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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the year ended December 31, 2006

-OR-



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

For the transition period from  to

Commission File Number 001-15775



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GLOBAL EPOINT, INC.

(Name of Small Business Issuer as Specified in its Charter)



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|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|NEVADA                                                        |  | 33-0423037                      
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (IRS EmployerIdentification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|339 S. CHERYL LANE, CITY OF INDUSTRY, CA |  | 91789     
|(Address of Principal Executive Offices) |  | (Zip Code)

(909) 869-1688

(Issuers Telephone Number, Including Area Code)

Securities registered pursuant to section
12 (b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $.03 per share

(Title of Class)



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Check whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  x    No ̈

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding twelve
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 ̈

Check if disclosure of delinquent filers in response to Item 405 of regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB. ̈

The registrants revenues for fiscal year ended
December 31, 2006 were $32,914,000

Check whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange
Act).    Yes ̈No  x

The aggregate market value of the registrants common stock held by nonaffiliates of the registrant as of

April 3, 2007, was $7,366,000

The number of shares outstanding of the registrants common stock as of April 3, 2007, was 19,413,812

Transitional Small Business Disclosure Format.    Yes  x    No ̈

DOCUMENTS INCORPORATED BY REFERENCE

None.



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GLOBAL EPOINT, INC.

ANNUAL REPORT ON FORM 10-KSB

FOR THE YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS



|           |  |          |  |                                                                                                                                       |  |         
|---------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|           |  |          |  |                                                                                                                                       |  | Page No.
|Part I.    |  |          |  |                                                                                                                                      
|           |  |          | 
|           |  | Item 1.  |  | Description of Business                                                                                                               |  | 1       
|           |  |          | 
|           |  | Item 1A. |  | Cautionary Statement Regarding Future Results, Forward-Looking Information and Certain Important Factors                              |  | 16      
|           |  |          | 
|           |  | Item 2.  |  | Description of Properties                                                                                                             |  | 21      
|           |  |          | 
|           |  | Item 3.  |  | Legal Proceedings                                                                                                                     |  | 22      
|           |  |          | 
|           |  | Item 4.  |  | Submission of Matters to a Vote of Stockholders                                                                                       |  | 22      
|           |  |         
|Part II.   |  |          |  | 23                                                                                                                                   
|           |  |          | 
|           |  | Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                                              |  | 23      
|           |  |          | 
|           |  | Item 6.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                 |  | 23      
|           |  |          | 
|           |  | Item 7.  |  | Consolidated Financial Statements                                                                                                     |  | 33      
|           |  |          | 
|           |  | Item 8.  |  | Change In and Disagreements with Accountants on Accounting and Financial Disclosure                                                   |  | 33      
|           |  |          | 
|           |  | Item 8A. |  | Controls and Procedures                                                                                                               |  | 33      
|           |  |          | 
|           |  | Item 8B  |  | Other Information                                                                                                                     |  | 34      
|           |  |         
|Part III.  |  |          |  | 35                                                                                                                                   
|           |  |          | 
|           |  | Item 9.  |  | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act |  | 35      
|           |  |          | 
|           |  | Item 10. |  | Executive Compensation                                                                                                                |  | 36      
|           |  |          | 
|           |  | Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                        |  | 39      
|           |  |          | 
|           |  | Item 12. |  | Certain Relationships and Related Transactions and Director Independence                                                              |  | 40      
|           |  |          | 
|           |  | Item 13. |  | Exhibits                                                                                                                              |  | 43      
|           |  |          | 
|           |  | Item 14. |  | Principal Accountant Fees and Services                                                                                                |  | 43      
|           | 
|SIGNATURES |  | 44      



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##### Table of Contents

Global ePoint, Sequent, McDigit, Tops and Best Logic are trademarks or registered trademarks of Global
ePoint, Inc. or its subsidiaries. All other brands and names listed are trademarks of their respective companies.

