bank has agreed to loan Best Logic up to $1,000,000. Pursuant to a promissory note, dated March 9, 2005, executed in
connection with the loan agreement, interest on the outstanding principal balance of the loan will accrue at a variable rate equal to the lenders prime rate plus 2%. The initial interest rate is 10.25% per annum, subject to change each
time the lenders prime rate changes. Interest is payable monthly with all outstanding principal and accrued and unpaid interest due and payable in full on December 15, 2006. As of June 30, 2006, a total of $965,000 is outstanding by
Best Logic pursuant to the loan agreement.

Net cash provided by financing activities for the six months ended June 30, 2006 totaled
$7.5 million as follows: the issuance of our Series E preferred stock provided $3.6 million, the proceeds from the exercise of stock warrants provided $4.4 million, and proceeds from the exercise of stock options provided $.7 million all of which
were offset by $.3 million to pay in full a loan to complete the Tops acquisition, $.5 million reduction in loans to related parties and $.4 million to pay preferred stock dividends and redemptions. As of June 30, 2006, the total outstanding
balance on loans from related parties was $1.6 million. Net cash provided by financing activities for the six months ended June 30, 2005 totaled $4.4 million. In March 2005 our contract manufacturing division obtained a $1 million bank line of
credit to assist in the funding of our working capital requirements of which $700,000 was provided for operations as of June 30, 2005. In the second quarter of 2005, we completed the private placement sale of Series B and Series C preferred
stock resulting in net proceeds of $4.6 million. This was offset by a reduction in borrowings from related parties in the amount of $1 million. As of June 30, 2005, the total outstanding balance on loans from related parties was $1.0 million.

On March 31, 2006, we entered into an Agreement and Plan of Reorganization (the Purchase Agreement) with Tops Digital
Security, Inc. (Tops) pursuant to which, among other things, we acquired substantially all of the assets and certain liabilities of Tops solely in exchange for shares of our common stock. The shares of common stock comprising the
purchase price are issuable in two installments. The first installment of 603,421 shares was issued at the closing date. The second installment of up to 375,000 shares is based on an earnout formula and is issuable on the 15 month anniversary of the
closing of the acquisition. The number of shares issuable pursuant to the Purchase Agreement is subject to adjustment based on (i) the amount of liabilities assumed by us, (ii) the amount by which the net income generated by the Tops
assets for the first 12 months following the closing date is less than $2,500,000, and (iii) the amount by which the volume-weighted average trading price of our common stock exceeds $4.00 per share for the 10 trading days preceding the 15
month anniversary of the closing date.



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As of June 30, 2006, the Company had net working capital totaling $9 million. As a means of
increasing our return on capital and avoiding the dilution and costs associated with financings, we generally attempt to minimize the amount of working capital our business requires. We believe that the funds provided by the recently completed
financings in addition to cash generated by operations will provide adequate working capital to meet the needs for our current operations, capital expenditures, and commitments over the next 12 months. Additional funding may be required to the
extent we exceed our current commitments. We will require further funding if we are to be successful in acquiring Astrophysics or completing other acquisitions should they occur; however, the amount and timing of such funding is contingent upon
reaching agreements with the proposed acquisition candidates and accordingly is not yet determinable.

Our future capital requirements may
vary materially from those now planned. We anticipate that the amount of capital that we will need in the future will depend on many factors, including:



| |  |  | the overall levels of sales of our products and gross profit margins;
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| |  |  | market acceptance of the technology and products;
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| |  |  | our business, product, capital expenditure and research and development plans, and product and technology roadmaps;
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| |  |  | the overall levels of sales of our products and gross profit margins;
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| |  |  | the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a competitive position in the marketplace;
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| |  |  | volume price discounts and customer rebates;
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| |  |  | the levels of inventory and accounts receivable that we maintain;
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| |  |  | acquisition opportunities;
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| |  |  | capital improvements to new and existing facilities;
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| |  |  | technological advances;
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| |  |  | our competitors responses to our products;
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| |  |  | our relationships with suppliers and customers; and
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| |  |  | the effectiveness of our expense and product cost control and reduction efforts.
| | - |  | --------------------------------------------------------------------------------

In addition, we may require additional capital to accommodate planned future growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, assets, products, or technologies. We
believe we will be able to obtain the funding required to support our operations and growth, however, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on
satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Debt financing will increase expenses and must be repaid regardless of operating results. Equity financing could
result in dilution to existing stockholders.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING
INFORMATION AND CERTAIN IMPORTANT FACTORS

In this report we make, and from time to time we otherwise make, written and oral statements
regarding our business and prospects, such as projections of future performance, statements of managements plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases will likely result, are expected to, will continue, is
anticipated, estimates, projects, believes, expects, anticipates, intends, target, goal, plans, objective,
should or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other
representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.



