UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








FORM
10-QSB








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




For the
quarterly period ended: May 31,
2008




o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT





For the
transition period from __________ to ___________





Commission
file number: 000-32475





ASTRATA
GROUP INCORPORATED


(Name of
small business issuer in its charter)








NEVADA
              
              84-1408762(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)950
      South Coast Dr., Suite 265, Costa Mesa, California
              
              92626(Address
      of principal executive offices)
              
              (Zip
      Code)


Issuer’s
telephone number (714) 641-1512





Securities
registered under Section 12(b) of the Exchange Act:  None





Securities
registered under Section 12(g) of the Exchange Act:





Common
Stock, par value $0.0001


(Title of
class)





Check  whether
the Issuer (1) filed all reports  required to be filed by Section 13
or 15(d) of the  Exchange  Act during the past 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 o





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





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of June 30, 2008: 28,524,244





Transitional
Small Business Disclosure Format (Check One):  Yes o    No
x





















TABLE
OF CONTENTS




PagePart
      I - Financial InformationItem
      1
              Financial
      Statements (Unaudited)Condensed
      Consolidated Balance Sheet as of May 31, 2008
              F-1Condensed
      Consolidated Statements of Operations and ComprehensiveLoss
      for the three ended May 31, 2008 and 2007
              F-2Condensed
      Consolidated Statements of Cash Flows for thethree
      months ended May 31, 2008 and 2007
              F-3Notes
      to Condensed Consolidated Financial Statements
              F-4Item
      2
              Management’s
      Discussion and Analysis or Plan of Operation
              1Item
      3
              Controls
      and Procedures
              9Part
      II - Other InformationItem
      1
              Legal
      Proceedings
              11Item
      2
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              11Item
      6
              Exhibits
      and Reports on Form 8-K
              11


i


PART
I – FINANCIAL INFORMATION




Item
1:  Condensed Consolidated Financial Statements
(Unaudited)





These
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the Securities and Exchange
Commission (the “SEC”) instructions to Form 10-QSB.  In the opinion of
management, all adjustments considered necessary for a fair presentation, which
(except where stated otherwise) consisted only of normal recurring adjustments,
have been included.  Operating results for the interim period ended
May 31, 2008 are not necessarily indicative of the results anticipated for the
entire fiscal year ending February 29, 2009.  This report should be
read in conjunction with the Company’s February 29, 2008 annual report on Form
10-KSB filed with the SEC on June 11, 2008.




ii




ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETMAY
      31, 2008(UNAUDITED)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              4,221,466Trade
      receivables, net
              
              
              1,220,354Inventories
              
              
              355,592Cost
      in excess of billings and estimated earnings on uncompleted
      contract
              
              
              4,835,523Other
      assets
              
              
              402,371Total
      current assets
              
              
              11,035,306Property
      and equipment, net
              
              
              651,896Certificate
      of deposit and other restricted cash
              
              
              412,987Goodwill
              
              
              300,000Notes
      receivable - unconsolidated affiliate
              
              
              72,251Total
      assets
              
              $
              12,472,440LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
              
              $
              4,116,465Salaries
      and benefits payable to officers and directors
              
              
              6,731,099Registration
      rights penalties
              
              
              599,241Interest
      payable
              
              
              1,967,108Deferred
      income
              
              
              1,007,652Income
      taxes and related penalties payable
              
              
              510,010Convertible
      notes payable to stockholder
              
              
              1,884,000Advances
      from stockholders
              
              
              150,636Current
      portion of long-term liabilities
              
              
              221,046Other
      current liabilities
              
              
              265,555Total
      current liabilities
              
              
              17,452,812Long-term
      liabilities
              
              
              7,990Total
      liabilities
              
              
              17,460,802Commitments
      and contingencies (Note 9)Subsequent
      events (Note 13)Stockholders'
      deficit:Preferred
      stock, Series A, A2 and C convertible, $0.0001 par value, 75,000,000
      shares authorized,50,000
      shares of Series A issued and outstanding with a liquidation preference of
      $1.00 per share
              
              
              51,500,000
      shares of Series A2 issued and outstanding with a liquidation preference
      of $5.00 per share
              
              
              1501,285,238
      shares of Series C issued and outstanding with a liquidation preference of
      $7.80 per share
              
              
              129Common
      stock, $0.0001 par value, 300,000,000 shares authorized,28,524,244
      shares issued and outstanding
              
              
              2,853Additional
      paid-in capital
              
              
              43,127,266Accumulated
      deficit
              
              
              (48,243,612
              )Accumulated
      other comprehensive income
              
              
              124,847Total
      stockholders' deficit
              
              
              (4,988,362
              )Total
      liabilities and stockholders' deficit
              
              $
              12,472,440
 See
accompanying notes to these condensed consolidated financial
statements.


F-1




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 FOR
THE THREE MONTHS ENDED MAY 31, 2008 AND 2007
 (UNAUDITED)




THREE
      MONTHS2008
              
              
              2007Net
      sales
              
              $
              3,026,515
              
              
              $
              1,672,413Cost
      of goods sold
              
              
              1,927,714
              
              
              
              1,080,261Gross
      profit
              
              
              1,098,801
              
              
              
              592,152Selling,
      general and administrative expenses
              
              
              1,849,320
              
              
              
              3,959,504Research
      and development
              
              
              153,646
              
              
              
              -Operating
      loss
              
              
              (904,165
              )
              
              
              (3,367,352
              )Other
      income (expense):Interest
      expense
              
              
              (164,089
              )
              
              
              (93,449
              )Other
      income
              
              
              1,438
              
              
              
              1,582Total
      other income (expense)
              
              
              (162,651
              )
              
              
              (91,867
              )Loss
      before tax (benefit)/provision and equity in net loss of
      affiliate
              
              
              (1,066,816
              )
              
              
              (3,459,219
              )Income
      tax (benefit)/provision
              
              
              (5,720
              )
              
              
              500,000Loss
      before equity in net loss of affiliate
              
              
              (1,061,096
              )
              
              
              (3,959,219
              )Equity
      in net loss of affiliate
              
              
              (13,458
              )
              
              
              -Loss
      from continuing operations
              
              
              (1,074,554
              )
              
              
              (3,959,219
              )Loss
      on discontinued operations, net of tax
              
              
              -
              
              
              
              (170,007
              )Net
      loss
              
              $
              (1,074,554
              )
              
              $
              (4,129,226
              )Net
      loss from continuing operations applicableto
      common stockholders consists of the following:Loss
      from continuing operations
              
              $
              (1,074,554
              )
              
              $
              (3,959,219
              )Cumulative
      undeclared dividends on preferred stock
              
              
              (11,757,951
              )
              
              
              (56,000
              )Net
      loss from continuing operations applicableto
      common stockholders
              
              $
              (12,832,505
              )
              
              $
              (4,015,219
              )Comprehensive
      loss and its components consist of the following:Net
      loss
              
              $
              (1,074,554
              )
              
              $
              (4,129,226
              )Foreign
      currency translation adjustment, net of tax
              
              
              516,868
              
              
              
              (358,195
              )Comprehensive
      loss
              
              $
              (557,686
              )
              
              $
              (4,487,421
              )Basic
      and diluted (loss) per common share:Continuing
      operations applicable to common stockholders
              
              $
              (0.45
              )
              
              $
              (0.19
              )Discontinued
      operations
              
              
              -
              
              
              
              (0.01
              )$
              (0.45
              )
              
              $
              (0.20
              )Weighted
      average common shares outstanding:Basic
      and diluted
              
              
              28,504,171
              
              
              
              21,426,745




See
accompanying notes to these condensed consolidated financial
statements.




F-2


ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR
THE THREE MONTHS ENDED MAY 31, 2008 AND 2007
 (UNAUDITED)


2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (1,074,554
                )
                
                $
                (4,129,226
                )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activities:Depreciation
      and amortization
                
                
                87,654
                
                
                
                86,236Gain
      on disposal transactions relating to discontinued
    operations
                
                
                -
                
                
                
                (59,304
                )Stock-based
      compensation
                
                
                213,738
                
                
                
                2,057,629Equity
      loss from  affiliate
                
                
                13,458
                
                
                
                -Unrealized
      foreign currency exchange gain
                
                
                32,764
                
                
                
                -Changes
      in operating assets and liabilities:Trade
      and other receivables
                
                
                (37,899
                )
                
                
                (68,385
                )Inventories
                
                
                (49,829
                )
                
                
                (126,987
                )Costs
      in excess of billings and estimated earnings on uncompleted
      contract
                
                
                (1,245,849
                )
                
                
                154,013Assets
      and liabilities held for sale, net
                
                
                -
                
                
                
                (4,974
                )Other
      assets
                
                
                122,510
                
                
                
                451,320Accounts
      payable and accrued liabilities
                
                
                854,661
                
                
                
                1,723,260Taxes
      and related penalties payable
                
                
                (7,582
                )
                
                
                493,368Net
      cash provided by (used in) operating activities
                
                
                (1,090,928
                )
                
                
                576,950CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                
                
                (121,823
                )
                
                
                (43,171
                )Investment
      in affiliates
                
                
                -
                
                
                
                11,741Certificate
      of deposit-restricted
                
                
                -
                
                
                
                (416,477
                )Net
      cash used in investing activities
                
                
                (121,823
                )
                
                
                (447,907
                )CASH
      FLOWS FROM FINANCING ACTIVITIESRepayment
      of long-term liabilities
                
                
                -
                
                
                
                (1,775
                )Repayment
      on long-term debt
                
                
                (3,595
                )
                
                
                -Proceeds
      from notes payable
                
                
                -
                
                
                
                46,183Proceeds
      from warrants exercised for preferred stock
                
                
                3,937,234
                
                
                
                1,000,000Net
      cash provided by financing activities
                
                
                3,933,639
                
                
                
                1,044,408Effect
      of foreign currency exchange rate changeson
      cash and cash equivalents
                
                
                468,527
                
                
                
                (342,545
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                3,189,415
                
                
                
                830,906Cash
      and cash equivalents at beginning of period
                
                
                1,032,051
                
                
                
                179,371Cash
      and cash equivalents at end of period
                
                $
                4,221,466
                
                
                $
                1,010,277Cash
      paid during the period for:Interest
                
                $
                -
                
                
                $
                -Income
      taxes
                
                $
                -
                
                
                $
                -
  See
accompanying notes to these condensed consolidated financial
statements.




F-3




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





1.
ORGANIZATION, NATURE OF OPERATIONS, AND LIQUIDITY/GOING CONCERN
CONSIDERATIONS





Organization
and Nature of Operations





Astrata
Group Incorporated (“Astrata,” or “Astrata Group”) and subsidiaries (sometimes
hereafter collectively referred to as the “Company,” “we,” and “our”) currently
operate exclusively in the Telematics sector of the Global Positioning System
(“GPS”) industry. Telematics comprises the remote monitoring of assets in
real-time (including tracking and tracing) whereby location, time and sensor
status are communicated. Our products are deployed into diverse
markets.





We
operate in the Telematics sector of the GPS industry. Our expertise is focused
on advanced location-based IT products and services that combine positioning,
wireless communications, and information technologies, which add measurable
value to location–based information. We provide advanced positioning products,
as well as monitoring and airtime services to commercial and governmental
entities in a number of markets including homeland security, public safety,
transportation, surveying, utility, construction, mining, and
agriculture.





Telematics
products often focus on people and assets in hostile and demanding environments
such as monitoring the movement of hazardous materials for homeland security
purposes. This business also addresses the market for fleet management,
workforce management, remote asset management and tracking, and emergency
services by providing hardware for GPS information and data collection, as well
as the software needed to access and analyze the data through the Internet. We
offer airtime to communicate data from the vehicle or field locations to the
customer’s data center or provide access over the Internet to the data and
application software. This allows critical real-time performance and monitoring
data to be accessed and analyzed by supervisory, maintenance, or financial users
and make real-time decisions for productivity improvement, cost reductions,
safety improvement, or other critical decisions to be fed to the field.





Examples
of our products and services include surveying instrumentation using GPS and
other augmenting technologies, such as wireless communication and lasers; fleet
management for specialized machines, such as guidance for earth-moving
equipment; positioning and IT technology for remote asset management and
associated Telematics products, field data collection equipment, and products
and airtime communications services for high volume track and trace
applications. Positioning technologies employed by us include GPS and inertial
navigation systems. Communication techniques employed by us include GSM (“Global
Systems for Mobile Telecommunications”), cellular and satellite
communications.





Liquidity
and Going Concern Considerations





For the
three months ended May 31, 2008, we had a net loss of approximately $1.1
million.  We had negative cash flow from operating activities of
approximately $1.1 million.  In addition, we had a working capital
deficit of approximately $6.4 million, an accumulated deficit of approximately
$48.2 million and a stockholders’ deficit of approximately $5.0 million as of
May 31, 2008.





Our
February 29, 2008 audited consolidated financial statements included a report of
independent registered public accounting firm that contained a going concern
paragraph. The going concern paragraph stated that there is substantial doubt
about the Company’s ability to continue as a going concern. These condensed
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern (based upon management’s plans discussed
herein) which contemplates, among other things, the realization of assets and
satisfaction of liabilities in the ordinary course of business. Accordingly, the
condensed consolidated financial statements do not include any adjustments
related to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result, should the
Company be unable to continue as a going concern.