PART I.



|ITEM 1. | DESCRIPTION OF BUSINESS
|------- | -----------------------

GENERAL

Global ePoint, Inc., and its subsidiaries, is a provider of digital video surveillance products, IT network and computing solutions. Our business is
operated from three divisions: our digital technology division, aviation division and our contract manufacturing division. Our digital technology division designs and markets digital video, audio and data transmission and recording products,
primarily for surveillance systems in the commercial, industrial, governmental, and homeland security sectors. Our aviation division designs, manufactures, certifies, and installs electronic, surveillance, and cabin modification systems in the
commercial aviation marketplace. Our contract manufacturing division manufactures customized security applications primarily for the industrial, business and consumer markets, with the capability of specialized, custom-manufacture of other
electronic products and systems.

We intend to continue to build our digital video surveillance product offerings through our research and
development initiatives, strategic acquisitions and other development activities to provide complete turn key digital solutions for the commercial, industrial, governmental, and homeland security market sectors.

As of December 31, 2006, due to the reclassification of $7.5 million of our Series C, D and E preferred stock to short term loans payable, the
Company had a $5.4 million net working capital deficit and no cash or cash equivalents. Since then, our working capital position has worsened due to continuing losses from operations. We intend to improve our working capital position by pursuing
negotiations with the holders of our Series C, D and E preferred stock to resolve their redemption demands without the need to make the required redemption payments. However, there can be no assurance that we will be successful in resolving their
redemption demands. There can also be no assurance that we will not receive additional redemption demands from other holders of our Series C and E preferred stock. We also intend to improve our working capital position by pursuing various funding
alternatives, however at this time there are no understandings or arrangements on the part of any third party to provide us with additional funding. In this regard, our recent delisting from the Nasdaq Stock Market and the recently filed shareholder
derivative lawsuit against our board of directors is likely to impair our ability to resolve the redemption demands of our preferred shareholders and successfully acquire funding from other sources. In the meantime, we are solely dependent on our
existing current assets to meet our operating expenses, capital expenditures, and other commitments, which we believe will provide sufficient funds only for six months from the date of this report assuming we do not fund the required mandatory
redemption payments.

We believe that we require a minimum of $5 million of additional funding, in addition to funds we may need to resolve
the redemption demands our Series C and E preferred stockholders without the need to make the required redemption payments in cash. If we are not successful in resolving their redemption demands without a cash payment, we will need a minimum of
$11.4 million of additional funding over the next 12 months. In the event we are unable to acquire the required financing within the next few months, our companys financial condition will be severely impacted and we may be unable to continue
as a going concern. In that event, we may be forced to radically restructure our operations or seek protection under the bankruptcy laws. There can be no guarantee that the funds we require will be available on commercially reasonable terms, if at
all. The report of our independent registered public accounting firm for the fiscal year ended December 31, 2006 states that due to recurring losses, reclassification of all preferred stock as current liability because of mandatory redemption,
and working capital deficiency, there is substantial doubt about our ability to continue as a going concern.

We are a Nevada corporation
organized in March 1990. Our executive offices are located at 339 S. Cheryl Lane, City of Industry, CA 91789, telephone (909) 869-1688.

DIGITAL
TECHNOLOGY

The digital technology division focuses on the development of digital products and technologies for law enforcement,
commercial and industrial markets to provide digital security products for both fixed and mobile surveillance applications.

In our
continuing effort to expand our digital technology division product line, in April 2006, we entered into an Agreement and Plan of Reorganization with Tops Digital Security, Inc. (Tops) a privately held total solutions provider of large
enterprise video surveillance systems that are designed primarily for high quality video capture and central monitoring security operations in the high-end commercial, industrial, and government electronic security markets.



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The acquisition of Tops is an example of our plan to develop a complete line of secured network digital
video technology and products for growing vertical markets in the electronic security industry. Tops is a total solutions provider of large enterprise video surveillance systems that are designed primarily for high quality video capture and central
monitoring security operations in the high-end commercial, industrial, and government electronic security markets. The Tops system is a total integrated solution that provides D1 CIF quality video recording capability, the highest level available,
along with the front-end surveillance cameras, fiber optic cabling, and the command center application to network and control the hundreds of cameras. The Tops solution has proprietary video surveillance technology that efficiently integrates
the ability to capture D1 CIF quality video while maintaining a secure and fast system for recording, monitoring, managing, and archiving video surveillance. We believe the Tops platform will provide us with a high level enterprise surveillance
solution and expand our fixed video surveillance product line to enable us to develop new opportunities in the casino gaming, museum, and government security markets.