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Our future results, including results related to forward-looking statements, involve a number of risks
and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are
based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any
obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical
results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, include the following:

Our common stock is subject to potential delisting from the Nasdaq Capital Market. On July 19, 2006, we received a notice from the
Listing Qualifications Staff of The Nasdaq Stock Market, Inc. that our common stock is subject to potential delisting from the Nasdaq Capital Market. The Staffs determination to pursue the delisting of our common stock is based upon three
factors: (1) shareholder approval issues arising from the Staffs determination to aggregate our Series C, D, and E financings; (2) our failure to file listing of additional share forms for these financings on a timely
basis; and (3) public interest concerns related to the foregoing violations.

We have requested a hearing before a Nasdaq
Listing Qualifications Panel to appeal the Staffs delisting determination and request continued listing on the Nasdaq Capital Market. The Panel has assigned us a September 7, 2006 hearing date. Our hearing request stays the delisting
process and our common stock will therefore remain listed on the Nasdaq Capital market until the Listing Qualifications Panel renders a final written decision on our appeal, sometime after the hearing date.

At the Listing Qualifications Panel hearing we intend to demonstrate that we have taken steps to remediate any past shareholder approval and listing of
additional share form violations. We further intend to argue that these remedial measures, when combined with definitive steps we are taking to ensure that similar violations do not occur in the future, alleviate any basis for future public interest
concerns.

Although we believe that these arguments are meritorious and that we should remain listed on the Nasdaq Capital Market, there
can be no guarantee that the Listings Qualification Panel will agree, or that our common stock will remain listed in the future.

If our
appeal is unsuccessful and our common stock cannot be traded on the Nasdaq Capital Market, we will pursue listing on another principal exchange, such as the American Stock Exchange, or alternatively, our stock could be traded on secondary markets,
such as the Over the Counter Bulletin Board. However, there can be no assurances as to when, or whether, we will be successful in finding an alternate trading market for our common stock.

If we transfer our listing to the OTC Bulletin Board or other secondary market, the liquidity and trading price of our common stock in the secondary
market may be adversely affected, impairing our ability to raise necessary capital through equity or debt financing. We would expect decreases in institutional and other investor demand, analyst coverage, market making activity and information
available concerning trading prices and volume. In addition, if our common stock is delisted, the regulatory burdens to which broker-dealers are subject may discourage them from effecting transactions in our common stock, further limiting the
liquidity thereof.



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We may require additional funding in the future to continue to operate our
business. As of June 30, 2006, the Company had net working capital totaling $9 million, which we believe will provide adequate working capital to meet the needs for our current operations, capital expenditures, and commitments over
the next 12 months when combined with cash generated by operations. However, continuing losses from operations and the possibility of increased expenses may cause us to require additional funding prior to that time. In addition, we will require
further funding if we are to be successful in acquiring Astrophysics or completing other acquisitions should they occur; if any of these things occur and we are required to seek additional funding, there can be no guarantees that such funds will be
available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Debt financing will
increase expenses and must be repaid regardless of operating results. Equity financing could result in dilution to existing stockholders.

In addition, any financing arrangement may have potentially adverse effects on us or our stockholders. Debt financing (if available and undertaken) may involve restrictions limiting our operating flexibility. Moreover, if we issue equity
securities to raise additional funds, the following results may occur:



| |  |  | the percentage ownership of our existing stockholders will be reduced;
| | - |  | ----------------------------------------------------------------------



| |  |  | our stockholders may experience additional dilution in net book value per share; or
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the new equity securities may have rights, preferences or privileges senior to those of the holders of our Common Stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