The
Company’s capital requirements depend on numerous factors, including the
Company’s ability to fill its current backlog, rate of market acceptance of the
Company’s products and services, the Company’s ability to service its customers,
the ability to maintain and expand our customer base, the level of resources
required to expand the Company’s marketing and sales organization, research and
development activities and other factors. Management presently believes that
cash generated from operations, combined with the Company’s current credit
facilities and the debt and/or equity financing recently completed and proposals
now under consideration, will be sufficient to meet the Company’s anticipated
liquidity requirements through February 2009. In order for us to fund our
operations and continue this growth plan, substantial additional funding will be
required from external sources.  Management currently intends to fund
operations through a combination of borrowings under line(s) of credit, debt,
and if necessary, equity-based transactions.




F-4




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007







1. ORGANIZATION, NATURE OF
OPERATIONS, AND LIQUIDITY/GOING CONCERN CONSIDERATIONS
(continued)





Liquidity and
Going Concern Considerations (continued)





The
Company entered into a fixed-price Contract with a Singapore entity on April 10,
2007 to design, develop and manufacture approximately $93.5 million of its
Telematics products. Deliveries began in January 2008 and we anticipated
beginning the five major shipments in the later part of 2008. The Company’s
proprietary Telematics system is undergoing significant
customization/modification in order to achieve the functionality required by the
customer.  The design and development phase is where we designed the
functionality of the system to meet the customer’s needs and then developed the
functionalities into a working environment for testing and acceptance to move
into production.  Throughout the last thirteen months, we have
accomplished all requirements under the Contract with no liquidation damages
incurred. Upon completion of the development phase, we will move into the
production phase which includes the units for delivery over approximately
fifteen months to the customer.   We expect to progress through
the production phase with minimal to no liquidation damages through the
completion of this Contract.  Funding for the manufacturing phase is
covered by the customer providing a letter of credit for each
shipment.  Profits from these shipments will partially fund our
operations and begin to reflect a strengthening of our balance sheet, cash flow
and equity position; however, there can be no assurance of the outcome of these
events.





The
Company entered into a $4 million Warrant Exchange Agreement, a Warrant
Amendment Agreement, and a Preferred Stock Exchange Agreement (collectively, the
“Amended and Restated Rights Agreements”), dated as of May 29, 2008, between the
Company and each of the holders of certain warrants, and holders of certain
series of preferred shares issued by the Company (individually, a “Holder” and
collectively, the “Holders”) relating to the Company’s Series A and Series B
Preferred shares. The Amended and Restated Rights Agreements eliminate the
anti-dilution and cashless exercise provisions of the Series A and Series B
warrants (see Note 8).




2.  CERTAIN
SIGNIFICANT ACCOUNTING POLICIES





The
accompanying unaudited interim condensed consolidated financial statements
reflect adjustments (consisting of normal recurring adjustments) necessary to
present fairly the consolidated financial position of the Company at
May 31, 2008, the consolidated results of its operations and its
consolidated cash flows for the three month periods ended May 31, 2008 and
2007.  Certain information and footnote disclosures normally included
in the consolidated financial statements have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission (“SEC”),
although the Company believes that the disclosures in the unaudited condensed
consolidated financial statements are adequate to ensure the information
presented is not misleading. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company’s Annual Report on Form
10-KSB for the fiscal year ended February 29, 2008. The results of operations of
interim periods are not necessarily indicative of future operating
results.  All intercompany amounts have been eliminated in
consolidation.





Use
of Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting periods. Significant estimates and assumptions
made by management include the deferred tax asset valuation allowance, allowance
for doubtful accounts receivable, realization of inventories, goodwill and
long-lived assets, stock-based compensation, certain other equity transactions,
income taxes and related penalties payable and revenue recognition under the
percentage of completion method of accounting.  Actual results could
differ from these estimates.





Risks
and Uncertainties Related to International Operations





Since
inception in August 2004, the Company’s revenue-producing activities have been
conducted exclusively outside the United States of America.  The
Company’s customers, other end users of our products and services, and
third-party manufacturers and other suppliers (collectively, “vendors”) engaged
by the Company are located throughout the world.  As a result, our
operations are subject to foreign political and economic uncertainties which are
beyond our control.  The specific risks of operating in the
international marketplace include abrupt changes in a foreign government’s
policies/regulations, local or regional hostilities (such as war, terrorism and
civil unrest) in foreign countries, and United States government policies
restricting certain business transactions with a given foreign
country.




F-5




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007







2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES




Risks and Uncertainties Related to
International Operations




Some of
the Company’s sales and supplier contracts with its customers and vendors are
subject to unilateral cancellation (regardless of whether such action is
permitted by the terms of the agreement), and certain accounts receivable may
suddenly become doubtful of collection.  In addition, the lack of a
well-developed legal system in some foreign countries may make it difficult to
enforce all of the Company’s contractual rights.





Cash
and Cash Equivalents





The Company considers all highly liquid
short-term investments with original maturities of three months or less when
purchased to be cash equivalents.





Other
Concentrations





The
financial instruments that potentially expose the Company to a concentration of
credit risk principally consist of cash, cash equivalents and accounts
receivable. The Company deposits its cash with high credit financial
institutions, principally in the United States, Europe and Asia. The countries
do not have any institutional depository insurance comparable to the United
States, which insures bank balances up to $100,000 per bank.  At May
31, 2008, the Company’s cash balances in U.S. bank accounts totaled
approximately $4 million which exceeds the Federal Deposit Insurance Corporation
limit of $100,000.





The
certificate of deposit described below (approximately $413,000 at May 31, 2008)
is with a Singapore bank. Because the funds deposited were in U.S. dollars, such
account is not eligible for coverage under Singapore’s Deposit Insurance
Act.





Trade
Accounts Receivable





The
Company records trade accounts receivable when its customers are invoiced for
products delivered and/or services provided, or when contractual billing
milestones have been reached.  As explained under “Revenue
Recognition”, the recording of certain accounts receivable does not necessarily
result in immediate recognition of revenue.





The
Company does not require collateral from its customers, but performs ongoing
credit evaluations of its customers’ financial condition. Credit risk with
respect to the accounts receivable is limited because of the large number of
customers included in the Company’s customer base and the geographic dispersion
of those customers.





Certificate
of Deposit - Restricted





Under the
terms of the Contract described in Note 4, the Company was required to provide a
performance bond for the benefit of the customer.  In lieu of such
bond, a certificate of deposit was initiated.  The certificate of
deposit (the “CD”) in the amount of approximately $413,000 bears interest at
5.1% per annum and matures in August 2009. Under the terms of the Company’s
arrangement with the bank that issued the CD, the funds will not be available
for withdrawal until August 2009. Thus, the CD is a restricted account which has
been reported as a non-current asset in the accompanying condensed consolidated
balance sheet.





Derivative
Instruments and Hedging Activities





The
Company records all derivative financial instruments in its condensed
consolidated financial statements at estimated fair value, regardless of the
purpose or intent of holding the instrument.  Changes in the fair
value of derivative financial instruments are either recognized periodically in
the results of operations or in stockholders’ deficit as a component of
accumulated other comprehensive loss, depending on whether the derivative
instrument qualifies for hedge accounting as defined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” and related
interpretations.  Changes in the estimated fair value of derivatives
not qualifying for hedge accounting are included in the results of operations as
they occur.




F-6




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Fair
Value of Other Financial Instruments





SFAS No.
107, “Disclosures about Fair
Value of Financial Instruments,”requires disclosure of the estimated
fair value (if reasonably obtainable) of the Company’s financial
instruments.  The carrying amount of the Company’s trade accounts
receivable, trade accounts payable, accrued expenses and credit facilities
approximates their estimated fair value due to either the short-term maturities
of those financial instruments and/or the fact that the credit facilities bear
market interest rates.





In the
opinion of management, the fair value of payables to related parties cannot be
estimated without incurring excessive costs; for that reason, the Company has
not provided such disclosure.  Other information about related-party
liabilities (such as the carrying amount, the interest rate, and the maturity
date) is provided, where applicable, elsewhere in these notes to the condensed
consolidated financial statements.





Translation
of Foreign Currencies





The
operations of our subsidiaries in international markets results in exposure to
fluctuations in foreign currency exchange rates.  The potential of
volatile foreign currency exchange rate fluctuations in the future could have a
significant effect on our financial position and results of
operations.





The
Company uses the U.S. dollar as its functional currency.  We translate
all assets and liabilities at period-end exchange rates and income and expenses
accounts at average rates during the period.  During the three months
ended May 31, 2008, we had transactions denominated in the Euro, the British
Pound, the Singapore Dollar, the Malaysian Ringgit, and the Brunei
Dollar.  In accordance with SFAS No. 52, “Foreign Currency Translation”
such adjustments are reported as a component of accumulated other comprehensive
loss within stockholders’ deficit.





Inventories





Inventories
are stated at the lower of cost (first-in, first-out) or market, and consist of
raw materials and finished goods at May 31, 2008. Market is determined by
comparison with recent sales or estimated net realizable value. Net realizable
value is based on management’s forecasts for sales of the Company’s products and
services in the ensuing years and/or consideration and analysis of any change in
the customer base, products mix, or other factors that may impact the estimated
net realizable value. Should the demand for the Company’s products and/or
services prove to be significantly less than anticipated, the ultimate
realizable value of the Company’s inventories could be substantially less than
the amount reflected in the accompanying  condensed consolidated
balance sheet.





Property
and Equipment





Property
and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the assets, which
generally range from three to seven years. Leasehold improvements are amortized
on a straight-line basis over the shorter of the estimated useful lives of the
assets or the remaining lease terms. Maintenance and repairs are charged to
expense as incurred. Significant renewals and betterments are capitalized. At
the time of retirement, other disposition of property and equipment or
termination of a lease, the cost and accumulated depreciation or amortization
are removed from the accounts and any resulting gain or loss is reflected in
results of operations.





Other
Assets





Included
in other assets are prepaid expenses and deposits required in the normal course
of operation and approximated $402,000.




F-7




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Goodwill
and Other Intangible Assets





Statement
of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets”, addresses how intangible assets that are acquired individually
or with a group of other assets should be accounted for upon their acquisition
and after they have been initially recognized in the condensed consolidated
financial statements. SFAS No. 142 requires that goodwill and identifiable
intangible assets that have indefinite lives not be amortized but rather be
tested at least annually for impairment, and intangible assets that have finite
useful lives be amortized over their estimated useful lives. SFAS No. 142
provides specific guidance for testing goodwill and intangible assets that will
not be amortized for impairment, and expands the disclosure requirements about
intangible assets in the years subsequent to their acquisition.




Long-Lived
Assets





SFAS No.
144 “Accounting for the
Impairment or Disposal of Long-Lived Assets” addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amount may not
be recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such assets, and impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value.





As of May
31, 2008, management has determined that no new impairment indicators exist and
therefore, no adjustments have been made to the carrying values of long-lived
assets held for sale or held and used. There can be no assurance, however, that
market conditions will not change or demand for the Company’s services and
products will continue which could result in impairment of long-lived assets in
the future.





Convertible
Preferred Stock





If the
conversion feature of cumulative preferred stock is beneficial (i.e., the market
price of the Company’s common stock exceeds the per-share conversion price when
the preferred stock is issued), management accounts for the beneficial
conversion feature (“BCF”) based on SFAS No. 133 “Accounting for Derivative
Instruments and Certain Hedging Activities” (as amended) and an analysis of the
rights of the preferred stock owners.  When management concludes that
the economic risks and characteristics of the BCF are clearly and closely
related to those of the “host contract “ (the preferred stock), the BCF (1) is
not separated from the host contract or accounted for as a derivative financial
instrument and (2) is measured using intrinsic value accounting.  The
Company has evaluated the conversion features and determined that the economic
characteristics and risks are clearly and closely related to the host primarily
because the host contract is a perpetual interest and there are no collateral
requirements or creditor rights in the instruments.





Revenue
Recognition





General





Except as
described in “Contract Accounting” below, the Company’s revenues are recorded in
accordance with the SEC Staff Accounting Bulletin No. 104, “Revenue
Recognition.” The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured.  In instances where final
acceptance of the product is specified by the customer or is uncertain, revenue
is deferred until all acceptance criteria have been met.





Contract
Accounting





The
Company is accounting for the Contract described in Note 4 under the
percentage-of completion method under the AICPA Statement of Position (“SOP”)
81-1, “Accounting for
Performance of Construction-Type and Certain Production –Type Contracts”.
Under the percentage-of-completion method, revenues, expenses and profits are
recognized as performance progresses on long-term contracts. Progress toward
completion is measured using the cost-to-cost method.  The Company
uses the estimated cost of goods (“COGS”) for the project to determine the
associated recognized revenues in the periods in which they are
earned.  This is calculated by taking the current reporting period
COGS against the total projected COGS to determine a percentage of completion;
then applying the percentage against the Contract project total revenues to
determine the revenues for the reporting period.




F-8




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Revenue
Recognition (continued)





Other
Matters





Our
Telematics equipment may be sold or provided as part of a monthly package which
includes telecommunications, data warehousing and mapping.  These
revenues are recognized over the life of such contracts as revenues are
earned.





Revenue
from distributors and resellers is recognized upon delivery, assuming that all
other criteria for revenue recognition have been met. Distributors and resellers
do not have the right of return.





