UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549








**FORM
      10-QSB/A-2**








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








For
      the
      quarterly period ended: **August
      31, 2006**








[
      ]
      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.)1801
                  CENTURY PARK EAST, SUITE 1830, LOS ANGELES, CALIFORNIA
              
              90067-2320(Address
                  of principal executive offices)
              
              (Zip
                  Code)


Issuer’s
      telephone number (310) 282-8646





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 [ ]





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





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of October 31 2006: 13,781,818





Transitional
      Small Business Disclosure Format (Check One): Yes [ ] No [X]
















**TABLE
      OF CONTENTS**







PagePart
                I - Financial InformationItem
                1
            Financial
                Statements (Unaudited)Condensed
                Consolidated Balance Sheet as of August 31, 2006
            F-1Condensed
                Consolidated Statements of Operations and ComprehensiveLoss
                for the three and six months ended August 31, 2006 and
                2005
            F-2Condensed
                Consolidated Statements of Cash Flows for thesix
                months ended August 31, 2006 and 2005
            F-3Notes
                to Condensed Consolidated Financial Statements
            F-4Item
                2
            Management’s
                Discussion and Analysis or Plan of Operation
            1Item
                3
            Controls
                and Procedures
            13Part
                II - Other InformationItem
                1
            Legal
                Proceedings
            14Item
                1A
            Risk
                Factors
            14Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            17Item
                3
            Defaults
                upon Senior Securities
            17Item
                4
            Submission
                of Matters to a Vote of Security Holders
            17Item
                5
            Other
                Information
            17Item
                6
            Exhibits
            18


**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 August 31,
      2006 are not necessarily indicative of the results anticipated for the entire
      fiscal year ending February 28, 2007. This report should be read in conjunction
      with the Company’s February 28, 2006 annual report on Form 10-KSB filed with the
      SEC on July 18, 2006.





Management
      inadvertently submitted a superceded document to the Edgarizing company when
      filing the Company’s August 31, 2006 Form 10-QSB on October 23, 2006. As a
      result, the Company immediately filed a Form 10-QSB/A on October 24, 2006 to
      submit the accompanying statement of cash flows for the six- month period ended
      August 31, 2006.





This
      second amendment of the Company’s August 31, 2006 Form 10-QSB was filed
      principally to (a) correct certain errors and omissions in Management’s
      Discussion and Analysis or Plan of Operation (Item 2 of Part I), (b) revise
      the
      pro forma stock-based compensation expense determined using the fair value
      method for the quarter and six-month period ended August 31, 2005 disclosed
      in
      Note 2 to the Company’s condensed consolidated financial statements included
      elsewhere herein, and (c) provide additional updating of the risk factors set
      forth in Item 1A of Part II of the filing.










ii





ASTRATA
                GROUP INCORPORATED AND SUBSIDIARIESCONDENSED
                CONSOLIDATED BALANCE SHEET(UNAUDITED)AUGUST
                31, 2006




ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            71,480Trade
                and other receivables, net
            
            
            919,112Inventories
            
            
            173,523Deferred
                financing costs, net
            
            
            79,410Other
                assets
            
            
            173,470Current
                assets held for sale
            
            
            204,308Total
                current assets
            
            
            1,621,303Property
                and equipment, net
            
            
            670,608Goodwill
            
            
            300,000Investment
                in and advances to affiliate
            
            
            88,146Total
                assets
            
            $
            2,680,057LIABILITIES
                AND STOCKHOLDERS' DEFICITCurrent
                liabilities:Accounts
                payable
            
            $
            4,862,269Salaries
                and benefits payable to officers and directors
            
            
            1,723,743Registration
                rights penalties
            
            
            885,500Derivative
                warrant liability
            
            
            423,600Interest
                payable
            
            
            738,535Income
                taxes payable
            
            
            6,401Notes
                payable to stockholders
            
            
            1,884,000Advances
                from stockholders
            
            
            603,860Liabilities
                related to assets held for sale
            
            
            644,273Current
                portion of long-term liabilities
            
            
            1,124,139Other
                current liabilities
            
            
            302,306Total
                current liabilities
            
            
            13,198,626Debenture,
                net
            
            
            412,142Long-term
                liabilities
            
            
            19,122Other
                liabilities related to assets held for sale
            
            
            36,449Total
                liabilities
            
            
            13,666,339Minority
                interest
            
            
            33,579Commitments
                and contingenciesStockholders'
                deficit:Preferred
                stock, $0.0001 par value, 10,000,000 sharesauthorized,
                none issued or outstanding
            
            
            -Common
                stock, $0.0001 par value, 40,000,000 sharesauthorized,
                13,343,707 shares issued and outstanding
            
            
            1,332Additional
                paid-in capital, net
            
            
            14,670,765Deferred
                compensation cost
            
            
            (152,625
            )Accumulated
                deficit
            
            
            (25,506,656
            )Accumulated
                other comprehensive loss
            
            
            (32,677
            )Total
                stockholders' deficit
            
            
            (11,019,861
            )Total
                liabilities and stockholders' deficit
            
            $
            2,680,057




See
                accompanying notes to these condensed consolidated financial
                statements.




F-1


ASTRATA
                  GROUP INCORPORATED AND SUBSIDIARIESCONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
                  (LOSS)FOR
                  THE THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005
                (UNAUDITED)
  THREE
                  MONTHS
              
              SIX
                  MONTHS2006
              
              2005
              
              2006
              
              2005Net
                  sales
              
              $
              912,868
              
              $
              954,632
              
              $
              1,339,206
              
              $
              1,409,870Cost
                  of goods sold
              
              
              670,888
              
              
              791,352
              
              
              975,576
              
              
              1,047,879Gross
                  profit
              
              
              241,980
              
              
              163,280
              
              
              363,630
              
              
              361,991Other
                  selling, general and administrative expenses
              
              
              1,696,873
              
              
              1,786,635
              
              
              3,237,889
              
              
              3,766,869Research
                  and development
              
              
              -
              
              
              280,401
              
              
              -
              
              
              284,965Stock-based
                  compensation
              
              
              265,238
              
              
              -
              
              
              728,946
              
              
              -Operating
                  (loss)
              
              
              (1,720,131
              )
              
              (1,903,756
              )
              
              (3,603,205
              )
              
              (3,689,843
              )Other
                  income (expense):Interest
                  expense
              
              
              (206,699
              )
              
              (100,865
              )
              
              (435,589
              )
              
              (595,507
              )Change
                  in fair value of derivative warrant liability
              
              
              22,000
              
              
              -
              
              
              306,996
              
              
              -Loss
                  on sale of assets
              
              
              (2,346
              )
              
              -
              
              
              (2,346
              )
              
              -Other
                  income (expense)
              
              
              32,789
              
              
              (21,938
              )
              
              33,105
              
              
              (21,295
              )Total
                  other (expense)
              
              
              (154,256
              )
              
              (122,803
              )
              
              (97,834
              )
              
              (616,802
              )(Loss)
                  before minority interest and provision for income taxes
              
              
              (1,874,387
              )
              
              (2,026,559
              )
              
              (3,701,039
              )
              
              (4,306,645
              )Income
                  tax provision
              
              
              -
              
              
              -
              
              
              -
              
              
              -(Loss)
                  before minority interest
              
              
              (1,874,387
              )
              
              (2,026,559
              )
              
              (3,701,039
              )
              
              (4,306,645
              )Minority
                  interest
              
              
              335
              
              
              (12,863
              )
              
              -
              
              
              6,774Equity
                  in net (loss) of affiliate
              
              
              (7,067
              )
              
              -
              
              
              (18,828
              )
              
              -Net
                  (loss) from continuing operations
              
              
              (1,881,119
              )
              
              (2,039,422
              )
              
              (3,719,867
              )
              
              (4,299,871
              )Income
                  (loss) on discontinued operations, net of tax
              
              
              1,420,370
              
              
              (515,974
              )
              
              489,196
              
              
              (1,039,261
              )Net
                  (loss)
              
              $
              (460,749
              )
              $
              (2,555,396
              )
              $
              (3,230,671
              )
              $
              (5,339,132
              )Comprehensive
                  (loss) andits
                  components consist of the following:Net
                  (loss)
              
              $
              (460,749
              )
              $
              (2,555,396
              )
              $
              (3,230,671
              )
              $
              (5,339,132
              )Foreign
                  currency translationadjustment,
                  net of tax
              
              
              50,843
              
              
              (62,448
              )
              
              (32,677
              )
              
              (227,504
              )Comprehensive
                  (loss)
              
              $
              (409,906
              )
              $
              (2,617,844
              )
              $
              (3,263,348
              )
              $
              (5,566,636
              )(Loss)
                  per common share basic and diluted:Continuing
                  operations
              
              $
              (0.14
              )
              $
              (0.17
              )
              $
              (0.29
              )
              $
              (0.36
              )Discontinued
                  operations
              
              
              0.11
              
              
              (0.04
              )
              
              0.04
              
              
              (0.09
              )$
              (0.03
              )
              $
              (0.21
              )
              $
              (0.25
              )
              $
              (0.45
              )Weighted
                  average common shares outstanding:Basic
                  and diluted
              
              
              13,080,970
              
              
              12,284,492
              
              
              12,920,103
              
              
              11,999,048




See
                  accompanying notes to these condensed consolidated financial
                  statements.


F-2




ASTRATA
                  GROUP INCORPORATED AND SUBSIDIARIESCONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
                  THE SIX MONTHS ENDED AUGUST 31, 2006 AND 2005(UNAUDITED)
  2006
              
              2005(As
                  Restated)**CASH
                  FLOW FROM OPERATING ACTIVITIES:**Net
                  loss
              
              $
              (3,230,671
              )
              $
              (5,339,130
              )Adjustments
                  to reconcile net loss to netcash provided by (used in) operating activities:Gain
                  on sale of property and equipment
              
              
              (7,394
              )
              
              (4,814
              )Gain
                  on forgiveness of debt
              
              
              (332,691
              )
              
              -Depreciation
                  and amortization
              
              
              266,270
              
              
              459,999Gain
                  on disposal transactions relating to discontinued
                  operations
              
              
              (1,810,098
              )
              
              -Loss
                  on early termnation of lease
              
              
              101,886
              
              
              -Amortization
                  of deferred compensation cost
              
              
              200,250
              
              
              187,500Deferred
                  financing costs and debt discount
              
              
              (58,383
              )
              
              416,025Issuance
                  of stock for services
              
              
              38,252
              
              
              74,375Issuance
                  of stock options for compensation
              
              
              728,945
              
              
              -Equity
                  in net loss (earnings) of affiliate
              
              
              18,828
              
              
              (3,669
              )Minority
                  interest
              
              
              (6,535
              )
              
              (6,774
              )Deferred
                  income taxes
              
              
              -
              
              
              (39,706
              )Unrealized
                  foreign currency exchange gain
              
              
              (16,922
              )
              
              (69,690
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              2,635,709
              
              
              (1,822,417
              )Inventories
              
              
              2,857,494
              
              
              174,690Other
                  assets
              
              
              139,222
              
              
              129,753Accounts
                  payable and accrued liabilities
              
              
              (1,265,163
              )
              
              2,032,438Taxes
                  payable
              
              
              6,401
              
              
              -Deferred
                  tax liability
              
              
              (14,893
              )
              
              -Net
                  cash provided by (used in) operating activities
              
              
              250,507
              
              
              (3,811,420
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              50,501
              
              
              (394,114
              )Proceeds
                  from sale of assets
              
              
              36,978
              
              
              14,899Investment
                  in affiliates
              
              
              (135,491
              )
              
              47,419Restricted
                  cash
              
              
              (47,592
              )
              
              -Net
                  cash used in investing activities
              
              
              (95,604
              )
              
              (331,796
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Repayment
                  of bridge loan
              
              
              -
              
              
              (1,500,000
              )Repayment
                  of long term liabilities
              
              
              (279,298
              )
              
              (35,013
              )Proceeds
                  from long term liabilities
              
              
              -
              
              
              54,012Lines
                  of credit, net
              
              
              (1,149,790
              )
              
              1,305,774Proceeds
                  from note payable to stockholders
              
              
              -
              
              
              200,000Proceeds
                  from advances to stockholders
              
              
              731,017
              
              
              333,655Proceeds
                  from issuance of common stock
              
              
              -
              
              
              3,073,234Net
                  cash (used in) provided by financing activities
              
              
              (698,071
              )
              
              3,431,662**Effect
                  of foreign currency exchange rate changes****on
                  cash and cash equivalents**
              
              
              178,116
              
              
              (75,025
              )**Net
                  (decrease) in cash and cash equivalents**
              
              
              (365,052
              )
              
              (786,579
              )**Cash
                  and cash equivalents at beginning of period**
              
              
              436,532
              
              
              1,281,064**Cash
                  and cash equivalents at end of period**
              
              $
              71,480
              
              $
              494,485Cash
                  paid during the period for:Interest
              
              $
              -
              
              $
              140,194Income
                  taxes
              
              $
              -
              
              $
              -




See
                    the accompanying notes for information on non-cash investing
                    and financing
                    activities.
                  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 AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**1.
      ORGANIZATION AND NATURE OF OPERATIONS**





***Organization***




Astrata
      Group Incorporated (“Astrata Group”) and subsidiaries (sometimes hereinafter
      collectively referred to as the “Company,” “we,” and “our”) currently operates
      exclusively in the Telematics sector of the
      Global Positioning System (“GPS”) industry. Until June 2006, the Company also
      operated in the Geomatics sector of the GPS industry; see Note 8 for additional
      information regarding this segment. Our expertise is focused on advanced location-based IT products and services that
      combine positioning, wireless communications, and information technologies
      and
      add measurable
      value to location-based information . Telematics
      comprises the remote monitoring of assets in real-time (including tracking
      and
      tracing) whereby location, time and sensor status are communicated. 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 services and construction.





Examples
      of our products and services include 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 System for Mobile Telecommunications”) cellular and
      satellite communications.





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 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.





***Liquidity
      and Going Concern Considerations***





For
      the
      six months ended August 31, 2006, we had a net loss of approximately $3.2
      million and positive cash flow from operating activities of approximately $0.2
      million. In addition, we had an accumulated deficit and negative working capital
      of approximately $25.5 million and $11.6 million, respectively, as of August
      31,
      2006. Because of the Company’s financial condition, our independent public
      accountants included a going concern paragraph in their audit report on our
      February 28, 2006 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 financial statements and the accompanying 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
      aforementioned 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.





In
      the
      first quarter of fiscal 2007, management revised our business plan to focus
      on
      the more developed markets in Europe, South East Asia and North America. As
      our
      core strategic direction is now to focus on the telematics market rather than
      the geomatics market, the Company entered into discussions regarding the sale
      of
      its geomatics business. The sale of this business and the winding down of our
      remaining South African operations (see Note 10 for additional information
      regarding these two events) is expected to yield annual savings of approximately
      $5.8 million, or 41% of the Company’s annual selling, general and administrative
      expenses with an associated headcount reduction of over 120 members of staff,
      a
      Company-wide reduction of about 60%. As more fully explained in Note 11,
      the Company has recently concluded a convertible preference share offering
      that
      yielded $4 million in equity.


