**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**






**FORM
      10-Q**







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




**For
      the quarterly period ended June 30, 2007**


**-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**







**GLOBAL
      EPOINT, INC.**


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






**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)**







Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
      requirements for the past 90
      days.    Yes x No  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer  ̈ Accelerated
      filer  ̈ Non-accelerated
      filer x




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 13, 2007, there were 19,513,812 shares of Common Stock ($.03 par
      value) outstanding.**



















GLOBAL
      EPOINT, INC.


QUARTERLY
      REPORT ON FORM 10-Q


FOR
      THE PERIOD ENDED JUNE 30, 2007




TABLE
      OF
      CONTENTS




**Page**Part
                I. FINANCIAL INFORMATIONItem 1.
                Interim Financial Statements (Unaudited):
            3Condensed
                Consolidated Balance Sheets as of June 30, 2007 and December 31,
                2006
            3Condensed
                Consolidated Statements of Operations for the Three and Six Months
                Ended
                June 30, 2007 and 2006
            4Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2007 and 2006
            5Condensed
                Consolidated Statements of Stockholders’ Equity (Deficit) for the Six
                Months Ended June 30, 2007
            6Notes
                to Condensed Consolidated Financial Statements
            7Item 2.
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item 3.
                Quantitative and Qualitative Disclosures about Market Risk
            23Item 4.
                Controls and Procedures
            29Part
                II. OTHER INFORMATIONItem 1.
                Legal Proceedings
            29Item 1A.
                Risk Factors
            29Item 6.
                Exhibits
            29SIGNATURES
            30


2


**GLOBAL
      EPOINT, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Thousands
      of dollars, except per share amounts)**







December
                  31,
            
            June
                30,ASSETS
            
            2006
            
            2007CURRENT
                ASSETS:Accounts
                receivable, net
            
            $
            2,292
            
            $
            3,745Inventories
            
            
            4,045
            
            
            4,061Assets
                of discontinued operations, net (Note 8)
            
            
            2,012
            
            
            1,826Other
                current assets
            
            
            751
            
            
            442Total
                current assets
            
            
            9,100
            
            
            10,074Property,
                plant and equipment, net
            
            
            771
            
            
            634Card
                dispensing equipment and related parts
            
            
            885
            
            
            885Goodwill
            
            
            8,043
            
            
            2,282Other
                intangibles
            
            
            2,541
            
            
            2,557Deposits
                and other assets
            
            
            1,193
            
            
            707Total
                other assets
            
            
            13,433
            
            
            7,065Total
                assets
            
            $
            22,533
            
            $
            17,139LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            2,875
            
            $
            4,554Accrued
                expenses
            
            
            775
            
            
            1,161Customer
                deposits
            
            
            103
            
            
            1,246Due
                to related parties
            
            
            -
            
            
            1Due
                to stockholder
            
            
            1,311
            
            
            1,354Loans
                payable
            
            
            16
            
            
            1,486Liabilities
                of discontinued operations, net (Note 8)
            
            
            1,834
            
            
            2,286Mandatorily
                redeemable preferred stock
            
            
            7,485
            
            
            7,485Total
                current liabilities
            
            
            14,399
            
            
            19,573NON-CURRENT
                LIABILITIES
            
            
            1,997
            
            
            1,989Total
                liabilities
            
            
            16,396
            
            
            21,562Commitments
                and Contingencies (Notes 10 and 11)STOCKHOLDERS'
                EQUITY (DEFICIT):Common
                stock, $.03 par value, 50,000,000 shares authorized and 19,513,812
                sharesissued
                and outstanding
            
            
            581
            
            
            584Paid-in
                capital
            
            
            28,596
            
            
            28,874Accumulated
                other comprehensive loss
            
            
            (56
            )
            
            (77
            )Accumulated
                deficit
            
            
            (22,984
            )
            
            (33,804
            )Total
                stockholders' equity (deficit)
            
            
            6,137
            
            
            (4,423
            )Total
                liabilities and stockholders' equity (deficit)
            
            $
            22,533
            
            $
            17,139






See
      accompanying notes to unaudited condensed consolidated financial statements.


3


**GLOBAL
      EPOINT, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


(Thousands
      of dollars, except per share amounts)







For
                the three months ended
            
            For
                the six months endedJune
                30,
            
            June
                30,
            
            June
                30,
            
            June
                30,2007
            
            2006
            
            2007
            
            2006Sales
            
            $
            1,725
            
            $
            2,040
            
            $
            2,372
            
            $
            3,947Sales-
                related parties
            
            
            -
            
            
            -
            
            
            157
            
            
            -Total
                net sales
            
            
            1,725
            
            
            2,040
            
            
            2,529
            
            
            3,947Cost
                of sales
            
            
            1,034
            
            
            1,481
            
            
            1,595
            
            
            3,179Cost
                of sales- related parties
            
            
            -
            
            
            -
            
            
            157
            
            
            -Total
                cost of sales
            
            
            1,034
            
            
            1,481
            
            
            1,752
            
            
            3,179Gross
                profit
            
            
            691
            
            
            559
            
            
            777
            
            
            768Operating
                expenses:Selling
                and marketing
            
            
            299
            
            
            571
            
            
            743
            
            
            1,052General
                and administrative
            
            
            1,635
            
            
            1,760
            
            
            3,283
            
            
            3,083Research
                and development
            
            
            240
            
            
            293
            
            
            559
            
            
            589Goodwill
                impairment
            
            
            4,277
            
            
            -
            
            
            4,277
            
            
            -Depreciation
                and amortization
            
            
            113
            
            
            110
            
            
            234
            
            
            217Total
                operating expenses
            
            
            6,564
            
            
            2,734
            
            
            9,097
            
            
            4,941Loss
                from operations
            
            
            (5,873
            )
            
            (2,175
            )
            
            (8,320
            )
            
            (4,173
            )Other
                income (expense)
            
            
            (573
            )
            
            166
            
            
            (610
            )
            
            157Loss
                before income tax provision
            
            
            (6,446
            )
            
            (2,009
            )
            
            (8,930
            )
            
            (4,016
            )Income
                tax provision
            
            
            -
            
            
            -
            
            
            -
            
            
            -Loss
                from continuing operations
            
            
            (6,446
            )
            
            (2,009
            )
            
            (8,930
            )
            
            (4,016
            )Loss
                from discontinued operations, net of tax
            
            
            (223
            )
            
            (103
            )
            
            (1,890
            )
            
            (171
            )Preferred
                stock dividend
            
            
            -
            
            
            (4,940
            )
            
            -
            
            
            (5,076
            )Net
                loss applicable to common stockholders
            
            $
            (6,669
            )
            $
            (7,052
            )
            $
            (10,820
            )
            $
            (9,263
            )Loss
                per share - basic and dilutedLoss
                from continuing operations
            
            $
            (0.33
            )
            $
            (0.42
            )
            $
            (0.46
            )
            $
            (0.57
            )Loss
                from discontinued operations
            
            
            (0.01
            )
            
            (0.01
            )
            
            (0.10
            )
            
            (0.01
            )$
            (0.34
            )
            $
            (0.43
            )
            $
            (0.56
            )
            $
            (0.58
            )Weighted
                average shares and share equivalents
            
            
            19,383
            
            
            16,491
            
            
            19,383
            
            
            15,925






See
      accompanying notes to unaudited condensed consolidated financial statements.


4


**GLOBAL
      EPOINT, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


(Thousands
      of dollars)




For
                the six months endedJune
                30,2007
            
            June
                30,2006CASH
                FLOWS USED IN OPERATING ACTIVITIES:Net
                loss
            
            $
            (10,820
            )
            $
            (4,187
            )Adjustments
                  to reconcile net loss to net cash flowsused
                  in operating activities:Depreciation
                and amortization
            
            
            234
            
            
            221Goodwill
                impairment
            
            
            5,820
            
            
            -Provision
                for bad debts
            
            
            15
            
            
            312Stock
                based compensation
            
            
            292
            
            
            51Non
                refundable acquisition deposit
            
            
            500
            
            
            -Increase/(decrease)
                in cash and cash equivalents from changes in:Accounts
                receivable
            
            
            (1,529
            )
            
            (433
            )Accounts
                receivable - related parties
            
            
            (67
            )
            
            460Inventory
            
            
            243
            
            
            (612
            )Other
                current assets
            
            
            236
            
            
            (265
            )Accounts
                payable
            
            
            2,146
            
            
            (804
            )Accounts
                payable - related parties
            
            
            42
            
            
            1,196Accrued
                expenses
            
            
            378
            
            
            (137
            )Customer
                deposits
            
            
            1,142
            
            
            46Net
                cash used in operating activities
            
            
            (1,368
            )
            
            (4,152
            )CASH
                FLOWS (USED IN)/PROVIDED BY INVESTING ACTIVITIES:Additions
                to property and equipment
            
            
            (12
            )
            
            (22
            )Additions
                to goodwill and other intangibles
            
            
            (96
            )
            
            (676
            )(Increase)/decrease
                in other assets
            
            
            29
            
            
            409Net
                cash used in investing activities
            
            
            (79
            )
            
            (289
            )CASH
                FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:Proceeds
                from (repayment of) loan payable
            
            
            1,362
            
            
            1,597Net
                borrowings from related parties
            
            
            42
            
            
            (485
            )Proceeds
                from advances from stockholder
            
            
            43
            
            
            32Proceeds
                from exercise of stock options
            
            
            -
            
            
            731Net
                proceeds from preferred stock offerings
            
            
            -
            
            
            3,594Net
                proceeds from the exercise of stock warrants
            
            
            -
            
            
            2,466Preferred
                stock dividend payments
            
            
            -
            
            
            (295
            )Preferred
                stock redemption
            
            
            -
            
            
            (112
            )Net
                cash provided by financing activities
            
            
            1,447
            
            
            7,528NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            -
            
            
            3,087CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            -
            
            
            780CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            -
            
            $
            3,867SUPPLEMENTAL
                DISCLOSURES OF NONCASH INVESTING AND FINANCING
                ACTIVITIES:Beneficial
                conversion included in preferred stock dividend
            
            $
            -
            
            $
            1,828Preferred
                stock dividend
            
            $
            -
            
            $
            2,982Increase
                in preferred stock dividend payable
            
            $
            -
            
            $
            5Preferred
                stock reclassified to short term debt
            
            $
            -
            
            $
            61Tops
                Digital Security, Inc. acquisition
            
            $
            -
            
            $
            2,003Compensation
                on consulting agreement
            
            $
            68
            
            $
            207






See
      accompanying notes to unaudited condensed consolidated financial statements.