Customer
incentive bonuses and other consideration received or receivable directly from a
vendor for which the Company acts as a reseller are accounted for as a reduction
in the price of the vendor’s products or services. When such incentive is
pursuant to a binding arrangement, the amount received or receivable is recorded
as deferred income and recognized as income on a systematic basis over the life
of the arrangement.





Research
and Development Costs





Research
and development costs relating to GPS positioning hardware and software systems
to be sold or otherwise marketed that are incurred before technological
feasibility of the products has been established and after general release of
the product to customers are expensed as incurred. Management believes that
technological feasibility is not established until a beta version of the
software product exists. Historically, costs incurred during the period from
when a beta version is available until general release to the public have not
been material. Accordingly, the Company has not capitalized any software
development costs.





Stock-Based
Compensation





Effective
March 1, 2006, the Company adopted the provisions of SFAS No. 123-R, “Share-Based Payment” (“SFAS
No. 123-R”). SFAS No. 123-R requires employee stock options and rights to
purchase shares under stock participation plans to be accounted for under the
fair value method and requires the use of an option pricing model for estimating
fair value. Accordingly, share-based compensation is measured at the grant date,
based on the fair value of the award.





Under the
modified prospective method of adoption for SFAS No.123-R, the compensation cost
recognized by the Company beginning March 1, 2006 includes (a) compensation cost
for all equity incentive awards granted prior to, but not yet vested as of March
1, 2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost for all equity
incentive awards granted or modified subsequent to February 28, 2006, based on
the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123-R.





Options granted by the Company
generally expire five years from the grant date. Options granted to existing and
newly hired employees generally vest over a three-year period from the date of
grant. The effects of share-based compensation resulting from the application of
SFAS No. 123-R to options granted under the Company’s equity incentive plan
resulted in an expense of approximately $213,000 for the three months ended May
31, 2007.   During the three months ended May 31, 2008 there was
no effect of SFAS No. 123-R and no options were granted.




F-9




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Stock-Based
Compensation (continued)





The
following weighted average assumptions were used in estimating the fair value of
certain share-based payment arrangements:





Three
      Months EndedMay
      31, 2007Annual
      dividends
            
            ZeroExpected
      volatility
            
            
            133%Risk
      free interest rate
            
            
            3.7%Expected
      life
            
            3.5
      years




The
expected volatility is based on the historical volatility. The expected life of
options previously granted were based on the “simplified method” described in
the SEC’s Staff Accounting Bulletin No. 107 due to changes in the vesting terms
and the contractual life of current option grants compared to the Company’s
historical grants.  The historical forfeiture rate was then calculated
as 6.5%. Management considers this to be a realistic average forfeiture rate
excluding any one time events.





Options
outstanding as of May 31, 2008 are as follows:





Number
      of Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
                  Average
                  Remaining
                  Contractual
                  Term
      in
                  Years
                
                
                Aggregate
                  Intrinsic
                  Value
      (a)Vested
                
                
                108,500
                
                
                $
                5.00
                
                
                
                1.8
                
                
                $
                -Total
                
                
                108,500
                
                
                
                
                
                
                
                
                
                
                $
                -


(a)
            These
      amounts represent the difference between the exercise price and $0.43, the
      closing market price of the Company’s common stock on May 31, 2008 as
      quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol
      “ATTG” for all in-the-money options
outstanding.




F-10




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Stock-Based
Compensation (continued)





Options
outstanding that are expected to vest are net of estimated future forfeitures in
accordance with the provisions of SFAS No. 123-R, which are estimated when
compensation costs are recognized. Additional information with respect to stock
option activity is as follows:




Outstanding
      OptionsShares
                Available
      for
                Grant
              
              
              Number
      of
                Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Aggregate
                Intrinsic
                Value
      (a)February
      29, 2008
              
              
              2,291,500
              
              
              
              108,500
              
              
              $
              5.00
              
              
              $
              -Grants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercises
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancellations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -May
      31, 2008
              
              
              2,291,500
              
              
              
              108,500
              
              
              $
              5.00
              
              
              $
              -Options
      exercisable at:February
      29, 2008
              
              
              
              
              
              
              108,500
              
              
              $
              5.00May
      31, 2008
              
              
              
              
              
              
              108,500
              
              
              $
              5.00


Basic
and Diluted Loss Per Share





In
accordance with SFAS No. 128, “Earnings per Share”, the
Company calculates basic and diluted net loss per share using the weighted
average number of common shares outstanding during the periods presented and
adjusts the amount of net loss, used in this calculation, for preferred stock
dividends during the period.





We
incurred a net loss in each period presented, and as such, did not include the
effect of potentially dilutive common stock equivalents in the diluted net loss
per share calculation, as their effect would be anti-dilutive for all
periods.  Potentially dilutive common stock equivalents would include
the common stock issuable upon the conversion of preferred stock, the exercise
of warrants, stock options and convertible debt.  As of May 31, 2008
and May 31, 2007, all potentially dilutive common stock equivalents amount to
72,578,097 and 41,190,006 shares, respectively.





Reclassification





Certain amounts in the prior period
financial statements have been reclassified to conform to the current period
presentation.





Income
Taxes




The
Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes”.
SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the condensed consolidated financial statements or income tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates for the year in which the differences are
expected to reverse.




F-11




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Uncertain
Income Tax Positions





Effective
March 1, 2007, the Company accounts for uncertain income tax positions in
accordance with Financial Accounting Standards Board Interpretation (“FIN”) No.
48 (“FIN 48”). This pronouncement, which is an interpretation of SFAS No. 109,
“Accounting for Income
Taxes”, seeks to reduce the diversity in practice associated with certain
aspects of measurement and recognition in accounting for income taxes. FIN 48
clarifies when tax benefits should be recorded in financial statements, and
indicates how any tax reserves should be classified in the balance sheet. In
addition, FIN 48 requires expanded disclosure with respect to the uncertainty in
income taxes. See Note 5 for additional information.





Segment
Reporting





The
Company discloses information regarding segments in accordance with SFAS No.
131, “Disclosure about
Segments of an Enterprise and Related Information”. SFAS No. 131
establishes standards for reporting of financial information about operating
segments in annual financial statements, and requires reporting selected
information about operating segments in interim financial reports (see Note
10).





Recently
Issued Accounting Pronouncements





On
December 4, 2007, the Financial Accounting Standards Board (“FASB”), issued SFAS
No. 141 (Revised 2007), “Business Combinations”.
Statement 141R will significantly change the accounting for business
combinations. Under Statement 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. Statement 141R will
change the accounting treatment for certain specific items,
including:





·
            Acquisition
      costs will be generally expensed as
incurred;


·
            Non-controlling
      interests (formerly known as "minority interests" -- see Statement 160
      discussion below) will be valued at fair value at the acquisition
      date;


·
            Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies;


·
            In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;


·
            Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date;
and


·
            Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.





Statement
141R also includes a substantial number of new disclosure requirements.
Statement 141 applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is prohibited.
Accordingly, a calendar year-end company is required to record and disclose
business combinations following existing GAAP until January 1,
2009.  The Company does not believe the application of this standard
will materially impact its consolidated financial statements.





SFAS No.
157, “Fair Value
Measurements”, provides guidance for using
fair value to measure assets and liabilities. The FASB believes the standard
also responds to investors’ requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. Statement 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand the use
of fair value in any new circumstances. Currently, over 40
accounting standards within GAAP require (or permit) entities to measure assets
and liabilities at fair value. Prior to Statement 157, the methods for measuring
fair value were diverse and inconsistent, especially for items that are not
actively traded. The standard clarifies that for items that are not actively
traded, such as certain kinds of derivatives, fair value should reflect the
price in a transaction with a market participant, including an adjustment for
risk, not just the company’s mark-to-model value. Statement 157 also requires
expanded disclosure of the effect on earnings for items measured using
unobservable data.




F-12




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007







2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Recently Issued
Accounting Pronouncements (continued)





Under
Statement 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. In this
standard, the FASB clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing the asset or
liability. In support of this principle, Statement 157 establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the reporting
entity’s own data. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy.





The
provisions of Statement 157 are effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year,
including any financial statements for an interim period within that fiscal
year.  The Company adopted SFAS No. 157 as of March 1, 2008 which had
no material impact its consolidated financial statements.





SFAS  No.
159, “The Fair Value
Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115” permits an
entity to choose to measure many financial instruments and certain other items
at fair value. This option is available to all entities, including
not-for-profit organizations. Most of the provisions in Statement 159 are
elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities”, applies to all entities
with available-for-sale and trading securities. Some requirements apply
differently to entities that do not report net income. The FASB's stated
objective in issuing this standard is as follows: "to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions."





The fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. A
not-for-profit organization will report unrealized gains and losses in its
statement of activities or similar statement. The fair value option: (a) may be applied instrument
by instrument, with a few exceptions, such as investments otherwise accounted
for by the equity method; (b) is irrevocable (unless a
new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments.





Statement
159 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice
in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157, “Fair Value Measurements”.The Company
adopted SFAS No. 159  as of March 1, 2008 which had no material impact
its consolidated financial statements.





SFAS No.
160,“Non-controlling Interests in
Consolidated Financial Statements - AnAmendment of ARB No. 51” establishes new accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. Specifically, this statement requires the
recognition of a non-controlling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's equity. The
amount of net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the income statement.
Statement 160 clarifies that changes in a parent's ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the non-controlling equity investment on the deconsolidation date.
 Statement 160 also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interest.  Statement 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Like Statement 141R discussed above,
earlier adoption is prohibited.  The Company does not believe the
application of this standard will materially impact its consolidated financial
statements.




F-13




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





2.  CERTAIN SIGNIFICANT
ACCOUNTING POLICIES (continued)





Recently Issued
Accounting Pronouncements (continued)





SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
133” enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how: (a) an entity uses derivative
instruments; (b)
derivative instruments and related hedged items are accounted for under SFAS No.
133, “Accounting for
Derivative Instruments and Hedging Activities”; and (c) derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. Specifically, Statement 161 requires:





·
            Disclosure of the objectives for
      using derivative instruments be disclosed in terms of underlying risk and
      accounting designation;·
            Disclosure of the fair values of derivative
      instruments and their gains and losses in a tabular
      format;·
            Disclosure of information about
      credit-risk-related contingent features; and·
            Cross-reference
      from the derivative footnote to other footnotes in which
      derivative-related information is
disclosed.




Statement
161 is effective for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged.  The Company does not
believe the application of this standard will materially impact its consolidated
financial statements.





SFAS No.
162, “The Hierarchy of
Generally Accepted Accounting Principles” identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy).  Specifically, the sources of accounting principles that
are generally accepted are categorized in descending order of authority as
follows:





a.
            FASB
      Statements of Financial Accounting Standards and Interpretations, FASB
      Statement 133 Implementation Issues, FASB Staff Positions, and American
      Institute of Certified Public Accountants (AICPA) Accounting Research
      Bulletins and Accounting Principles Board Opinions that are not superseded
      by actions of the FASB;


b.
            FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of
Position;


c.
            AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the FASB Emerging Issues Task
      Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts (EITF
      D-Topics); and


d.
            Implementation
      guides (Q&As) published by the FASB staff, AICPA Accounting
      Interpretations, AICPA Industry Audit and Accounting Guides and Statements
      of Position not cleared by the FASB, and practices that are widely
      recognized and prevalent either generally or in the
    industry.





This
Statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning ofPresent Fairly in Conformity With
Generally Accepted Accounting Principles.  The Company intends
to adhere to this statement once it becomes effective.





SFAS No.
163, “Accounting for Guarantee
Insurance Contracts” requires that an insurance enterprise recognize
a claim liability prior to an event of default (insured event) when there
is evidence that credit deterioration has occurred in an insured financial
obligation. This Statement requires expanded disclosures about financial
guarantee insurance contracts. The accounting and disclosure requirements
of the Statement will improve the quality of information provided to users
of financial statements.





Statement
163 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those
fiscal years, except for some disclosures about the insurance enterprise’s
risk-management activities. This Statement requires that disclosures about
the risk-management activities of the insurance enterprise be effective for
the first period (including interim periods) beginning after issuance of
this Statement. Except for those disclosures, earlier application is not
permitted.  The Company does not believe the application of this
standard will impact its consolidated financial statements.




F-14




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





3.
INVENTORY





Inventories
consisted of the following as of May 31, 2008:




AGI
              
              
              Europe
              
              
              Asia
              
              
              TotalsRaw
      materials
              
              
              184,933
              
              
              
              -
              
              
              
              -
              
              
              
              184,933Finished
      goods
              
              
              -
              
              
              
              790
              
              
              
              169,869
              
              
              
              170,659$
              184,933
              
              
              $
              790
              
              
              $
              169,869
              
              
              $
              355,592








4.
CONTRACT IN PROGRESS





The
Company’s Singapore subsidiary entered into the Contract with a Singapore entity
on April 10, 2007 to design, develop and manufacture approximately $93.5 million
of its Telematics products. Deliveries began in January 2008 and we anticipated
beginning the five major shipments in the later part of 2008. The Contract
includes a provision for substantial liquidated damages for unexcused delays in
product deliveries and/or failure to satisfy certain customer-specified
acceptance criteria. In addition, in the event of non-performance by the Company
that remains uncorrected after notice from the customer and the expiration of a
contractual grace period, the customer has the right to cancel the Contract. The
Company’s proprietary Telematics system is undergoing significant
customization/modification in order to achieve the functionality required by the
customer.