F-4


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**1.
      ORGANIZATION AND NATURE OF OPERATIONS** **** (continued)





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, finance research and development activities and other factors.
      As
      more fully explained elsewhere herein, management presently believes that cash
      generated from operations, the October 2006 equity transaction (which yielded
      net proceeds of approximately $1.6 million, and reduced debt by $1.5 million),
      the October 2006 restructuring and partial repayment of other notes payable
      (see
      Note 11 for additional information regarding these two transactions), 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 for the near future.





Management
      is projecting growth in telematics sales during fiscal 2007, and has announced
      a
      single sales order in this sector valued at approximately $17 million.
      Additional major contracts are under negotiation (see Note 11), but at this
      time
      there can be no assurances regarding the ultimate success of these negotiations.
      In order for us to fund our operations and continue this growth plan,
      substantial additional funding will be required from external sources.








**2.
      CERTAIN SIGNIFICANT ACCOUNTING POLICIES**




The
      significant accounting policies presented below are designed to assist in
      understanding the Company’s condensed consolidated financial statements. Such
      financial statements and these notes are the representation of the Company’s
      management, who is responsible for their integrity and objectivity. In the
      opinion of management, these accounting policies conform to accounting
      principles generally accepted in the United States of America (“GAAP”) in all
      material respects, and have been consistently applied in preparing the
      accompanying condensed consolidated financial statements.





The
      accounting policies described in the following paragraphs should be read in
      conjunction with the Company’s February 28, 2006 annual report on Form 10-KSB
      (filed with the SEC on July 18, 2006), which includes all of the Company’s
      significant accounting policies.




***Principles
      of Consolidation***





The
      condensed consolidated financial statements include the accounts of Astrata
      Group and its majority-owned subsidiaries in which it has a controlling
      financial interest. All significant intercompany transactions and balances
      have
      been eliminated in consolidation. For reasons explained in the “Deconsolidation
      and Effective Disposition of Astrata Systems” section of Note 10, management
      deconsolidated the accounts of Astrata Systems (Pty) Limited (“Astrata Systems”)
      from the Company’s condensed consolidated financial statements effective June
      2006.




***Use
      of Estimates***





The
      preparation of financial statements in conformity with 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 financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Significant estimates made by management include
      current and deferred income taxes, the deferred tax asset valuation allowance,
      allowance for doubtful accounts, and realization of inventories and long-lived
      assets. Actual results could differ from these estimates.





***Concentrations***





The
      financial instrument that potentially exposes the Company to a concentration
      of
      credit risk principally consists of cash. The Company deposits its cash with
      high credit financial institutions, principally in Europe and Asia. These
      countries do not have any institutional depository insurance comparable to
      the
      United States, which insures bank balances up to $100,000 per bank. At August
      31, 2006, the Company’s bank balances approximated $71,000. The Company had
      approximately $12,000 in bank accounts in the U.S., which is covered by the
      Federal Deposit Insurance Corporation limit of $100,000.





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. The Company also performs periodic reviews of collectability
      and provides an allowance for doubtful accounts receivable. Management considers
      the allowance for doubtful accounts receivable at August 31, 2006 of
      approximately $19,000 to be adequate.


F-5


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**2.
      CERTAIN SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Inventories***





Inventories
      are stated at the lower of cost (first-in, first-out) or estimated market,
      and
      consist of only finished goods at August 31, 2006. 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, product 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
      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.





***Deferred
      Financing Costs***





Direct
      costs of securing debt financing are capitalized and amortized over the term
      of
      the related debt using the straight-line method. When a loan is paid in full,
      any unamortized financing costs are removed from the related accounts and
      charged to operations. During the quarter ended August 31, 2006, the Company
      recorded approximately $9,000 of finance charges in relation to the unamortized
      portion of deferred financing costs for certain debt that was
      refinanced.




***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 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.





For
      additional information, see the discussion in “Long-Lived Assets” immediately
      below.




***Long-Lived
      Assets***





SFAS
      No.
      144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to be Disposed of” addresses financial accounting and reporting for the
      impairment or disposal of long-lived assets. SFAS 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 asset, an 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
      August 31, 2006, 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.





Long-lived
      assets (including goodwill) that have not been reported as “held for sale” at
      August 31, 2006 are being held and used as of that date.


F-6


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**2.
      CERTAIN SIGNIFICANT ACCOUNTING POLICIES** (continued)





***Discontinued
      Operations***





In
      accordance with SFAS No. 144, the Company accounts for the results of operations
      of a component of an entity that has been disposed of or that meets all of
      the
“held for sale” criteria as discontinued operations if (a) the component’s
      operations and cash flows have been (or are to be) eliminated from the ongoing
      operations of the entity as a result of the disposal transaction and (b) the
      Company did not have any significant continuing involvement in the operations
      of
      the component after the disposal transaction. When the applicable criteria
      are
      met, the component is classified as “held for sale” and its operations are
      reported as discontinued operations (See Note 10).





The
      accompanying condensed consolidated statements of operations for the quarter
      and
      six months ended August 31, 2005 have been reclassified to separately report
      the
      discontinued operations discussed above.




***Revenue
      Recognition***





*General*





Except
      as
      described in "Contract Accounting" below, 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 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.





*Sales
      as a Distributor*





Contracts
      and customer purchase orders are generally used to determine the existence
      of an
      arrangement. Shipping documents (and customer acceptance criteria, when
      applicable) are used to verify delivery. The Company assesses whether the fee
      is
      fixed or determinable based on the payment terms associated with the
      transaction, and whether the sales price is subject to refund or adjustment.
      The
      Company assesses collectability based primarily on the creditworthiness of
      the
      customer as determined by credit checks and analysis, as well as the customer's
      payment history.





In
      the
      Company’s Telematics operations, orders are generally shipped free-on-board
      shipping point, which means that such orders are recognized as revenue when
      the
      product is delivered to the carrier (shipped). Free-on-board shipping point
      also
      means that the customer bears all costs and risks of loss or damage to the
      goods
      prior to their receipt.





*Contract
      Accounting*





The
      Company accounted for the government contract described in Note 7 under AICPA
      Statement of Position ("SOP") 81-1 using the percentage-of-completion method.
      Product delivery and installation were separate deliverables under the terms
      of
      the contract, and the related revenue was not recognized until the necessary
      activities were completed. Under SOP 81-1 accounting, the stage of completion
      is
      estimated by whichever of the following methods is considered most indicative
      of
      the physical completion under the circumstances of the specific transaction:
      a
      survey of the work performed, services completed as a percentage of total
      services required by the agreement, or costs incurred to date as a percentage
      of
      management's most recent estimate of total costs to be incurred under the
      related contract or other agreement. Amounts which are billable under the terms
      of a contract may not reflect earned revenue under this accounting policy.
      Thus,
      invoiced amounts that have not been earned are reported as a liability in the
      Company's consolidated balance sheet.





** *Services
      Revenue*





Our
      Telematics business has a technical team responsible for effecting installations
      and upgrades, and training clients on installation and supporting them on an
      ongoing basis. We do not earn revenue for training or software/firmware
      upgrades, but we do charge for non-warranty repairs and installation; however,
      this revenue is not material.


F-7


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**2.
      CERTAIN SIGNIFICANT ACCOUNTING POLICIES** (continued)




***Revenue
      Recognition*** **** (continued)





*Other
      Matters*





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 deferred
      and amortized 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
      (including the Astrata “Geo-Location Platform”) to be sold or otherwise marketed
      that are incurred before technological feasibility of the product 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.





The
      Company did not incur any research and development expenses during the quarter
      ended August 31, 2006.




***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. The Company previously accounted for awards granted under its
      equity incentive plan under the intrinsic value method prescribed by Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees,” and related interpretations, and provided the required pro forma
      disclosures prescribed by SFAS No. 123, “Accounting for Stock-Based
      Compensation,” as amended. The exercise price of options is equal to the market
      price of the Company’s common stock (defined as the closing price as quoted on
      the Over-the-Counter Bulletin Board administered by Nasdaq) on the date of
      grant. Accordingly, no share-based compensation was recognized in the financial
      statements prior to March 1, 2006.




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.




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 $265,000
      for the quarter ended August 31, 2006 and $729,000 for the six months ended
      August 31, 2006. This expense was recorded as stock compensation in the
      accompanying August 31, 2006 condensed consolidated statements of
      operations.





Share-based
      compensation recognized as a result of the adoption of SFAS No. 123-R as
      well as pro forma disclosures according to the original provisions of SFAS
      No. 123 for periods prior to the adoption of SFAS No. 123-R use the
      Black-Scholes option pricing model for estimating fair value of options granted
      under the Company’s equity incentive plan.


F-8


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**2.
      CERTAIN SIGNIFICANT ACCOUNTING POLICIES** (continued)




***Stock-Based
      Compensation*** (continued)





The
      following table summarizes the effect of share-based compensation resulting
      from
      the application of SFAS No. 123-R to options granted under the Company’s
      equity incentive plan:


**Three
                  Months Ended**
              
              **Six
                  Months Ended****August
                  31, 2006**
              
              **August
                  31, 2006**General
                  and administrative
              
              $
              (265,239
              )
              $
              (728,946
              )Net
                  share-based compensation effect on net loss fromcontinuing operations
              
              $
              (265,239
              )
              $
              (728,946
              )Basic
                  and diluted loss per common share
              
              $
              (0.02
              )
              $
              (0.06
              )


In
      accordance with SFAS No. 123-R, the Company adjusts share-based
      compensation on a quarterly basis for changes to the estimate of expected award
      forfeitures based on actual forfeiture experience. The effect of adjusting
      the
      forfeiture rate for all expense amortization after February 28, 2006 is
      recognized in the period the forfeiture estimate is changed. The effect of
      forfeiture adjustments in the second quarter of fiscal 2007 was
      insignificant.





Pro
      forma
      information required under SFAS No. 123 for periods prior to fiscal 2007 as
      if the Company had applied the fair value recognition provisions of SFAS No.
      123
      to options granted under the Company’s equity incentive plan was as
      follows:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****August
                  31, 2005**
              
              **August
                  31, 2005**Net
                  loss as reported
              
              $
              (2,555,396
              )
              $
              (5,339,130
              )Stock-based
                  employee compensation expense determinedunder
                  the Black-Scholes option pricing model, net of tax *
              
              
              (415,087
              )
              
              (830,174
              )Pro
                  forma net loss
              
              $
              (2,970,483
              )
              $
              (6,169,304
              )Basic
                  and diluted loss per common share:As
                  reported
              
              $
              (0.21
              )
              $
              (0.45
              )Pro
                  forma
              
              $
              (0.24
              )
              $
              (0.51
              )


*These
      amounts have been revised to correct the information reported in the Company’s
      August 31, 2005 Form 10-QSB filed with the SEC on October 17, 2005.





The
      table
      immediately above includes compensation expense related to stock options granted
      to employees during the indicated periods in fiscal 2006 and 2005. Pro forma
      compensation expense reported in the above table is generally based on the
      vesting provisions in the related stock option grants.




The
      following weighted average assumptions were used as applicable in the above
      tables:


**Six
                  Months Ended August 31,****2006**
              
              **2005**Annual
                  dividends
              
              
              Zero
              
              
              ZeroExpected
                  volatility
              
              
              133
              %
              
              133
              %Risk
                  free interest rate
              
              
              3.7
              %
              
              3.7
              %Expected
                  life
              
              
              3.5
                  years
              
              
              3.5
                  years




F-9


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**2.
      CERTAIN SIGNIFICANT ACCOUNTING POLICIES** (continued)




***Stock-Based
      Compensation*** (continued)





The
      expected volatility is based on the historical volatility. The expected life
      of
      options granted is based on the “simplified method” described in the SEC’s Staff
      Accounting Bulletin No. 107 due to changes in the vesting terms and contractual
      life of current option grants compared to the Company’s historical
      grants.




Options
      outstanding that have vested and are expected to vest as of August 31, 2006
      are
      as follows:


**Weighted****Weighted**
              
              **Average****Average**
              
              **Remaining**
              
              **Aggregate****Number
                  of**
              
              **Exercise**
              
              **Contractual**
              
              **Intrinsic****Shares**
              
              **Price**
              
              **Term
                  in****Years**
              
              **Value
                  (a)**Vested
              
              
              391,583
              
              $
              3.19
              
              
              3.6
              
              $
              18,333Expected
                  to vest
              
              
              833,167
              
              
              3.19
              
              
              3.6
              
              
              41,667Total
              
              
              1,224,750
              
              
              
              
              
              
              
              $
              60,000




*(a)*
            *These
                amounts represent the difference between the exercise price and $1.40,
                the
                closing market price of the Company’s common stock on August 31, 2006
                as quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the
                symbol “ATTG” for all in-the-money options
                outstanding.*





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 Options****Shares**
              
              
              
              **Weighted**
              
              **Aggregate****Available for**
              
              **Number of**
              
              **Average**
              
              **Intrinsic****Grant**
              
              **Shares**
              
              **Exercise Price**
              
              **Value (b)****February
                  28, 2006**
              
              
              602,850
              
              
              1,797,150
              
              $
              3.76
              
              $
              450,000Grants
              
              
              
              
              
              -
              
              
              -Exercises
              
              
              
              
              
              -
              
              
              -Cancellations
              
              
              572,400
              
              
              (572,400
              )
              
              5.00**August 31,
                  2006**
              
              
              1,175,250
              
              
              1,224,750
              
              $
              3.19
              
              $
              60,000Options
                  exercisable at:February
                  28, 2006
              
              
              
              
              
              482,383
              
              $
              3.76August 31,
                  2006
              
              
              
              
              
              391,583
              
              $
              3.19




*(b)*
            *Represents
                the difference between the exercise price and the February 28, 2006
                or
                August 31, 2006 market price of the Company’s common stock.*





***Recently
      Issued Accounting Pronouncements***





Except
      as
      described below, in the opinion of management neither the Financial Accounting
      Standards Board (including its Emerging Issues Task Force), the American
      Institute of Certified Public Accountants nor the SEC have issued any accounting
      pronouncements since the Company filed its February 28, 2006 Form 10-KSB that
      are believed by management to have a material impact on the Company’s present or
      future consolidated financial statements.