5


**GLOBAL
      EPOINT, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)**


**(Thousands
      of dollars and shares)**




**JUNE
      30, 2007**




Accumulated
            
            Retained
            
            TotalAdditional
            
            Other
            
            Earnings/
            
            Stockholders'Preferred
                Stock
            
            Common
                Stock
            
            Paid
                in
            
            Comprehensive
            
            (Accumulated
            
            EquityShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Loss
            
            Deficit)
            
            (Deficit)**Balances-
                December 31, 2006**
            
            
            625
            
            $
            -
            
            
            19,414
            
            $
            581
            
            $
            28,596
            
            $
            (56
            )
            $
            (22,984
            )
            $
            6,137Common
                stock and option based compensation
            
            
            -
            
            
            -
            
            
            100
            
            
            3
            
            
            278
            
            
            -
            
            
            -
            
            
            281Net
                loss from operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,930
            )
            
            (8,930
            )Loss
                from discontinued operations, net of tax
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,890
            )
            
            (1,890
            )Other
                Comprehensive Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (21
            )
            
            -
            
            
            (21
            )**Balances-
                June 30, 2007 (unaudited)**
            
            
            625
            
            $
            -
            
            
            19,514
            
            
            584
            
            $
            28,874
            
            $
            (77
            )
            $
            (33,804
            )
            $
            (4,423
            )






See
      accompanying notes to unaudited condensed consolidated financial statements.


6


**GLOBAL
      EPOINT, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**




**JUNE
      30, 2007**




**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, 2007 and for the three and six months ended June 30, 2007 and 2006
      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, 2006 audited financial statements, which
      are included in the Company’s Annual Report on Form 10-KSB for the year ended
      December 31, 2006. The results of operations for the three and six months
      ended June 30, 2007 are not necessarily indicative of the results to be expected
      for the year ending December 31, 2007. The financial statements were
      prepared assuming that the Company is a going concern. The financial statements
      do not include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that may result from the outcome of this uncertainty.





The
      preparation of condensed consolidated financial statements in conformity with
      accounting principles generally accepted in the U.S. requires management to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.





The
      Company has suffered recurring losses from operations and at June 30, 2007
      had a
      shareholders deficit of $4.4 million that raises substantial doubt about its
      ability to continue as a going concern. The Company believes that it can satisfy
      its cash requirements for at least the next 3 months, however it will need
      to raise up to an additional $3 million in order to continue to operate its
      business. If the Company is unable to achieve projected operating results and/or
      obtain such additional financing if and when needed, management will be required
      to curtail plans and scale back planned activities. No assurances can be given
      that the Company will be successful in raising additional financing should
      such
      financing be required by future operations.




**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 have been operated from three divisions: our contract
      manufacturing division, aviation division and our digital technology division.
      Our contract manufacturing division, which 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. We
      are
      restructuring our operations, we are closing the operations of our contract
      manufacturing division which we expect to complete in the third quarter of
      2007.
      We are currently reviewing our digital technology division operations. We have
      substantially reduced our digital technology division through the closing of
      our
      research and development operations and reduced our product offerings.




***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, 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. Best Logic LLC (“Best Logic”),
      which was organized in California in November 2000, operations were discontinued
      in the second quarter of 2007 as described in Note 8. In accordance with
      Statement of Financial Accounting Standards No. 144, “Accounting for the
      Impairment or Disposal of Long Lived Assets,” results of operations for the
      three and six months ended June 30, 2007 and 2006 included in our consolidated
      statements of income have been reclassified and presented as discontinued
      operations. 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.


7




***Accounting
      for stock options*** The Company recorded expenses for stock based compensation of $148 thousand
      and
      $22 thousand for the three months ended June 30, 2007 and 2006, respectively,
      and $292 thousand and $44 thousand for the six months ended June 30, 2007 and
      2006, respectively.




***Earnings(Losses)
      per share*** 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 9.5 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**
            
            **Shares**
            
            **Per-share****(Numerator)**
            
            **(Denominator)**
            
            **Amount**For
                the three months ended June 30, 2007:Basic
                and fully diluted loss per shareLoss
                applicable to common stockholders
            
            
            
            
            $
            (6,669
            )
            
            19,383
            
            $
            (0.34
            )For
                the three months ended June 30, 2006:Basic
                and fully diluted loss per shareLoss
                applicable to common stockholders
            
            
            
            
            $
            (7,052
            )
            
            16,491
            
            $
            (0.43
            )For
                the six months ended June 30, 2007:Basic
                and fully diluted loss per shareLoss
                applicable to common stockholders
            
            
            
            
            $
            (10,820
            )
            
            19,383
            
            $
            (0.56
            )For
                the six months ended June 30, 2006:Basic
                and fully diluted income per shareLoss
                applicable to common stockholders
            
            
            
            
            $
            (9,289
            )
            
            15,925
            
            $
            (0.58
            )





**3.  
      Inventories**




Inventories
      consisted of the following as of June 30, 2007 (in thousands):




Video
                and data recording component parts
            
            $
            2,552Cockpit
                door surveillance system and wire harness component parts
            
            
            1,509Total
            
            $
            4,061





8




**4.  
      Property and equipment**




Property
      and equipment consisted of the following as of June 30, 2007 (in thousands):




Furniture
                and equipment
            
            $
            540Computer
                equipment and software
            
            
            300Building
                improvements
            
            
            476Tooling
                and demo units
            
            
            34Vehicles
            
            
            158Totals
            
            
            1,507Less
                accumulated depreciation
            
            
            (873
            )Property
                and equipment, net
            
            $
            634





**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, 2007 the net amount of $4.9
      million of goodwill and intangible assets represented 28% 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 thousand 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. 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
      contract manufacturing division has been discontinued, and the Company
      recognized non-cash goodwill impairment charges of $1.5 million in March 2007.
      Upon review of the digital technology division and based on the current
      restructuring and reduction in product offerings, the Company recognized
      non-cash goodwill impairment charges of $2.9 million in June 2007.




On
      August
      15, 2007 the Federal Aviation Administration (FAA) published its final rule
      on
      flightdeck door monitoring and crew discreet alerting systems (See Note 12
      Subsequent Events for more details). The FAA’s final rule provides for
      alternative methods to comply with monitoring on the passenger side of the
      flightdeck door other than a video monitoring system. The Company expected
      an
      FAA mandate for its CDSS system would provide substantial near term opportunity
      from US based air carriers. Without the mandate, the near term opportunity
      becomes less certain. The lack of a FAA mandate for CDSS systems resulted in
      a
      revision to Management revenue assumptions. Application of the discounted cash
      flows methodology using the revised assumptions, resulted in a $1.4 million
      non-cash goodwill impairment charge for the aviation division.




The
      Company is restructuring it operations and continually monitors its operations
      for any potential indicators of impairment of goodwill and intangible assets.
      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, 2007 and 2006, one and two customers accounted
      for 80% and 60% of the Company’s sales, respectively. For the six months ended
      June 30, 2007 and 2006 one and two customers accounted for 59% and 60% of
      the Company’s sales, respectively, and 41% of the accounts receivable as of
      June 30, 2007. For the three months ended June 30, 2007 there was no
      purchase concentration. For the three months ended June 30, 2006, two vendors
      accounted for 72% of the Company’s purchases. For the six months ended
      June 30, 2007 and 2006, one and two vendors, respectively, accounted for
      70% and 62% of the Company’s purchases, respectively, and none of the accounts
      payable as of June 30, 2007. A substantial amount of the above sales and
      purchase transactions in 2006 were conducted with related parties through our
      contract manufacturing division the results of which have been reclassified
      as
      discontinued operations as discussed in Note 8.


9




**7.  
      Related party transactions**




**Rent
      agreement** Mr. John Pan, the Company’s Chairman, Chief Financial Officer, 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 $49 thousand and $108 thousand for the three months ended June
      30, 2007 and 2006, respectively, and $98 thousand and $216 thousand for the
      six
      months ended June 30, 2007 and 2006, respectively.




Rental
      costs for manufacturing and assembly equipment were approximately $8 thousand
      and $21 thousand for the three months ended June 30, 2007 and 2006,
      respectively, and $18 thousand and $42 thousand for the six months ended June
      30, 2007 and 2006, respectively.




**Loans
      Payable** In
      June 2004, the Company borrowed $1,000,000 from John Pan, the Company’s
      Chairman, Chief Financial Officer and President. 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 8.50% as of December 31,
      2006. The Company is required to accrue interest payments each month until
      the
      principal balance is paid in full, which was to occur no later than
      December 15, 2006. The Company is negotiating with Mr. Pan to extend
      the term of the loan.