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

We are also developing additional stationary applications for our digital surveillance technology within the retail, commercial/industrial sectors, and in other markets. We believe that demand in many of these markets
will be driven by government mandates to install surveillance systems for anti-terrorism or law enforcement measures and potential cost savings available to business owners arising out of theft or loss reduction, lower insurance premiums, and other
savings. We believe that new markets will be available for our digital surveillance products in support of homeland security initiatives. Such new markets may include oil refineries, chemical plants, nuclear power plants, electric power transmission
lines, oil, gas, chemical and water pipelines, and other critical facilities. We are also developing products for retail establishments, manufacturing facilities, commercial locations, and small businesses. We believe the commercial and industrial
sector to be a multi-billion dollar annual market that may provide us with an excellent growth opportunity.

The digital technology
division is in its early stages of growth, and continues to concentrate on developing and acquiring new products and technologies with an emphasis on security applications to target these high growth, high margin markets. The developmental nature of
this division requires that we make investments in new products, staffing our sales team and other parts of the organization, establishing our sales channels, building relationships with customers and potential customers, marketing our products, and
other investments. As such, our financial results continued to show losses and may continue to do so in future quarters.

Operating Data

The following financial data relates to the digital technology division results of operations and assets as of and for the years ended
December 31, 2006 and 2005:



|                                 |  |                         |        |   |      |   |        |  
|-------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                 |  | Year ended December 31, |       
|($ in thousands)                 |  | 2006                    |        |   | 2005 |  
|Net Sales                        |  | $                       | 2,031  |   |      | $ | 1,286  |  
|                                 |  |                        
|Cost of sales                    |  |                         | 1,251  |   |      |   | 902    |  
|                                 |  |                         |        |   |      |   |        |  
|Gross profit                     |  |                         | 780    |   |      |   | 384    |  
|                                 |  |                        
|Operating Expenses               |  |                         | 4,727  |   |      |   | 3,612  |  
|                                 |  |                         |        |   |      |   |        |  
|Loss from operations             |  |                         | (3,947 | ) |      |   | (3,228 | )
|                                 |  |                        
|Other income (expense)           |  |                         | (70    | ) |      |   | (23    | )
|                                 |  |                         |        |   |      |   |        |  
|Loss before income tax provision |  | $                       | (4,017 | ) |      | $ | (3,251 | )
|                                 |  |                         |        |   |      |   |        |  
|Total assets                     |  | $                       | 6,962  |   |      | $ | 4,795  |  
|                                 |  |                         |        |   |      |   |        |  



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Digital Video Surveillance Market

The digital video surveillance market consists primarily of digital video security utilized by government agencies and public and private organizations for use in airports, public buildings, correctional facilities,
law enforcement vehicles, retail establishments, schools, financial institutions, corporate buildings, casino gaming, restaurants, healthcare, and hospitality sites. We believe government agencies, private organizations, corporations and individuals
are increasingly recognizing the need for digital video surveillance of their facilities and operations to ensure the proper level of security and liability control. We also believe law enforcement agencies especially have become increasingly aware
of the need for digital video surveillance in daily law enforcement activities as an affective litigation weapon. In the wake of the 9/11 attacks and the ongoing conflicts in Iraq and other areas of the world there is still a heightened public
awareness to the security needs of public facilities, including airports and government buildings, as well as other organizations and institutions.

Traditionally, video security consisted of connecting surveillance cameras to analog monitors and VCR recording equipment that archived video images on tape. Today, digital video technology offers many advantages over analog equipment while
allowing for the continued use of the existing infrastructure of installed cameras. These advantages include more efficient storage of video for faster search and retrieval, either locally or remotely through IP networks, and the capability to
interface with other digital systems, such as access control.

The commercial and industrial marketplace provides a substantial opportunity
for electronic security systems and services. The need for digital video surveillance has been influenced by the demand to reduce revenue loss due to theft or insurance claims. Security solutions can play a significant role in affecting the bottom
line of any commercial business, from the small mom/pop store owner to the large national commercial operations. Adoption of the latest surveillance tools assists in strengthening loss prevention through combating crimes such as robbery, employee
theft, shoplifting, and vendor fraud as well as assisting in detection of administrative and operational errors. These systems allow the user to become pro-active in their fight against crime, fraud and errors, thus strengthening their loss
prevention program.