We have a history of significant operating losses, and we may be unable to achieve profitability. We have a history of significant
operating losses. For the six months ended June 30, 2006 and 2005, we incurred a net loss from operations of $4.3 and $3.5 million, respectively, and our operations used $4.2 million of cash and $2.6 million of cash during the six months ended
June 30, 2006 and 2005, respectively. As of June 30, 2006, we had an accumulated deficit of $16 million. Over the past few years, the great majority of our revenue has been derived from our contract manufacturing operations, which tend to
provide low margins. Our current focus is on the development of sales of our higher margin digital and aviation products, however, revenues from these two divisions totaled $4.0 million and $1.5 million in the six months ended June 30, 2006 and
2005, respectively. As of June 30, 2006, we had a backlog of $9.0 million for orders for aviation products and we expect to achieve profitability in the fourth quarter of 2006 based on our expectation of increased sales of digital and aviation
products. However, until such time as we are able to generate significantly increased sales of our digital and aviation products, we are likely to continue to incur losses from operations.

We rely on related parties for a substantial portion of our revenues and as the primary source for our component and subsystem purchases. The loss
of business from any of these related parties would adversely affect our business. In the ordinary course of our business, we purchase from, sell products to and perform contract manufacturing services for a number of related parties
that are owned or otherwise controlled by Mr. John Pan, our Chief Financial Officer, Chairman, President and principal stockholder. During 2005 and the first six months of 2006 we purchased approximately $15.3 and $7.2 million, respectively,
worth of products from these related parties. This represents 53% of our overall cost of goods for the year ended December 31, 2005 and six months ended June 30, 2006, respectively. In addition, during 2005 and the first six months of
2006, we sold approximately $18 and $7.5 million, respectively, worth of products and contract manufacturing services to these related parties. This represents 55% and 49% of our overall sales for the year ended December 31, 2005 and first six
months of 2006, respectively. We believe that these related party relationships provide access to attractively priced components and products and an additional and a substantial amount of sales revenues. However, there are no agreements, written or
otherwise, between Global ePoint and these related parties obligating such parties to transact business with us in the future. As a result, these types of related party transactions could cease at any time. If our transactions with these related
parties cease, our business would be adversely affected.

Our current revenues and purchases are dependent on a limited number of
customers and suppliers, most of which are related parties. For the six months ended June 30, 2006 and 2005, two and three customers accounted for 60% and 66%, respectively, of our sales. Two of these customers in 2006 and one of
these customers in 2005 was a related party, accounting for 60% and 51%, respectively, of our sales. During the six months ended June 30, 2006 and 2005, two and three vendors accounted for 62% and 43%, respectively, of our purchases. Two of
these vendors were related parties. Substantially all of our related party transactions are derived from our contract manufacturing division. If we were to lose one or more of these customers before we are able to secure sales from other customers,
our income and financial condition would be adversely affected. If we are unable to enter into and maintain satisfactory distribution arrangements with leading suppliers and an adequate supply of products, our sales could be adversely affected.

Our issuance of preferred stock is dilutive to holders of our common stock, and could adversely affect holders of our common
stock. Our board of directors is authorized to issue series of shares of preferred stock without any action on the part of our stockholders, subject to the rules of the applicable stock market. Our board of directors also has the power,
without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends or if we liquidate, dissolve
or wind up our business and other terms. Currently, we have three series of preferred stock outstanding, C, D, and E, all of which may be converted into shares of our common stock at any time at the option of the holders, which will result in
dilution to holders of our common stock. In addition, all of the preferred shareholders are entitled to receive dividends on their shares of preferred stock, and upon a liquidity event all classes of preferred stock are entitled to receive payment
out of our assets before holders of our common stock. We are also required to redeem a portion of each series of our preferred stock periodically. The dividend and redemption payments may be made, at our option, in shares of our common stock or in
cash.