The
Company is accounting for the Contract described above under the percentage-of
completion method under SOP 81-1. Under the percentage-of-completion method,
revenues, expenses and profits are recognized as performance progresses on
long-term contracts. Progress toward completion is measured using the
cost-to-cost method.  The Company uses the estimated COGS for the
project to determine the associated recognized revenues in the periods in which
they are earned.  This is calculated by taking the current reporting
period COGS against the total projected COGS to determine a percentage of
completion; then applying the percentage against the Contract project total
revenues to determine the revenues for the reporting period.  During
the three months ended May 31, 2008, the Company recognized approximately $1.5
million in revenue on the Contract.





Customer
billing is determined by the “schedule of values” in accordance with the
Contract terms as agreed to by all parties.  Timing differences
between costs incurred and billings based on the Contract terms generate the
billings in excess of costs and estimated earnings on uncompleted
contract.





Costs in excess of billings and
estimated earnings on the Contract consisted of the following as of May
31:




2008Costs
      and estimated earnings on uncompleted contract
              
              
              10,277,857Billings
      in excess of estimated earnings on uncompleted contract
              
              
              (5,442,334
              )Costs
      and estimated earnings on uncompleted contract
              
              $
              (4,835,523
              )








5.  INCOME
TAXES





The
Company adopted FIN 48 effective March 1, 2007.  Management has
determined that the failure to file certain information returns (for the period
from inception to and including the year ended February 28, 2007) may result in
the assessment of income tax penalties.  As a result, management has
accrued an estimate of such penalties at March 1, 2007.  Accordingly,
the Company’s condensed consolidated balance sheet for May 31, 2008 includes an
estimated liability of approximately $0.5 million relating to potential income
tax penalties.





All open
tax years of the Company remain subject to examination by tax authorities and,
as applicable, certain foreign tax authorities.





F-15




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007








6.  NOTES
PAYABLE





In April
2007, the Company received an unsecured note payable which was due on February
4, 2008 and carries an annual interest rate of 16.5%.  During February
2008, the maturity date was extended to August 4, 2008. The balance of the note
is approximately $58,000 at May 31, 2008 and is included in current portion of
long-term liabilities in the accompanying condensed consolidated balance
sheet.





In August
2007, the Company received an unsecured non-interest bearing note payable which
was due on February 11, 2008. The amount of the imputed interest is
insignificant.  This note payable replaces approximately $130,000 of
accrued expenses.  During February 2008, the maturity date was
extended to August 11, 2008. The balance of the note payable is approximately
$155,000 at May 31, 2008 and is included in current portion of long- term
liabilities in the accompanying condensed consolidated balance
sheet.





During
the fiscal year ended February 28, 2007, certain stockholders advanced funds to
the Company for working capital purposes at an annual interest rate of 15%
payable upon demand with a remaining balance of approximately $57,000 as of May
31, 2008.   During the fiscal year ended February 29, 2008,
certain stockholders advanced to the Company approximately $85,000 in working
capital at an annual interest rate of 15% payable upon demand.  The
aggregate balance of stockholders advances is approximately $151,000 at May 31,
2008 and is included in advances from stockholders in the accompanying condensed
consolidated balance sheet.




7.  OTHER
MATTERS RELATING TO CERTAIN DEBT AND EQUITY INSTRUMENTS





In the
prior year, the Company entered into certain convertible debt
financings.  A $1.5 million convertible note payable to a stockholder
issued in September 2004 (as amended in November 2004) and a $384,000
convertible note payable issued to the same stockholder in December 2004 are
outstanding at May 31, 2008 and are included in the convertible notes payable to
stockholders on the accompanying condensed consolidated balance
sheet.




F-16




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





8.  EQUITY
TRANSACTIONS





Preferred
Stock





May
29, 2008 Series C Preferred Stock Transaction





Background





Following
approval of its Board of Directors and a majority of its Shareholders’ the
Company entered into a Warrant Exchange Agreement, a Warrant Amendment
Agreement, and a Preferred Stock Exchange Agreement (collectively, the “Amended
and Restated Rights Agreements”), dated as of May 29, 2008, between Company and
each of the holders of certain warrants, and holders of certain series of
Preferred shares issued by the Company (individually, a “Holder” and
collectively, the “Holders”) relating to the Company’s Series A and Series B
Preferred shares and related warrants. The Company accepted an exchange of
warrants with modified terms for cash and Series C Preferred stock; and the
exchange of Series A and Series B Preferred stock for Series A-2 Preferred stock
sequentially with all transactions closing concurrently on the same
day.  The Company offered the same terms to all participants of Series
A and Series B Preferred stock and related warrant holders for a limited 20 day
period of exchange. The specific changes contained in the Amended and Restated
Rights Agreements are as follows:





·
            Decrease
      the exercise price of 5,963,571 Series A Preferred stock warrants, 805,260
      Series B Preferred stock warrants, 4,384,027 Series C Preferred stock
      warrants, 3,657,142 Series J Preferred stock warrants and 1,200,000 Other
      Preferred stock warrants from exercise prices ranging between $1.00
      through $1.50 per share to $0.25 per share.  The warrant terms
      were also modified to eliminate the anti-dilution and cashless exercise
      provisions of each of the warrant series and so that the holders of the
      warrants received 800,000 shares of Series C Preferred stock upon exercise
      of the warrants instead of shares of the Company’s common
      stock.  These warrants were then exercised for cash proceeds of
      $4,000,000.


·
            Simultaneously,
      modify 314,286 Series A Preferred stock warrants, 5,462,597 Series B
      Preferred stock warrants, 1,883,830 Series C Preferred stock warrants,
      6,267,857 Series D Preferred stock warrants and 628,572 Series J Preferred
      stock warrants so that the holders  exchanged such warrants for
      1,285,238 shares of Series C Preferred
stock.


·
            Simultaneously,
      modify 4,500,000 shares of Series A Preferred stock and 2,142,857 shares
      of Series B Preferred stock so that the holders exchanged such shares for
      1,500,000 shares of Series A-2 Preferred
stock.





The
Certificates of Designation for the Series A-2 Preferred shares and the Series C
Preferred shares contain the same terms except that the Series A-2 Preferred
shares maintain privileges from the Series A Preferred stock in the event of
certain transactions; and the Series C Preferred shares do not have these
privileges.





Overall
Consideration





The
substance of this transactions is to convert the Series A and Series B Preferred
stock and related warrants exercisable for shares into Series A-2 and Series C
Preferred stock.  Based on an assessment of the overall effect of the
components of the transaction, there is an increase of 11,861,904 potential
shares to be issued between the number of shares to be issued upon conversion of
the Series A-2 and Series C Preferred Stock versus the number of shares that
would have been issued upon the conversion of the Series A and Series B
Preferred stock and the exercise of the Series A, B, C, D, J and Other warrants.
This is accomplished through the reduction of the conversion and exercise prices
from between $0.50 to $1.75 to $0.25 and $0.39.





Accounting for
Transactions





Change in Exercise
Price





The
change in the exercise prices of the Series A, B, C, J and other warrants as
well as the change such that the warrants are exercisable in exchange for Series
C Preferred Stock instead of common stock is considered to be a modification and
must be accounted for in accordance with paragraph 51 of SFAS No. 123(R), “Share-Based Payment,” (“SFAS
123(R)”) as follows:





“A modification of the terms or
conditions of an equity award shall be treated as an exchange of the original
award for a new award. In substance, the entity repurchases the original
instrument by issuing a new instrument of equal or greater value, incurring
additional compensation cost for any incremental value. The effects of a
modification shall be measured as follows:




F-17




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007







8.  EQUITY
TRANSACTIONS (continued)





Preferred Stock(continued)





a.  Incremental
compensation cost shall be measured as the excess, if any, of the fair value of
the modified award determined in accordance with the provisions of this
Statement over the fair value of the original award immediately before its terms
are modified, measured based on the share price and other pertinent factors at
that date.”





The
warrants were exercisable into 16,000,000 shares of common stock. The fair value
of the warrants on the transaction date before the modifications was determined
to be $4,110,225 using the Black-Scholes option pricing model in accordance with
SFAS 123(R). The fair value of the warrants on the transaction date after the
modifications was determined to be $5,696,144 using the Black-Scholes option
pricing model in accordance with SFAS 123(R). In addition, the warrants were
originally issued as part of an equity transaction and the fair value of those
warrants was recorded as paid-in capital; therefore, a modification resulting in
a change in the fair value of those warrants would also be recorded as paid-in
capital rather than as a compensation charge.  As a result, the
difference in the fair value of the warrants before and after the modification
of $1,585,919 will be recorded as a deemed dividend – since these warrant
holders are also holders of the Company’s Series A and Series B Preferred stock
and are the beneficiaries of the increase in incremental value – and will be
recognized over the period until the Series C Preferred Stock becomes
convertible, which was upon issuance since the Series C Preferred stock are
convertible upon issuance. However, since the Company did not have retained
earnings on the transaction date, the deemed dividend was accounted for by
reducing additional paid in capital. The accounting for these dividends also
requires that they be credited to additional paid in capital; as a result, there
was no net effect of the transaction on the Company’s stockholders’ deficit on
the transaction date.





For
purposes of reporting the basic and diluted loss per common share, as required
by paragraphs 8 and 9 of SFAS No. 128, “Earnings per
Share.”  Paragraph 8 states “the objective of basic earnings per share
(“EPS”) is to measure the performance of an entity over the reporting period.
Basic EPS shall be computed by dividing income available to common stockholders
(the numerator) by the weighted-average number of common shares outstanding (the
denominator) during the period. Shares issued during the period and shares
reacquired during the period shall be weighted for the portion of the period
that they were outstanding.” Paragraph 9 states “income available to
common stockholders shall be computed by deducting both the dividends declared
in the period on preferred stock (whether or not paid) and the dividends
accumulated for the period on cumulative preferred stock (whether or not
earned)from income
from continuing operations (if that amount appears in the income statement) and
also from net income. If there is a loss from continuing operations or a net
loss, the amount of the loss shall be increased by those preferred
dividends.”  Therefore, the deemed dividend to Preferred stockholders
was added to the net loss in determining the net loss available to common
shareholders in the statement of operations.





Exchange of Warrants for
shares of Series C Preferred Stock





Based on
the facts of the transaction, this is considered to be a non-monetary exchange
and is to be accounted at fair value for in accordance with APB No. 29, “Accounting for Non-Monetary
Transactions” (as amended by SFAS 153). The transaction does not qualify
for the exception for transactions that lack “commercial substance’ since the
future cash flows of the Company are expected to change significantly as a
result of the transaction (the Company would have received cash proceeds from
the exercise of the warrants but will receive no cash proceeds upon the
conversion of the Series C Preferred stock).





The
warrants were exercisable into 14,557,142 shares of common stock. The fair value
of the warrants on the transaction date was determined to be $4,331,396 using
the Black-Scholes option pricing model in accordance with SFAS
123(R).  The Series C Preferred stock has a liquidation preference of
$7.80 per share with a 20:1 conversion to the Company’s common shares issuable
upon conversion; therefore, the liquidation preference on a per-share of common
stock basis of $0.39 (fair value) is equal to the closing price of the Company’s
common stock on May 29, 2008, which was determined to be $3,784,856. The
difference in fair value between the warrants and the Preferred stock exchanged
of $546,540 is considered to be a deemed dividend to the Preferred stockholders,
with the entire amount charged to equity on the transaction date. However, since
the Company did not have retained earnings on the transaction date, the deemed
dividend was accounted for by reducing additional paid in capital. The
accounting for these dividends also requires that they be credited to additional
paid in capital; as a result, there was no net effect of the transaction on the
Company’s stockholders’ deficit on the transaction date.




F-18




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





8.  EQUITY
TRANSACTIONS (continued)





Preferred Stock(continued)





For
purposes of reporting the basic and diluted loss per common share, as required
by paragraphs 8 and 9 of SFAS No. 128, “Earnings per
Share.”  Paragraph 8 states “the objective of basic EPS is to measure
the performance of an entity over the reporting period. Basic EPS shall be
computed by dividing income available to common stockholders (the numerator) by
the weighted-average number of common shares outstanding (the denominator)
during the period. Shares issued during the period and shares reacquired during
the period shall be weighted for the portion of the period that they were
outstanding.” Paragraph 9 states “income available to common stockholders shall
be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on
cumulative preferred stock (whether or not earned) from income from
continuing operations (if that amount appears in the income statement) and also
from net income. If there is a loss from continuing operations or a net loss,
the amount of the loss shall be increased by those preferred
dividends.”  Therefore, the deemed dividend to Preferred stockholders
was added to the net loss in determining the net loss available to common
shareholders in the statement of operations.