**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, and
      principal stockholder, Mr. John Pan (“Related Parties”). Substantially all
      of our related party transactions are through our contract manufacturing
      division whose operations have been discontinued.




**8.  
      Discontinued operations**




In
      the
      second quarter of 2007, the Company discontinued the contract manufacturing
      operations to focus its resources on business initiatives which the Company
      believes have higher margin and growth potential. The discontinuation of the
      contract manufacturing division resulted in an after tax charge of $1.9 million
      for the six months ended June 30, 2007 of which $1.5 million was due to the
      impairment of goodwill.




The
      Company has reflected the results of its contract manufacturing business as
      discontinued operations in the Condensed Consolidated Statements of Operations.
      Summary results of operations for the contract manufacturing division were
      as
      follows (in thousands):





For
                the three months ended
            
            For
                the six months ended***($
                in thousands)***
            
            June
                30, 2007
            
            June
                30, 2006
            
            June
                30, 2007
            
            June
                30, 2006Net
                sales
            
            $
            266
            
            $
            6,178
            
            $
            949
            
            
            11,590Cost
                of sales
            
            
            194
            
            
            5,651
            
            
            731
            
            
            10,470Gross
                profit
            
            
            72
            
            
            527
            
            
            218
            
            
            1,120Operating
                expenses
            
            
            280
            
            
            603
            
            
            2,091
            
            
            1,265Loss
                from operations
            
            
            (208
            )
            
            (76
            )
            
            (1,873
            )
            
            (145
            )Other
                income (expense)
            
            
            (14
            )
            
            (26
            )
            
            (17
            )
            
            (26
            )Loss
                before income tax provision
            
            $
            (222
            )
            $
            (102
            )
            $
            (1,890
            )
            
            (171
            )




10


The
      assets of the contract manufacturing division are reflected as net assets of
      discontinued operations in the Condensed Consolidated Balance Sheets and were
      as
      follows (in thousands):





December
                31,
            
            June
                  30,2006
            
            2007Accounts
                receivable, net
            
            $
            399
            
            $
            472Accounts
                receivable - related parties
            
            
            139
            
            
            206Inventories
            
            
            1,318
            
            
            1,059Property,
                plant and equipment, net
            
            
            18
            
            
            14Deposits
                and other assets
            
            
            138
            
            
            75Assets
                of discontinued operations, net
            
            $
            2,012
            
            $
            1,826




**9.  
      Segment reporting**




The
      Company’s continuing operations are in two business segments; marketing,
      developing and distributing advanced digital technology products related to
      digital video, audio and data transmission and recording products (digital
      technology) and flight support business including aircraft electronics and
      communications systems (aviation). 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
      loss before income tax provision and total assets. All inter-company
      transactions between segments have been eliminated. Information with respect
      to
      the Company’s loss before income tax provision by segment is as follows:





For
                the three months ended June 30, 2007Digital***($
                in thousands)***
            
            Technology
            
            Aviation
            
            Corporate
            
            TotalNet
                sales
            
            $
            141
            
            $
            1,584
            
            $
            -
            
            $
            1,725Cost
                of sales
            
            
            67
            
            
            967
            
            
            -
            
            
            1,034Gross
                profit
            
            
            74
            
            
            617
            
            
            -
            
            
            691Operating
                expenses
            
            
            3,723
            
            
            1,742
            
            
            1,099
            
            
            6,564Loss
                from operations
            
            
            (3,649
            )
            
            (1,125
            )
            
            (1,099
            )
            
            (5,873
            )Other
                income (expense)
            
            
            (30
            )
            
            (43
            )
            
            (500
            )
            
            (573
            )Loss
                before income tax provision
            
            $
            (3,679
            )
            $
            (1,168
            )
            $
            (1,599
            )
            $
            (6,446
            )Total
                assets as of June 30, 2007
            
            $
            5,146
            
            $
            8,751
            
            $
            1,430
            
            $
            15,326


11





For
                the three months ended June 30, 2006Digital***($
                in thousands)***
            
            Technology
            
            Aviation
            
            Corporate
            
            TotalNet
                sales
            
            $
            420
            
            $
            1,620
            
            $
            -
            
            $
            2,040Cost
                of sales
            
            
            238
            
            
            1,243
            
            
            -
            
            
            1,481Gross
                profit
            
            
            182
            
            
            377
            
            
            -
            
            
            559Operating
                expenses
            
            
            1,230
            
            
            703
            
            
            802
            
            
            2,735Loss
                from operations
            
            
            (1,048
            )
            
            (326
            )
            
            (802
            )
            
            (2,176
            )Other
                income (expense)
            
            
            (14
            )
            
            -
            
            
            180
            
            
            166Loss
                before income tax provision
            
            $
            (1,062
            )
            $
            (326
            )
            $
            (622
            )
            $
            (2,010
            )Total
                assets as of June 30, 2006
            
            $
            10,729
            
            $
            10,179
            
            $
            5,465
            
            $
            26,373For
                the six months ended June 30, 2007Digital***($
                in thousands)***
            
            
            Technology
            
            
            Aviation
            
            
            Corporate
            
            
            TotalNet
                sales
            
            $
            514
            
            $
            2,015
            
            $
            -
            
            $
            2,529Cost
                of sales
            
            
            403
            
            
            1,349
            
            
            -
            
            
            1,752Gross
                profit
            
            
            111
            
            
            666
            
            
            -
            
            
            777Operating
                expenses
            
            
            4,822
            
            
            2,250
            
            
            2,025
            
            
            9,097Loss
                from operations
            
            
            (4,711
            )
            
            (1,584
            )
            
            (2,025
            )
            
            (8,320
            )Other
                income (expense)
            
            
            (50
            )
            
            (60
            )
            
            (500
            )
            
            (610
            )Loss
                before income tax provision
            
            $
            (4,761
            )
            $
            (1,644
            )
            $
            (2,525
            )
            $
            (8,930
            )Total
                assets as of June 30, 2007
            
            $
            5,146
            
            $
            10,179
            
            $
            1,430
            
            $
            15,326For
                the six months ended June 30, 2006Digital***($
                in thousands)***
            
            
            Technology
            
            
            Aviation
            
            
            Corporate
            
            
            TotalNet
                sales
            
            $
            625
            
            $
            3,322
            
            $
            -
            
            $
            3,947Cost
                of sales
            
            
            419
            
            
            2,760
            
            
            -
            
            
            3,179Gross
                profit
            
            
            206
            
            
            562
            
            
            -
            
            
            768Operating
                expenses
            
            
            2,036
            
            
            1,422
            
            
            1,483
            
            
            4,941Loss
                from operations
            
            
            (1,830
            )
            
            (860
            )
            
            (1,483
            )
            
            (4,173
            )Other
                income (expense)
            
            
            (29
            )
            
            -
            
            
            186
            
            
            157Loss
                before income tax provision
            
            $
            (1,859
            )
            $
            (860
            )
            $
            (1,297
            )
            $
            (4,016
            )Total
                assets as of June 30, 2006
            
            $
            10,729
            
            $
            10,179
            
            $
            5,465
            
            $
            26,373




12




**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
      of
      which 748,087 shares have been converted into common stock or redeemed since
      issuance. 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.




Pursuant
      to the terms of the Certificates of Designations, if the Company’s common stock
      is not listed on the New York Stock Exchange, American Stock Exchange, Nasdaq
      National Market, Nasdaq Capital Market or the OTC Bulletin Board for a period
      of
      seven consecutive trading days, holders of the outstanding preferred shares
      may
      elect that we repurchase their preferred shares. Effective upon the opening
      of
      the market on September 19, 2006, the Company’s securities were delisted
      from the Nasdaq Capital Market. Since that time, the Company’s common stock has
      been trading on the electronic Pink Sheets. There are outstanding 501,917 shares
      of Series C preferred stock. Beginning September 29, 2006, the Company has
      received demands for redemption on an aggregate 287,508 Series C preferred
      shares with an aggregate redemption amount of $805,022 plus $12,210 accrued
      but
      unpaid dividends. If the holders of all Series C preferred shares outstanding
      as
      of June 30, 2007 request redemption, the aggregate redemption amount of all
      Series C preferred shares outstanding as of June 30, 2007 would be $1.4 million,
      plus $115 thousand of accrued but unpaid dividends and interest. All demands
      for
      redemption payments are due within sixty (60) days of the date the Company
      receives written notice from such stockholder of its election and to date the
      redemption demands have not been paid. The preferred shares were reclassified
      as
      liabilities resulting in a beneficial conversion of $0.4 million which was
      recorded as a non cash preferred dividend. The preferred stock is included
      in
      current liabilities on the accompanying condensed consolidated balance sheets.




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 Company issued 120,000 shares of Series D Preferred Stock
      convertible into shares of the Company’s common stock at the rate of $4.16 per
      share of which 114,500 shares have been converted to common stock. The Company
      also issued warrants (“A warrants”) to purchase 721,157 shares of the Company’s
      common stock at $4.33 per share. 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.
      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.


13




Holders
      of the Series D Preferred Stock are entitled to receive dividends, payable
      semi-annually, 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.
      The Company must redeem the Series D preferred stock, on a quarterly basis,
      which began 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.