F-10


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**2.**
            **CERTAIN
                SIGNIFICANT ACCOUNTING POLICIES**(continued)





***Recently
      Issued Accounting Pronouncements*** **** (continued)





In
      June
      2006, the Financial Accounting Standards Board (the “FASB”) issued FASB
      Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an
      interpretation of FASB Statement No. 109.” This interpretation clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS No. 109, “ *Accounting
      for Income Taxes* .”
FIN
      No. 48 prescribes a more-likely-than-not recognition threshold and a measurement
      attribute for the financial statement recognition and measurement of tax
      positions taken (or expected to be taken) in an income tax return. It also
      provides guidance on de-recognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. The requirement to
      assess the need for a valuation allowance on net deferred tax assets is not
      affected by FIN No. 48. This pronouncement is effective for fiscal years
      beginning after December 31, 2006. Management is in the process of evaluating
      this guidance, and therefore has not yet determined the impact (if any) that
      FIN
      No. 48 will have on the Company’s financial position or results of operations
      upon adoption.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ,”
which
      defines fair value, establishes a framework for measuring fair value in GAAP,
      and expands disclosures about fair value measurements. SFAS No. 157 simplifies
      and codifies related guidance within GAAP, but does not require any new fair
      value measurements. The guidance in SFAS No. 157 applies to derivatives and
      other financial instruments measured at estimated fair value under SFAS No.
      133,
      (“ *Accounting
      for Derivative Instruments and Hedging Activities”* )
      and
      related pronouncements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. Management does not expect the adoption of SFAS
      No.
      157 to have a significant effect on the Company’s financial position or results
      of operations.





**3.** **INVENTORY**





Inventories
      consisted of the following as of August 31, 2006:


Europe
              
              Asia
              
              TotalRaw
                  materials
              
              $
              -
              
              $
              -
              
              $
              -Work
                  in progress
              
              
              -
              
              
              -
              
              
              -Finished
                  goods
              
              
              3,682
              
              
              169,841
              
              
              173,523Totals
              
              $
              3,682
              
              $
              169,841
              
              $
              173,523





**4.
      NOTES PAYABLE TO STOCKHOLDERS**





During
      the quarter ended May 31, 2006, the Company received working capital loans
      from
      a stockholder of approximately $351,000. The loans are repayable on demand
      and
      carry an annual interest rate of 15%.





During
      the quarter ended August 31, 2006, the Company received a working capital loan
      from a stockholder of approximately $10,000. The loan is repayable on demand
      and
      carries an annual interest rate of 15%.





During
      the quarter ended August 31, 2006, the Company received a working capital loan
      from a stockholder of approximately $391,000. The loan is repayable on demand
      and carries an annual interest rate of 15%.


F-11


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**5.
      OTHER DEBT TRANSACTIONS**





***Debt
      Financing Transaction***





In
      October 2005, the Company completed a private placement financing transaction
      and agreed to issue secured convertible notes payable to a group of accredited
      investors in the total amount of $2,170,000. The Company received $700,000
      in
      cash on October 7, 2005, and $500,000 on November 22, 2005. The remaining
      $550,000 of net proceeds were placed in an escrow account; in connection with
      the transaction described in the “10/13/06 Equity Financing Transaction” section
      of Note 11, these funds have been returned to the investors. These notes
      payable, which were due in October and November 2008, were convertible into
      shares of the Company’s common stock at the holder's option at a price of not
      less than $0.78 per share. In connection with the October 2005 transaction,
      the
      Company also issued five-year warrants to purchase a total of 480,000 shares
      of
      its common stock at an initial exercise price of $3.00 per share.





In
      connection with the above, the creditors/warrant holders (hereinafter
      collectively referred to as "the investors") in the October 2005 debt financing
      transaction (the "debt financing transaction") had certain registration rights
      for the common stock underlying both the warrants and the convertible debt.
      See
      Note 7 for a discussion of accounting for the contractual financial penalties
      associated with the investors' registration rights.





As
      more
      fully described in Note 11, the debt financing transaction was restructured
      in
      October 2006.





***Redeemable
      Preferred Stock of Subsidiary***





In
      a
      prior year, Astrata South Africa (Pty) Limited (sometimes hereinafter referred
      to as “Astrata SA”) issued redeemable preferred stock as part of the purchase
      price in acquiring Astrata Systems. Management concluded that, for accounting
      purposes, such stock was considered “mandatorily” redeemable; as a result, the
      aforementioned preferred stock has been reported as a liability in the Company’s
      consolidated financial statements since February 28, 2005. Because of their
      resignation as employees of Astrata SA, in fiscal 2006 the owners of the
      preferred stock described above forfeited preferred stock with a carrying value
      of approximately $443,000.





In
      August
      2006, in connection with the sale of Astrata SA’s Geomatics operations (see Note
      10), the preferred stockholders agreed to accept a lesser amount in full
      satisfaction of the remaining liability. As a result, the Company recorded
      a
      gain on debt extinguishment of approximately $332,000 during the quarter ended
      August 31, 2006. Such gain has been reported as an element of income from
      discontinued operations in the accompanying condensed consolidated statements
      of
      operations.





***Other
      Matters***





Because
      of the debt financing transaction referenced above and the transaction described
      in the “10/13/06 Equity Financing Transaction” section of Note 11, the exercise
      prices of certain warrants outstanding at February 28, 2006 have been reduced
      pursuant to anti-dilution contractual requirements. As a result of the same
      transaction, the conversion prices of the $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 have been reduced pursuant to anti-dilution contractual
      requirements.


F-12


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





The
      combined effect of the adjustments described in the preceding paragraph and
      of
      similar adjustments relating to previous transactions is summarized as
      follows:


**Exercise
                  or Conversion****Price
                  Per Share****Original**
              
              **Adjusted****Amount**
              
              **Amount**48,000
                  warrants outstanding at February 28, 2005
              
              $
              2.00
              
              $
              1.39580,148
                  warrants outstanding at February 28, 2005
              
              
              5.00
              
              
              2.991,043,106
                  warrants issued in April/May 2005
              
              
              3.50
              
              
              2.22Other
                  warrants issued after February 28, 2005:108,196
                  warrants
              
              
              5.00
              
              
              2.994,955
                  warrants
              
              
              3.50
              
              
              2.22$1,884,000
                  of convertible debt outstanding at February 28, 2006
              
              
              5.00
              
              
              2.99







**6.
      EQUITY TRANSACTIONS**





During
      the quarter ended May 31, 2006, the Company issued 169,600 shares of its common
      stock to satisfy a liability for services provided by consultants. Such shares
      were valued at approximately $343,000 (estimated to be the fair 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 of 1933, as amended (the “Securities Act”).





During
      the quarter ended May 31, 2006, the Company issued 25,000 shares of its common
      stock in exchange for services provided by consultants. Such shares were valued
      at approximately $38,000 (estimated to be the fair value based on the trading
      price on the issuance date, with a 15% discount from the market price). Such
      amount was recorded as compensation expense and included in other selling,
      general and administrative expenses in the accompanying condensed consolidated
      statement of operations. The transaction described in this paragraph constituted
      an exempt offering under Section 4(2) of the Securities Act.




During
      the quarter ended August 31, 2006, the Company issued 273,902 shares of its
      common stock to satisfy a liability for services provided by consultants. Such
      shares were valued at approximately $437,000 (estimated to be the fair 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.




During
      the quarter ended August 31 2006, the Company also issued 198,210 shares of
      its
      common stock in exchange for services provided by consultants. Such shares
      were
      valued at approximately $165,000 (estimated to be the fair value based on the
      trading price on the issuance date, with a 15% discount from the market price).
      The transactions described in this paragraph constituted exempt offerings under
      Section 4(2) of the Securities Act.




F-13


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**7.
      OTHER COMMITMENTS AND CONTINGENCIES**




***Legal
      Matters***





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.





***Operating
      Leases***




The
      Company occupies facilities under operating lease agreements expiring on various
      dates through March 2011. Certain leases include future rental escalations
      and
      renewal options. As of August 31, 2006, future minimum payments under operating
      leases approximated the following for the fiscal years ending February 28/29
      listed below:




2007
              
              $
              62,0002008
              
              
              45,0002009
              
              
              42,0002010
              
              
              42,0002011
              
              
              42,000Thereafter
              
              
              4,000$
              237,000








Rent
      expense approximated $33,000 and $222,000 for the three months ended August
      31,
      2006 and 2005, respectively. Rent expense approximated $59,000 and $409,000
      for
      the six months ended August 31, 2006 and 2005, respectively.





***Government
      Contract***





In
      December 2004, a subsidiary of the Company was awarded a fixed-price contract
      to
      provide the Singapore government's Civil Defense Force (the "SCDF") with
      software and hardware in an integrated control system designed to provide
      real-time tracking (the "System") of vehicles that are authorized to transport
      hazardous materials within the country. The contract amount approximates 2.0
      million Singapore dollars, or about $1.2 million as of August 31, 2005 (the
      "Contract"). The Company recognized revenue on the Contract of approximately
      $0.3 million and $0.5 million, respectively, during the three and six- month
      periods ended August 31, 2005. The Company did not recognize any revenue on
      the
      Contract during the six months ended August 31, 2006.




In
      the
      opinion of management, the Contract was completed on or before September 30,
      2005 (the required contractual completion date) in accordance with its terms.
      Thus, it is not presently expected that the Company will be assessed any
      liquidated damages (which are limited to 10% of the Contract price) for late
      completion. SCDF has the right to withhold the final 10% of the Contract price
      (the “retention”) until approximately sixteen months after the System has
      completed certain acceptance tests specified in the Contract; such tests were
      successfully completed in late December 2005; as of August 31, 2006, the Company
      had not collected the retention. The Company is obligated to warrant the System
      for a one-year period beginning approximately fourteen weeks after the System
      has passed all of the aforementioned acceptance tests. The time frames described
      in the preceding two sentences assume that the "performance guarantee period"
      (as defined) is not extended beyond the original time specified in the
      Contract.





SCDF
      also
      has the right to audit all of the Company's subsidiaries which provided goods
      or
      services under the Contract in order to ensure that there was appropriate
      internal control and compliance with the terms of the Contract.




F-14


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





***Registration
      Rights Penalties***





The
      Company is contractually liable for certain penalties because its registration
      statement (on Form SB-2) was not declared effective by the SEC by the deadline
      dates. Based on the current estimate of the effective date of such registration
      statement and the effectiveness-date contractual deadline, as of August 31,
      2006
      the Company has accrued estimated penalties of approximately $886,000 relating
      to the October 2005 debt financing transaction discussed in Note 5 and the
      April/May 2005 sale of equity units.





See
      the
“Restructuring of the October 2005 Debt Financing Transaction” section of Note
      11 for additional information regarding certain matters discussed in the
      preceding paragraph.








**8.
      SEGMENT REPORTING AND GEOGRAPHIC INFORMATION**





Until
      June 2006, the Company operated in the following two reportable
      segments:





*Geomatics*





Products,
      accessories and services related to the business of measurement and setting
      out
      (i.e. Survey, Mapping and Geographic Information Systems) and precise position
      monitoring (such as scanning excavations and industrial plants). Also included
      within this segment are the machine guidance products, accessories and services
      related to the business of guiding, controlling and monitoring machinery,
      including mobile machinery such as graders, dump trucks and drills as well
      as
      agricultural products which have tractor and crop-spraying guidance in
      them.





The
      Company exited the Geomatics segment in June 2006; see Note 10 for information
      about assets held for sale and related liabilities in connection with
      discontinued operations.





*Telematics*





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.





Because
      of the discontinued operations described in the Note referenced in “Geomatics”
immediately above, 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, “Disclosures about
      Segments of an Enterprise and Related Information.”





F-15


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**8.
      SEGMENT REPORTING AND GEOGRAPHIC INFORMATION** (continued)





*Telematics* (continued)





Certain
      condensed geographic information is presented below including property and
      equipment, revenues, gross profit (loss) and operating loss:


For
                  the three months ended August 31, 2006:Property
                  and
              
              
              
              Gross
              
              Operating
              
              OperatingEquipment,
                  net
              
              Revenue
              
              Profit
                  (Loss)
              
              Expenses
              
              (Loss)Asia
              
              $
              530,302
              
              $
              742,983
              
              $
              254,318
              
              $
              267,594
              
              $
              (13,276
              )United
                  States
              
              
              -
              
              
              -
              
              
              -
              
              
              912,480
              
              
              (912,480
              )Western
                  Europe
              
              
              140,306
              
              
              169,885
              
              
              (12,338
              )
              
              782,037
              
              
              (794,375
              )Total
              
              $
              670,608
              
              $
              912,868
              
              $
              241,980
              
              $
              1,962,111
              
              $
              (1,720,131
              )For
                  the three months ended August 31, 2005:Property
                  and
              
              
              
              
              
              Gross
              
              
              Operating
              
              
              OperatingEquipment,
                  net
              
              
              Revenue
              
              
              Profit
              
              
              Expenses
              
              
              (Loss)Asia
              
              $
              416,439
              
              $
              758,616
              
              $
              158,467
              
              $
              395,911
              
              $
              (237,444
              )United
                  States
              
              
              4,106
              
              
              -
              
              
              -
              
              
              738,265
              
              
              (738,265
              )Western
                  Europe
              
              
              341,201
              
              
              196,016
              
              
              4,813
              
              
              932,860
              
              
              (928,047
              )Total
              
              $
              761,746
              
              $
              954,632
              
              $
              163,280
              
              $
              2,067,036
              
              $
              (1,903,756
              )For
                  the six months ended August 31, 2006:Property
                  and
              
              
              
              
              
              Gross
              
              
              Operating
              
              
              OperatingEquipment,
                  net
              
              
              Revenue
              
              
              Profit
                  (Loss)
              
              
              Expenses
              
              
              (Loss)Asia
              
              $
              530,302
              
              $
              1,107,871
              
              $
              426,325
              
              $
              693,252
              
              $
              (266,927
              )United
                  States
              
              
              -
              
              
              -
              
              
              -
              
              
              2,050,067
              
              
              (2,050,067
              )Western
                  Europe
              
              
              140,306
              
              
              231,335
              
              
              (62,695
              )
              
              1,223,516
              
              
              (1,286,211
              )Total
              
              $
              670,608
              
              $
              1,339,206
              
              $
              363,630
              
              $
              3,966,835
              
              $
              (3,603,205
              )For
                  the six months ended August 31, 2005:Property
                  and
              
              
              
              
              
              Gross
              
              
              Operating
              
              
              OperatingEquipment,
                  net
              
              
              Revenue
              
              
              Profit
              
              
              Expenses
              
              
              (Loss)
              )Asia
              
              $
              416,439
              
              $
              1,208,722
              
              $
              359,311
              
              $
              970,721
              
              $
              (611,410
              )United
                  States
              
              
              4,106
              
              
              -
              
              
              -
              
              
              1,214,614
              
              
              (1,214,614
              )Western
                  Europe
              
              
              341,201
              
              
              201,148
              
              
              2,680
              
              
              1,866,499
              
              
              (1,863,819
              )Total
              
              $
              761,746
              
              $
              1,409,870
              
              $
              361,991
              
              $
              4,051,834
              
              $
              (3,689,843
              )




See
      Note
      3 for geographic information on inventory.