Accounting for Series C
Preferred Stock





SFAS
No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity,” (“SFAS 150”) requires an issuer to classify the following
instruments as liabilities (or assets in some circumstances):  a
financial instrument issued in the form of shares that is mandatorily
redeemable—that embodies an unconditional obligation requiring the issuer to
redeem it by transferring its assets at a specified or determinable date (or
dates) or upon an event that is certain to occur.  However, SFAS 150
provisions do not apply if redemption is required to occur only upon the
liquidation or termination of the reporting entity. The Series C Preferred Stock
contains no unconditional obligation requiring redemption.  SFAS 150
also requires unconditional obligations in the form of shares that the issuer
must or may settle by issuing a variable number of shares to be classified as a
liability.  The Series C Preferred Stock contains no unconditional
obligations that may be settled in a variable number of shares.  The
Series C Preferred Stock contains redemption features if a Major Transaction or
Triggering Event were to occur, that may be settled in cash or shares, at the
Company’s option or solely within the Company’s control.  These
transactions are not certain to occur and are not
unconditional.  Accordingly, the Series C Preferred Stock is
considered not to be within the scope of SFAS 150.





The
conversion feature in the Series C Preferred Stock was also be evaluated as a
potential embedded derivative in accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”(“SFAS 133”)  SFAS 133
provides guidance on derivative instruments and contracts that do not in their
entirety meet the definition of a derivative instrument but may contain
“embedded” derivative instruments.  SFAS 133 requires that an embedded
derivative instrument be separated from the host contract and accounted for as a
derivative instrument if specified criteria are met.  It also
indicates the necessary criteria for bifurcation including (i) that the economic
characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, as well as (ii) that a separate instrument with the same terms as the
embedded derivative instrument would be a derivative instrument subject to the
requirements of the Statement.





SFAS 133
paragraph 61 (l) provides guidance on evaluating convertible Preferred stock and
requires that the terms of the Preferred stock (other than the conversion
option) be analyzed to determine whether the economic characteristics and risks
are more akin to a debt or an equity instrument. Based on an evaluation of the
conversion features, the economic characteristics and risks are considered to be
more akin to equity since they are clearly and closely related to the host
primarily because the host contract is a perpetual interest and there are no
collateral requirements or creditor rights in the
instruments.  Therefore, the conversion feature does not need to be
bifurcated from the host instrument.




F-19




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





8.  EQUITY
TRANSACTIONS (continued)





Preferred Stock(continued)





The
Series C Preferred Stock was also analyzed in comparison to the requirements of
EITF Abstracts, Topic D-98, “Classification and Measurement of
Redeemable Securities” (“Topic D-98”) and the SEC’s Regulation S-X,
Article 5-02.28 (“Reg S-X”).  Reg S-X requires securities that are
redeemable for cash or other assets to be classified outside of permanent equity
if they are redeemable upon the occurrence of an event that is not solely within
the control of the issuer.  Topic D-98 excludes cash redemption upon
final liquidation as an event requiring classification outside of permanent
equity.  In addition, Topic D-98 states that if a company issues
preferred shares that are conditionally redeemable, for example, at the holder's
option or upon the occurrence of an uncertain event not solely within the
company's control, the shares are not within the scope of SFAS 150 because there
is no unconditional obligation to redeem the shares by transferring assets at a
specified or determinable date or upon an event certain to occur. If the
uncertain event occurs, the condition is resolved, or the event becomes certain
to occur, then the shares become mandatorily redeemable under SFAS 150 and would
require reclassification to a liability. Certain events require cash redemption
of the Series C Preferred Stock; however, the Company is either in sole control
of these events or upon the occurrence of an uncertain event not solely within
the Company’s control. Upon any required conversion the Company has the ability
to deliver unregistered common shares. However, the shares become redeemable in
the event that the Company does not timely file all reports required by Section
13(a) of 15(d) of the Exchange act of ’34. Based on the terms of the agreement,
the Company has the ability (at its option) to settle this via the delivery of
unregistered common shares.  Accordingly, this is deemed to be within
the control of the Company. Therefore, the Series C Preferred Stock is
considered to be permanent equity in accordance with Topic D-98 and Reg
S-X.





Finally,
the existence of a beneficial conversion feature (“BCF”) must be determined in
accordance with EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments,” and the amount of the BCF calculated in
accordance with these accounting standards, if any, must be recorded. The Series
C Preferred Stock conversion price of $0.39 per share was equal to the Company’s
closing stock price on the transaction date and therefore no BCF existed at the
time of issuance of the Series C Preferred Stock.





Exchange of Series A and
Series B Preferred Stock for Series A-2 Preferred Stock





Based on
the facts of the transaction, this is considered to be a non-monetary exchange
and is to be accounted at fair value for in accordance with APB 29, “Accounting for Non-Monetary
Transactions (as amended by SFAS 153).” The transaction does not qualify
for the exception for transactions that lack “commercial substance.’ Although
the future cash flows of the Company are not expected to change significantly as
a result of the transaction (the Company will not receive proceeds from the
conversion of either the Series A, the Series B or the Series A-2 Preferred
stock), using the number of shares to be issued upon conversion of the Series A
and Series B Preferred stock compared to the number to be issued upon the
conversion of the Series A-2 as a measure of entity-specific value as discussed
in paragraph 21.b of SFAS 153 shows that there would be an effect on the Company
(13,285,714 total shares versus 30,000,000 shares). Because the transaction has
entity specific value, it therefore has commercial substance and therefore must
be measured at fair value.





The
Series A and Series B Preferred stock were convertible into 9,000,000 and
4,285,714 shares of Company common stock, respectively. The fair value of the
Series A and Series B Preferred stock was based on the closing price of the
Company’s common stock on the transaction date and the number of common shares
issuable upon conversion and was determined to be $5,181,428. The Series A-2
Preferred stock is convertible into 30,000,000 shares of common stock. The
Series A-2 Preferred stock has a liquidation preference of $7.80 per share with
a 20:1 conversion to the Company’s common shares issuable upon conversion;
therefore, the liquidation preference on a per-share of common stock basis of
$0.39 (fair value) is equal to the closing price of the Company’s common stock
on May 29, 2008, which was determined to be $11,700,000.  The
difference in fair value of the Preferred stock exchanged, $6,518,572, is
considered to be a deemed dividend to the Preferred stockholders, with the
entire amount charged to equity on the transaction date. However, since the
Company did not have retained earnings on the transaction date, the deemed
dividend was accounted for by reducing additional paid in capital. The
accounting for these dividends also requires that they be credited to additional
paid in capital; as a result, there was no net effect of the transaction on the
Company’s stockholders’ deficit on the transaction date.




F-20




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





8.  EQUITY
TRANSACTIONS (continued)





Preferred Stock(continued)





For
purposes of reporting the basic and diluted loss per common share, as required
by paragraphs 8 and 9 of SFAS No. 128, “Earnings per
Share.”  Paragraph 8 states “the objective of EPS is to measure the
performance of an entity over the reporting period. Basic EPS shall be computed
by dividing income available to common stockholders (the numerator) by the
weighted-average number of common shares outstanding (the denominator) during
the period. Shares issued during the period and shares reacquired during the
period shall be weighted for the portion of the period that they were
outstanding.” Paragraph 9 states “income available to common stockholders shall
be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on
cumulative preferred stock (whether or not earned) from income from
continuing operations (if that amount appears in the income statement) and also
from net income. If there is a loss from continuing operations or a net loss,
the amount of the loss shall be increased by those preferred
dividends.”  Therefore, the deemed dividend to Preferred stockholders
was added to the net loss in determining the net loss available to common
shareholders in the statement of operations.





Accounting for Series A-2
Preferred Stock





SFAS 150
requires an issuer to classify the following instruments as liabilities (or
assets in some circumstances):  a financial instrument issued in the
form of shares that is mandatorily redeemable—that embodies an unconditional
obligation requiring the issuer to redeem it by transferring its assets at a
specified or determinable date (or dates) or upon an event that is certain to
occur.  However, SFAS 150 provisions do not apply if redemption is
required to occur only upon the liquidation or termination of the reporting
entity. The Series A-2 Preferred Stock contains no unconditional obligation
requiring redemption.  SFAS 150 also requires unconditional
obligations in the form of shares that the issuer must or may settle by issuing
a variable number of shares to be classified as a liability.  The
Series A-2 Preferred Stock contains no unconditional obligations that may be
settled in a variable number of shares.  The Series A-2 Preferred
Stock contains redemption features if a Major Transaction or Triggering Event
were to occur, that may be settled in cash or shares, at the Company’s option or
solely within the Company’s control.  These transactions are not
certain to occur and are not unconditional.  Accordingly, the Series
A-2 Preferred Stock is considered to not be within the scope of SFAS
150.





The
conversion feature in the Series A-2 Preferred Stock were evaluated as a
potential embedded derivative in accordance with SFAS
No. 133.   SFAS 133 provides guidance on derivative
instruments and contracts that do not in their entirety meet the definition of a
derivative instrument but may contain “embedded” derivative
instruments.  SFAS 133 requires that an embedded derivative instrument
be separated from the host contract and accounted for as a derivative instrument
if specified criteria are met.  It also indicates the necessary
criteria for bifurcation including (i) that the economic characteristics and
risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, as well as (ii)
that a separate instrument with the same terms as the embedded derivative
instrument would be a derivative instrument subject to the requirements of the
Statement.





SFAS 133
paragraph 61 (l) provides guidance on evaluating the convertible Preferred stock
and requires that the terms of the Preferred stock (other than the conversion
option) be analyzed to determine whether the economic characteristics and risks
are more akin to a debt or an equity instrument. Based on an evaluation of the
conversion features, the economic characteristics and risks are considered to be
more akin to equity since they are clearly and closely related to the host
primarily because the host contract is a perpetual interest and there are no
collateral requirements or creditor rights in the
instruments.  Therefore, the conversion feature does not need to be
bifurcated from the host instrument.




F-21




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





8.  EQUITY
TRANSACTIONS (continued)





Preferred Stock(continued)





The
Series A-2 Preferred Stock was also analyzed in comparison to the requirements
of EITF Abstracts, Topic D-98 and the SEC’s Reg S-X.  Reg S-X requires
securities that are redeemable for cash or other assets to be classified outside
of permanent equity if they are redeemable upon the occurrence of an event that
is not solely within the control of the issuer.  Topic D-98 excludes
cash redemption upon final liquidation as an event requiring classification
outside of permanent equity.  In addition, Topic D-98 states that if a
company issues Preferred shares that are conditionally redeemable, for example,
at the holder's option or upon the occurrence of an uncertain event not solely
within the company's control, the shares are not within the scope of SFAS 150
because there is no unconditional obligation to redeem the shares by
transferring assets at a specified or determinable date or upon an event certain
to occur. If the uncertain event occurs, the condition is resolved, or the event
becomes certain to occur, then the shares become mandatorily redeemable under
SFAS 150 and would require reclassification to a liability. Certain events
require cash redemption of the Series A-2 Preferred Stock; however, the Company
is either in sole control of these events or upon the occurrence of an uncertain
event not solely within the Company’s control. Upon any required conversion the
Company has the ability to deliver unregistered common shares. However, the
shares become redeemable in the event that the Company does not timely file all
reports required by Section 13(a) of 15(d) of the Exchange act of
’34.  Based on the terms of the agreement, the Company has the ability
(at its option) to settle this via the delivery of unregistered common
shares.  Accordingly, this is deemed to be within the control of the
Company.  Therefore, the Series A-2 Preferred Stock is considered to
be permanent equity in accordance with Topic D-98 and Reg S-X.





Finally,
the existence of a BCF must be determined in accordance with EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments,” and the amount of the BCF calculated in
accordance with these accounting standards, if any, must be recorded. The Series
A-2 Preferred Stock conversion price of $0.25 per share was in-the-money when
issued, since the Company’s closing stock price on May 29, 2008 was $0.39, and
therefore a BCF existed at the time of issuance of the Series A-2 Preferred
Stock. The BCF, $6,518,572, is considered to be a deemed dividend to the
preferred stockholders, with the entire amount charged to equity on the
transaction date. However, since the Company did not have retained earnings on
the transaction date, the deemed dividend was accounted for by reducing
additional paid in capital. The accounting for these dividends also requires
that they be credited to additional paid in capital; as a result, there was no
net effect of the transaction on the Company’s stockholders’ deficit on the
transaction date.





For
purposes of reporting the basic and diluted loss per common share, as required
by paragraphs 8 and 9 of SFAS No. 128, “Earnings per
Share.”  Paragraph 8 states “the objective of basic EPS is to measure
the performance of an entity over the reporting period. Basic EPS shall be
computed by dividing income available to common stockholders (the numerator) by
the weighted-average number of common shares outstanding (the denominator)
during the period. Shares issued during the period and shares reacquired during
the period shall be weighted for the portion of the period that they were
outstanding.” Paragraph 9 states “income available to common stockholders shall
be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on
cumulative preferred stock (whether or not earned) from income from
continuing operations (if that amount appears in the income statement) and also
from net income. If there is a loss from continuing operations or a net loss,
the amount of the loss shall be increased by those preferred
dividends.”  Therefore, the deemed dividend to Preferred stockholders
was added to the net loss in determining the net loss available to common
shareholders in the statement of operations.





Accounting Treatment of the
Company’s Derivatives





Paragraph
10 of  EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock,” requires that contracts be reassessed at each balance sheet date
or as result of transactions during a period.  One of the criteria to
be satisfied so that a potential derivative can be accounted for as equity is
that the Company have sufficient authorized and unissued shares available to
settle a contract after all other commitments that may require the issuance of
stock.





As part
of the transactions discussed above, on May 27, 2008 the Company’s Board
approved modification of the Astrata Articles of Incorporation to increase
authorized Preferred stock to 75,000,000 shares; also authorizing Common Stock
to 300,000,000 shares.  On May 28, 2008, the Company received 52% of
the common stockholder’s approval for the modification of the Astrata Articles
of Incorporation.