Pursuant
      to the terms of the Certificates of Designations, if the Company’s common stock
      is not listed on the New York Stock Exchange, American Stock Exchange, Nasdaq
      National Market, Nasdaq Capital Market or the OTC Bulletin Board for a period
      of
      seven consecutive trading days, holders of the outstanding preferred shares
      may
      elect that the Company repurchase their preferred shares. Effective upon the
      opening of the market on September 19, 2006, the Company’s securities were
      delisted from the Nasdaq Capital Market. Since that time, the Company’s common
      stock has been trading on the electronic Pink Sheets. There are outstanding
      5,500 shares of Series D preferred stock for which the Company has received
      redemption demands. The aggregate redemption amount is $275 thousand plus $20
      thousand accrued but unpaid dividends and interest. All demands for redemption
      payments are due within sixty (60) days of the date the Company receives
      written notice from such stockholder of its election and to date the redemption
      demand has not been paid. The preferred shares were reclassified as liabilities
      resulting in a beneficial conversion of $0.1 million which was recorded as
      a
      non-cash preferred dividend. The preferred stock is included in current
      liabilities on the accompanying condensed consolidated balance sheets.




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, at the time the related mandatory redemption requirements have
      been met, the shares will be reclassified as liabilities. 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.




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.




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.


14




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 began 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 is 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 E preferred stock has been classified as equity. Additionally, in
      accordance with SFAS No. 150, at the time the related mandatory redemption
      requirements have been met, the shares 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
      accompanying condensed consolidated balance sheets.




The
      Company is subject to 1% liquidated damages to the extent the registration
      statement for the underlying shares was not declared effective by the SEC as
      of
      August 21, 2006. The liquidated damages 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 SEC
      has not declared the registration statement effective and the Company may be
      subject to liquidated damages in the aggregate amount of $136 thousand as of
      June 30, 2007. 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.




There
      are
      outstanding 117,314 shares of Series E preferred stock. Beginning
      September 29, 2006, the Company has received demands for redemption on an
      aggregate of 101,878 Series E preferred shares with an aggregate redemption
      amount of $5,093,900 plus $472 accrued but unpaid dividends and interest. If
      the
      holders of all Series E preferred shares outstanding request redemption, the
      aggregate redemption amount of all Series E preferred shares outstanding as
      of
      September 30, 2006 would be $5.9 million, plus $533 thousand of accrued but
      unpaid dividends and interest. All demands for redemption payments are due
      within sixty (60) days of the date the Company receives written notice from
      such stockholder of its election and to date the redemption demands have not
      been paid. The preferred shares were reclassified as current liabilities
      resulting in a beneficial conversion of $2.8 million which was recorded as
      a
      non-cash preferred dividend. The preferred stock is included in current
      liabilities on the accompanying condensed consolidated balance sheets.




**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.




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 sheets.


15




**11. 
      Other Financing Transactions**




On
      March 9, 2005, the Company’s wholly-owned subsidiary, Best Logic, LLC,
      entered into a loan agreement with Far East National Bank pursuant to which
      the
      bank has agreed to loan Best Logic up to $1 million. 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%. As of December 31,
      2006 the 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
      March 15, 2007. The Company is currently in default on the loan agreement
      and has negotiated a forbearance agreement with Far East National Bank. As
      of
      June 30, 2007, a total of $865,000 remains outstanding on the loan agreement
      and
      $17 thousand of accrued but unpaid interest.




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 and Chief
      Financial Officer.




On
      January 15, 2007, the Company’s wholly-owned subsidiary, Global Airworks,
      Inc., entered into a loan agreement with Hu Cheng-Lien, an individual, to loan
      Global Airworks, Inc. up to $1.5 million. Pursuant to a promissory note, dated
      January 15, 2007, executed in connection with the loan agreement, interest
      on the outstanding principal balance of an advance will accrue at an interest
      rate equal to 10%. Interest is payable at the maturity date of each advance
      which is 180 days from the date of each advance. As of June 30, 2007, a total
      of
      $1.47 million has been advanced to Global Airworks, Inc. pursuant to the loan
      agreement. The Company is currently in default on the initial repayment due
      on
      the loan and plans to enter into negotiations with Hu Cheng-Lien to revise
      the
      terms or restructure the loan.




In
      connection with the loan agreement, and as collateral for the loan, Global
      Airworks, Inc executed a security agreement granting Hu Cheng-Lien a security
      interest in certain assets of Global Airworks, Inc. including all inventory,
      accounts, equipment, and general intangibles. In addition, the loan is secured
      by a guaranty executed by Global ePoint, Inc. and Tops Digital Security, LLC.




**12. 
      Subsequent Events**




On
      August
      15, 2007 the Federal Aviation Administration (FAA) published its final rule
      on
      flightdeck door monitoring and crew discreet alerting systems. The final rule
      sets a performance standard whereby air carriers must choose a method of
      compliance to view the area outside the flightdeck door. The performance
      standard may be met using a video monitoring device, a peephole or viewport,
      or
      other viewing device. The method of compliance must include procedures and
      training for unlocking the flightdeck door and operating all of the associated
      equipment for use in operations.




The
      International Civil Aviation Organization (ICAO) is the body that establishes
      standards for international civil aviation. On March 15, 2002 the ICAO adopted
      standards for monitoring the area on the passenger side of the flightdeck door.
      The standards are published in ICAO Annex 6 Part 1, Chapter 13. Section 13.2.3
      (b) states, “Means shall be provided for monitoring from either pilot’s station
      the entire door area outside the flight crew compartment to identify persons
      requesting entry and to detect suspicious behavior or potential threat.” The FAA
      issued a Notice of Proposed Rule Making (NPRM) in November 2005 which, if
      enacted as written, would mandate cockpit door surveillance system (CDSS) for
      all commercial passenger aircraft operating in the US and require compliance
      with the mandate within two years of enactment of the rule. The Company believed
      in order to comply with the international standards and in accordance with
      the
      NPRM as written, a video monitoring device would be required. The Company’s CDSS
      system met the expected video monitoring standard.




The
      FAA’s
      final rule allows for alternative methods of complying with the
      requirement to monitor the passenger side of the flightdeck door than a video
      monitoring system. The Company believes video monitoring from the pilot’s
      station provides a safer and more secure solution for monitoring the area
      outside the flightdeck door than other alternatives. The Company
      expected the FAA mandate to require CDSS systems,
      which would provide substantial near term opportunities from US based air
      carriers. Without the mandate, the near term opportunity becomes less certain;
      however, the Company believes considerable opportunity remains for these
      products in the United States market given the importance of passenger safety
      and security. The Company also believes there is substantial opportunity around
      the world for the CDSS system as various countries governing authorities through
      out the world may provide stricter adherence to the standards provided by the
      ICAO.




On
      March
      1, 2007, Iroquois Master Fund Ltd filed a summons and complaint against Global
      ePoint, Inc. in the United Stated District Court for the Southern District
      of
      New York (Case No. 07 CIV 1789). In its complaint, Iroquois alleged that the
      Company owed Iroquois a total of approximately $5,292,503 pursuant to the
      mandatory redemption features of the Company’s Series D and Series E convertible
      preferred stock previously sold to Iroquois. Pursuant to a Stipulation entered
      into between the parties in July 2007, the Company has agreed to the entry
      of a
      judgment against the Company in the amount of $5,292,853, inclusive of court
      costs. By way of the Stipulation, Iroquois has agreed not to take action to
      enforce the judgment until the earlier to occur of (i) eight (8) months from
      the
      date of the judgment; (ii) a bankruptcy event within the meaning of subparts
      (a)
      through (e), (g) or (h) of the definition “Bankruptcy Event” as defined in the
      Securities Purchase Agreement (“Purchase Agreement”) dated May 23, 2006 between
      the Company and Iroquois; or (iii) a “Change of Control” as defined in the
      Purchase Agreement.


16


**ITEM 2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




**OVERVIEW**




Our
      working capital deficiency and continued operating loss, requires us to
      restructure our operations. Our goal is to focus our resources in the areas
      we
      believe will lead us to the fastest opportunity to reach profitability and
      long
      term growth. In the initial step to achieve our goal we have begun to trim
      our
      operating costs by discontinuing our contract manufacturing division operations
      and significantly reducing our research and development efforts. Our continuing
      operations currently consist of our aviation division which primarily provides
      surveillance and safety products and aircraft modification products and services
      to the commercial airline industry; and digital technology division, 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.
      Additionally, we are exploring opportunities to sell various assets and product
      offerings to achieve our objective. Upon completion of the restructuring we
      expect to significantly reduce overhead. We believe the streamlining of our
      operations and reduction of overhead will provide us with additional opportunity
      to obtain the working capital required to move forward.




We
      have
      continued to have difficulty financing our operations. We entered into our
      Series E preferred stock financing in order to continue with our product
      development, acquisitions and sales and marketing strategies. As a result of
      the
      transaction, we were delisted from the Nasdaq Capital Market due to shareholder
      approval issues arising from the Nasdaq’s determination to aggregate our Series
      C, D, and E financings and our failure to file “listing of additional
      share” forms for these financings on a timely basis. Although we appealed the
      determination our appeals were denied and we were delisted from the Nasdaq
      Capital Market. Our common stock is currently quoted in the Pink Sheets under
      the trading symbol “GEPT.PK.”




As
      a
      result of the delisting substantially all of our preferred stockholders have
      submitted redemption demands which has resulted in a working capital deficit.
      On
      March 1, 2007, Iroquois Master Fund Ltd filed a summons and complaint against
      Global ePoint, Inc. in the United Stated District Court for the Southern
      District of New York (Case No. 07 CIV 1789). In its complaint, Iroquois alleged
      that the Company owed Iroquois a total of approximately $5,292,503 pursuant
      to
      the mandatory redemption features of the Company’s Series D and Series E
      convertible preferred stock previously sold to Iroquois. Pursuant to a
      Stipulation entered into between the parties in July 2007, the Company has
      agreed to the entry of a judgment against the Company in the amount of
      $5,292,853, inclusive of court costs. By way of the Stipulation, Iroquois has
      agreed not to take action to enforce the judgment until the earlier to occur
      of
      (i) eight (8) months from the date of the judgment; (ii) a bankruptcy event
      within the meaning of subparts (a) through (e), (g) or (h) of the definition
      “Bankruptcy Event” as defined in the Securities Purchase Agreement (“Purchase
      Agreement”) dated May 23, 2006 between the Company and Iroquois; or (iii) a
“Change of Control” as defined in the Purchase Agreement.We intend to
      improve our working capital position by negotiating with Iroquois regarding
      its
      judgement and the holders of our remaining Series C, D and E preferred stock
      to
      resolve their demands without the need to make the required cash
      payments.