We believe the transportation industry has seen a major increase in security concerns in the wake of the 9/11 attacks
and more recent attacks on mass transit systems around the world. The transportation industry has been deploying the latest in video surveillance technologies as a means to expand their perimeters and detection systems. Mass transit systems and
airports have been primary targets for terrorists, but transit officials also face other types of crimes that occur on their systems, which provide a need for video surveillance to properly patrol all facets of their system. Some of the important
security tools for the transportation industry include enterprise surveillance systems that network both fixed and mobile video surveillance in unison. These surveillance networks provide the latest technologies that can identify and track potential
threats through the streets, buses, and trains through the transit system.

Digital Technology Strategy

Our goal is to become a major provider of secured network digital video technology in commercial and industrial, law enforcement, homeland security, and
transportation applications. We have implemented several initiatives designed to achieve that goal.

Tops and Perpetual Digital

Tops provides state of the art large scale enterprise solutions which can host an unlimited number of encoders and decoders providing
the ultimate in scalability to meet the needs for any industrial, commercial or government customer. Tops provides custom solutions to meet the customers needs. Tops enterprise solutions are marketed and sold direct to the end user incorporating
strategic alliances with manufacturer representatives, installers and integrators. The Perpetual Digital line of digital video surveillance security products also targets the commercial and industrial market sectors. These products were marketed to
security dealers, installers, and integrators and sold through the wholesale security distribution channel. Penetrating the wholesale distribution channel has proven to be difficult as there are many established competitors. With the



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acquisition of Tops we intend to leverage the direct marketing and sales strategy to market our digital video surveillance systems and solutions direct to
the end user incorporating strategic alliances with manufacturer representatives, installers and integrators.

We will concentrate our
marketing efforts with advertising, trade show, and other direct marketing efforts in our core growth markets, such as law enforcement, retail, transportation, and homeland security. Our product provides us with strategic market video surveillance
solutions that feature an end-to-end, cohesive systemfrom the camera, to the network, to the DVR and video storage solutions. We will focus on delivering that message to our vertical markets to develop sales opportunities.

Sequent Mobile

In 2006 and 2005, the
Sequent mobile video surveillance solution continued its market development with several key law enforcement opportunities that provided key customer feedback and analysis for the overall solution. We garnered several opportunities with deployments
to the US Air Force, several law enforcement and fire agencies. We continued to develop our technology, expanding our mobile digital video recorder platform to 4 camera inputs and upgrading our backend in video management solution. We initiated a
new marketing strategy that re-branded our mobile solution as Sequent Mobile and launched a new web site aimed at developing our direct marketing efforts. We are developing a network of strategic partnerships and direct marketing efforts to provide
further development of market awareness of our solutions. As an example, in 2006, our Sequent Mobile product is one of the few mobile solutions certified for Motorolas Motomesh network. The combination of our Sequent Mobile product and the
Motomesh network will allow for streaming real time video between vehicles which we believe will provide significant marketing opportunities, especially in the law enforcement sector. We will focus our strategic marketing efforts on the law
enforcement, transportation, and homeland security markets as we begin to expand our communications through vertical market trade shows, magazines, and direct mail.

Commercial Products

The digital technology division develops and markets fixed and mobile digital video surveillance
products and solutions under three brand names, Tops, Perpetual Digital and Sequent Mobile. Tops provides state of the art large scale enterprise solutions which can host an unlimited number of encoders and decoders providing the ultimate in
scalability to meet the needs for any industrial, commercial or government customer. Perpetual Digital products feature a full range of security systems, which feature a complete line of PC Based and Embedded Digital Video Recorder systems;
including Market-specific solutions such as the Point-of-Sale (POS) DVR and ATM DVR for the Retail and Banking industries. Whether you are providing a security system for a small convenience store or a Fortune 500 corporation, we have a DVR system
to meet any projects technical requirements on a cost effective basis. The Sequent Mobile line provides state-of-the-art high security video, audio, and data transmission systems, as well as, indexing and archiving systems. These systems can
transmit video, audio and data files using many of the existing wireless networks. Our video recorder/transmitters are capable of recording thousands of hours of video on a single unit using solar, battery, AC, DC, or aircraft power. They can be
readily installed anywhere as a standalone system or interfaced with existing video surveillance systems, which makes surveillance in remote locations or at one-time special events possible.