F-22




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





8.  EQUITY
TRANSACTIONS (continued)





Preferred Stock(continued)





As a
result of the approval discussed above, the number of authorized and unissued
shares of the Company is sufficient to settle all the current potential common
stock commitments that may require the issuance of common stock, which as of May
29, 2008 was 101,102,341 shares of common stock fully diluted. Therefore, no
further assessment is required.





Issuance
of Common Stock and Other Equity Instruments





During
the quarter ended May 31, 2008, the Company issued 43,334 shares of its
restricted common stock in exchange for services provided by consultants. Such
shares were valued at approximately $21,600 (estimated to be the closing value
based on the trading price on the issuance date).  The transaction
described in this paragraph constituted an exempt offering under Section 4(2) of
the Securities Act.




9.  OTHER
COMMITMENTS AND CONTINGENCIES





Legal
Matters





From time
to time, the Company may be involved in various claims, lawsuits and disputes
with third parties, actions involving allegations of discrimination or breach of
contract incidental to the ordinary operations of the business.  The
Company is not currently involved in any litigation which management believes
could have a material adverse effect on the Company's financial position or
results of operations.





Registration
Rights Penalties





The
Company is contractually liable for certain penalties because its registration
statement relating to the preferred stock and the April/May 2005 sale of equity
units was not filed (or expected to be declared effective by the SEC) by the
deadline dates.  Based on the current estimate of the filing and
effective dates of such registration statement and the contractual deadlines, as
of May 31, 2008, the Company has accrued estimated penalties and related
interest of approximately $0.6 million.





Accrued
Interest Expense





A number
of directors, officers, employees and consultants have deferred salaries, fees
and/or expenses for significant periods of time to support the
Company.  These loans accrue 1% per month simple interest on balances
that remained outstanding for over six months.  During the three
months ended May 31, 2008 we accrued interest payable and expensed approximately
$46,000 included within interest expense in the accompanying condensed
consolidated statement of operations.




F-23




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





10.
SEGMENT REPORTING AND GEOGRAPHIC INFORMATION





Revenues
(from continuing operations) reported in the accompanying condensed consolidated
statements of operations relate exclusively to the Company’s Telematics
operations. Thus, management has not reported the segment information otherwise
required by SFAS No. 131, “Disclosure about Segments of an Enterprise and
Related Information.”





Telematic
products, accessories and services related to the business of remote monitoring
of assets (including track-and-trace) whereby position, attributes, status and
communication are involved.





Certain
condensed geographic information is presented below including property and
equipment, revenues:





As of and
for the three months ended May 31, 2008:
 Property
      and
                Equipment,
      net
              
              
              RevenueAsia
              
              $
              546,337
              
              
              $
              2,857,879United
      States
              
              
              12,930
              
              
              
              -Western
      Europe
              
              
              92,629
              
              
              
              168,636Total
              
              $
              651,896
              
              
              $
              3,026,515
 
 As of and
for the three months ended May 31, 2007:
  RevenueAsia
              
              $
              1,552,119United
      States
              
              
              -Western
      Europe
              
              
              120,294Total
              
              $
              1,672,413







F-24




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007





11.  LOSS
PER COMMON SHARE





The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per common share from continuing operations computations for
the three months ended May 31, 2008 and 2007:




2008
              
              
              2007Numerator
      for basic and diluted loss per common share:Net
      loss from continuing operations
              
              $
              (1,074,554
              )
              
              $
              (3,959,219
              )Deemed
      dividend and cumulative undeclared dividends on preferred
      stock
              
              
              (11,757,951
              )
              
              
              (56,000
              )Total
      net loss from continuing operations charged to common
      shareholders
              
              $
              (12,832,505
              )
              
              $
              (4,015,219
              )Net
      loss from continuing operations
              
              $
              (1,074,554
              )
              
              $
              (3,959,219
              )Income
      (loss) from discontinued operations, net of tax
              
              
              -
              
              
              
              (170,007
              )Net
      loss
              
              $
              (1,074,554
              )
              
              $
              (4,129,226
              )Denominator
      for basic and diluted loss per common share:Weighted
      average number of common share outstanding
              
              
              28,504,171
              
              
              
              21,426,745Basic
      and diluted (loss) per common share:Continuing
      operations applicable to common stockholders
              
              $
              (0.45
              )
              
              $
              (0.19
              )Discontinued
      operations
              
              
              -
              
              
              
              (0.01
              )$
              (0.45
              )
              
              $
              (0.20
              )
   12.  DISCONTINUED
OPERATIONS





In the
opinion of management, the Company’s future opportunities in the GPS industry
are principally in the Telematics sector in the Southeast Asia, Western Europe,
and United States markets, with particular emphasis on the homeland security
business. In combination with certain operational issues in South Africa, the
desire to outsource manufacturing activities, and the intent to
restructure/relocate the research and development function, management reached a
decision in the first quarter of fiscal 2007 to sell the Company’s Geomatics
operations. The Company consummated certain disposal transactions in the second
quarter of fiscal 2007. In addition, management placed Astrata Systems (a
wholly-owned) subsidiary in South Africa) in liquidation during fiscal
2007.





Management
believes that the Company has not incurred any material contingent liabilities
in connection with the transactions and events described in the preceding
paragraph. The Company did not recognize any losses for write-downs (to fair
value, less cost to sell) of any assets related to discontinued operations
during the three months ended May 31, 2008. Operations reported as discontinued
in the accompanying consolidated statements of operations are not generating any
significant cash flows.  Management has concluded that the
Company does not have any active continuing involvement with the components
that have been classified as discontinued operations in the accompanying
consolidated financial statements.





The
(loss) from discontinued operations (net of tax) reported by the Company for the
three months ended May 31, 2007 was $170,007.




F-25




ASTRATA
GROUP INCORPORATED AND SUBSIDIARIES


NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE
THREE MONTHS ENDED May 31, 2008 and 2007






13.  SUBSEQUENT
EVENTS





As part
of the May 29, 2008 Series C Preferred stock transaction  discussed in
Note 8,  the remaining approximately 11.7 million Preferred stock
warrant holders have a limited twenty (20) day offer  in which to
elect to participate in the  exchange of their warrants into
Series C Preferred stock.  As of June 18, 2008, holders
of approximately 8.2 million Preferred stock warrants elected to
participate in the exchange and will be issued approximately 311,000
shares of Series C Preferred stock for cash and non-cash proceeds
of approximately $37,000 and $482,000, respectively.  The
remaining approximately 3.5 million Preferred stock warrant holders which did
not elect to participate in the exchange will continue to hold their
original warrants with terms modified eliminating the anti-dilution
and cashless exercise provision.  In addition, in accordance with the
anti-dilution terms of the warrant agreement, the exercise price of these
approximately 3.5 million warrants was reduced to $0.61.




F-26


Item
2:  Management’s Discussion and Analysis or Plan of
Operation





Overview





Astrata
Group Incorporated is a U.S. publicly-held company, headquartered in Costa Mesa,
California.  Astrata is focused on advanced location-based IT services
and solutions (Telematics) that combine the GPS positioning, wireless
communications (satellite or terrestrial) and geographical information
technology, which together enable businesses and institutions to monitor, trace,
or control the movement and status of machinery, vehicles, personnel or other
assets. The Company's intelligent vehicle tracking system currently in use
enables the customer to track vehicles carrying hazardous materials and to halt
them in case they veer off course.  Astrata has designed, developed,
manufactured and currently supports eight generations of Telematics systems with
units deployed worldwide. Astrata has offices throughout the world including the
United States, Europe and Asia.





Nature
of Operations





We
operate in the Telematics sector of the GPS industry.  Our expertise
is focused on advanced location-based IT products and services that combine
positioning, wireless communications, and information
technologies.  We provide advanced positioning products, as well as
monitoring and airtime services to commercial and governmental entities in a
number of markets including homeland security, public safety, transportation,
surveying, utility, construction, mining, and agriculture.





Examples
of our products and services include surveying instrumentation using GPS and
other augmenting technologies, such as wireless communication and lasers; fleet
management for specialized machines, such as guidance for earth-moving
equipment; positioning and IT technology for remote asset management and
associated Telematics products, field data collection equipment, and products
and airtime communications services for high volume track and trace
applications.





Positioning
technologies employed by us include GPS, laser, optical and inertial navigation
systems.  Communication techniques employed by us include GSM cellular
and satellite communications.





Our
Product





Telematics
comprises the remote monitoring of assets in real-time (including tracking and
tracing) whereby location, time and sensor status are
communicated.  These products are deployed into diverse markets
including homeland security, public safety, transportation services and
construction.





Telematics
products often focus on people and assets in hostile and demanding environments
such as monitoring the movement of hazardous materials for homeland security
purposes.  We also address the market for fleet management, workforce
management, remote asset management and tracking, and emergency services by
providing hardware for GPS information and data collection, as well as the
software needed to access and analyze the data through the
Internet.  Our products combine positioning, wireless, and information
technology and add measurable value to location-based information.  We
offer airtime to communicate data from the vehicle or field location to the
customer’s data center or provide access over the Internet to the data and
application software.  This allows critical real-time performance and
monitoring data to be accessed and analyzed by supervisory, maintenance, or
financial users and make real-time decisions for productivity improvement, cost
reductions, safety improvement, or other critical decisions to be fed to the
field.





Recent
Trends





Our
business strategy is to focus on the homeland security, hazardous materials,
civil defense and business-to-business markets by providing our customers with
comprehensive solutions to meet their needs. Frequently this involves additional
integration such as sensors ranging from Radio Frequency Identification to
biometrics, remote displays or augmenting technologies to allow tracking in
tunnels.  Our business strategy anticipates we will be doing business
internationally which carries risks which the Company must consider in
conducting business with each international customer.





Our
anticipated sales cycle in our target markets is subject to long cycles which
include potential buyers requiring an evaluation process. As a result, we may be
required to subsidize our operations during the period of obtaining sales
contracts and the subsequent payment of invoices.  Since our
technology is new, prospective customers may require a longer evaluation process
prior to purchasing or making a decision to include our product in their
vehicles or containers.  Some prospective customers may require a test
installation of a customized system before making a purchase decision, which
could be costly and time consuming for us.  Each industry that we
serve may have entirely different requirements, which can diminish our ability
to fine tune a marketing approach.




1




The
Company entered into a fixed-price Contract with a Singapore entity on April 10,
2007 to design, development and manufacture, approximately $93.5 million of our
Telematics products. Deliveries began in January 2008 and we anticipated
beginning the five major shipments in the later part of 2008. The Contract
includes a provision for substantial liquidated damages for unexcused delays in
product deliveries and/or failure to satisfy certain customer-specified
acceptance criteria. The Company’s proprietary Telematics system is undergoing
significant customization/modification in order to achieve the functionality
required by the customer.  The design and development phase is where
we have designed the functionality of the system to meet the customer needs and
then developed the functionalities into a working environment for testing and
acceptance to move into production.  Throughout the last ten months,
we have accomplished all requirements under the Contract with no liquidation
damages incurred. Upon completion of the development phase, we will move into
the production phase which includes the units for delivery over approximately
fifteen months to the customer.   We expect to progress through
the production phase with minimal to no liquidation damages through the
completion of this Contract.





In May
2008, Geneva-based Cotecna Group SA, one of the world’s leading trade
inspection, security and certification companies, has awarded Astrata a contract
to produce a transit monitoring system for the government of Senegal’s customs
operations.  The contract, the first for Astrata in the West African
country, is to provide RDU’s and fixed tracking units as part of Cotecna’s
Transit Monitoring & Traceability solution, which is designed to remotely
monitor the movement of vehicles transporting goods.





Management
is projecting growth in Telematics sales during fiscal 2008 and 2009, and has
announced sales orders in this sector valued at a total of approximately $110
million (which includes $93.5 million for the Contract) for the next two years.
Other sales contracts are under negotiation, but at this time there can be no
assurance regarding the ultimate success of these negotiations.




Results
of Operations for the Three Months Ended May 31, 2008 Compared to May 31,
2007





Revenues





Net sales
from continuing operations were approximately $3 million for the three months
ended May 31, 2008; an increase of approximately $1.3 million compared to the
three months ended May 31, 2007 of approximately $1.7 million.  This
increase was attributable to increased business in South East Asia and
approximately $0.8 million related to the fixed-price Contract with a Singapore
entity we entered into on April 10, 2007 to design, develop and manufacture
approximately $93.5 million of our Telematics products. We are currently in the
later stage of the development phase and recognize revenue using the percentage
of completion method of accounting.  The design and development phase
is where we have designed the functionality of the system to meet the customer’s
needs and then developed the functionalities into a working environment for
testing and acceptance to move into production.  Throughout the last
thirteen months, we have accomplished all requirements under the Contract with
no liquidation damages incurred. Upon completion of the development phase, we
will move into the production phase which includes the units for delivery over
approximately fifteen months to the customer.   We expect to
progress through the production phase with minimal to no liquidation damages
through the completion of this Contract.





Our
business strategy is to focus on the homeland security, hazardous materials,
civil defense and business-to-business markets by providing our customers with
comprehensive solutions to their needs. Frequently this involves additional
integration such as sensors ranging from Radio Frequency Identification to
biometrics, remote displays or augmenting technologies to allow tracking in
tunnels.