As of June 30, 2006, there were 594,770 shares of Series C Preferred Stock outstanding, which are convertible into 594,770 shares of
our common stock, 6,000 shares of Series D Preferred Stock outstanding, which are convertible into 72,115 shares of our common stock, and 127,977 shares of Series E Preferred Stock outstanding, which are currently convertible into 2,318,423 shares
of our common stock. The conversion price of the Series C and Series D Preferred Stock is not adjustable except for standard anti-dilution adjustments relating to stock splits, combinations and similar events. However, the conversion price of our
Series E Preferred Stock will be adjusted downward if we issue shares of common stock, or securities convertible into shares of common stock, at an effective price less than $2.76 per common share. If this occurs, the Series E Preferred Stock can be
converted into a larger number of shares than stated above, resulting in even greater dilution to holders of our common stock. Upon a liquidity event, the holders of our Series C Preferred Stock and Series D Preferred Stock are entitled to be paid
out of our assets available for distribution to the stockholders an amount equal to $2.80 per share and $4.16 per share, respectively, ahead of all shareholders except the holders of our Series E Preferred Stock. Upon a liquidity event, holders of
our Series E Preferred Stock are entitled to receive $50.00 per share of Series E Preferred Stock ahead of all of our other stockholders. Except as required by law, holders of our preferred stock have no voting rights.

At this time we have no plans to issue additional shares or series of preferred stock. However, except to the extent required by applicable market rules,
we may do so at any time without stockholder approval. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up of our affairs, or
if we issue preferred stock that is convertible into shares of our common stock, or has voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be
adversely affected.

Our business strategy includes acquiring businesses from time to time in exchange for shares of our common
stock, which results in dilution to our shareholders. Our business strategy involves engaging in strategic acquisitions from time to time to grow our business and expand our product offerings. We have traditionally issued shares of our
common stock as consideration in past acquisitions, and we expect to do so in the future. Accordingly, our acquisition strategy is generally dilutive to holders of our common and preferred stock.



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We are an emerging growth company with limited operating history. Following our
acquisition of McDigit, Inc. in August 2003, and having essentially ceased operations of our prior businesses, we recommenced operations as a new business engaged in designing and selling industrial, business and consumer computers and computing
solutions; and digital video, audio and data transmission and recording products. In 2004, we acquired substantial operating assets included in our digital technology division and aviation division. As a result, we have a limited history operating
our current businesses and forecasting our sales. The future success of our business will depend on our ability to successfully operate our recently acquired businesses, all of which are in highly competitive markets. Moreover, our digital
technology division operates in a new and emerging market. As an emerging company, it will be necessary for us to implement additional operational, financial and other controls and procedures in order to be successful.

Our digital technology business is new and based on emerging technologies. Market demand for digital technologies is uncertain. We
have a limited history of marketing and selling our digital video products. We continue to assess internal and external feedback relating to these products but cannot guarantee that we will be able to successfully sell products based on those
technologies. We initially focused on law enforcement and the military as potential markets for our digital video products and recently began to focus on other potential market segments, including industrial, commercial and homeland security. Demand
for our digital video, audio and data transmission and recording products is uncertain as, among other reasons, our customers and potential customers may:



| |  |  | not accept our emerging technologies or shift to other technologies;
| | - |  | --------------------------------------------------------------------



| |  |  | experience technical difficulty in installing or utilizing our products; or
| | - |  | ---------------------------------------------------------------------------



| |  |  | use alternative solutions to achieve their business objectives.
| | - |  | ---------------------------------------------------------------

In addition, the lengthy and variable sales cycle for products sold by our digital technology division makes it difficult to predict sales and may result in fluctuations in quarterly operating results. Because customers often require a
significant amount of time to evaluate products sold by our digital technology division before purchasing, the sales cycle associated with these products can be lengthy (exceeding one year in some cases). The sales cycles for these products also
varies from customer to customer and are subject to a number of significant risks over which we have little or no control.

Government regulation of communications monitoring could cause a decline in the use of our digital video surveillance products, result in increased expenses, or subject us and our customers to regulation or liability. As
the communications industry continues to evolve, governments may increasingly regulate products that monitor and record voice, video, and data transmissions over public communications networks. For example, the products we sell to law enforcement
agencies, which interface with a variety of wireline, wireless, and Internet protocol networks must comply in the United States with the technical standards established by the Federal Communications Commission pursuant to the Communications
Assistance for Law Enforcement Act and in Europe by the European Telecommunications Standard Institute. The adoption of new laws governing the use of our products or changes made to existing laws could cause a decline in the use of our products and
could result in increased costs, particularly if we are required to modify or redesign products to accommodate these new or changing laws.