There
      can
      be no assurance, however that we will be successful in our restructuring
      efforts, including the resolution of the Iroquois judgement or the
      preferred stockholders’ redemption demands without the need to make the
      required cash payments or obtain additional working capital.




**RESULTS
      OF OPERATIONS—COMBINED**




The
      following is a schedule showing the combined operations for our digital
      technology and aviation 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, 2007Digital***($
                in thousands)***
            
            Technology
            
            Aviation
            
            Corporate
            
            TotalNet
                sales
            
            $
            141
            
            $
            1,584
            
            $
            -
            
            $
            1,725Cost
                of sales
            
            
            67
            
            
            967
            
            
            -
            
            
            1,034Gross
                profit
            
            
            74
            
            
            617
            
            
            -
            
            
            691Operating
                expenses
            
            
            3,723
            
            
            1,742
            
            
            1,099
            
            
            6,564Loss
                from operations
            
            
            (3,649
            )
            
            (1,125
            )
            
            (1,099
            )
            
            (5,873
            )Other
                income (expense)
            
            
            (30
            )
            
            (43
            )
            
            (500
            )
            
            (573
            )Loss
                before income tax provision
            
            $
            (3,679
            )
            $
            (1,168
            )
            $
            (1,599
            )
            $
            (6,446
            )Total
                assets as of June 30, 2007
            
            $
            5,146
            
            $
            8,751
            
            $
            1,430
            
            $
            15,326


17





For
                the three months ended June 30, 2006Digital***($
                in thousands)***
            
            Technology
            
            Aviation
            
            Corporate
            
            TotalNet
                sales
            
            $
            420
            
            $
            1,620
            
            $
            -
            
            $
            2,040Cost
                of sales
            
            
            238
            
            
            1,243
            
            
            -
            
            
            1,481Gross
                profit
            
            
            182
            
            
            377
            
            
            -
            
            
            559Operating
                expenses
            
            
            1,230
            
            
            703
            
            
            802
            
            
            2,735Loss
                from operations
            
            
            (1,048
            )
            
            (326
            )
            
            (802
            )
            
            (2,176
            )Other
                income (expense)
            
            
            (14
            )
            
            -
            
            
            180
            
            
            166Loss
                before income tax provision
            
            $
            (1,062
            )
            $
            (326
            )
            $
            (622
            )
            $
            (2,010
            )Total
                assets as of June 30, 2006
            
            $
            10,729
            
            $
            10,179
            
            $
            5,465
            
            $
            26,373




For
                the six months ended June 30, 2007Digital***($
                in thousands)***
            
            Technology
            
            Aviation
            
            Corporate
            
            TotalNet
                sales
            
            $
            514
            
            $
            2,015
            
            $
            -
            
            $
            2,529Cost
                of sales
            
            
            403
            
            
            1,349
            
            
            -
            
            
            1,752Gross
                profit
            
            
            111
            
            
            666
            
            
            -
            
            
            777Operating
                expenses
            
            
            4,822
            
            
            2,250
            
            
            2,025
            
            
            9,097Loss
                from operations
            
            
            (4,711
            )
            
            (1,584
            )
            
            (2,025
            )
            
            (8,320
            )Other
                income (expense)
            
            
            (50
            )
            
            (60
            )
            
            (500
            )
            
            (610
            )Loss
                before income tax provision
            
            $
            (4,761
            )
            $
            (1,644
            )
            $
            (2,525
            )
            $
            (8,930
            )Total
                assets as of June 30, 2007
            
            $
            5,146
            
            $
            10,179
            
            $
            1,430
            
            $
            15,326




For
                the six months ended June 30, 2006Digital***($
                in thousands)***
            
            Technology
            
            Aviation
            
            Corporate
            
            TotalNet
                sales
            
            $
            625
            
            $
            3,322
            
            $
            -
            
            $
            3,947Cost
                of sales
            
            
            419
            
            
            2,760
            
            
            -
            
            
            3,179Gross
                profit
            
            
            206
            
            
            562
            
            
            -
            
            
            768Operating
                expenses
            
            
            2,036
            
            
            1,422
            
            
            1,483
            
            
            4,941Loss
                from operations
            
            
            (1,830
            )
            
            (860
            )
            
            (1,483
            )
            
            (4,173
            )Other
                income (expense)
            
            
            (29
            )
            
            -
            
            
            186
            
            
            157Loss
                before income tax provision
            
            $
            (1,859
            )
            $
            (860
            )
            $
            (1,297
            )
            $
            (4,016
            )Total
                assets as of June 30, 2006
            
            $
            10,729
            
            $
            10,179
            
            $
            5,465
            
            $
            26,373




18




**RESULTS
      OF OPERATIONS—DIGITAL TECHNOLOGY DIVISION**




*For
      the Three Months Ended June 30,, 2007 Compared to June 30,, 2006*




Revenues
      for the digital technology division decreased to $141 thousand for the three
      months ended June 30, 2007 compared to $420 thousand for the three months ended
      June 30, 2006. Gross margins were 52% for the three months ended June 30, 2007
      compared to 43% for the three months ended June 30, 2006. The decrease in
      revenues is due to a decrease in sales of our mobile digital video surveillance
      and our Perpetual Digital branded fixed digital surveillance solutions. As
      part
      of our restructuring we have streamlined the division by reducing our overhead
      and discontinuing our research and development efforts for these product
      offerings. The division is currently focusing on its Tops Digital Security
      products and services. We are continuing to review the division’s overhead and
      operations to meet our strategic objectives.




Operating
      expenses increased to $3.7 million for the three months ended June 30, 2007
      from
      $1.2 million for the three months ended June 30, 2006. The increase in operating
      expenses is due to $2.9 impairment of goodwill relating to our mobile, Perpetual
      Digital and Tops product offerings. This is offset by a reduction in operating
      expenses of $400 thousand comprised of $263 thousand reduction in selling and
      sales related expenses and $122 thousand reduction in general and administrative
      expenses related to the mobile and Perpetual Digital products.




The
      net
      result of the foregoing is that the digital technology division incurred a
      loss
      from operations of $3.6 million for the three months ended June 30, 2007
      compared to a loss from operations of $1.0 million for the three months ended
      June 30, 2006.




*For
      the Six Months Ended June 30, 2007 Compared to June 30, 2006*




Revenues
      for the digital technology division decreased to $514 thousand for the six
      months ended June 30, 2007 compared to $625 thousand for the six months ended
      June 30, 2006. The decrease in revenues is due to a $214 thousand decrease
      in
      sales of the mobile and Perpetual Digital products offset by $87 thousand
      increase in sales of our Tops digital surveillance products. Gross margins
      were
      22% for the six months ended June 30, 2007 compared to 33% for the six months
      ended June 30, 2006. The decline in gross margins is due to the sale of low
      margin Perpetual Digital products.




Operating
      expenses increased to $4.8 million for the six months ended June 30, 2007 from
      $2.0 million for the six months ended June 30, 2006. The increase in operating
      expenses is due to $2.9 million impairment of goodwill relating to our mobile,
      Perpetual Digital, and Tops product offerings. Other operating expenses declined
      $100 thousand comprised of $293 thousand reduction in selling and sales related
      expenses, $94 thousand reduction in general and administrative expenses and
      $235
      thousand reduction in research and development expenses associated with the
      mobile and Perpetual Digital products. This decline in other operating expenses
      was offset by an increase in expenses for Tops. Tops was acquired in April
      2006,
      the resulting increase in expenses is due to a full six months of expenses
      in
      2007. The additional expenses consisted of $56 thousand selling expenses, $250
      thousand general and administrative expenses and $204 thousand for research
      and
      development costs associated with our establishment of an R&D facility in
      Korea to facilitate the development of the high end Tops product line.




The
      net
      result of the foregoing is that the digital technology division incurred a
      loss
      from operations of $4.7 million for the six months ended June 30, 2007 compared
      to a loss from operations of $1.8 million for the six months ended June 30,
      2006.




**RESULTS
      OF OPERATIONS—AVIATION DIVISION**




*For
      the Three Months Ended June 30, 2007 Compared to June 30, 2006*




Revenues
      for the three months ended June 30, 2007 and 2006 totaled $1.6 million. Cost
      of
      goods sold was $1.0 million for the three months ended June 30, 2007 compared
      to
      $1.2 million for the three months ended June 30, 2006. Gross margins were 39%
      for the three months ended June 30, 2007 compared to 23% for the three months
      ended June 30, 2006. The decrease in cost of goods sold and increase in gross
      margins is due to the increase in sales of higher margin equipment sales in
      the
      quarter ended June 30, 2007 from lower margin maintenance services operations
      in
      the quarter ended June 30, 2006. We established a maintenance operation in
      Tulsa, Oklahoma, in September 2005, to service a contract we obtained from
      a
      large Latin American airlines. The operation did not meet our expected
      profitability, therefore, we no longer offer the services and closed the
      maintenance facility in Tulsa Oklahoma at the end of 2006 upon completion of
      the
      contract.