F-16


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**9.
      LOSS PER COMMON SHARE**





The
      following is a reconciliation of the numerators and denominators of the basic
      and diluted loss per common share computations for the three and six months
      ended August 31, 2006 and 2005:


Three
                  Months
                Ended
                August
                  31, 2006
              
              Three
                  Months
                Ended
                August
                  31, 2005
              
              Six
                  Months
                Ended
                August
                  31, 2006
              
              Six
                  Months
                Ended
                August
                  31, 2005Numerator
                  for basic and diluted lossper
                  common share:Net
                  loss from continuing operations charged tocommon
                  shareholders
              
              $
              (1,881,119
              )
              $
              (2,039,422
              )
              $
              (3,719,867
              )
              $
              (4,299,871
              )Total
                  net loss charged to common shareholders
              
              $
              (1,881,119
              )
              $
              (2,039,422
              )
              $
              (3,719,867
              )
              $
              (4,299,871
              )Denominator
                  for basic and diluted lossper
                  common share:Weighted
                  average number of common shares outstanding
              
              
              13,080,970
              
              
              12,284,492
              
              
              12,920,103
              
              
              11,999,048Basic
                  and diluted loss per common share:From
                  continuing operations
              
              $
              (0.14
              )
              $
              (0.17
              )
              $
              (0.29
              )
              $
              (0.36
              )Total
                  net loss
              
              
              (0.03
              )
              
              (0.21
              )
              
              (0.25
              )
              
              (0.45
              )




**10.
      DISCONTINUED OPERATIONS**





***Introduction***





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. As more fully discussed below, management placed Astrata
      Systems in liquidation during the quarter ended August 31, 2006.





Management
      believes that the Company has not incurred any material contingent liabilities
      in connection with the transactions and events described in the preceding
      paragraph or in the “Sale of Geomatics Business in South Africa” section of this
      Note. 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
      six months ended August 31, 2006. As described in the following paragraph,
      operations reported as discontinued in the accompanying condensed consolidated
      statements of operations are not expected to generate any significant continuing
      cash flows after May 31, 2006.





Including
      “customer incentive bonuses” due from certain vendors, the Company had total
      receivables relating to discontinued Telematics operations (in South Africa)
      of
      approximately $310,000 at August 31, 2006. However, since these receivables
      have
      not been (and will not be) sold, they have been excluded from “assets held for
      sale” in the below table. Such assets have been reported as “Trade and other
      receivables, net” in the accompanying August 31, 2006 condensed consolidated
      balance sheet. While management expects to collect such receivables during
      the
      twelve months ending May 31, 2007, this does not involve any continuing
      operations; the business activity related thereto will be limited to the effort
      expended in the collection process. The collection of such receivables is a
      non-recurring event for the Company, and all of the cash will be used to pay
      liabilities that are not reported as related to assets held for sale at either
      May 31, 2006 or August 31, 2006. Thus, management has concluded that the Company
      will not have any active continuing involvement with the components that have
      been classified as discontinued operations in the accompanying condensed
      consolidated financial statements.




F-17


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**10.
      DISCONTINUED OPERATIONS** (continued)





The
      income from discontinued operations reported by the Company for the quarter
      and
      six months ended August 31, 2006 is summarized as follows:


Income
                  (Loss)FromDiscontinuedOperationsLoss
                  from discontinued operations for the quarter ended August 31,
                  2006
              
              $
              (722,000
              )Disposal
                  and other non-operating transactions:Income
                  from sale of Astrata SA's Geomatics business (see below)
              
              
              1,484,000Gain
                  on extinguishment of liability for redeemable preferred
                  stockof
                  subsidary (see Note 5)
              
              
              332,000Gain
                  on relief from net liabilities resulting from the liquidation
                  ofAstrata
                  Systems (see below)
              
              
              326,000Total
                  income from discontinued operations for the quarter ended August
                  31,
                  2006
              
              
              1,420,000Loss
                  from discontinued operations for the quarter ended May 31,
                  2006
              
              
              (931,000
              )Income
                  from discontinued operations for the six-month period ended August
                  31,
                  2006
              
              $
              489,000




Over
      90%
      of Astrata SA’s revenues for the six months ended August 31, 2006 (which totaled
      approximately $3.4 million) relate to the Company’s former Geomatics operations.
      The above loss from discontinued operations for the quarter ended May 31, 2006
      includes interest expense of approximately $60,000 and severance pay of
      approximately $210,000.





***Sale
      of Geomatics Business in South Africa***





In
      a Form
      8-K filed with the SEC on June 23, 2006, the Company announced the
      following:





Astrata
      South Africa (Pty) Ltd (sometimes hereinafter referred to as the "Subsidiary")
      is a wholly owned subsidiary of the Company. The Subsidiary's primary activity
      was the marketing, sale, and service of products for the Geomatics industry,
      which the Company did not sell or support outside of Africa. As an extension
      to
      the strategic growth plan announced earlier this year, the Company has elected
      to divest the Subsidiary's Geomatics business and re-allocate its resources
      to
      the Telematics business only. This decision is supported by the Company's
      announcement on June 14, 2006 of a sales order for $17 million of Telematics
      products to a single European customer.





In
      connection with the above, as of March 28, 2006, the Subsidiary was indebted
      to
      Chesterfin (Pty) Ltd ("Chesterfin") under a line of credit in the amount of
      approximately $455,000, used primarily to support Geomatics products and sales.
      The financial obligations thereunder were secured under a general notarial
      bond
      by the Subsidiary's assets, including the assets of the Geomatics business.
      On
      March 28, 2006, Chesterfin, with the Company's concurrence, executed its
      interests in the general notarial bond and, on March 31, 2006, sold its claims
      against the Subsidiary under the bond to Trimble Navigation Limited
      ("Trimble").





Trimble
      was the Subsidiary's largest supplier of Geomatics products, and the Subsidiary
      was Trimble's largest distributor of Geomatics products in Africa.




F-18


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**10.
      DISCONTINUED OPERATIONS** (continued)





***Sale
      of Geomatics Business in South Africa*** (continued)




On
      April
      24, 2006, Trimble registered its interest in the general notarial bond and
      subsequently, through a court order, affirmed its rights under such bond. As
      part of exercising those rights, Trimble agreed to transfer the Subsidiary's
      Geomatics business and certain moveable assets to Astrata Geomatics (Pty) Ltd,
      a
      newly established entity that is not affiliated with the Company.





In
      consideration of these transactions, the Subsidiary received: (i) a credit
      in
      the amount of the outstanding balance under the Chesterfin line of credit of
      approximately $455,000 plus interest at 12.5% per annum from August 12, 2006;
      (ii) a credit of approximately $3,350,000 plus interest at 1% per month from
      the
      due date of each invoice due to Trimble; and, (iii) an assumption by the
      purchaser of all liabilities with respect to the Subsidiary's Geomatics business
      as of May 31, 2006, including trade creditors and all other obligations, but
      excluding liabilities that relate to any form of tax.





The
      transaction described immediately above was consummated on June 19,
      2006.





***Closure
      of South African Operations and Related Events***





Effective
      May 31, 2006, all of the remaining employees of Astrata Systems and Astrata
      SA
      who did not become employees of Astrata Geomatics (Pty) Limited (see above)
      were
      terminated. As more fully discussed below, on June 27, 2006 management commenced
      the formal process of liquidating Astrata Systems. Subsequent to May 31, 2006,
      the Company's then existing Telematics business operated by Astrata SA was
      sold
      (subject to certain closing conditions) to two unrelated entities. Subsequent
      to
      May 31, 2006, the Company also sold the subcontract manufacturing business
      operated by Astrata Systems to an unrelated party.





Management
      considered the transactions and events described in the preceding paragraph
      and
      in the "Sale of Geomatics Business in South Africa" section of this Note in
      (a)
      measuring the adjustment to reduce inventory to its estimated net realizable
      value and (b) reviewing the Company's intangible and other long-lived assets
      for
      possible impairment as of February 28, 2006. The matters described in the
      preceding sentence resulted in total fiscal 2006 expense of approximately $3.1
      million. See the Company’s February 28, 2006 Form 10-KSB (filed with the SEC on
      July 18, 2006) for additional information.





***Deconsolidation
      and Effective Disposition of Astrata Systems***





Effective
      May 31, 2006, Astrata Systems was closed and its continuing operations
      terminated. Management then voluntarily placed the entity in liquidation when
      a
      winding-up order (a “statement of affairs”) was filed in June 2006 with the
      appropriate agency in South Africa. When the statement of affairs was filed,
      Astrata Systems had an excess of liabilities to outsiders over assets (“excess
      liabilities”) with a carrying value of approximately $326,000. Based on advice
      of local counsel, management has determined that (1) Astrata Systems is no
      longer responsible for the excess liabilities and (2) neither the assets of
      Astrata Group nor any of its other subsidiaries are available to the creditors
      of Astrata Systems. Therefore, management concluded that the Company had
      effectively disposed of Astrata Systems, and the Company recorded a gain on
      debt
      extinguishment of approximately $326,000 during the quarter ended August 31,
      2006. Such gain has been reported as an element of income from discontinued
      operations in the accompanying condensed consolidated statements of
      operations.





For
      reasons explained in the preceding paragraph, the accounts of Astrata Systems
      were deconsolidated from the Company’s condensed consolidated financial
      statements effective June 2006.




F-19


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**10.
      DISCONTINUED OPERATIONS** (continued)





***Other
      Matters***





The
      major
      classes of assets and liabilities related to discontinued operations as of
      August 31, 2006 are as follows:


Current
                  Assets Held for SaleTrade
                  and other receivables
              
              
              
              
              $
              170,007Other
                  current assets
              
              
              
              
              
              34,301Total
              
              
              
              
              $
              204,308Liabilities
                  Related to Assets
                Held
                  for SaleCurrent
                Liabilities
              
              
              Other
                LiabilitesTrade
                  and accrued payables
              
              $
              574,789
              
              $
              -Other
                  current Liabilities
              
              
              69,484
              
              
              -Long-term
                  liabilities
              
              
              -
              
              
              36,449Totals
              
              $
              644,273
              
              $
              36,449







**11.
      SUBSEQUENT EVENTS**





During
      September 2006, the Company issued 273,589 shares of its registered common
      stock
      to satisfy liabilities for services provided by suppliers and employees. Such
      shares were valued at approximately $320,000 (estimated to be the fair value
      based on the trading price on the issuance date).




During
      September 2006, the Company also issued 111,197 shares of its unregistered
      common stock in exchange for services provided by an employee. Such shares
      were
      valued at approximately $109,000 (estimated to be the fair value based on the
      trading price on the issuance date, with a 15% discount from the market price).
      The transactions described in this paragraph constituted exempt offerings under
      Section 4(2) of the Securities Act.





Subsequent
      to August 31, 2006, the Company also issued 83,325 shares of registered common
      stock (valued at approximately $108,000 based on the trading price on the
      issuance date) for the exercise of employee stock options.





***The
      10/13/06 Equity Financing Transaction***





As
      more
      fully described below, on October 13, 2006 the Company entered into certain
      equity transactions with an unrelated entity (which has represented itself
      as an
“accredited investor” as that term is defined in Regulation D of the Securities
      Act) and certain creditors. The aforementioned unrelated entity is sometimes
      hereinafter referred to as the “Investor”. In the opinion of management - based
      in part on advice of counsel, such transactions are exempt from registration
      under the Securities Act.




F-20


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**11.
      SUBSEQUENT EVENTS** (continued)





***The
      10/13/06 Equity Financing Transaction*** (continued)





The
      Company has agreed to sell a maximum of 5.5 million shares of its Series A
      convertible preferred stock (with a par value of $0.0001 per share) and certain
      warrants to purchase its common stock for a maximum purchase price of $5.5
      million. Such preferred stock is hereinafter referred to as the “Preferred
      Stock,” which is convertible into shares of the Company’s common stock based on
      a formula (see the next paragraph) set forth in the Series A Convertible
      Preferred Stock Purchase Agreement Dated October 13, 2006 (the “Agreement”). The
      Preferred Stock has a liquidation preference of $1.00 per share (the
“Liquidation Preference Amount”), and a cumulative annual cash dividend of 8% of
      the Liquidation Preference Amount; such dividend is payable only in the event
      of
      the dissolution, liquidation or winding up of Astrata Group.





Each
      share of Preferred Stock is convertible into a number of shares of the Company’s
      common stock equal to the quotient that results from dividing $1.00 by the
      “Conversion Price.” As defined in the October 12, 2006 Certificate of
      Designation of the Relative Rights and Preferences of the Series A Convertible
      Preferred Stock of Astrata Group Incorporated (the “Certificate of
      Designation”), the Conversion Price is a maximum of $0.50 per share except for
      adjustments relating to stock splits and stock combinations. The Conversion
      Price is subject to downward adjustment for reorganizations, mergers,
      consolidations, certain dividends and other corporate events set forth in the
      Certificate of Designation. Issuances of the Company’s common stock for reasons
      other than those described in the preceding sentence at a per-share price less
      than the then-current Conversion Price will generally trigger a downward
      adjustment of the Conversion Price, with a minimum adjusted price of $0.40
      per
      share.





Under
      the
      terms of the Agreement, the Company issued warrants to the holders of the
      Preferred Stock and agreed to issue additional warrants under certain
      conditions. Each warrant entitles the holder to purchase Company common stock
      based on a percentage of the shares of common stock issuable upon conversion
      of
      the Preferred Stock (the “Conversion Shares”). The Series A and B warrants each
      entitle the holder to purchase 75% of the Conversion Shares at an exercise
      price
      of $1.00 and $1.50 per share, respectively; such warrants vested and became
      exercisable upon issuance. The Series J Warrant permits the holder to acquire
      100% of the Conversion Shares at an exercise price of $0.50 per share, provided
      that the warrant holder has purchased Preferred Stock in a minimum amount of
      $2
      million. If the Series J warrant is exercised, the Series C and D warrants
      become exercisable and would each permit the holder to purchase 75% of the
      Conversion Shares at an exercise price of $1.00 and $1.50 per share,
      respectively. Except as explained below, these warrants expire as follows:
      the
      Series J Warrants in October 2007, and the other warrants in October 2011.





The
      Company has granted registration rights (the “Registration Rights Agreement”)
      for the common stock underlying both the aforementioned warrants and the
      Preferred Stock; such common stock is sometimes hereinafter collectively
      referred to as the “Registrable Securities.” Under the terms of the Registration
      Rights Agreement, the Company is required to file with the SEC a registration
      statement providing for the resale of all Registrable Securities on a continuous
      basis pursuant to Rule 415 of the Securities Act. Until such registration
      statement is declared effective by the SEC, the Registrable Securities, the
      Preferred Stock, and the related warrants are restricted securities under Rule
      144 of the Securities Act. The Registration Rights Agreement also provides
      that
      the Company will incur liquidated damages in the form of a cash penalty if
      (a)
      the aforementioned registration statement is not filed by November 12, 2006
      or
      (assuming that the registration statement receives a “full review” by the SEC)
      is not declared effective by the SEC by approximately February 12, 2007, or
      (b)
      the effectiveness of such registration statement is not continuously maintained
      until the earlier of when all the Registrable Securities have been sold or
      the
      Rule 144 restrictions relating to such securities have lapsed. Such penalty
      would also be triggered if the Company’s common stock was delisted or no longer
      quoted by the OTCBB. The penalty is 2% per month (or any portion thereof) of
      the
      holder’s initial investment in the Preferred Stock, with a maximum penalty of
      10% of the base amount.