We believe our ability to network video surveillance systems and provide secure access to that network and its archived files via existing internet,
cellular and computer interface significantly advances the potential use of video for several different applications, including law enforcement, homeland security, inventory, defense, commercial, airport and airline security, public safety, and
access security. Our wireless products are designed to be able to be readily installed as a standalone system or integrated into new or existing video surveillance systems. The following are the base products that are currently being offered:

Enterprise Solution

Tops Enterprise Video Surveillance System is a true enterprise level Digital Video Management System that delivers DVD quality video and the flexibility of an analog matrix system. Utilizing the latest compression
technology of H.264 and designed with the customers needs in mind, the Enterprise Video Surveillance System is fully scalable, redundant and interoperable with most existing analog systems. Designed for ultimate scalability, the Enterprise
Video Surveillance System can host an unlimited number of encoders and decoders.



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Key Advantages



| |  |  | Scalability- the Video encoder allows the user to scale the system size from 1 channel to an unlimited amount of channels.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Redundancy- the system is capable of automatically detecting video, network, or power problems and immediately re-route the video signal so that not a second of
video recording is missed. Disk arrays are configured RAID 5 or RAID 6.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interoperability- designed to be integrated with most existing analog systems, the user can seamlessly integrate the system partially or in its entirety.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Simple Graphic User Interface- designed with the end user in mind, the touch screen, digital matrix controller makes the system extremely easy to use and simple to
learn. Camera and monitor call up, preset zone setup and drag and drop map eliminate the need to remember complex keyboard and camera codes.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Intelligent Central Monitoring System (ICMS)- TOPS equipment is a new generation of DVR utilizing the latest state-of-the-art technology that ensure reliable high
quality systems. Designed to meet the needs of all security and surveillance directors and managers, our ICMS system will allow the user to set up one surveillance room from which to view and monitor multiple locations. The system allows for
unlimited cameras onto the working monitor, allowing the user to watch multiple cameras from multiple locations. All cameras operating in the system can be monitored. In addition, the user may also set up a map of the cameras in each location. With
this map the user can simply click on the camera to view on the monitor. The user can also drag and drop one DVR from a location, and all 16 channels will open on the monitor.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Tops DVRs present robust functionality and ease of integration. Tops DVRs recording features enables easy to customize search, archive and
monitoring utilizing continuous, motions, and sensor detection settings. Included with Tops DVRs, is the single site connection software. The software allows remote site viewing of live and recorded video, archive video to local and remote DVR,
schedulable recording and event recording. With optional Central Monitoring Software, multiple DVRs can be managed through the intra or inter network.

Digital Video Recorders (DVR)

PerpetualPro DVR seriesa PC Based DVR
series that has advanced features such as remote access and control via Internet or network, interlace filter, pentaplex functionality, motion detection, and now features POS interface as a standard specification for all models. We market this line
as our retail video surveillance system that distinguishes itself with advanced search capabilities, a solid state drive for storing the O/S, and a VGA board. The advanced search capability allows retailers to search their video surveillance by POS
transactions, using over 30 search criteria, including, types of items purchased, credit card number, date, time and check number. These DVR systems feature independently configurable frame rate settings per camera, and the flexibility to configure
and customize to your surveillance requirements. The PerpetualPro series has 4 to 32 channel systems offered in three categories based on video recording qualityPerpetualPro-1, PerpetualPro-2, and PerpetualPro-3.

PerpetualMax DVR seriesa mid to high level DVR series that also has advanced features such as remote access via network, mouse PTZ
control, multiplex functionality, watermarking, both hardware and software video encoding and surveillance network command center capabilities. The PerpetualMax DVRs provide another level of stability and efficiency with the hardware encoding, which
enables expanded storage capabilities. For applications that require the flexibility of a network DVR without POS, we offer the PerpetualMax DVR, which has 9 to 16 channel systems in four categories based on embedded or PC based and hardware or
software encoding.

PerpetualEB DVR seriesan embedded DVR series that provides plug nplay capabilities that allow
for a quick setup and functionality. This DVR line is considered our analog VHS replacement model that provides customers with not only a cost effective upgrade from analog but also a high quality solution with remote internet access capability and
a robust application feature set.