Operating
      expenses totaled $1.7 million for the three months ended June 30, 2007 compared
      to $703 thousand for the three months ended June 30, 2006. The increase in
      operating expenses is due to $1.4 million impairment of goodwill offset by
      $355
      thousand decrease in expenses primarily due to costs associated with the
      maintenance services operation.


19




As
      a
      result of the foregoing, the aviation division incurred loss from operations
      of
      $1.1 million for the three months ended June 30, 2007 compared to a loss from
      operations of $326 thousand for the three months ended June 30, 2006. Excluding
      the charge for the impairment of goodwill, the aviation division incurred income
      from operations of $269 thousand for the three months ended June 30,
      2007




*For
      the Six Months Ended June 30, 2007 Compared to June 30, 2006*




Revenues
      for the six months ended June 30, 2007 totaled $2.0 million compared to $3.3
      million for the six months ended June 30, 2006. The decrease in sales is the
      result of a decrease in aircraft maintenance services of $2.2 million offset
      by
      a $0.8 million increase in sales of other modification equipment and services.
      Cost of goods sold was $1.3 million for the six months ended June 30, 2007
      compared to $2.8 million for the six months ended June 30, 2006. Gross margins
      increased to 33% for the six months ended June 30, 2007 compared to 17% for
      the
      six months ended June 30, 2006. The decrease in cost of goods sold and increase
      in gross margins is due to the change in revenues to higher margin modification
      equipment in the six months ended June 30, 2007 compared to revenue from the
      low
      margin maintenance services operations for the six months ended June 30, 2006.




Operating
      expenses totaled $2.2 million for the six months ended June 30, 2007 compared
      to
      $1.4 million for the six months ended June 30, 2006. The increase in operating
      expenses is due to $1.4 million impairment of goodwill and $85 thousand increase
      in interest and legal expenses on the secured line of credit which was
      established in January 2007. The increase in expenses is offset primarily by
      a
      decrease of $467 thousand in costs associated with the maintenance services
      operation and reduction in overhead and $120 thousand decrease in sales and
      sales related expenses.




On
      August
      15, 2007 the Federal Aviation Administration (FAA) published its final rule
      on
      flightdeck door monitoring and crew discreet alerting systems (See Note 12
      Subsequent Events for more details). The FAA’s final rule provides for
      alternative methods to comply with monitoring on the passenger side of the
      flightdeck door other than a video monitoring system. The Company expected
      an
      FAA mandate for its CDSS system would provide substantial near term opportunity
      for US based air carriers. Without the mandate, the near term opportunity
      becomes less certain. The lack of a FAA mandate for CDSS systems resulted in
      a
      revision to Management revenue assumptions. Application of the discounted cash
      flows methodology using the revised assumptions, resulted in a $1.4 million
      non-cash goodwill impairment charge.




As
      a
      result of the foregoing, the aviation division incurred a loss from operations
      of $1.6 million for the six months ended June 30, 2007 from $860 thousand for
      the six months ended June 30, 2006. Excluding the charge for impairment of
      goodwill, the aviation division incurred a loss from operations of $190 thousand
      for the six months ended June 30, 2007.




**RESULTS
      OF OPERATIONS—CORPORATE**




*For
      the Three Months Ended June 30, 2007 Compared to June 30, 2006*




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 months ended June 30, 2007,
      corporate general and administrative costs totaled $1.1 million compared to
      $0.8
      million for the three months ended June 30, 2006. The increase in corporate
      expenses was due to the expensing of $0.2 million of accumulated accounting,
      legal and other professional fees related to the termination of discussions
      for
      the acquisition of Astrophysics, LLC, $0.1 million increase in stock option
      compensation expense and $0.3 million increase for damages and penalties related
      to defaults associated with our preferred stock offset by a $0.3 million
      decrease in the general allowance for doubtful accounts.




Other
      expenses increased $0.5 million for the three months ended June 30, 2007 due
      to
      the termination of discussions for the acquisition of Astrophysics, LLC
      resulting in the expensing of a $0.5 million non refundable good faith deposit.
      Other income decreased $0.2 million for the quarter ended June 30, 2007 due
      to
      the receipt of uncollected funds from the State of Pennsylvania from the
      pre-merged public entity in the quarter ended June 30, 2006.




The
      net
      result for corporate operations was a loss from operations of $1.1 million
      for
      the three months ended June 30, 2007 compared to a loss from operations of
      $0.8
      million for the three months ended June 30, 2006.




*For
      the Six Months Ended June 30, 2007 Compared to June 30, 2006*




During
      the six months ended June 30, 2007, corporate general and administrative costs
      totaled $2.0 million compared to $1.5 million for the six months ended June
      30,
      2006. The increase in corporate expenses was due to the expensing of $0.2
      million of accumulated accounting, legal and other professional fees related
      to
      the termination of discussions for the acquisition of Astrophysics, LLC, $0.2
      million increase in stock option compensation expense and $0.5 million increase
      for damages and penalties related to defaults associated with our preferred
      stock offset by a $0.3 million decrease in the general allowance for doubtful
      accounts and $0.1 million decrease in travel and other expenses.


20




Other
      expenses increased $0.5 million for the six months ended June 30, 2007 due
      to
      the termination of discussions for the acquisition of Astrophysics, LLC
      resulting in the expensing of a $0.5 million non refundable good faith deposit.
      Other income decreased $0.2 million for the six months ended June 30, 2007
      due
      to the receipt of uncollected funds from the State of Pennsylvania from the
      pre-merged public entity in the six months ended June 30, 2006.




The
      net
      result for corporate operations was a loss from operations of $2.0 million
      for
      the three months ended June 30, 2007 compared to a loss from operations of
      $1.5
      million for the three months ended June 30, 2006.




**DISCONTINUED
      OPERATIONS**




In
      the
      second quarter of 2007, we discontinued the contract manufacturing operations
      to
      focus our resources on business initiatives which we believe have higher margin
      and growth potential. The discontinuation of the contract manufacturing division
      resulted in an after tax charge of $1.9 million for the six months ended June
      30, 2007 of which $1.5 million was due to the impairment of
      goodwill.




**SUMMARY**




As
      a net
      result of the combined operations, we incurred a net loss of $6.7 million,
      or
      $(0.34) per share for the three months ended June 30, 2007 which includes $0.2
      million for discontinued operations and $4.3 million for the impairment of
      goodwill and a net loss of $10.8 million, or $(0.56) per share for the six
      months ended June 30, 2007 which includes $1.9 million for discontinued
      operations and $4.3 million for the impairment of goodwill. For the three months
      ended June 30, 2006, we incurred a net loss of $2.1 million, or $(0.13) per
      share, and a net loss of $4.2 million, or $(0.26) 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
      $(0.43) per share for the three months ended June 30, 2006, and a net loss
      applicable to common stockholders of $9.3 million, or $(0.58) per share for
      the
      six months ended June 30, 2006.




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      June 30, 2007, due primarily to the reclassification of $7.5 million of our
      Series C, D and E preferred stock to short term loans payable, the Company
      had a
      $9.5 million net working capital deficit and no cash or cash equivalents. Since
      then, our working capital position has worsened due to continuing losses from
      operations. In July 2007, we agreed to the entry of a judgement in the amount
      of
      $5,292,503 in favor of our largest preferred stockholder, Iroquois Master
      Fund Ltd., in settlement of Iroquois' claim for mandatory redemption of our
      Series C and Series E convertible preferred stock previously sold to
      Iroquois. We intend to improve our working capital position by pursuing
      negotiations with Iroquois and the other holders of our Series C, D and E
      preferred stock to resolve the judgement and their redemption demands,
      respectfully, without the need to make the required cash payments.
      However, there can be no assurance that we will be successful in resolving
      their demands for cash payments. There can also be no assurance that we
      will not receive additional redemption demands from other holders of our Series
      C and E preferred stock. We also intend to improve our working capital position
      by restructuring our operations through discontinuing our contract manufacturing
      division and reducing our research and development efforts. Additionally, we
      are
      exploring opportunities to sell various assets and product offerings while
      pursuing various funding alternatives, however at this time there are no
      understandings or arrangements on the part of any third party to provide us
      with
      additional funding. In this regard, our delisting from the Nasdaq Stock Market
      and the shareholder derivative lawsuit against our board of directors is likely
      to impair our ability to resolve the redemption demands of our preferred
      shareholders and successfully acquire funding from other sources. In the
      meantime, we are solely dependent on our existing current assets to meet our
      operating expenses, capital expenditures, and other commitments, which we
      believe will provide sufficient funds only for three months from the date of
      this report assuming we do not fund the required mandatory redemption payments.




As
      we
      continue to restructure our operations and reduce our overhead expenses, we
      believe that we will require a minimum of $3 million of additional funding,
      in
      addition to any funding required to resolve the $5.2 million Iroquois judgement
      and the $0.9 million in redemption demands of our preferred shareholders, in
      order to fund our ongoing and planned operations over the next 12 months. If
      we
      are not successful in resolving the Iroquois judgement the preferred
      stockholders redemption demands without a cash payment, we will need a
      minimum of $11.4 million of additional funding over the next 12 months. In
      the
      event we are unable to acquire the required financing within the next few
      months, our company’s financial condition will be severely impacted and we may
      be unable to continue as a going concern. In that event, we may be forced to
      seek protection under the bankruptcy laws. There can be no guarantee that the
      funds we require will be available on commercially reasonable terms, if at
      all.
      The report of our independent registered public accounting firm for the fiscal
      year ended December 31, 2006 states that due to recurring losses,
      reclassification of all preferred stock as current liability because of
      mandatory redemption and working capital deficiency there is substantial doubt
      about our ability to continue as a going concern.