The
      Company has also agreed to amend its Articles of Incorporation (the “Amended
      Articles”) to increase the number of shares of its authorized common stock to a
      minimum of 150% of that required to effect the conversion/exercise of all the
      Preferred Stock and related warrants. If the Amended Articles have not been
      effected by approximately January 12, 2007, the term of the warrants described
      above will increase by one year.




F-21


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**11.
      SUBSEQUENT EVENTS** (continued)





***The
      10/13/06 Equity Financing Transaction*** (continued)


On
          October 13, 2006, under the terms of the Agreement the Investor purchased
          2.5
          million shares of the Company’s Preferred Stock and received certain warrants
          for total consideration of $2.5 million; the net proceeds approximated
          $1.6
          million. The Company incurred a finder’s fee of $250,000 related to this
          transaction; in addition, approximately $550,000 of the gross proceeds
          was used
          to partially repay the debt described in the “Debt Financing Transaction”
section of Note 5. As part of the same transaction, certain creditors (who
          are
          also existing common stockholders of the Company) exchanged $1.5 million
          of
          Company notes payable for Series A and B warrants and 1.5 million shares
          of
          Preferred Stock. One such creditor was the Company’s chief executive
          officer/chief financial officer, who held a promissory note payable by
          the
          Company in the amount of $250,000. Absent an election to the contrary,
          the
          Agreement limits the beneficial ownership resulting from conversion of
          the
          Preferred Stock and/or exercise of any related warrants to a maximum of
          9.9% of
          the Company’s then outstanding shares of common stock. Based on the number of
          common shares outstanding at September 30, 2006 (including the common stock
          presently owned by the aforementioned creditors) and assuming that none
          of the
          Preferred Stock owners elect to opt out of such ownership limitation, conversion
          of the Preferred Stock and exercise of the applicable warrants described
          in this
          Note would result in such stockholders owning approximately 50% of the
          Company’s
          then outstanding shares of common stock.


***Restructuring
      of the October 2005 Debt Financing Transaction***





In
      connection with the matters described in the “October 13, 2006 Equity Financing
      Transaction” section of this Note, the Company restructured certain elements of
      its October 2005 debt financing (as amended, the “debt financing transaction”)
      on October 12, 2006. As noted above, $550,000 of the proceeds from the
      aforementioned equity financing transactions was paid to the creditors in the
      debt financing transaction. The other significant provisions of the
      aforementioned October 2006 restructuring (the “Restructuring”) are summarized
      below.





The
      Restructuring provides that all of the original agreements documenting the
      debt
      financing transaction are terminated, and thus are no longer binding on any
      of
      the parties to such transaction. As part of the Restructuring, the Company
      issued four non-interest-bearing unsecured promissory notes payable dated
      October 12, 2006 (the “2006 notes payable”) to the creditors in the total amount
      of $1,200,000; such notes are due in three quarterly installments of $400,000
      each beginning January 15, 2007. In lieu of the $1.2 million, the
      creditors/warrant holders in the debt financing transaction (hereinafter
      collectively referred to as “the investors”) granted the Company an option to
      (a) pay $950,000 prior to December 31, 2006 and (b) issue warrants to purchase
      a
      total of 500,000 shares of the Company’s common stock with an exercise price
      equal to 120% of the five-day volume-weighted average price of the Company’s
      common stock as quoted on the OTCBB. There is no penalty for prepayment of
      the
      2006 notes payable after December 30, 2006.





In
      consideration for the investors’ waiver of any and all defaults by the Company
      relating to the debt financing transaction, the Restructuring provides that
      the
      Company will issue 500,000 shares (the “default shares”) of its restricted
      common stock to the investors.





As
      a
      result of the Restructuring (including the waiver referenced in the preceding
      paragraph), accrued registration rights penalties of approximately $390,000
      described in Note 7 relating to the debt financing transaction have been
      extinguished. On October 12, 2006, the Company filed a Form RW with the SEC
      to
      withdraw its registration statement on Form SB-2 covering the common stock
      underlying the warrants described below and the convertible notes payable issued
      in the debt financing transaction.





The
      investors have retained the five-year warrants to purchase 480,000 shares of
      the
      Company’s common stock issued in the original transaction; see the “Debt
      Financing Transaction” section of Note 7 to the Company’s February 28, 2006
      consolidated financial statements included in its Form 10-KSB for the year
      then
      ended for additional information regarding such warrants.





The
      Company has also executed an agreement whereby the investors have been given
      “piggyback” registration rights for the common stock underlying the warrants
      described in the preceding paragraph and for the default shares; such rights
      do
      not become effective until mid-April 2007. The Company will not be liable for
      any penalties if any related registration statement is not filed or declared
      effective by any particular date.




F-22


ASTRATA
      GROUP INCORPORATED AND SUBSIDIARIES


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      THREE AND SIX MONTHS ENDED AUGUST 31, 2006 AND 2005


(UNAUDITED)





**11.
      SUBSEQUENT EVENTS** (continued)





***Letter
      of Intent Regarding Sales Contract***





Effective
      October 16, 2006, the Company entered into an exclusive letter of intent (“LOI”)
      valued at approximately $85 million with a Singapore-based entity for the supply
      of Astrata’s intelligent tracking systems and the associated command and control
      centers. This equipment is intended to satisfy a homeland security requirement;
      as a result, the identity of the ultimate end-user will remain confidential.





The
      buyer
      has requested that the initial shipments begin during the first quarter of
      calendar 2007, with the entire order being delivered within twelve to eighteen
      months. There can be no assurance at this time that a contract will in fact
      be
      executed as a result of the LOI. However, if and when such contract is executed,
      the Company expects to receive a significant down payment to fund the
      manufacturing requirements. Hardware manufacturing for this contract will be
      outsourced, and the Company is now in discussion with a number of major
      subcontractor manufacturers.





The
      Company has previously provided Singapore’s countrywide hazardous materials
      (“hazmat”) vehicle tracking system, which is expected to play a prominent role
      in their expanded homeland security program. As part of Singapore’s civil
      defense program, Astrata has fitted almost 1000 vehicles transporting hazardous
      materials in that country with its advanced intelligent tracking
      device.








***Settlement
      of Disputed Liability***





In
      September 2006, Astrata SA accepted an offer from a South African entity (which
      was formerly a major supplier) to settle a disputed liability with an August
      31,
      2006 balance of approximately $341,000. Under the terms of the settlement,
      except as described in the next paragraph, the vendor has agreed to accept
      the
      following in full satisfaction of such liability: (a) cash of approximately
      $42,000 (which was paid in September 2006), (b) the June 2006 sale (which was
      consummated in October 2006) of certain assets associated with Astrata SA’s
      Solaris distributorship business, including the customer list, to a third party
      (financed by the supplier and applied to Astrata SA’s liability) for
      approximately $75,000, and (c) other non-cash consideration (including the
      transfer by Astrata SA of certain MT2000 data terminal inventory, and Astrata
      SA’s acceptance of the rental fees owed to the vendor) with a total agreed-upon
      value of approximately $31,000.





If
      and
      when Astrata SA is dissolved and all of its assets are sold, the settlement
      described above is subject to upward adjustment (on a pro rata basis) to the
      extent of any cash remaining after paying all of Astrata SA’s other creditors.




F-23


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





***Overview***





The
      following discussion should be read in conjunction with the unaudited condensed
      consolidated financial statements and notes thereto of the Company appearing
      elsewhere in this report. Such financial statements have been prepared to
      reflect the Company's financial position as of August 31, 2006, together with
      the results of operations for the three and six months ended August 31, 2006
      and
      2005, and cash flows for the six months ended August 31, 2006 and
      2005.





***Forward-Looking
      Statements***





Historical
      results and trends should not be taken as indicative of future operations.
      Management's statements contained in this report that are not historical facts
      are forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
      the Securities Exchange Act of 1934, as amended or the "Exchange Act". Actual
      results may differ materially from those included in the forward-looking
      statements. We intend such forward-looking statements to be covered by the
      safe-harbor provisions for forward-looking statements contained in the Private
      Securities Litigation Reform Act of 1995, and are including this statement
      for
      purposes of complying with those provisions. Forward-looking statements, which
      are based on certain assumptions and describe our future plans, strategies
      and
      expectations, are generally identifiable by use of the words "believe,"
      "expect," "anticipate," "estimate," "project," "prospects," or similar
      expressions. Our ability to predict results or the actual effect of future
      plans
      or strategies is inherently uncertain. Factors which could have a material
      adverse affect on our operations and future prospects on a consolidated basis
      include, but are not limited to: changes in economic conditions generally in
      the
      United States of America and the other countries in which we operate,
      legislative/regulatory changes, the political climate in the foreign countries
      in which we operate, the availability of capital, interest rates, competition,
      and changes in U.S. generally accepted accounting principles. These risks and
      uncertainties should be considered in evaluating forward-looking statements
      and
      undue reliance should not be placed on any such statements. Further information
      concerning us and our business, including additional factors that could
      materially affect our financial results, are included herein and in our other
      filings with the Securities and Exchange Commission (the “SEC”).





**Company
      Overview**





***Strategic
      Direction***





Astrata's
      core objective is to be a major service provider and supplier in the Telematics
      market sector. This objective has been further refined with emphasis being
      placed on the homeland security and business to business sectors where the
      demand for complex integrated solutions is driving market growth in North
      America, Europe and South East Asia.





***Structural
      Adjustments***





During
      the six months ended August 31, 2006, a number of core structural changes were
      implemented.





These
      included decisions to:





o
            Withdraw
                from Geomatics and focus exclusively on
                Telematics;





o
            Restructure
                research and development operationally by increased outsourcing and
                geographically by transferring this function to South East
                Asia;





o
            Outsource
                all manufacturing activities;





o
            Withdraw
                from the South African Telematics market where the primary market
                related
                to "stolen vehicle recovery" as opposed to more demanding and complex
                integrated solutions.





o
            Restructure
                our Indonesian distribution arrangements with a view to minimizing
                costs.





In
      combination, these decisions also allowed Astrata to make further significant
      headcount and overhead savings by eliminating the South African selling, general
      and administrative expenses which, in fiscal 2006, amounted to $5.8 million
      or
      approximately 40% of total selling, general and administrative expenses. The
      associated headcount reductions approximate 120 members of staff, a reduction
      of
      over 60%.




1


***Operational
      Considerations***





Astrata's
      Telematics operations were strengthened during the prior fiscal year by the
      addition of a number of key distribution partners in Western Europe (North
      Security; Motive Geeks) and an increased presence in South East Asia, based
      primarily on the successful delivery of the previously announced Hazmat
      ( Haz ardous Mat erials)
      Tracking Project to the Singapore Civil Defense Force.





In
      line
      with our structural realignment during the quarter ended August 31, 2006,
      Astrata entered into a number of agreements to dispose of its South African
      operations. The effective date for these transactions is June 1, 2006. South
      African based operations that were not sold by this date were closed effective
      May 31, 2006 and on June 27, 2006 Astrata Systems (Pty) Ltd was placed in
      voluntary liquidation.





***Major
      Sales Order***





In
      June
      2006 Astrata announced the award of a sales order valued at approximately $17
      million from AST Europe Group AB for the delivery of 50,000 telematics units.
      The Company now expects this order to commence delivery during the last quarter
      of fiscal 2007.





**Homeland
      Security - Letter of Intent**





In
      a Form
      8-K filed with the SEC on October 18, 2006, the Company disclosed that:





Effective
      October 16, 2006, Astrata
      Group Incorporated has entered into an exclusive letter of intent valued at
      $85
      million from a Singapore based company for the supply of Astrata's Intelligent
      Tracking Systems and the associated command and control Centers. This equipment
      is intended to meet a homeland security requirement and as a result the ultimate
      end user will remain confidential.





The
      ultimate end user has requested that initial deliveries begin during the first
      quarter of calendar 2007 with the entire order being delivered within twelve
      to
      eighteen months. If and when a contract is executed, the Company expects to
      receive a significant down payment to fund the manufacturing requirements.
      Hardware manufacturing for this contract will be outsourced and the Company
      is
      now in discussion with a number of major sub-contract
      manufacturers.








**Results
      of Operations for the Three Months Ended August 31, 2006 and
      2005**





As
      discussed above (see Note 10 to the condensed consolidated financial statements
      included elsewhere herein), the Company is discontinuing its operations and
      exiting South Africa. Accordingly, all South African operations are being
      reported as discontinued operations effective with the May 31, 2006
      quarter.





***Revenues***





Net
      sales
      were approximately $913,000 for the three months ended August 31, 2006; a
      decrease of approximately $42,000 compared to the three months ended August
      31,
      2005 of approximately $955,000. This reflects a 5% decline quarter to quarter.
      Astrata's core objective is to be a major service provider and supplier in
      the
      Telematics market sector. This objective has been further refined by exiting
      the
      South African based Geomatics segment and focusing on the homeland security
      and
      business to business sectors where the demand for complex integrated telematics
      solutions is driving market growth in North America, Europe and South East
      Asia.





***Gross
      profit***




Gross
      profit increased approximately $79,000 to approximately $242,000 for the three
      months ended August 31, 2006 compared to the three months ended August 31,
      2005
      of approximately $163,000. Gross profit as a percentage of revenue increased
      from 17% to 27%.





2


***Selling,
      general and administrative expenses***




Selling
      general and administrative expenses for the three months ended August 31, 2006
      were approximately $1.7 million, a decrease of approximately $0.1 million
      compared to the three months ended August 31, 2005 of approximately $1.8
      million.





In
      Asia,
      expenses for the three months ending August 31, 2006 were approximately $0.3
      million, compared to the three months ended August 31, 2005 of approximately
      $0.4 million. These expenses are primarily related to staffing, facilities
      and
      travel costs.





In
      Europe, expenses for the three months ending August 31, 2006 were approximately
      $0.6 million, a decline of approximately $0.2 million compared to the three
      months ended August, 2005 of approximately $0.8 million. These expenses are
      primarily related to staffing, facilities and travel costs. The London offices
      leased by Astrata Europe Ltd were vacated in May 2006.





Corporate
      expenses for the three months ending August 31, 2006 were approximately $ 0.8
      million, compared to the three months ending August 31, 2005 of approximately
      $0.6 million. Corporate expenses include public company expenses of
      approximately $0.4 million (accounting, auditing, legal fees and director fees)
      and administrative expenses of approximately $0.4 million (primarily marketing,
      salaries, facilities and travel expenses).





Research
      and development expenses for the three months ending August 31, 2006 were nil,
      compared to the three months ending August 31, 2005 of approximately $0.3
      million.





As
      more
      fully explained in Note 2 to the condensed consolidated financial statements
      included elsewhere herein, the adoption of SFAS 123-R "Share-Based Payments"
      from March 1, 2006 resulted in recording a non-cash expense of approximately
      $0.3 million in the quarter ending August 31, 2006.





***Net
      Results of Operations***





Our
      operating loss was approximately $1.7 million for the three months ended August
      31, 2006 and approximately $1.9 million for the three months ended August 31,
      2005. Underlying these results the impact of SFAS No.123-R of approximately
      $0.3
      million was offset principally by savings in research and development
      overhead.