Management
is projecting growth in Telematics sales during fiscal 2009 and 2010. Other
sales contracts are under negotiation, but at this time there can be no
assurance regarding the ultimate success of these negotiations.  Based
on our current estimates, we project recording revenue under the Contract of
approximately $31.7 million and $49.5 million in fiscal 2009 and 2010,
respectively.





Margins





Gross
profit from continuing operations increased approximately $0.5 million to
approximately $1.1 million for the three months ended May 31, 2008 compared to
the three months ended May 31, 2007 of approximately $0.6
million.  Total gross profit as a percentage of revenue increased
slightly to 36% for the three months ended May 31, 2008 compared to
approximately 35% for the three months ended May 31, 2007.  Based on
percentage of completion of the Contract, we project recording gross margins
under the Contract of approximately $5 million and $7.8 million in fiscal 2009
and 2010, respectively.




2


Operating
Expenses





Selling
general and administrative expenses from continuing operations for the three
months ended May 31, 2008 were approximately $1.8 million, a decrease of
approximately $2.2 million compared to the three months ended May 31, 2007 of
approximately $4 million.  For the three months ended May 31, 2008,
approximately $0.6 million relates to South East Asia; approximately $0.3
million relates to Europe; and approximately $0.9 million relates to the United
States.  In South East Asia (including Singapore, Malaysia, and
Brunei) overheads decreased by $0.5 million; Europe remained consistent with the
prior year for the same period; and corporate overhead increased by
approximately $0.2 million.  The majority of these expenses are
specifically related to staffing, facilities and travel. Administrative expenses
primarily include marketing, salaries, facilities and travel
expenses.  Corporate overhead of approximately $0.9 million includes
public company expenses of approximately $0.1 million, investor relations and
investment banker service expenses of approximately $0.2 million and
administrative expenses of approximately $0.4 million.  Public company
expenses include audit expenses, legal fees, and director’s fees.  We
expect our expenses to remain consistent or decrease as we progress through the
manufacturing phase on the Contract.  A non-cash expense for stock
based compensation amounting to approximately $0.2 million was recorded for the
three months ended May 31, 2008 compared to approximately $2 million for the
three months ended May 31, 2007; which included approximately $1.8 million in
awards related to the Contract.





Research
and Development





Research
and development expenses not directly related to the Contract were approximately
$0.2 million for the three months ended May 31, 2008.  During the
prior year our research and development team devoted the majority of their time
on the Contract in which their costs became direct charges to cost of goods
during the development phase.  We expect to incur approximately $0.5
million during fiscal 2009 for the addition of enhanced features to become
available with our current products.





Operating
Loss





Our
operating loss for the three months ended May 31, 2008 was approximately $0.9
million, a decrease of approximately $2.5 million from approximately $3.4
million for the three months ended May 31, 2007.  This primarily
reflects a decrease in expenses incurred related to the award of the Contract
during the three months ended May 31, 2007.





Certain
Non-Operating Items





Interest
expense increased by approximately $0.1 million to $0.2 million for three months
ended May 31, 2008 compared to approximately $0.1 million for three months ended
May 31, 2007.  This was directly related to the loans provided by
officers and shareholders for working capital.





Net
Results of Operations





We are
reporting a net loss from continuing operations of approximately $1.1 million or
$0.04 per common share for the three months ended May 31, 2008 compared to a net
loss of approximately $4 million or $0.19 per common share for the three months
ended May 31, 2007.  Our discontinued operations had no effect on net
results from operations for the three months ended May 31, 2008.  Our
discontinued operations resulted in a loss of approximately $0.2 million or
$0.01 per common share for the three months ended May 31, 2007.





Liquidity
and Capital Resources





Total
assets increased by approximately $5 million from approximately $7.5 million as
of February 29, 2008 to approximately $12.5 million as of May 31, 2008. The
increase is due to the increase in cash of approximately $3.2 million; an
increase in accounts receivable of approximately $0.2 million, in addition to
approximately $1.5 million in costs in excess of billings and estimated earnings
related to the Contract.





Total
liabilities increased by approximately $1.4 million from approximately $16.1
million as of February 29, 2008 to approximately $17.5 million as of May 31,
2008.  The increase is due to an increase in salaries and benefits
payable to officers and directors of approximately $1.2 million; an increase in
interest payable of approximately $0.2 million.





Our
operating activities used approximately $1.1 million in cash for the three
months ended May 31, 2008.  Our net loss of approximately $1.1 million
was the primary component of our negative operating cash flow.




3




At May
31, 2008, the Company had negative working capital of approximately $6.4 million
compared to approximately $9.5 million at May 31, 2007.  The primary
reason for the working capital deficit is the salaries and benefits payable to
officers and directors of approximately $6.7 million, convertible notes payable
to stockholder of approximately $1.9 million and related interest payable of
approximately $2 million.





Our
operating activities provided approximately $0.6 million in cash for the three
months ended May 31, 2007.  Our net loss of approximately $4.1 million
was offset by certain non-cash expenses such as stock-based compensation and
depreciation and amortization in the total amount of approximately $2.1 million
and a increase in accounts payables, accrued liabilities and income taxes and
penalties payable of approximately $2 million.





Under the
terms of the Contract, the Company was required to provide a performance bond
for the benefit of the customer.  In lieu of such bond, a certificate
of deposit was initiated to guarantee this bond.  The CD in the amount
of $413,000 bears interest at 5.1% per annum and matures in August 2009. Under
the terms of the Company’s arrangement with the bank that issued the CD, the
funds will not be available for withdrawal until August 2009. Thus, the CD is a
restricted account which has been reported as a non-current asset in the
Company’s condensed consolidated balance sheet.





On December 19, 2007, Astrata Group
Incorporated entered into a Series B Convertible Preferred Stock Purchase
Agreement with Investors.  Under the terms of the Stock Purchase
Agreement, the Investors purchased an aggregate of (i) $3,000,000 of Series B
Convertible Preferred Stock and (ii) warrants to purchase a total of
approximately 8.6 million shares of our common stock and warrants to purchase a
total of approximately 2.1 million shares of our preferred stock.  The
Company intends to use the proceeds for working capital and general corporate
purposes.





Following
approval of the Board of Directors and a majority of its shareholders, the
Company entered into a $4 million Warrant Exchange Agreement, a Warrant
Amendment Agreement, and a Preferred Stock Exchange Agreement (collectively, the
“Amended and Restated Rights Agreements”), dated as of May 29, 2008, between
Company and each of the holders of certain warrants, and holders of certain
series of preferred shares issued by the Company (individually, a “Holder” and
collectively, the “Holders”) relating to the Company’s Series A and Series B
Preferred shares. The Amended and Restated Rights Agreements eliminate the
anti-dilution and cashless exercise provisions of the Series A and Series B
warrants.  The Company received net cash proceeds of approximately $4
million which we intend to use the proceeds for working capital.  For
additional information on this transaction, see Note 8 in the accompanying
footnotes to these condensed consolidated financial statements.





Liquidity
and Going Concern Considerations





The
accompanying consolidated financial statements have been prepared assuming we
will continue in our present form, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the ordinary course of
business.  For the three months ended May 31, 2008, we had a net loss
of approximately $1.1 million and negative cash flows from operating activities
of approximately $1.1 million.  In addition, we had a working capital
deficit of approximately $6.4 million and an accumulated deficit of
approximately $48.2 million and stockholders’ deficit of approximately $5.0
million as of May 31, 2008.




Because
of the matters discussed in the immediately preceding paragraph, the Company’s
independent registered public accounting firm has added a going concern
paragraph to their audit report on our February 29, 2008 consolidated financial
statements.  The going concern paragraph states that there is
substantial doubt about the Company’s ability to continue as a going
concern.  Such consolidated financial statements have been prepared
assuming that the Company will continue as a going concern (based upon
management’s plans discussed herein) which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the ordinary course of
business.  Accordingly, the aforementioned consolidated financial
statements do not include any adjustments related to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result, should the Company be unable to continue as a
going concern.





The
Company’s capital requirements depend on numerous factors, including the rate of
market acceptance of the Company’s products and services, the Company’s ability
to service its customers, the ability to maintain and expand our customer base,
the level of resources required to expand the Company’s marketing and sales
organization, research and development activities and other
factors.  Management presently believes that cash generated from
operations, combined with the Company’s current credit facilities and the debt
and/or equity financing proposals now under consideration, will be sufficient to
meet the Company’s anticipated liquidity requirements through February
2009.  In order for us to fund our operations and continue this growth
plan, substantial additional funding will be required from external
sources.  Management currently intends to fund operations through a
combination of borrowings under line(s) of credit, debt, and if necessary,
equity-based transactions.  Management is in discussion with lending
facilities and certain investors, who have expressed an interest in providing
the Company with such investments.  These discussions are ongoing;
however, there can be no assurance of the outcome of these
negotiations.




4




Astrata’s
Telematics operations were strengthened during fiscal 2007 by our increased
presence in South East Asia based primarily on the successful delivery of the
fixed-price Contract. Deliveries began in January 2008 and we anticipate
beginning the five major shipments in the later part of 2008. The Contract
includes a provision for substantial liquidated damages for unexcused delays in
product deliveries and/or failure to satisfy certain customer-specified
acceptance criteria. The Company’s proprietary Telematics system is undergoing
significant customization/modification in order to achieve the functionality
required by the customer.  The design and development phase is where
we have designed the functionality of the system to meet the customer’s needs
and then developed the functionalities into a working environment for testing
and acceptance to move into production.  Throughout the last thirteen
months, we have accomplished all requirements with no liquidation damages
incurred. Upon completion of the development phase, we will move into the
production phase which includes the units for delivery over approximately
fifteen months to the customer.   We expect to progress through
the production phase with minimal to no liquidation damages through the
completion of this Contract.  Funding for the manufacturing phase is
covered by the customer providing a letter of credit for each
shipment.  Profits from these shipments will partially fund our
operations and begin to result in a strengthening of our balance sheet, cash
flow and equity position; however, there can be no assurance of the outcome of
these events.  Also, based on our current estimates, we project
recording revenue under the Contract of approximately $31.7 million and $49.5
million in fiscal 2009 and 2010, respectively; and margins of approximately $5
million and $7.8 million in fiscal 2009 and 2010, respectively.





In May
2008, Geneva-based Cotecna Group SA, one of the world’s leading trade
inspection, security and certification companies, has awarded Astrata a contract
to produce a transit monitoring system for the government of Senegal’s customs
operations.  The contract, the first for Astrata in the West African
country, is to provide RDU’s and fixed tracking units as part of Cotecna’s
Transit Monitoring & Traceability solution, which is designed to remotely
monitor the movement of vehicles transporting goods.





Following
approval of the Board of Directors and a majority of its shareholders, the
Company entered into a $4 million Warrant Exchange Agreement, a Warrant
Amendment Agreement, and a Preferred Stock Exchange Agreement (collectively, the
“Amended and Restated Rights Agreements”), dated as of May 29, 2008, between
Company and each of the holders of certain warrants, and holders of certain
series of preferred shares issued by the Company (individually, a “Holder” and
collectively, the “Holders”) relating to the Company’s Series A and Series B
Preferred shares. The Amended and Restated Rights Agreements eliminate the
anti-dilution and cashless exercise provisions of the Series A and Series B
warrants.  The Company received net cash proceeds of approximately $4
million which we intend to use the proceeds for working capital.  For
additional information on this transaction, see Note 8 in the accompanying
footnotes to these condensed consolidated financial statements.





Off
Balance Sheet Arrangements





As of May
31, 2008, there were no off balance sheet arrangements.  Please refer
to the Commitment and Contingencies footnote (Note 9 to our condensed
consolidated financial statements included elsewhere herein) for additional
information.





Inflation





We do not
believe that inflation has had a material effect on our business, financial
condition, or results of operations.  If our costs were to become
subject to significant inflationary pressures, we may not be able to offset
fully such higher costs through price increases.  Our inability or
failure to do so could adversely affect our business, financial condition, and
results of operations.





Foreign
Currency Exchange Rate Risk





The
operation of our subsidiaries in international markets results in exposure to
fluctuations in foreign currency exchange rates.  The potential of
volatile foreign currency exchange rate fluctuations in the future could have a
significant effect on our results of operations.





The
Company uses the U.S. dollar as its functional currency.  We translate
all assets and liabilities at period-end exchange rates and income and expenses
accounts at average rates during the period.  In fiscal 2008, we had
transactions denominated in the Euro, the British Pound, the Singapore Dollar,
the Malaysian Ringgit, and the Brunei Dollar.  In accordance with SFAS
No. 52, “Foreign Currency
Translation” such adjustments are reported as a component of accumulated
other comprehensive loss within stockholders’ deficit.





Interest
Rate Risk





Since
many of our credit facilities are directly based on various prime rates of
interest, we are exposed to interest rate risk.




5




Critical
Accounting Policies





In
December 2001, the SEC requested that all registrants list their most “critical
accounting policies” in the Management Discussion and Analysis.  The
SEC indicated that a “critical accounting policy” is one which is both important
to the portrayal of our financial condition and results, and requires
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.  We believe that the following accounting policies fit this
definition as they relate to our consolidated financial statements.