21




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 additional factors, including:




•  the
      overall levels of sales of our products and gross profit margins;


•  market
      acceptance of the technology and products;


•  our
      business, product, capital expenditure and research and development plans,
      and
      product and technology roadmaps;


•  the
      overall levels of sales of our products and gross profit margins;


•  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;


•  volume
      price discounts and customer rebates;


•  the
      levels of inventory and accounts receivable that we maintain;


•  acquisition
      opportunities;


•  capital
      improvements to new and existing facilities;


•  technological
      advances;


•  our
      competitors’ responses to our products;


•  our
      relationships with suppliers and customers; and


•  the
      effectiveness of our expense and product cost control and reduction efforts.




Net
      cash
      used by operations for the six months ended June 30, 2007 was $1.4 million
      as
      compared to cash used by operations of $4.2 million for the corresponding period
      in 2006. In the six months ended June 30, 2007 and 2006, the primary use of
      cash
      was funding the operating loss.




Cash
      used
      by investing activities for the six months ended June 30, 2007 consisted of
      $0.1
      million compared to cash used by investing activities of $0.3 million for the
      six months ended June 30, 2006. For the six months ended June 30, 2007 the
      cash
      was used for the acquisition of other intangibles. For the six months ended
      June
      30, 2006 the cash was comprised of the payment of $0.5 million on the note
      provided to Astrophysics, Inc. offset by of $0.8 million of cash used for the
      acquisition of fixed assets and other intangibles.




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 million. 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 was 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 March 15, 2007. Best Logic has worked out a
      forbearance plan to pay down the note by December 1, 2007 through monthly
      payments based on the collection of outstanding receivables and liquidation
      of
      its assets. Best Logic is current on the payments due per the terms of the
      forbearance agreement. As of June 30, 2007, a total of $865 thousand is
      outstanding by Best Logic pursuant to the loan agreement.





On
      January 15, 2007, the Company’s wholly-owned subsidiary, Global Airworks,
      Inc., entered into a loan agreement with Hu Cheng-Lien, an individual, to loan
      Global Airworks, Inc. up to $1.5 million. Pursuant to a promissory note, dated
      January 15, 2007, executed in connection with the loan agreement, interest
      on the outstanding principal balance of an advance will accrue at an interest
      rate equal to 10%. Interest is payable at the maturity date of each advance
      which is 180 days from the date of each advance. As of May 15, 2007, a
      total of $1.47 million has been advanced to Global Airworks, Inc. pursuant
      to
      the loan agreement. In connection with the loan agreement, and as collateral
      for
      the loan, Global Airworks, Inc executed a security agreement granting Hu
      Cheng-Lien a security interest in certain assets of Global Airworks, Inc.
      including all inventory, accounts, equipment, and general intangibles. In
      addition, the loan is secured by a guaranty executed by Global ePoint, Inc.
      and
      Tops Digital Security, LLC. Global Airworks is currently in default on $300
      thousand due under the loan agreement. The Company is attempting to negotiate
      a
      work-out or extension of the loan, however there can be no assurance it will
      be
      able to do so.




Net
      cash
      provided by financing activities for the six months ended June 30, 2007 totaled
      $1.4 million primarily from advances on the loan agreement from our Global
      Airworks, Inc. As of June 30, 2007, the total outstanding balance on loans
      from
      related parties was $1.4 million.


22




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 $0.3 million to pay in full a loan to
      complete the Tops acquisition, $0.5 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.




Pursuant
      to the terms of the Certificates of Designations for the Series C, D and E
      preferred stock, if our common stock is not listed on the New York Stock
      Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq Capital Market
      or the OTC Bulletin Board for a period of seven consecutive trading days,
      holders of the outstanding preferred shares may elect that we repurchase their
      preferred shares. Effective upon the opening of the market on September 19,
      2006, our securities were delisted from the Nasdaq Capital Market. Since that
      time, our common stock has been trading on the electronic Pink Sheets.




On
      September 29, 2006, we received redemption notices from certain holders of
      our Series C and Series E preferred stock demanding that we repurchase an
      aggregate of 136,908 shares of their Series C preferred stock, representing
      27%
      of the issued and outstanding Series C preferred stock, and 95,703 shares of
      their Series E preferred stock, representing 82% of the issued and outstanding
      Series E preferred stock. Subsequently, we received redemption notices demanding
      that we repurchase an additional 150,600 shares of Series C preferred stock,
      5,500 remaining shares of the Series D preferred stock and 6,175 shares of
      Series E preferred stock. As of June 30, 2007, the aggregate redemption amount
      under the notices received is $6,148,922 plus $508,737 accrued and unpaid
      dividends and interest.




On
      March
      1, 2007, Iroquois Master Fund Ltd filed a summons and complaint against Global
      ePoint, Inc. in the United Stated District Court for the Southern District
      of
      New York (Case No. 07 CIV 1789). In its complaint, Iroquois alleged that the
      Company owed Iroquois a total of approximately $5,292,503 pursuant to the
      mandatory redemption features of the Company’s Series D and Series E convertible
      preferred stock previously sold to Iroquois. Pursuant to a Stipulation entered
      into between the parties in July 2007, the Company has agreed to the entry
      of a
      judgment against the Company in the amount of $5,292,853, inclusive of court
      costs. By way of the Stipulation, Iroquois has agreed not to take action to
      enforce the judgment until the earlier to occur of (i) eight (8) months from
      the
      date of the judgment; (ii) a bankruptcy event within the meaning of subparts
      (a)
      through (e), (g) or (h) of the definition “Bankruptcy Event” as defined in the
      Securities Purchase Agreement (“Purchase Agreement”) dated May 23, 2006 between
      the Company and Iroquois; or (iii) a “Change of Control” as defined in the
      Purchase Agreement.




After
      giving effect to the settlement with Iroquois, there are outstanding 501,917
      shares of Series C preferred stock, 5,500 shares of Series D preferred stock
      and
      117,314 shares of Series E preferred stock. Under the applicable provisions
      of
      the Certificates of Designations for the Series C, D and E preferred stock,
      the
      redemption payment amounts for the Series C, D, and E preferred stock is $2.80
      per share, $50 per share and $50 per share, respectively, plus accrued but
      unpaid dividends. In the event holders of all of the Series C, D and E preferred
      stock are entitled to have their preferred stock redeemed, the aggregate
      redemption amount would be $7,484,851, plus accrued but unpaid dividends. All
      demands for redemption payments are due within sixty (60) days of the date
      the Company receives written notice from such stockholder of its election.




We
      are
      currently working to get our common stock listed on the OTC Bulletin Board
      and
      we are pursuing negotiations with the remaining holders of its Series C, D
      and E
      preferred stock to resolve their redemption demands without the need for us
      to
      make the required redemption payment in cash. There can be no assurance that
      we
      will be successful in resolving the redemption demands on terms satisfactory
      to
      us. There can also be no assurance that we will not receive additional
      redemption demands from other holders of its Series C, D, and E preferred stock.




**OFF-BALANCE
      SHEET ARRANGEMENTS**




We
      do not
      have any off-balance sheet arrangements.




**ITEM 3.**  **QUANTITATIVE
      AND QUALITATIVE DESCLOSURES ABOUT MARKET RISK**




We
      are
      exposed to a variety of market risks, including changes in interest rates
      primarily as a result of our borrowings, commodity price risk and electronic
      and
      computer component price fluctuations. The Company has established procedures
      to
      manage its fluctuations in interest rates.




Our
      borrowings are in fixed and variable rate instruments, with interest rates
      tied
      to either the Prime Rate or the LIBOR. A 100 basis point change in these rates
      would have an impact of approximately $15,000 on our annual interest expense,
      assuming consistent levels of floating rate debt with those held at June 30,
      2007.




Commodity
      price movements create a market risk by affecting the price we must pay for
      certain component parts used to assemble our products as certain commodities
      are
      embedded in components we purchase from major suppliers. Our suppliers generally
      pass on significant commodity price changes to us in the form of revised prices
      on future purchases. The Company has not used commodity forward or option
      contracts to manage this market risk.


23




**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.




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:




***We
      require additional funding of $3 million in the near term to continue to operate
      our business, and in the event we are unable to obtain such financing we may
      be
      forced to radically restructure our operations or seek protection under the
      bankruptcy laws.*** As
      of June 30, 2007, due to the reclassification of $7.5 million for redemption
      demands on our Series C, D and E preferred stock to short term loan payable,
      we
      had a net working capital deficit of $7.6 million and no cash or cash
      equivalents. Since then, our working capital position has worsened due to
      continuing losses from operations. In July 2007, we agreed to the entry of
      a
      judgement in teh amount of $5,292,503 in favor of our largest stockholder,
      Iroquois Master Fund Ltd, in settement of Iroquois' claim for mandatory
      redemption of our Series C and Series E convertible preferred stock previously
      sold to Iroquois. We intend to improve our working capital position by pursuing
      negotiations with Iroquois and the holders of our Series C, D and E preferred
      stock to resolve the judgement and their redemption demands,
      respectively, without the need to make the required cash payment.
      However, there can be no assurance that we will be successful in doing so.
      There
      can also be no assurance that we will not receive additional redemption demands
      from other holders of our Series C and E preferred stock. We also intend to
      improve our working capital position by restructuring our operations through
      discontinuing our contract manufacturing division and reducing our research
      and
      development efforts. Additionally, we are exploring opportunities to sell
      various assets and product offerings while pursuing various funding
      alternatives, however at this time there are no understandings or arrangements
      on the part of any third party to provide us with additional funding. In this
      regard, our recent delisting from the Nasdaq Stock Market and the recently
      filed
      shareholder derivative lawsuit against our board of directors is likely to
      impair our ability to resolve the Iroquois judgement and the redemption demands
      of our preferred shareholders and successfully acquire funding from other
      sources. In the meantime, we are solely dependent on our existing current assets
      to meet our operating expenses, capital expenditures, and other commitments,
      which we believe will provide sufficient funds only for six months assuming
      we
      do not fund the required mandatory redemption payments




We
      believe that we require a minimum of $3 million of additional funding, in
      addition to any funds needed to resolve the $5.2 million Iroquois judgement
      and
      the $0.9 million in redemption demands of our preferred, in order to fund our
      ongoing and planned operations over the next 12 months. In the event we are
      unable to acquire the required financing within the next few months, our
      company’s financial condition will be severely impacted and we may be unable to
      continue as a going concern. In that event, we may be forced to seek protection
      under the bankruptcy laws. There can be no guarantee that the funds we require
      will be available on commercially reasonable terms, if at all.