***Interest
      expense***





Interest
      expense for the three months ended August 31, 2006 was approximately $0.2
      million as compared to $0.1 million for the quarter ended August 31,
      2005.





***Net
      Results***





We
      are
      reporting a net loss of approximately $0.5 million or $0.03 per common share
      for
      the three months ended August 31, 2006 compared to a net loss of approximately
      $2.6 million or $0.21 per common share for the three months ended August 31,
      2005. Our continuing operations resulted in a net loss of approximately $1.9
      million or $0.14 per common share for the three months ended August 31, 2006
      and
      approximately $2.0 million or $0.17 per common share for the three months ended
      August 31, 2005. Our discontinued operations resulted in income of approximately
      $1.4 million or $0.11 per common share for the three months ended August 31,
      2006 and a loss of approximately $0.5 million or $0.04 per common share for
      the
      three months ended August 31, 2005.





**Results
      of Operations for the Six Months Ended August 31, 2006 and
      2005**





***Revenues***





Net
      sales
      were approximately $1.3 million for the six months ended August 31, 2006; a
      decrease of approximately $0.1 million compared to the six months ended August
      31, 2005 of approximately $1.4 million. This reflects a 7% decline quarter
      to
      quarter.




3


***Gross
      profit***




Gross
      profit increased approximately $2,000 to approximately $364,000 for the six
      months ended August 31, 2006 compared to the six months ended August 31, 2005
      of
      approximately $362,000. Gross profit as a percentage of revenue increased from
      26% to 27%.





***Selling,
      general and administrative expenses***




Selling
      general and administrative expenses for the six months ended August 31, 2006
      were approximately $3.2 million, a decrease of approximately $0.6 million
      compared to the six months ended August 31, 2005 of approximately $3.8
      million.





In
      Asia,
      expenses for the six months ending August 31, 2006 were approximately $0.7
      million, compared to the six months ended August 31, 2005 of approximately
      $1.0
      million. These expenses are primarily related to staffing, facilities and travel
      costs.





In
      Europe, expenses for the six months ending August 31, 2006 were approximately
      $1.0 million, a decline of approximately $0.9 million compared to the six months
      ended August, 2005 of approximately $1.9 million. These expenses are primarily
      related to staffing, facilities and travel costs. The London offices leased
      by
      Astrata Europe Ltd were vacated in May 2006.





Corporate
      expenses for the six months ending August 31, 2006 were approximately $ 1.5
      million, compared to the six months ending August 31, 2005 of approximately
      $0.9
      million. Corporate expenses include public company expenses of approximately
      $0.8 million (accounting, auditing, legal fees and director fees) and
      administrative expenses of approximately $0.7 million (primarily marketing,
      salaries, facilities and travel expenses).





Research
      and development expenses for the six months ending August 31, 2006 were nil,
      compared to the three months ending August 31, 2005 of approximately $0.3
      million.





As
      more
      fully explained in Note 2 to the condensed consolidated financial statements
      included elsewhere herein, the adoption of SFAS 123-R "Share-Based Payments"
      from March 1, 2006 resulted in recording a non-cash expense of approximately
      $0.7 million in the six months ending August 31, 2006.





***Net
      Results of Operations***





Our
      operating loss was approximately $3.6 million for the six months ended August
      31, 2006 and approximately $3.7 million for the six months ended August 31,
      2005. Underlying these results, the impact of SFAS No.123-R of approximately
      $0.7 million was offset by reductions in selling, general and administrative
      overhead of approximately $0.5 million, and research and development expense
      of
      approximately $0.2 million.





***Other
      income (expense)***





Interest
      expense for the six months ended August 31, 2006 was approximately $0.4 million
      as compared to $0.6 million for the six months ended August 31, 2005. The fair
      value adjustment for a warrant liability amounted to a benefit of $0.3 million
      for the six months ended August 31, 2006 as compared to nil for the six months
      ended August 31, 2005.





***Net
      Results***





We
      are
      reporting a net loss of approximately $3.2 million or $0.25 per common share
      for
      the six months ended August 31, 2006 compared to a net loss of approximately
      $5.3 million or $0.45 per common share for the six months ended August 31,
      2005.
      Our continuing operations resulted in a net loss of approximately $3.7 million
      or $0.29 per common share for the six months ended August 31, 2006 and
      approximately $4.3 million or $0.36 per common share for the six months ended
      August 31, 2005. Our discontinued operations resulted in income of approximately
      $0.5 million or $0.04 per common share for the six months ended August 31,
      2006
      and a loss of approximately $1.0 million or $0.09 per common share for the
      six
      months ended August 31, 2005.




4


***Liquidity
      and Capital Resources***





*Balance
      Sheet Comparison of August 31, 2006 to February 28, 2006*





During
      the quarter ended May 31, 2006, the Company determined it would withdraw from
      Geomatics and focus exclusively on Telematics. The Geomatics business
      represented the vast majority of the revenue of Astrata South Africa (Pty)
      Ltd.
      (“ASA”). On May 31, 2006, the Company closed its subsidiary Astrata Systems
      (Pty) Ltd. (“Astrata Systems’); during the quarter then ended, management
      reached a decision to sell the assets of ASA as discussed in Note 10 to the
      condensed consolidated financial statements included elsewhere herein. As of
      August 31, 2006, we have approximately $0.2 million in assets being held for
      sale, and approximately $0.7 million of liabilities related to assets held
      for
      sale, which should be completed in the near future.




For
      purposes of the matters discussed in the following two paragraphs, management
      has recast the Company’s February 28, 2006 consolidated balance sheet (included
      in the February 28, 2006 Form 10-KSB filed with the SEC on July 18, 2006) to
      retroactively reflect the estimated effect of assets classified as “held for
      sale” at August 31, 2006 and the related liabilities. These pro forma
      adjustments, which are for discussion purposes only, have been developed by
      management based on the transactions and events relating to the Company’s
      discontinued operations reported in the condensed consolidated financial
      statements (and discussed in the related notes) included elsewhere herein.




Total
      assets decreased by approximately $4.2 million from $6.9 million as of February
      28, 2006 to $2.7 million as of August 31, 2006. The decrease is primarily due
      to
      the sale of accounts receivable of approximately $1 million, the sale of
      inventory of approximately $1.8 million, the sale of property and equipment
      of
      approximately $0.3 million, the impairment of intangible assets of approximately
      $1 million, and a decrease in cash of approximately $0.4 million; offset by
      an
      increase in other assets of approximately $0.1 million.





Total
      liabilities decreased by approximately $2.8 million from approximately $16.5
      million as of February 28, 2006 to approximately $13.7 million as of August
      31,
      2006. This is primarily due to a decrease in trade accounts payable of
      approximately $3.3 million which were assumed by the buyer in connection with
      the sale of our geomatics business within South Africa.





*Statement
      of Cash Flow Changes*





Our
      operating activities provided approximately $0.3 million in cash during the
      six
      months ended August 31, 2006. The sale of our geomatics business, debt
      forgiveness of approximately $0.3 million and a gain on disposal of other
      discontinued operations were the primary components of our positive operating
      cash flow. The net loss was offset by a number of non-cash items totaling
      approximately $0.9 million. These include forgiveness of debt, depreciation,
      amortization, impairment of assets and issuance of stock for services and
      compensation. The net change in receivables, payables and inventories of
      approximately $4.2 million yielded a net increase in working capital of
      approximately $0.3 million.





Cash
      flows from investing activities used approximately $0.1 million primarily to
      support investment in affiliates. Cash flows used in financing activities were
      increases in advances from stockholders of approximately $0.7 million; offset
      by
      repayment of long-term liabilities of approximately $0.3 million, and the
      repayment in full of approximately $1.2 million on a line of
      credit.





At
      August
      31, 2006, the Company had negative working capital of approximately $11.6
      million. In
      order
      for us to fund our operations and continue management’s growth plan, substantial
      additional funding will be required from external sources. Management currently
      intends to fund operations through a combination of equity financing and lines
      of credit. As more fully described in Note 11 to the condensed consolidated
      financial statements included elsewhere herein, ,the Company has recently
      concluded a convertible preferred stock (with warrants) offering that yielded
      $4
      million of additional equity.




5


***Liquidity
      and Going Concern Considerations***





For
      the
      six months ended August 31, 2006, we had a net loss of approximately $3.2
      million and positive cash flow from operating activities of approximately $0.3
      million. In addition, we had an accumulated deficit and negative working capital
      of approximately $25.5 million and $11.6 million, respectively, as of August
      31,
      2006. Because of the Company’s financial condition, our independent public
      accountants included a going concern paragraph in their audit report on our
      February 28, 2006 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 financial statements and the condensed consolidated
      financial statements included elsewhere herein 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 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.





In
      the
      first quarter of fiscal 2007, management revised our business plan to focus
      on
      the more developed markets in Europe, South East Asia and North America. As
      our
      core strategic direction is now to focus on the telematics market rather than
      the geomatics market, the Company entered into discussions regarding the sale
      of
      its geomatics business. The sale of this business and the winding down of our
      remaining South African operations (see Note 10 to the condensed consolidated
      financial statements included elsewhere herein for additional information
      regarding these two events) is expected to yield annual savings of approximately
      $5.8 million, or 41% of the Company’s annual selling, general and administrative
      expenses with an associated headcount reduction of over 120 members of staff,
      a
      Company-wide reduction of about 60%. As more fully explained in Note 11 to
      the
      condensed consolidated financial statements included elsewhere herein, the
      Company has recently concluded a convertible preference share offering that
      yielded $4 million in equity.





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, finance research and development activities and other factors.
      As
      more fully explained elsewhere herein, management presently believes that cash
      generated from operations, the October 2006 equity transaction (which yielded
      net proceeds of approximately $1.6 million, and reduced debt by $1.5 million),
      the October 2006 restructuring and partial repayment of other notes payable
      (see
      Note 11 to the condensed consolidated financial statements included elsewhere
      herein for additional information regarding these two transactions), 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 August 2007.





Management
      is projecting growth in telematics sales during fiscal 2007, and has already
      announced a single sales order in this sector valued at approximately $17
      million.





Effective
      October 16, 2006, the Company entered into an exclusive letter of intent valued
      at approximately $85 million with a Singapore-based entity for the supply of
      Astrata’s intelligent tracking systems and the associated command and control
      centers. This equipment is intended to satisfy a homeland security requirement;
      as a result, the identity of the ultimate end-user will remain confidential.





Additional
      major contracts are under negotiation, but at this time there can be no
      assurances regarding the ultimate success of these negotiations. In order for
      us
      to fund our operations and continue this growth plan, substantial additional
      funding will be required from external sources.





***Common
      Stock Issuances***




During
      the quarter ended August 31, 2006, the Company issued 273,902 shares of its
      common stock to satisfy a liability for services provided by consultants. Such
      shares were valued at approximately $437,000 (estimated to be the fair 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.




During
      the quarter ended August 31 2006, the Company also issued 198,210 shares of
      its
      common stock in exchange for services provided by consultants. Such shares
      were
      valued at approximately $165,000 (estimated to be the fair value based on the
      trading price on the issuance date, with a 15% discount from the market price).
      The transactions described in this paragraph constituted exempt offerings under
      Section 4(2) of the Securities Act.




6


During
      September 2006, the Company issued 273,589 shares of its registered common
      stock
      to satisfy liabilities for services provided by suppliers and employees. Such
      shares were valued at approximately $320,000 (estimated to be the fair value
      based on the trading price on the issuance date).




During
      September 2006, the Company also issued 111,197 shares of its unregistered
      common stock in exchange for services provided by an employee. Such shares
      were
      valued at approximately $109,000 (estimated to be the fair value based on the
      trading price on the issuance date, with a 15% discount from the market price).
      The transactions described in this paragraph constituted exempt offerings under
      Section 4(2) of the Securities Act.





Subsequent
      to August 31, 2006, the Company also issued 83,325 shares of registered common
      stock (valued at approximately $108,000 based on the trading price on the
      issuance date) for the exercise of employee stock options.





***Related
      Party Loans***





During
      the period from June 1, 2006 to July 21, 2006, Astrata Group received loans
      of
      approximately $401,000 from existing shareholders. The loans are repayable
      on
      demand and carry an annual interest rate of 15%.





***Sale
      of Geomatics Business in South Africa***





In
      a Form
      8-K filed with the SEC on June 23, 2006, the Company announced the
      following:





Astrata
      South Africa (Pty) Ltd (the "Subsidiary" or “Astrata SA”) is a wholly owned
      subsidiary of the Company. The Subsidiary's primary activity was the marketing,
      sale, and service of products for the Geomatics industry, which the Company
      did
      not sell or support outside of Africa. As an extension to the strategic growth
      plan announced earlier this year, the Company has elected to divest the
      Subsidiary's Geomatics business and re-allocate its resources to the Telematics
      business only. This decision is supported by the Company's announcement on
      June
      14, 2006 of a sales order for $17 million of Telematics products to a single
      European customer (see "Major Sales Order" below). The divestiture transaction
      described above was consummated on June 19, 2006.





***Closure
      of South African Operations and Related Events***




Effective
      May 31, 2006, all of the remaining employees of Astrata Systems and Astrata
      SA
      who did not become employees of Astrata Geomatics (Pty) Limited were terminated.
      Astrata Geomatics (Pty) Limited, a newly established entity that is not
      affiliated with the Company, acquired the business and certain moveable assets
      of the Subsidiary named in the preceding paragraph. On June 27, 2006, management
      commenced the formal process of liquidating Astrata Systems. The assets of
      Astrata Group and its other subsidiaries are not available to satisfy the
      liabilities of Astrata Systems, whose tangible assets were not significant
      as of
      June 27, 2006.





Subsequent
      to May 31, 2006, the Company's then existing Telematics business operated by
      Astrata SA was sold (subject to certain closing conditions) to two unrelated
      entities. Subsequent to May 31, 2006, the Company also sold the subcontract
      manufacturing business operated by Astrata Systems to an unrelated
      party.





***Major
      Sales Order***





In
      a Form
      8-K filed with the SEC on June 23, 2006, the Company announced that it received
      a purchase order from AST Europe Group AB for 50,000 Fleet Management/AVL
      devices plus associated software. The order is expected to produce revenues
      of
      approximately $17 million, making it the largest sales order Astrata Group
      has
      received to date. It is anticipated that delivery for all the units will be
      completed during fiscal 2007.




**Off
      Balance Sheet Arrangements**





As
      of
      August 31, 2006, there were no off balance sheet arrangements. Please refer
      to
      Note 7 (“Other Commitments and Contingencies”) to the Company’s 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.




7


**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. Prior to June 2006, we
      purchased forward foreign exchange contracts to cover certain product purchase
      transactions denominated in U.S. dollars.





Our
      principal foreign currency has been the South African Rand. We translate all
      assets and liabilities at period-end exchange rates and income and expense
      accounts at average rates during the period. The Rand weakened against the
      U.S.
      Dollar by approximately 6.0% for the six months ended August 31, 2006. This
      increases both our revenue and costs as compared to previous periods. During
      the
      three months ended August 31, 2006, we also had transactions denominated in
      the
      British Pound, the Singapore Dollar, the Malaysian Ringgit, and the Brunei
      Dollar.