Surveillance Camerasas an extension of our Perpetual Digital product line, we offer
a complete line of digital video surveillance cameras. The camera product line consists of high and standard resolution CCTV cameras in several different form factors, including: box cameras, dome cameras, and vandal dome cameras. We have added wide
dynamic cameras, scan dome and PTZ cameras.

LCD Monitorswe offer a cost effective 17 VGA and composite monitors
that compliment our DVR and cameras lines while providing an accessory to complete our network solutions packages.



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Network Solutionswe provide accessory products that complete our network surveillance
solutions, which include distribution amps and external video storage systems.

The following are the base products that are currently
being offered by the Sequent Mobile product line:

Sequent MDVRa wide-area digital wireless video transmitter
thats also a digital video recorder as well as a powerful multi-purpose computing system with 1 to 4 channel camera inputs. We believe it is the smallest, lightest, and most robust system of its kind in the world. The product delivers digital
television quality video, audio and data files using a number of existing satellite, wireless, or wired networks.

Sequent VAMS
(Video Archiving Management System)video and data management system that provides a enterprise network for storing and referencing archived video surveillance. Users can instantly search and retrieve event files from thousands of hours
of stored video. Unlike linear tape systems, there are no cassettes to handle or store. When a file is retrieved, the Sequent VAMS can instantly detect any alteration or deletion with its authentication system. Sequent VAMS also provides secure
automated wireless upload of video files from vehicle mounted or remote MDVR onto the storage media with automatic entry to the control database and with no user or administrative intervention. The technology allows recorded video and audio data to
be uploaded in minutes.

Sequent Cameraszoom and mini surveillance cameras for in-vehicle mobile applications. High
resolution surveillance cameras that also have high digital zoom capabilities.

Sequent Installation Kitsthese kits
include the essential components for installing the Sequent Mobile solution into a vehicle. The kits include mounting materials for cameras and DVR as well as wireless network and microphone accessories.

Marketing and Sales

We intend to sell our products
with a focus on solution sales targeted to key markets such as law enforcement, government, commercial and industrial sectors such as, but not limited to, casinos, museums, financial institutions, retailers, and government agencies. With the
acquisition of Tops we intend to leverage the direct marketing and sales strategy of our digital video surveillance systems and solutions to the end user incorporating strategic alliances with manufacturer representatives, installers and
integrators.

We will concentrate our marketing efforts with advertising, trade show, and other direct marketing efforts in our core growth
markets, such as law enforcement, retail, transportation, and homeland security. Our product provides us with strategic market video surveillance solutions that feature an end-to-end, cohesive systemfrom the camera, to the network, to the DVR
and video storage solutions. We will focus on delivering that message to our vertical markets to develop sales opportunities.

Competition

The digital technology division faces strong competition in the markets for its products. We expect competition to persist and
intensify in the digital video surveillance market, primarily due to increased demand for homeland defense and digital security solutions. Our primary competitors are suppliers of security and recording systems and software, and indirect competitors
that supply certain components to systems integrators. The digital technology division operates primarily in two areas (1) the existing technology that is widely used in commercial and industrial security, law enforcement, military, public
safety and homeland defense which is based around VHS video cameras and recorders (Legacy Systems) and (2) various advanced technology systems that utilize combinations of the latest digital recording and data management
technologies available today (Advanced Systems).

In the digital video surveillance market the competitive landscape for the
Tops and Perpetual Digital product lines is very strong, the marketplace is highly fragmented with over one hundred (100) manufacturers including companies such as GE Security, Pelco, Panasonic, GVI, Samsung, Honeywell, and Dedicated Micros. We
strongly believe that we are competitively positioned to penetrate this market for the following reasons: (1) we offer both PC-based and embedded DVR systems with compatible surveillance cameras, (2) our PC-based systems provide pentaplex
functionality and deliver a feature rich software application that delivers advanced search capabilities, alarm settings, and remote access, (3) more cost effective for the market based on our manufacturing capabilities and product pricing
strategy. Our enterprise solution is state of the art offering the latest in video compression technology for ease of retrieval and storage.

Manufacturers of Legacy Systems competing with our Sequent product are numerous, as this market has fully matured. However, we expect to compete primarily against other Advanced Systems manufacturers for entire system upgrades.