The
      report of our independent registered public accounting firm for the fiscal
      year
      ended December 31, 2006 states that due to recurring losses,
      reclassification of all preferred stock as current liability because of
      mandatory redemption and working capital deficiency, there is substantial doubt
      about our ability to continue as a going concern


24




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.




***Our
      directors have been named as co-defendants in a shareholder derivative lawsuit,
      and we may in the future be named in additional litigation, which may result
      in
      substantial costs and divert management’s attention and
      resources.*** In
      November 2006, the Company was served with a complaint naming our entire board
      of directors as co-defendants in a shareholder derivative lawsuit. The complaint
      alleges that the directors of the Company have committed breaches of their
      fiduciary duties and engaged in abuse of control, corporate waste, unjust
      enrichment, gross mismanagement and violations of applicable Nasdaq marketplace
      rules in connection with the Company’s placement of the Series E preferred stock
      and associated warrants in May 2006. In addition, the complaint alleges that
      the
      Company’s Chairman of the Board, Johnny Pan, engaged in insider trading in July
      and August of 2005. The complaint also alleges that the defendant directors
      caused the Company to issue false and misleading statements of material facts
      concerning, among other things, the Company’s forecasted revenue and earnings.
      The plaintiffs seek monetary damages for all losses suffered by them as a result
      of the alleged misconduct and injunctive orders directing (i) the
      defendants to disgorge all profits and special benefits obtained by way of
      their
      alleged misconduct, including salaries, bonuses, stock options and proceeds
      from
      any stock sales, (ii) the Company reform and improve its corporate
      governance and internal control procedures to apply with applicable law, and
      (iii) the implementation of constructive trusts over any proceeds from the
      defendants wrongful sales of the Company’s common shares. There is no assurance
      of when, or on what terms, if any, we will be able to resolve this matter.




Should
      this lawsuit linger for a long period of time, whether ultimately resolved
      in
      our favor or not, or further lawsuits be filed against us, coverage limits
      of
      our insurance or our ability to pay such amounts may not be adequate to cover
      the fees and expenses and any ultimate resolution associated with such
      litigation. The size of these payments, if any, individually or in the
      aggregate, could seriously impair our cash reserves and financial condition.
      The
      continued defense of these lawsuits also could result in continued diversion
      of
      our management’s time and attention away from business operations, which could
      cause our financial results to decline. A failure to resolve definitively
      current or future material litigation in which we are involved or in which
      we
      may become involved, regardless of the merits of the respective cases, could
      also cast doubt as to our prospects in the eyes of customers, potential
      customers and investors, which could cause our revenue and stock price to
      decline.


25




***Our
      common stock has been delisted from the Nasdaq Capital Market and currently
      trades on the Pink Sheets.*** On
      July 19, 2006, we received a notice from the Listing Qualifications Staff
      of The Nasdaq Stock Market, Inc. that our common stock was subject to potential
      delisting from the Nasdaq Capital Market. The Staff’s determination to pursue
      the delisting of our common stock was 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
      requested a hearing before the Nasdaq Listing Qualifications Panel (the “Panel”)
      to appeal the Staff’s delisting determination and request continued listing on
      the Nasdaq Capital Market. The hearing was held on September 7, 2006. On
      September 15, 2006, we received the decision of the Panel denying our
      request for continued listing on the grounds that we violated the Nasdaq
      shareholder approval rules. As a result, our securities were delisted from
      the
      Nasdaq Capital Market effective with the open of business on Tuesday,
      September 19, 2006. Our common stock is currently quoted in the Pink Sheets
      under the trading symbol “GEPT.PK.”




Under
      the
      rules of The Nasdaq Stock Market we are entitled to appeal the decision of
      the
      Panel to the Nasdaq Listing and Hearing Review Council (the “Council”). We
      elected to pursue the second appeal and submitted the necessary documents to
      the
      Council on October 27, 2006. The Council denied our appeal. We have
      initiated the process to transfer our common stock to 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.
      The delisting has adversely affected the liquidity and trading price of our
      common stock, which is likely to impair our future ability to raise necessary
      capital through equity or debt financing. Because the market for securities
      traded on the Pink Sheets is limited, potential investors may voluntarily
      refrain, or be prohibited, from purchasing shares of our common stock or may
      agree to purchase our common stock solely on terms that are not beneficial
      to
      our long-term operations. If we are unable to obtain funding on terms favorable
      to us, or at all, we may be required to sell our company, cease operations,
      or
      declare bankruptcy.




***Our
      current revenues and purchases are dependent on a limited number of customers
      and suppliers.*** For
      the three months ended June 30, 2007 and 2006, one and two customers
      accounted for 80% and 60% of the Company’s sales, respectively. For the six
      months ended June 30, 2007 and 2006 one and two customers accounted for 59%
      and 60% of the Company’s sales, respectively, and 41% of the accounts receivable
      as of June 30, 2007. For the three months ended June 30, 2007 there
      was no purchase concentration. For the three months ended June 30, 2006, two
      vendors accounted for 72% of the Company’s purchases. For the six months ended
      June 30, 2007 and 2006, one and two vendors, respectively, accounted for
      70% and 62% of the Company’s purchases, respectively, and none of the accounts
      payable as of June 30, 2007. A substantial amount of the above sales and
      purchase transactions in 2006 were conducted with related parties through our
      contract manufacturing division the results of which have been reclassified
      as
      discontinued operations. 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. One of the principal
      allegations in the shareholders derivative lawsuit described above is that
      our
      board of director’s breached its fiduciary duty in approving our sale of the
      Series E preferred shares.




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, 2007, there were 501,917 shares of Series C Preferred Stock
      outstanding, which are convertible into 501,917 shares of our common stock,
      5,500 shares of Series D Preferred Stock outstanding, which are convertible
      into
      66,106 shares of our common stock, and 117,314 shares of Series E Preferred
      Stock outstanding, which are currently convertible into 2,125,254 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.


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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.




***We
      have also issued a warrant that allows for the issuance of a floating number
      of
      common shares and may be further dilutive to holders of our common stock, and
      could adversely affect holders of our common stock.*** In
      connection with the Series E preferred share financing, we issued a warrant
      that
      allows the holders to purchase a floating number of shares of common stock
      at an
      exercise price of $0.01 per share, 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. Since the number of shares
      of common stock issuable upon exercise of the warrant will move with the market
      price of our common stock, we are unable to state the number of shares that
      may
      be issued upon exercise of the warrant. One of the allegations in the
      shareholder derivative lawsuit described above is that our board of directors
      breached its fiduciary duties in approving the issuance of this warrant.




***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.




***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.


27




***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 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 Tops Digital Security, Inc., and are engaged
      in 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.


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**ITEM 4.**  **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, 2007. 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 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 at the reasonable assurance level
      as
      of June 30, 2007. 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.




**PART
      II. OTHER INFORMATION**




**ITEM 1.**  **LEGAL
      PROCEEDINGS**


On
        March
        1, 2007, Iroquois Master Fund Ltd filed a summons and complaint against Global
        ePoint, Inc. in the United Stated District Court for the Southern District
        of
        New York (Case No. 07 CIV 1789). In its complaint, Iroquois alleged that
        the
        Company owed Iroquois a total of approximately $5,292,503 pursuant to the
        mandatory redemption features of the Company’s Series D and Series E convertible
        preferred stock previously sold to Iroquois. Pursuant to a Stipulation entered
        into between the parties in July 2007, the Company has agreed to the entry
        of a
        judgment against the Company in the amount of $5,292,853, inclusive of court
        costs. By way of the Stipulation, Iroquois has agreed not to take action
        to
        enforce the judgment until the earlier to occur of (i) eight (8) months from
        the
        date of the judgment; (ii) a bankruptcy event within the meaning of subparts
        (a)
        through (e), (g) or (h) of the definition “Bankruptcy Event” as defined in the
        Securities Purchase Agreement (“Purchase Agreement”) dated May 23, 2006 between
        the Company and Iroquois; or (iii) a “Change of Control” as defined in the
        Purchase Agreement.
  **ITEM 1A.**  **RISK
        FACTORS**
  See
        Part
        I, Item 2, “Management’s Discussion and Analysis of Financial Condition and
        Results of Operations - Cautionary Statement Regarding Future Results,
        Forward-Looking Information and Certain Important Factors”, above.




**ITEM 6.**  **EXHIBITS**




31.1
            Certifications
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            Certifications
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32
            Certification
                of Principal Executive Officer and Principal Financial Officer pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
                1350)


29


**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 20, 2007
            /s/
                DARYL F. GATES**Daryl
                F. Gates,**
              **Chief
                Executive Officer**Date:
                August 20, 2007
            /s/
                JOHN PAN**John
                Pan,**
              **Chief
                Financial Officer and
                Chairman**






30