**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.





**Critical
      Accounting Policies**





In
      December 2001, the SEC requested that all registrants explain 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:





*Inventories*





Inventories
      are stated at the lower of cost (first-in, first-out) or estimated market,
      and
      consist exclusively of finished goods at August 31, 2006. 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 our products
      and services in the ensuing years and/or considerations and analysis of changes
      in the customer base, product mix, or other issues that may impact the estimated
      net realizable value. Should the demand for our products or services prove
      to be
      significantly less than anticipated, the ultimate realizable value of our
      inventories could be substantially less than reflected in the accompanying
      condensed consolidated balance sheet.





*Long-Lived
      Assets*





In
      July
      2001, the Financial Accounting Standards Board (the "FASB") issued Statement
      of
      Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
      of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No.
      144
      addresses financial accounting and reporting for the impairment or disposal
      of
      long-lived assets. SFAS 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
      asset, an 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
      February 28, 2006, management determined that as a result of the decision
      reached in the first quarter of fiscal 2007 to exit the South African market
      certain long-lived assets were impaired. Accordingly the carrying values of
      such
      assets were reduced as of that date. As of August 31, 2006, we determined that
      no additional impairment indicators existed; thus, no adjustments have been
      made
      to the carrying values of long-lived assets (that are either held for sale
      or
      held and used) as of August 31, 206. There can be no assurance that market
      conditions will not change or demand for our services and products will continue
      which could result in further impairment of long-lived assets in the
      future.




8


*Intangible
      Assets*





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
      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. In addition, SFAS No. 142 expands
      the
      disclosure requirements about intangible assets in the years subsequent to
      their
      acquisition.





*Revenue
      Recognition*





General





Except
      as
      described in "Contract Accounting" below, 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 exists, delivery has occurred, the fee is fixed or determinable,
      and
      collectibility 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.





Sales
      as
      a Distributor





Contracts
      and customer purchase orders are generally used to determine the existence
      of an
      arrangement. Shipping documents (and customer acceptance criteria, when
      applicable) are used to verify delivery. The Company assesses whether the fee
      is
      fixed or determinable based on the payment terms associated with the
      transaction, and whether the sales price is subject to refund or adjustment.
      The
      Company assesses collectibility based primarily on the credit worthiness of
      the
      customer as determined by credit checks and analysis, as well as the customer's
      payment history.





In
      the
      Company’s Telematics operations, orders are generally shipped free-on-board
      shipping point, which means that such orders are recognized as revenue when
      the
      product is delivered to the carrier (shipped). Free-on-board shipping point
      also
      means that the customer bears all costs and risks of loss or damage to the
      goods
      prior to their delivery.





Contract
      Accounting





The
      Company accounted for the government contract described in Note 7 to the
      condensed consolidated financial statements included elsewhere herein under
      AICPA Statement of Position ("SOP") 81-1 using the percentage-of-completion
      method. Product delivery and installation were separate deliverables under
      the
      terms of the contract, and the related revenue was not recognized until the
      necessary activities have been completed. Under SOP 81-1 accounting, the stage
      of completion is estimated by whichever of the following methods is considered
      most indicative of the physical completion under the circumstances of the
      specific transaction: a survey of the work performed, services completed as
      a
      percentage of total services required by the agreement, or costs incurred to
      date as a percentage of management's most recent estimate of total costs to
      be
      incurred under the related contract or other agreement. Amounts which are
      billable under the terms of a contract may not reflect earned revenue under
      this
      accounting policy. Thus, invoiced amounts that have not been earned are reported
      as a liability in the Company's consolidated balance sheet.





Services
      Revenue





Prior
      to
      June 2006, our Telematics segment had a technical team responsible for effecting
      installations and upgrades, and training clients on installation and supporting
      them on an ongoing basis. We did not earn revenue for training or
      software/firmware upgrades, but we do charge for non-warranty repairs and
      installation; however, this revenue was not material.





Other
      Matters





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 deferred
      and amortized on a systematic basis over the life of the
      arrangement.





9


*Research
      and Development Costs*





Research
      and development costs relating to computer software products to be sold or
      otherwise marketed that are incurred before technological feasibility of the
      product 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 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. Thus,
      we
      have not capitalized any software development costs.





**Recently
      Issued Accounting Pronouncements**





Except
      as
      described below, in the opinion of management neither the Financial Accounting
      Standards Board (including its Emerging Issues Task Force), the American
      Institute of Certified Public Accountants nor the SEC have issued any accounting
      pronouncements since the Company filed its February 28, 2006 Form 10-KSB that
      are believed by management to have a material impact on the Company’s present or
      future consolidated financial statements.





In
      June
      2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “ *Accounting
      for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
      109* .”
This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109, “ *Accounting
      for Income Taxes* .”
FIN
      No. 48 prescribes a more-likely-than-not recognition threshold and a measurement
      attribute for the financial statement recognition and measurement of tax
      positions taken (or expected to be taken) in an income tax return. It also
      provides guidance on de-recognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. The requirement to
      assess the need for a valuation allowance on net deferred tax assets is not
      affected by FIN No. 48. This pronouncement is effective for fiscal years
      beginning after December 31, 2006. Management is in the process of evaluating
      this guidance, and therefore has not yet determined the impact (if any) that
      FIN
      No. 48 will have on the Company’s financial position or results of operations
      upon adoption.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ,”
which
      defines fair value, establishes a framework for measuring fair value in GAAP,
      and expands disclosures about fair value measurements. SFAS No. 157 simplifies
      and codifies related guidance within GAAP, but does not require any new fair
      value measurements. The guidance in SFAS No. 157 applies to derivatives and
      other financial instruments measured at estimated fair value under SFAS No.
      133,
“ *Accounting
      for Derivative Instruments and Hedging Activities* ”
and
      related pronouncements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. Management does not expect the adoption of SFAS
      No.
      157 to have a significant effect on the Company’s financial position or results
      of operations.





**Subsequent
      Events**





*Issuance
      of Common Stock*





During
      September 2006, the Company issued 273,589 shares of its registered common
      stock
      to satisfy liabilities for services provided by suppliers and employees. Such
      shares were valued at approximately $320,000 (estimated to be the fair value
      based on the trading price on the issuance date).




During
      September 2006, the Company also issued 111,197 shares of its unregistered
      common stock in exchange for services provided by an employee. Such shares
      were
      valued at approximately $109,000 (estimated to be the fair value based on the
      trading price on the issuance date, with a 15% discount from the market price).
      The transactions described in this paragraph constituted exempt offerings under
      Section 4(2) of the Securities Act.





Subsequent
      to August 31, 2006, the Company also issued 83,325 shares of registered common
      stock (valued at approximately $108,000 based on the trading price on the
      issuance date) for the exercise of employee stock options.





*The
      10/13/06 Equity Financing Transaction*





As
      more
      fully described below, on October 13, 2006 the Company entered into certain
      equity transactions with an unrelated entity (which has represented itself
      as an
“accredited investor” as that term is defined in Regulation D of the Securities
      Act) and certain creditors. The aforementioned unrelated entity is sometimes
      hereinafter referred to as the “Investor”. In the opinion of management - based
      in part on advice of counsel, such transactions are exempt from registration
      under the Securities Act.





The
      Company has agreed to sell a maximum of 5.5 million shares of its Series A
      convertible preferred stock (with a par value of $0.0001 per share) and certain
      warrants to purchase its common stock for a maximum purchase price of $5.5
      million. Such preferred stock is hereinafter referred to as the “Preferred
      Stock,” which is convertible into shares of the Company’s common stock based on
      a formula (see the next paragraph) set forth in the Series A Convertible
      Preferred Stock Purchase Agreement Dated October 13, 2006 (the “Agreement”). The
      Preferred Stock has a liquidation preference of $1.00 per share (the
“Liquidation Preference Amount”), and a cumulative annual cash dividend of 8% of
      the Liquidation Preference Amount; such dividend is payable only in the event
      of
      the dissolution, liquidation or winding up of Astrata Group.





10


Each
      share of Preferred Stock is convertible into a number of shares of the Company’s
      common stock equal to the quotient that results from dividing $1.00 by the
      “Conversion Price.” As defined in the October 12, 2006 Certificate of
      Designation of the Relative Rights and Preferences of the Series A Convertible
      Preferred Stock of Astrata Group Incorporated (the “Certificate of
      Designation”), the Conversion Price is a maximum of $0.50 per share except for
      adjustments relating to stock splits and stock combinations. Issuances of the
      Company’s common stock for certain reasons described in the Certificate of
      Designation at a per-share price less than the then-current Conversion Price
      will generally trigger a downward adjustment of the Conversion Price, with
      a
      minimum adjusted price of $0.40 per share.





Under
      the
      terms of the Agreement, the Company issued warrants to the holders of the
      Preferred Stock and agreed to issue additional warrants under certain
      conditions. Each warrant entitles the holder to purchase Company common stock
      based on a percentage of the shares of common stock issuable upon conversion
      of
      the Preferred Stock (the “Conversion Shares”). The Series A and B warrants each
      entitle the holder to purchase 75% of the Conversion Shares at an exercise
      price
      of $1.00 and $1.50 per share, respectively; such warrants vested and became
      exercisable upon issuance. The Series J Warrant permits the holder to acquire
      100% of the Conversion Shares at an exercise price of $0.50 per share, provided
      that the warrant holder has purchased Preferred Stock in a minimum amount of
      $2
      million. If the Series J warrant is exercised, the Series C and D warrants
      become exercisable and would each permit the holder to purchase 75% of the
      Conversion Shares at an exercise price of $1.00 and $1.50 per share,
      respectively. These warrants are expected to expire as follows: the Series
      J
      Warrants expire in October 2007, and the other warrants in October 2011.





The
      Company has granted registration rights (the “Registration Rights Agreement”)
      for the common stock underlying both the aforementioned warrants and the
      Preferred Stock; such common stock is sometimes hereinafter collectively
      referred to as the “Registrable Securities.” Under the terms of the Registration
      Rights Agreement, the Company is required to file with the SEC a registration
      statement providing for the resale of all Registrable Securities on a continuous
      basis pursuant to Rule 415 of the Securities Act. The Registration Rights
      Agreement also provides that, under certain circumstances, the Company will
      incur liquidated damages in the form of a cash penalty. The penalty is 2% per
      month (or any portion thereof) of the holder’s initial investment in the
      Preferred Stock, with a maximum penalty of 10% of the base amount.





On
      October 13, 2006, under the terms of the Agreement the Investor purchased 2.5
      million shares of the Company’s Preferred Stock and received certain warrants
      for total consideration of $2.5 million; the net proceeds approximated $1.6
      million. The Company incurred a finder’s fee of $250,000 related to this
      transaction; in addition, approximately $550,000 of the gross proceeds was
      used
      to partially repay the debt described in the “Debt Financing Transaction”
section of Note 5 to the condensed consolidated financial statements included
      elsewhere herein. As part of the same transaction, certain creditors (who are
      also existing common stockholders of the Company) exchanged $1.5 million of
      Company notes payable for Series A and B warrants and 1.5 million shares of
      Preferred Stock. One such creditor was the Company’s chief executive
      officer/chief financial officer, who held a promissory note payable by the
      Company in the amount of $250,000. Absent an election to the contrary, the
      Agreement limits the beneficial ownership from conversion of the Preferred
      Stock
      and/or exercise of any related warrants to a maximum of 9.9% of the Company’s
      then outstanding shares of common stock. Based on the number of common shares
      outstanding at September 30, 2006 (including the common stock presently owned
      by
      the aforementioned creditors) and given the ownership limitation described
      above, conversion of the Preferred Stock and exercise of certain warrants
      described in this section would result in such stockholders owning approximately
      50% of the Company’s then outstanding shares of common stock.




11


*Restructuring
      of the October 2005 Debt Financing Transaction*





In
      connection with the matters described above in the “October 13, 2006 Equity
      Financing Transaction”, the Company restructured certain elements of its October
      2005 debt financing (as amended, the “debt financing transaction”) on October
      12, 2006. As noted above, $550,000 of the proceeds from the aforementioned
      equity financing transactions was paid to the creditors in the debt financing
      transaction. The other significant provisions of the aforementioned October
      2006
      restructuring (the “Restructuring”) are summarized below.





The
      Restructuring provides that all of the original agreements documenting the
      debt
      financing transaction are terminated, and thus are no longer binding on any
      of
      the parties to such transaction. As part of the Restructuring, the Company
      issued four non-interest-bearing unsecured promissory notes payable dated
      October 12, 2006 (the “2006 notes payable”) to the creditors in the total amount
      of $1,200,000; such notes are due in three quarterly installments of $400,000
      each beginning January 15, 2007. In lieu of the $1.2 million, the
      creditors/warrant holders in the debt financing transaction (hereinafter
      collectively referred to as “the investors”) granted the Company an option to
      (a) pay $950,000 prior to December 31, 2006 and (b) issue warrants to purchase
      a
      total of 500,000 shares of the Company’s common stock with an exercise price
      equal to 120% of the five-day volume-weighted average price of the Company’s
      common stock as quoted on the OTCBB. There is no penalty for prepayment of
      the
      2006 notes payable after December 30, 2006.





In
      consideration for the investors’ waiver of any and all defaults by the Company
      relating to the debt financing transaction, the Restructuring provides that
      the
      Company will issue 500,000 shares (the “default shares”) of its restricted
      common stock to the investors. As a result of the Restructuring (including
      the
      waiver referenced above), accrued registration rights penalties of approximately
      $390,000 relating to the debt financing transaction have been extinguished.





The
      investors have retained the five-year warrants to purchase 480,000 shares of
      the
      Company’s common stock issued in the original transaction; see the “Debt
      Financing Transaction” section of Note 7 to the Company’s February 28, 2006
      consolidated financial statements included in its Form 10-KSB for the year
      then
      ended (filed with the SEC on July 18, 2006) for additional information regarding
      such warrants.





The
      Company has also executed an agreement whereby the investors have been given
      “piggyback” registration rights for the common stock underlying the warrants
      described in the preceding paragraph and for the default shares; such rights
      do
      not become effective until mid-April 2007. The Company will not be liable for
      any penalties if any related registration statement is not filed or declared
      effective by any particular date.





*Letter
      of Intent Regarding Sales Contract*





Effective
      October 16, 2006, the Company entered into an exclusive letter of intent (“LOI”)
      valued at approximately $85 million with a Singapore-based entity for the supply
      of Astrata’s intelligent tracking systems and the associated command and control
      centers. This equipment is intended to satisfy a homeland security requirement;
      as a result, the identity of the ultimate end-user will remain confidential.





The
      buyer
      has requested that the initial shipments begin during the first quarter of
      calendar 2007, with the entire order being delivered within twelve to eighteen
      months. There can be no assurance at this time that a contract will in fact
      be
      executed as a result of the LOI. However, if and when such contract is executed,
      the Company expects to receive a significant down payment to fund the
      manufacturing requirements. Hardware manufacturing for this contract will be
      outsourced, and the Company is now in discussion with a number of major
      subcontractor manufacturers.