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Manufacturers and suppliers of advanced systems include Loronix, Mobile Vision, Applied Concepts, Secure Eye, Kustom Signals and Coban. We believe our system
is competitively positioned to any other advanced systems for the following reasons: (1) wireless data transfer is not available from most other manufacturers, (2) longer storage times, (3) most other systems only provide audio and
video while our systems provide various integrated data in the same screen display output, (4) our systems utilize compressed data structures which greatly enhances wireless transfer, data storage, and required less hardware capacity and
(5) lower total cost of ownership (6)our system is Motorola Motomesh certified.

We believe that our success depends primarily on our
ability to provide technologically advanced and cost effective solutions. Our competitors that manufacture other security-related systems or other recording systems may derive a competitive advantage in selling to customers that are purchasing or
have previously purchased other compatible equipment from such manufacturers. We expect that competition will increase as other established and emerging companies enter the market, and as new products, services and technologies are introduced.

Manufacturing and Supply

The contract
manufacturing division will provide our Sequent MDVR and PerpetualPro DVR products. See Manufacturing and Supply under Contract Manufacturing Division herein. Our Tops products are custom manufactured by Tops to meet the
customer needs. The manufacturing of our other DVR lines, cameras, and other accessory products is outsourced to overseas manufacturers.

Research and
Development

We intend to continue to enhance the features and performance of our existing products and introduce new solutions by
extensive research and development activities in our primary corporate facilities. However, we also intend to develop potential enhancements and new solutions through outsourcing in Asia. We believe that our future success depends on a number of
factors which include our ability to:



| |  |  | identify and respond to emerging technological trends in our target markets;
| | - |  | ----------------------------------------------------------------------------



| |  |  | develop and maintain competitive solutions that meet our customers changing needs;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | enhance our existing products by adding features and functionality to meet specific customers needs, and to differentiate our products from those of our
competitors; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduce our time to market.
| | - |  | --------------------------

Our
development strategy involves rolling out initial releases of our products and adding features over time. We have incorporated and intend to continue to incorporate product feedback we receive from beta tests and customers into our product
development process. While we expect that new products will continue to be developed internally, we may, based on timing and cost considerations, acquire or license technologies, products or applications from third parties. We incurred general
research and development costs in 2006 of approximately $1.6 million and in 2005 of approximately $1.3 million.

AVIATION

Our aviation division, known as Global Airworks, is an aviation service company specializing in commercial aircraft surveillance systems and interior
modification, serving both domestic and international carriers as well as original equipment manufacturers. Our products and services relate primarily to airline surveillance and security systems, new or upgraded passenger communication systems, in
flight entertainment systems, and comfort and convenience systems. Our aviation division has been approved by the U.S. Federal Aviation Administration (FAA) as a Certified Repair Station and Certified Parts Manufacturer. Global Airworks is also
certified by Civil Aviation Administration of China (CAAC) as an approved maintenance organization and the Joint Aviation Administration (JAA), the aviation regulatory authority of the European Union,(now known as EASA, European Aviation Safety
Administration) as an approved repair station. The complete list of products and services offered by our aviation division include:



| |  |  | Cockpit Door Surveillance System (CDSS)
| | - |  | ---------------------------------------



| |  |  | Electronic Flight Bag (EFB)
| | - |  | ---------------------------



| |  |  | Wire and Cable Harness Assemblies
| | - |  | ---------------------------------



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| |  |  | In-Seat Lap Top Power Systems
| | - |  | -----------------------------



| |  |  | Seat Actuation System
| | - |  | ---------------------



| |  |  | In-flight Entertainment Systems (IFE), Video and Audio
| | - |  | ------------------------------------------------------



| |  |  | Portable Passenger Entertainment Appliance
| | - |  | ------------------------------------------



| |  |  | Smoke Detection and Fire Suppression System
| | - |  | -------------------------------------------



| |  |  | Passenger Seat Repair, Modification, Upgrade and Overhaul
| | - |  | ---------------------------------------------------------



| |  |  | Terrestrial and Satellite Passenger Phone System Installation
| | - |  | -------------------------------------------------------------



| |  |  | Avionics Upgrades of Cockpits and Systems
| | - |  | -----------------------------------------