Our intellectual property rights may not be adequate to protect our business. We currently do not hold any patents for our products. To date, we have filed one patent application relating to certain elements of the
technology underlying our digital video surveillance products. Although we expect to continue filing, where applicable, patent applications related to our technology, no assurances can be given that any patent will be issued on our patent
application or any other application that we may file in the future or that, if such patents are issued, they will be sufficiently broad to adequately protect our technology. In addition, we cannot assure you that any patents that may be issued to
us will not be challenged, invalidated, or circumvented.

Even if we are issued patents, they may not stop a competitor from illegally
using our patented applications and materials. In such event, we would incur substantial costs and expenses, including lost time of management in addressing and litigating, if necessary, such matters. Additionally, we rely upon a combination of
copyright, trademark and trade secret laws, license agreements and nondisclosure agreements with third parties and employees having access to confidential information or receiving unpatented proprietary know-how, trade secrets and technology to
protect our proprietary rights and technology. These laws and agreements provide only limited protection. We can give no assurance that these measures will adequately protect us from misappropriation of proprietary information.

Our products may infringe on the intellectual property rights of others, which could lead to costly disputes or disruptions. The
information technology industry is characterized by frequent allegations of intellectual property



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infringement. In the past, third parties have asserted that certain of our digital video surveillance products infringe their intellectual property and they
may do so in the future. Any allegation of infringement could be time consuming and expensive to defend or resolve, result in substantial diversion of management resources, cause product shipment delays or force us to enter into royalty, license, or
other agreements rather than dispute the merits of such allegation. If patent holders or other holders of intellectual property initiate legal proceedings, we may be forced into protracted and costly litigation. We may not be successful in defending
such litigation and may not be able to procure any required royalty or license agreements on acceptable terms or at all.

If our
products infringe on the intellectual property rights of others, we may be required to indemnify customers for any damages they suffer. We generally indemnify our customers with respect to infringement by our products of the proprietary
rights of third parties in the event any third party asserts infringement claims directly against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits
of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms,
our customers may be forced to stop using, or in the case of value added resellers, selling our products.

Our business strategy
includes acquiring certain businesses and entering into joint ventures and strategic alliances. Failure to successfully integrate such businesses, joint ventures, or strategic alliances into our operations could adversely affect our
business. In the past, we have acquired companies and assets and entered into certain strategic alliances, including the purchase of assets from Next Venture, Inc., AirWorks, Inc. in April 2004. We recently completed the acquisition of
substantially all of the assets of and Tops Digital Security, Inc, and are continuing negotiations involving the proposed acquisition of Astrophysics. We may also make additional acquisitions and enter into joint ventures in the future. While we
believe we will effectively integrate such businesses, joint ventures, or strategic alliances with our own, we may be unable to successfully do so and may be unable to realize expected cost savings and/or sales growth. Regarding the assets purchased
from Next Venture and AirWorks, the acquired businesses are in emerging markets and their performance is subject to the inherent volatility of such markets. Furthermore, AirWorks assets were purchased from an assignee for the benefit of
creditors, which means that the business was not successful in the past. We are in the process of integrating the Tops assets with our own, and we may encounter unforeseen costs and other difficulties related to that process. Acquisitions, joint
ventures and strategic alliances may involve significant other risks and uncertainties, including distraction of managements attention away from normal business operations, insufficient revenue generation to offset liabilities assumed and
expenses associated with the transaction, and unidentified issues not discovered in our due diligence process, such as product quality and technology issues and legal contingencies. In addition, in the case of acquisitions, we may be unable to
effectively integrate the acquired companies marketing, technology, production, development, distribution and management systems. Our operating results could be adversely affected by any problems arising during or from acquisitions or from
modifications or termination of joint ventures and strategic alliances or the inability to effectively integrate any future acquisitions.



|ITEM 3. | CONTROLS AND PROCEDURES
|------- | -----------------------

Our Chief Executive
Officer and Chief Financial Officer have reviewed and continue to evaluate the effectiveness of Global ePoints controls and procedures over financial reporting and disclosure (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this quarterly report. The term disclosure controls and procedures is defined in Rules13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and
procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the
Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. In designing and evaluating the Companys controls and procedures over financial reporting and disclosure, our management recognized that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of June 30, 2006. We are continuing to evaluate our internal controls in accordance with
Section 404(a) of the Sarbanes-Oxley Act of 2002 which become effective in 2007. In the course of our evaluation, we have identified certain deficiencies in our internal controls over financial reporting, which we are addressing. The Merger and
the subsequent acquisitions, described in Footnote 5 in the Notes of the Condensed Consolidated Financial Statements, have resulted in the use of several different financial recordation and reporting systems. Management is aware of the issue and has
initiated the integration of the divisional financial recordation and reporting into a