Stock-based
compensation





Effective
March 1, 2006, the Company adopted the provisions of SFAS No. 123-R,
“Share-Based Payment” (“SFAS No. 123-R”). SFAS No. 123-R requires employee stock
options and rights to purchase shares under stock participation plans to be
accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the
award.





Under the
modified prospective method of adoption for SFAS No.123-R, the compensation cost
recognized by the Company beginning March 1, 2006 includes (a) compensation cost
for all equity incentive awards granted prior to, but not yet vested as of March
1, 2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost for all equity
incentive awards granted subsequent to February 28, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123-R.  For additional information see Note 2 in the Company’s
condensed consolidated financial statements included elsewhere
herein.





Revenue
Recognition





General





The
Company’s revenues are recorded in accordance with the SEC’s Staff Accounting
Bulletin No. 104, “Revenue Recognition.” The Company recognizes revenue when
persuasive evidence of an arrangement exits, delivery has occurred, the fee is
fixed or determinable, and collectability is reasonably assured. In instances
where final acceptance of the product is specified by the customer or is
uncertain, revenue is deferred until all acceptance criteria have been
met.





Contract
Accounting





The
Company is accounting for the Contract described above under the percentage-of
completion method under SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production –Type Contracts”. Under the
percentage-of-completion method, revenues, expenses and profits are recognized
as performance progresses on long-term contracts. Progress toward completion is
measured using the cost-to-cost method.  The Company uses the
estimated COGS for the project to determine the associated recognized revenues
in the periods in which they are earned.  This is calculated by taking
the current reporting period COGS against the total projected COGS to determine
a percentage of completion; then applying the percentage against the Contract
project total revenues to determine the revenues for the reporting
period.





Other
Matters





Our
Telematics equipment may be sold or provided as part of a monthly package which
includes telecommunications, data warehousing and mapping.  These
revenues are recognized over the life of such contracts as revenues are
earned.





Revenue
from distributors and resellers is recognized upon delivery, assuming that all
other criteria for revenue recognition have been met. Distributors and resellers
do not have the right of return.





Customer
incentive bonuses and other consideration received or receivable directly from a
vendor for which the Company acts as a reseller are accounted for as a reduction
in the price of the vendor’s products or services. When such incentive is
pursuant to a binding arrangement, the amount received or receivable is recorded
as deferred income and recognized as income on a systematic basis over the life
of the arrangement.




6


Recently
Issued Accounting Pronouncements





On
December 4, 2007, the Financial Accounting Standards Board (“FASB”), issued SFAS
No. 141 (Revised 2007), “Business Combinations”.
Statement 141R will significantly change the accounting for business
combinations. Under Statement 141R, an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. Statement 141R will
change the accounting treatment for certain specific items,
including:





·
            Acquisition
      costs will be generally expensed as
incurred;


·
            Non-controlling
      interests (formerly known as "minority interests" -- see Statement 160
      discussion below) will be valued at fair value at the acquisition
      date;


·
            Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired
      contingencies;


·
            In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;


·
            Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date;
and


·
            Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.





Statement
141R also includes a substantial number of new disclosure requirements.
Statement 141 applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is prohibited.
Accordingly, a calendar year-end company is required to record and disclose
business combinations following existing GAAP until January 1,
2009.  The Company does not believe the application of this standard
will materially impact its consolidated financial statements.





SFAS No.
157, “Fair Value
Measurements”,
provides guidance for using fair value to measure assets and liabilities. The
FASB believes the standard also responds to investors’ requests for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value, and the effect
of fair value measurements on earnings. Statement 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
but does not expand the use of fair value in any new
circumstances.   Currently, over 40 accounting standards within
GAAP require (or permit) entities to measure assets and liabilities at fair
value. Prior to Statement 157, the methods for measuring fair value were diverse
and inconsistent, especially for items that are not actively traded. The
standard clarifies that for items that are not actively traded, such as certain
kinds of derivatives, fair value should reflect the price in a transaction with
a market participant, including an adjustment for risk, not just the company’s
mark-to-model value. Statement 157 also requires expanded disclosure of the
effect on earnings for items measured using unobservable data.





Under
Statement 157, fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. In this
standard, the FASB clarifies the principle that fair value should be based on
the assumptions market participants would use when pricing the asset or
liability. In support of this principle, Statement 157 establishes a fair value
hierarchy that prioritizes the information used to develop those assumptions.
The fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the reporting
entity’s own data. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy.





The
provisions of Statement 157 are effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including
any financial statements for an interim period within that fiscal
year.  The Company adopted SFAS No. 157 as of March 1, 2008 which had
no material impact its consolidated financial statements.




7


SFAS  No.
159, “The FairValue Option for Financial Assets
and Financial Liabilities - Including an Amendment of FASB Statement No.
115” permits an entity to choose to measure many financial instruments
and certain other items at fair value. This option is available to all entities,
including not-for-profit organizations. Most of the provisions in Statement 159
are elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities”, applies to all entities
with available-for-sale and trading securities. Some requirements apply
differently to entities that do not report net income. The FASB's stated
objective in issuing this standard is as follows: "to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions."





The fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. A
not-for-profit organization will report unrealized gains and losses in its
statement of activities or similar statement. The fair value option: (a) may be applied instrument
by instrument, with a few exceptions, such as investments otherwise accounted
for by the equity method; (b) is irrevocable (unless a
new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments.





Statement
159 is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity makes that choice
in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157, “Fair Value Measurements”.The Company
adopted SFAS No. 159 as of March 1, 2008 which had no material impact its
consolidated financial statements.





SFAS No.
160,“Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51” establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
non-controlling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the non-controlling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
non-controlling equity investment on the deconsolidation
date.  Statement 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling
interest.  Statement 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Like
Statement 141R discussed above, earlier adoption is prohibited.  The
Company does not believe the application of this standard will materially impact
its consolidated financial statements.




SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133”
enhances required disclosures regarding derivatives and hedging activities,
including enhanced disclosures regarding how: (a) an entity uses derivative
instruments; (b)
derivative instruments and related hedged items are accounted for under SFAS No.
133, “Accounting for
Derivative Instruments and Hedging Activities”; and (c) derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. Specifically, Statement 161 requires:




·
            Disclosure
      of the objectives for using derivative instruments be disclosed in terms
      of underlying risk and accounting designation;·
            Disclosure
      of the fair values of derivative instruments and their gains and losses in
      a tabular format;·
            Disclosure
      of information about credit-risk-related contingent features;
      and·
            Cross-reference
      from the derivative footnote to other footnotes in which
      derivative-related information is
disclosed.




Statement
161 is effective for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged.  The Company does not
believe the application of this standard will materially impact its consolidated
financial statements.




8


SFAS No.
162, “The Hierarchy of
Generally Accepted Accounting Principles” identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy).  Specifically, the sources of accounting principles that
are generally accepted are categorized in descending order of authority as
follows:





e.
            FASB
      Statements of Financial Accounting Standards and Interpretations, FASB
      Statement 133 Implementation Issues, FASB Staff Positions, and American
      Institute of Certified Public Accountants (AICPA) Accounting Research
      Bulletins and Accounting Principles Board Opinions that are not superseded
      by actions of the FASB;


f.
            FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of
Position;


g.
            AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the FASB Emerging Issues Task
      Force (EITF), and the Topics discussed in Appendix D of EITF Abstracts (EITF
      D-Topics); and


h.
            Implementation
      guides (Q&As) published by the FASB staff, AICPA Accounting
      Interpretations, AICPA Industry Audit and Accounting Guides and Statements
      of Position not cleared by the FASB, and practices that are widely
      recognized and prevalent either generally or in the
    industry.





This
Statement is effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning ofPresent Fairly in Conformity With
Generally Accepted Accounting Principles.  The Company intends
to adhere to this statement once it becomes effective.





SFAS No.
163, “Accounting for Guarantee
Insurance Contracts” requires that an insurance enterprise recognize
a claim liability prior to an event of default (insured event) when there
is evidence that credit deterioration has occurred in an insured financial
obligation. This Statement requires expanded disclosures about financial
guarantee insurance contracts. The accounting and disclosure requirements
of the Statement will improve the quality of information provided to users
of financial statements.





Statement
163 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those
fiscal years, except for some disclosures about the insurance enterprise’s
risk-management activities. This Statement requires that disclosures about
the risk-management activities of the insurance enterprise be effective for
the first period (including interim periods) beginning after issuance of
this Statement. Except for those disclosures, earlier application is not
permitted.  The Company does not believe the application of this
standard will impact its consolidated financial statements.




9




Item
3:  Controls and Procedures
 
 Company
management, with the participation of the Chief Executive Officer and the Chief
Financial Officer, assessed the effectiveness of the Company’s internal control
over financial reporting as of May 31, 2008.  In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO") in Internal Control
– Integrated Framework.
 
 Management
used its knowledge and understanding of the Company’s organization, operations,
and processes to determine, in its judgment, the sources and potential
likelihood of misstatements in financial reporting.  Management also
considered in its assessment the Company’s size and complexity.  Based
on this assessment, management, with the participation of the Chief Executive
Officer and Chief Financial Officer, believes that, as of May 31, 2008, the
Company’s internal control over financial reporting was not effective based on
those criteria.




Specifically,
Company management identified certain matters involving internal control and the
Company’s operations that it considered to be material weaknesses under the
standards of the Public Company Accounting Oversight Board (“PCAOB”). These
material weaknesses involved:





·
            Ineffective
      controls over the period-end closing and financial reporting
      processes.  This is caused by the weakness of controls over the
      closing protocols for both the Company and its subsidiaries as well as the
      consolidation of all subsidiaries.


·
            Lack
      of uniform internal controls and procedures designed to formalize
      documentation of its accounting and operational policies and
      procedures.


·
            Inadequate
      financial reporting systems without standardization of the processes for
      the Company and its subsidiaries.  This is caused by the lack of
      formal policies and procedures to address financial functions and
      disciplines.


·
            Ineffective
      controls to provide the necessary documentation and procedures to assure
      that employee information, benefits and policies are accurate and timely
      administered.





Company
management is taking steps to remediate these weaknesses in the Company’s
internal control environment, including:





·
            Establishing
      effective controls over the period-end closing and financial reporting
      processes.  This will require enhancement of closing protocols
      for both the Company and its subsidiaries, as well as, the consolidation
      of all subsidiaries.


·
            Establishing
      formal policies and procedures to address all material financial functions
      and disciplines.  Management’s implementation of these policies
      and procedures will include appropriate staff enhancement and training to
      ensure financial reporting competencies are
  strengthened.


·
            Implementing
      a new accounting software package to standardize the financial reporting
      process for the Company and its subsidiaries as well as automating the
      consolidation of all subsidiaries.


·
            Enhancing
      Human Resource functions to provide the necessary documentation and
      procedures to assure that employee information, benefits and policies are
      accurate and timely administered.


·
            Retaining
      the services of a third-party consulting firm to assist Company management
      with on-going compliance with Section 404 of the Sarbanes-Oxley Act of
      2002 (SOX).


·
            Developing
      and implementing a formal, top-down, risk-based approach to the evaluation
      of the Company’s internal control over financial reporting, in accordance
      with recent interpretative guidance from the SEC.  Management is
      further utilizing a risk-based approach to remediate the control
      weaknesses identified as part of its assessment of the Company’s internal
      control environment.





Management
has evaluated the impact of these gaps on the Company’s ICFR, and is now
utilizing its risk-based approach to designing controls to remediate these gaps
as part of its implementation of the Company’s SOX Compliance Plan, beginning in
fiscal year 2009.





Company
management will continue to monitor and evaluate the effectiveness of our
disclosure controls and procedures and our internal control over financial
reporting on an ongoing basis and are committed to taking further action and
implementing additional improvements, as necessary and as funds
allow.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.




10


Limitations
on the Effectiveness of Internal Controls





Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.




PART
II – OTHER INFORMATION





Item
1: Legal Proceedings





From time
to time, the Company may be involved in various claims, lawsuits, disputes with
third parties, actions involving allegations of discrimination or breach of
contract incidental to the ordinary operations of the business. The Company is
not currently involved in any litigation which management believes could have a
material adverse effect on the Company’s financial position or results of
operations.




Item
1A: Risk Factors





There
were no material changes from the risk factors disclosed in the Company’s
February 29, 2008 Form 10-KSB filed with the SEC on June 11, 2008.




Item
2: Unregistered Sales of Equity Securities and Use of Proceeds





Common
Stock





During
the quarter ended May 31, 2008, the Company issued 43,334 shares of its
restricted common stock in exchange for services provided by consultants. Such
shares were valued at approximately $21,600 (estimated to be the closing value
based on the trading price on the issuance date).  The transaction
described in this paragraph constituted an exempt offering under Section 4(2) of
the Securities Act.




Item
6: Exhibits and Reports on Form 8-K




a)
            Form
      8-K, Item 3.03 Material modification to rights of security holders as
      filed on May 29, 2008.




b)
            Exhibits:




Exhibit
      31.1
            Certificate
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.





Exhibit
      31.2
            Certificate
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.





Exhibit
      32.1
            Certificate
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.





Exhibit
      32.1
            Certificate
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.




11


SIGNATURES





In accordance with Section 13 or 15(d)
of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.







ASTRATA GROUP
      INCORPORATEDBy:
            /s/THOMAS
      A.
      WAGNERThomas A.
      Wagner
            Date:  July
      21, 2008Chief Financial
      Officer







12