The
      Company has previously provided Singapore’s countrywide hazardous materials
      (“hazmat”) vehicle tracking system, which is expected to play a prominent role
      in their expanded homeland security program. As part of Singapore’s civil
      defense program, Astrata has fitted almost 1000 vehicles transporting hazardous
      materials in that country with its advanced intelligent tracking
      device.





12


*Settlement
      of Disputed Liability*





In
      September 2006, Astrata SA accepted an offer from a South African entity (which
      was formerly a major supplier) to settle a disputed liability with an August
      31,
      2006 balance of approximately $341,000. Under the terms of the settlement,
      except as described in the next paragraph, the vendor has agreed to accept
      the
      following in full satisfaction of such liability: (a) cash of approximately
      $42,000 (which was paid in September 2006), (b) the June 2006 sale (which was
      consummated in October 2006) of certain assets associated with Astrata SA’s
      Solaris distributorship business, including the customer list, to a third party
      (financed by the supplier and applied to Astrata SA’s liability) for
      approximately $75,000, and (c) other non-cash consideration (including the
      transfer by Astrata SA of certain MT2000 data terminal inventory, and Astrata
      SA’s acceptance of the rental fees owed to the vendor) with a total agreed-upon
      value of approximately $31,000.





If
      and
      when Astrata SA is dissolved and all of its assets are sold, the settlement
      described above is subject to upward adjustment (on a pro rata basis) to the
      extent of any cash remaining after paying all of Astrata SA’s other creditors.








**Item
      3: Controls and Procedures**





We
      carried out an evaluation of the effectiveness of the design and operation
      of
      our disclosure controls and procedures (as defined in Exchange Act Rules
      13a-15(e) and 15d-15(e)) as of August 31, 2006. This evaluation was carried
      out
      under the supervision and with the participation of our Chief Executive Officer
      and Chief Financial Officer. Based upon that evaluation, our Chief Executive
      Officer and Chief Financial Officer concluded that, as of August 31, 2006 our
      disclosure controls and procedures are effective. However, upon further review,
      certain misstatements in the fiscal 2004 statement of cash flows and our revised
      interpretation of financial reporting requirements resulted in the restatement
      of our fiscal 2004 and 2005 statements of cash flows and the weighted average
      common shares outstanding reported in the fiscal 2005 statement of operations
      as
      disclosed in Note 16 to the consolidated financial statements included in the
      Company’s February 28, 2005 Form 10-KSB/A filed with the SEC on July 14, 2006.
      There have been no significant changes in our internal controls over financial
      reporting during the quarter ended August 31, 2006 that have materially affected
      or are reasonably likely to materially affect such controls.





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.





***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 e 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.




13


**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**





The
      material changes from the risk factors disclosed in the Company’s February 28,
      2006 Form 10-KSB (based, in part, on the discontinued operations reported in
      our
      condensed consolidated statements of operations included elsewhere herein)
      are
      summarized below.





*Acquisitions
      of companies, divisions of companies, or products entail numerous risks and
      uncertainties, which in our past experience include, and which we anticipate
      will include:*





o  the
      difficulty of assimilating geographically dispersed operations and personnel
      of
      the acquired companies;





o  potential
      inability to successfully integrate acquired operations and/or products or
      to
      realize cost savings or other anticipated benefits from


integration;





o  loss
      of
      key employees of acquired operations;





o  the
      potential disruption of our ongoing business;





o  unanticipated
      expenses related to such integration;





o  unanticipated
      expenses related to discontinuance of operations;





o  the
      impairment of relationships with employees and customers of either an acquired
      company and/or our own business;





o  the
      potential unknown liabilities associated with acquired business;





o  inability
      to recover strategic investments in development stage entities;





o  amortization
      and/or impairment of large amounts of intangible assets;





o  the
      diversion of management's attention from ongoing development of our business
      and/or other business concerns; and





o  the
      use
      of substantial amounts of our available cash or financial resources to
      consummate the acquisition.





*We
      have limited marketing experience outside of South Africa and have conducted
      only limited marketing activities in the international market.*





We
      are in
      the early stages of development of our marketing, distribution and sales
      structure, organization, alliances, contracts and partnerships. Our expertise
      does not guarantee success or sales and there is a risk that we could be less
      capable in these areas of business development than in the area of product
      development. Further, we may experience delays in market acceptance of new
      products or product enhancements as we engage in marketing and education of
      our
      user base regarding the advantages and system requirements for the new products
      and services and as customers evaluate the advantages and disadvantages of
      upgrading to our new products or services.





14


*We
      are subject to significant risks associated with international operations.
      We
      have been subject to specific risks associated with doing business
      internationally and we anticipate that our future results will continue to
      be
      affected by a variety of international factors, which principally
      include:*





o  changes
      in foreign currency exchange rates;





o  changes
      in a specific country's or region's political or economic conditions,
      particularly in emerging markets;





o  trade
      protection measures and import or export licensing requirements;





o  potentially
      negative consequences from changes in tax laws;





o  difficulty
      in managing widespread sales and manufacturing operations;





o  less
      effective protection of intellectual property;





o  longer
      sales cycles in international markets;





o  tariffs,
      export controls and other trade barriers;





o  difficulties
      in collecting accounts receivable in foreign countries;





o  the
      burdens of complying with a wide variety of foreign laws; and





o  the
      need
      to develop internationalized versions of our products and foreign language
      marketing and sales materials.





*Our
      success is dependent on our ability to manage our growth and expansion
      effectively.*





Our
      ability to successfully offer products and implement our business plan in a
      rapidly evolving market requires, among other items, an effective planning
      and
      management process. Growth in sales or continued expansion in the scope of
      operations could strain our current management, financial, manufacturing and
      other resources, and may require us to implement and improve a variety of
      operating, financial and other systems, procedures, and controls.





*Our
      products are dependent on the continued availability of the Global Positioning
      System.*





GPS
      products depend upon satellites maintained by the United States Department
      of
      Defense. If a significant number of these satellites become inoperable,
      unavailable, not replaced, if the policies of the United States government
      for
      the free use of the GPS are changed, or if there is interference with GPS
      signals, our business will suffer.





The
      GPS
      is a satellite-based navigation and positioning system consisting of a
      constellation of orbiting satellites. The satellites and their ground control
      and monitoring stations are maintained and operated by the United States
      Department of Defense. The Department of Defense does not currently charge
      users
      for access to the satellite signals. These satellites and their ground support
      systems are complex electronic systems subject to electronic and mechanical
      failures and possible sabotage. The satellites were originally designed to
      have
      lives of 7.5 years and are subject to damage by the hostile space environment
      in
      which they operate. However, some of the current satellites have been operating
      for more than thirteen years.





If
      a
      significant number of satellites were to become inoperable, unavailable, or
      are
      not replaced, it would impair the current utility of our GPS products and the
      growth of current and additional market opportunities. In addition, there can
      be
      no assurance that the U.S. government will remain committed to the operation
      and
      maintenance of GPS satellites over a long period, or that the policies of the
      U.S. government that provide for the use of the GPS without charge and without
      accuracy degradation will remain unchanged.




Because
      of the increasing commercial applications of the GPS, other U.S. government
      agencies may become involved in the administration or the regulation of the
      use
      of GPS signals. European governments have expressed interest in building an
      independent satellite navigation system known as Galileo. Depending on the
      as
      yet undetermined design and operation of this system, it is possible that it
      could cause interference with GPS signals. Any of the foregoing factors could
      affect the willingness of buyers of our products to select GPS-based products
      instead of products that use competing technologies.




15


*Our
      success depends on our ability to protect the proprietary and confidential
      aspects of our technology and methodology.*





Our
      success will be dependent to a significant extent on our ability to protect
      the
      proprietary and confidential aspects of our products' technology and its method
      of utilization. We have no patents or patent applications pending for our
      products. We have used non-disclosure agreements and other contractual
      provisions and technical measures to establish and protect our proprietary
      rights in our products. It is our belief that the pace of product development
      is
      so fast that long-term patent protection would be of little benefit to us.
      Furthermore, there is no guarantee that a patent, if granted, will protect
      our
      products against infringement, or that we will have the financial resources
      to
      prosecute an infringement claim.





*We
      are subject to foreign currency exchange rate fluctuations.*





We
      have
      customers, suppliers and manufacturers that are located outside the United
      States. Some transactions relating to supply and development agreements may
      be
      conducted in currencies other than the U.S. Dollar, and fluctuations in the
      value of foreign currencies relative to the U.S. Dollar could cause us to incur
      currency exchange costs. We cannot predict the effect of exchange rate
      fluctuations on our future operating results. Should there be a sustained
      increase in average exchange rates for the local currencies in these countries,
      our suppliers and manufacturers may request a price increase at the end of
      the
      contract period.





*We
      operate in a single market segment.*





During
      the quarter ended August 31, 2006 the Company elected to exit the Geomatics
      segment which was limited by distribution agreements to distribution in
      Sub-Saharan Africa. The Company now focuses exclusively on the Telematics
      segment which affords global opportunities. As noted elsewhere this segment
      is
      dependent on access to Global Positioning System signals and cellular wireless
      providers.





The
      following risk factor has been updated as indicated below:





*The
      issuance of shares of common stock could result in a change of
      control.*





Our
      Articles of Incorporation authorize the issuance of 40,000,000 shares of common
      stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock,
      par value $0.0001. Our board of directors has the authority to issue up to
      the
      authorized capital stated in the Articles of Incorporation. In early February
      2006, we were negotiating a potential debt /equity financing transaction
      pursuant to which we would have issued a maximum of $20 million of junior
      convertible notes payable subject to a fixed conversion price per share and
      detachable warrants to purchase 28% of our fully -diluted outstanding common
      stock (as to be defined) at an exercise price of $2.00 per share. As of November
      30, 2005, management estimated that these warrants would be exercisable into
      approximately 5.7 million shares of our common stock. Management has abandoned
      this potential transaction. However, should we enter into a transaction on
      similar terms, the issuance of any such shares may result in a reduction of
      the
      proportionate ownership and voting power of all other stockholders and may
      result in a change of control of our corporation.





As
      more
      fully explained in the “10/13/06 Equity Financing Transaction” section of Note
      11 to the Company’s August 31, 2006 condensed consolidated financial statements
      included elsewhere herein, the Company (a) may issue a minimum of 20 million
      and
      a maximum of 47.5 million shares of its common stock if all of the warrants
      and
      convertible preferred stock described in such Note are issued and
      exercised/converted and (b) has agreed to amend its Articles of Incorporation
      to
      increase the number of shares of authorized common stock to a minimum of
      approximately 71 million shares. If the maximum number of shares of common
      stock
      are issued and none of the preferred stock or warrants issued after October
      2006
      are owned by the creditors referenced in the aforementioned Note, based on
      the
      number of common shares outstanding on September 30, 2006 there could be a
      change of control.




The
      following risk factor has been updated to reflect (1) the change in beneficial
      ownership of our common stock resulting from the transactions described in
      the
“10/13/06 Equity Financing Transaction” and the “Restructuring of the October
      2005 Debt Financing Transaction” sections of Note 11 to the Company’s August 31,
      2006 condensed consolidated financial statements included elsewhere herein
      and
      (2) common stock transactions since the fifth amendment of the Company’s Form
      SB-2 registration statement (now withdrawn) was filed with the SEC on February
      17, 2006.




16


*Because
        a limited number of stockholders together beneficially own approximately
        74% of
        our voting stock, the voting power of other stockholders may be
        limited.*
 Our
          directors, officers and greater than 5% stockholders own, as of October
          13, 2006
          approximately 51% of our outstanding common stock and beneficially own
          approximately 74% assuming (a) except as described below issuance of all
          currently unissued shares underlying convertible preferred stock, options
          and
          warrants held by directors, officers and more- than - 5% stockholders and
          (b)
          that the investor which purchased 2.5 million shares of preferred stock
          in
          October 2006 does not elect to opt out of the 9.9% beneficial ownership
          limitation. Accordingly, these stockholders may, if they act together,
          exercise
          significant influence over all matters requiring stockholder approval,
          including
          the election of a majority of the directors and the determination of significant
          corporate actions. The concentration could also have the effect of delaying
          or
          preventing a change in control that might be beneficial to our other
          stockholders, could delay or prevent an acquisition, and/or could cause
          the
          market price of our stock to decline. Some of these persons may have interests
          different than yours. For example, they could be more interested than our
          other
          stockholders in selling us to an acquirer or in pursuing alternative strategies.
 
 The
          following risk factor has been removed as we have discontinued our operations
          in
          South Africa:
 
 *As
          some of our sales and purchase transactions are denominated in currencies
          other
          than the South African Rand, Astrata SA is exposed to foreign currency
          risk.*
 
 Because
          of the matters described in the “Restructuring of the October 2005 Debt
          Financing Transaction” section of Note 11 to the Company’s August 31, 2006
          condensed consolidated financial statements included elsewhere herein,
          the
          following risk factor has been removed. ** As
          more
          fully explained in Note 11 to the aforementioned financial statements,
          the notes
          payable described below have been replaced with debt instruments that are
          not
          convertible.
 
 *Conversion
          of convertible notes issued to certain investors could negatively impact
          our
          share price.*
 
 On
          October 7, 2005 we agreed to issue convertible notes in the aggregate principal
          amount of $2,170,000. The number of shares issuable upon conversion of
          the
          convertible notes was based on a price of not less than $0.78 per share.
          Based
          upon an exercise price of $0.78, upon conversion holders of the convertible
          notes would have been entitled to receive 2,782,050 shares of our common
          stock.
          Conversion of the convertible notes may have a dilutive impact on our
          stockholders. As a result, our income (loss) per common share could decrease
          in
          the future periods, and the market price of our common stock could
          decline.


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





During
      the quarter ended August 31, 2006, the Company issued 273,902 shares of its
      common stock to satisfy a liability for services provided by consultants. Such
      shares were valued at approximately $437,000 (estimated to be the fair 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.





During
      the quarter ended August 31 2006, the Company also issued 198,210 shares of
      its
      common stock in exchange for services provided by consultants. Such shares
      were
      valued at approximately $165,000 (estimated to be the fair value based on the
      trading price on the issuance date, with a 15% discount from the market price).
      The transactions described in this paragraph constituted exempt offerings under
      Section 4(2) of the Securities Act.




**Item
      3: Defaults upon Senior Securities**





None





**Item
      4: Submission of Matters to a Vote of Security Holders**





None





**Item
      5: Other Information**





None




17




**Item
      6:** **Exhibits**





***Exhibit
                No.***
            ***Description***Exhibit
                31.1*
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.Exhibit
                31.2*
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.Exhibit
                32.1*
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.


________________


*  Filed
      herewith






18


**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 INCORPORATED**By:
            /S/
                MARTIN EULER
            Date:
                November 28, 2006Martin
                EulerChief
                Executive Officer,Chief
                Financial Officer,Principal
                Accounting Officer and Secretary








**EXHIBIT
      INDEX**









Exhibit
                31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.Exhibit
                31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.Exhibit
                32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.