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single consolidated financial reporting system. Additionally, there is a lack of segregation of duties due to the small number of employees within the
financial and administrative functions of the Company. Management will continue to evaluate the employees involved and the control procedures in place, the risks associated with such lack of segregation and whether the potential benefits of adding
employees to clearly segregate duties justifies the expense associated with such increases. These matters have been communicated to our Audit Committee and we are taking appropriate steps to make necessary improvements and enhance the reliability of
our internal controls over financial reporting.

Based on our continuing evaluation, the Companys management, including the CEO and
CFO, concluded that the Companys disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and, further, that such controls and procedures were effective as of June 30, 2006. The
Companys management has concluded that the deficiencies described above do not prevent the controls and procedures from being effective because management has identified the issues and is taking action to resolve them, other aspects of the
Companys business are not negatively impacted, and the controls and procedures are subject to continuous review by management. There have been no significant changes in our internal controls or in other factors that could significantly affect
these controls subsequent to the date we completed our evaluation.



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PART II. OTHER INFORMATION



|ITEM 6. | EXHIBITS
|------- | --------



|       |  |                                                                                                                                                                                  |  |                                                                              
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|       |  |                                                                                                                                                                                 
|3(i).1 |  | Certificate of Designation of Preferences and Rights of Series E Convertible Preferred Stock                                                                                     |  | Incorporated by reference to Exhibit 3(i).1 to Form 8-K filed on May 25, 2005
|       |  |                                                                                                                                                                                 
|10.1   |  | Standard Industrial/Commercial Lease, dated May 5, 2006, by and between the Company and Haitao Group, LLC, for property located at 350 Cheryl Lane, City of Industry, California |  | Filed herewith                                                               
|       |  |                                                                                                                                                                                 
|10.2   |  | Amendment (Series E Financing)                                                                                                                                                   |  | Incorporated by reference to Exhibit 10.1 to Form 8-K filed on May 25, 2005  
|       |  |                                                                                                                                                                                 
|10.3   |  | Securities Purchase Agreement (Series E Financing)                                                                                                                               |  | Incorporated by reference to Exhibit 10.2 to Form 8-K filed on May 25, 2005  
|       |  |                                                                                                                                                                                 
|10.4   |  | Registration Rights Agreement (Series E Financing)                                                                                                                               |  | Incorporated by reference to Exhibit 10.3 to Form 8-K filed on May 25, 2005  
|       |  |                                                                                                                                                                                 
|10.5   |  | Form of Warrant A (Series E Financing)                                                                                                                                           |  | Incorporated by reference to Exhibit 10.4 to Form 8-K filed on May 25, 2005  
|       |  |                                                                                                                                                                                 
|10.6   |  | Form of Warrant B (Series E Financing)                                                                                                                                           |  | Incorporated by reference to Exhibit 10.5 to Form 8-K filed on May 25, 2005  
|       |  |                                                                                                                                                                                 
|10.7   |  | Form of Additional Warrant (Series E Financing)                                                                                                                                  |  | Incorporated by reference to Exhibit 10.6 to Form 8-K filed on May 25, 2005  
|       |  |                                                                                                                                                                                 
|31.1   |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                       |  | Filed herewith                                                               
|       |  |                                                                                                                                                                                 
|31.2   |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                       |  | Filed herewith                                                               
|       |  |                                                                                                                                                                                 
|32     |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350                                                                           |  | Filed herewith                                                               



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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, thereto duly authorized.



|                      |  |  |  |                                     
|--------------------- |  |  |  | ------------------------------------
|                      |  |  |  | GLOBAL EPOINT, INC.                 
|                      |  | 
|Date: August 21, 2006 |  |  |  | /s/    TORESA LOU                   
|                      |  |  |  | Toresa Lou,                         
|                      |  |  |  | Chief Executive Officer             
|                      |  | 
|Date: August 21, 2006 |  |  |  | /s/    JOHN PAN                     
|                      |  |  |  | John Pan,                           
|                      |  |  |  | Chief Financial Officer and Chairman



30