| |  |  | Avionics Repairs, Modification, Upgrade and Overhaul
| | - |  | ----------------------------------------------------



| |  |  | Data Transfer, i.e. SELCAL, ACARS, Satellite-Installation
| | - |  | ---------------------------------------------------------



| |  |  | VIP Entertainment Packages
| | - |  | --------------------------



| |  |  | Noise Reduction Modification Kits
| | - |  | ---------------------------------



| |  |  | Overhead Bin Systems
| | - |  | --------------------



| |  |  | Interior Retrofits: Repair/Modification/Upgrade/Overhaul of Aircraft Interior Components
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | New/Refurbishment of Galleys, Sidewall Panels, Ceilings, Class Dividers, Lavatory Upgrade Kits
| | - |  | ----------------------------------------------------------------------------------------------

As an FAA Certified Repair Station, we can perform aircraft modifications at remote locations around in the world. This is very important because
aircraft modifications for the purpose of completing market driven interior changes are time critical from a market entry viewpoint, yet not always available at the home base for modification. We developed a system of modifying an aircraft during a
normal overnight layover at the home base or airport. Consequently, modifications can be achieved without taking the aircraft out of service. Because these modifications are primarily cabin or cockpit related, the need for expensive hangars, fuel
burn and ferry costs are not required. Self-contained installation teams complete the modifications at the aircraft, wherever it is located, often at the gate or on the ramp, at domestic or international airports or hangars.

Our aircraft modification expertise is segmented into four strategic areas: engineering, certification, manufacturing, and installation. We believe we
are the only aircraft modification company providing a complete turn key solution from product engineering through installation. We have developed project plans which we believe allows us to quickly navigate through the regulatory certification
process and part manufacturing approval requirements permitting us to deliver products to our customers more quickly and efficiently.

Our
Cockpit Door Surveillance System (CDSS) is an example of our responsiveness to market opportunities. In the wake of 9/11, the airline industry and regulatory agencies around the world identified the need to secure the cockpit and flight deck area by
installing intrusion proof cockpit doors. The regulatory agencies also recommended both pilot and co-pilot have the ability to determine and grant access to the cockpit and have the ability to observe suspicious behavior in the immediate area
outside the cockpit. In December 2001, Airworks introduced its first CDSS system to meet this recommendation. Since then, cockpit surveillance systems have been mandated in several European countries. Our system has been successfully installed and
currently operates in more than 800 commercial aircraft in Europe and Asia. There are still a number of countries in Europe and Asia which have not mandated the system for their air carriers.

We believe that both the Federal Aviation Administration (FAA) and EASA will release mandates requiring CDSS systems for all commercial passenger
aircraft. The FAA has issued a Notice of Proposed Rule Making which, if enacted, would mandate CDSS systems for all commercial passenger aircraft operating in the US. The comment period on this NPRM closed on November 21, 2005, and we believe a
final rule could be adopted in the near term. The FAA estimates that the



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market for CDSS systems is $185 million in the United States and we believe the worldwide market to be larger than the United States. The FAA identified
Global ePoint as one of only five vendors with products currently certified by the FAA. We believe that our product has several key advantages over competing systems, including having its display screen in front of the pilot and a rapid installation
schedule that generally avoids revenue loss for the airline. We believe that we are well positioned to capture a significant share of the world wide market.

Operating Data

The following financial data relates to the aviation division results of operations and assets as of and for
the most recent years ended December 31, 2006 and 2005:



|                                 |  |                         |        |   |      |   |        |  
|-------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                 |  | Year ended December 31, |       
|($ in thousands)                 |  | 2006                    |        |   | 2005 |  
|Net Sales                        |  | $                       | 4,975  |   |      | $ | 3,388  |  
|Cost of sales                    |  |                         | 4,431  |   |      |   | 2,703  |  
|                                 |  |                         |        |   |      |   |        |  
|Gross profit                     |  |                         | 544    |   |      |   | 685    |  
|Operating Expenses               |  |                         | 3,084  |   |      |   | 2,369  |  
|                                 |  |                         |        |   |      |   |        |  
|Loss from operations             |  |                         | (2,540 | ) |      |   | (1,684 | )
|Other income (expense)           |  |                         |       |   |      |   |       |  
|                                 |  |                         |        |   |      |   |        |  
|Loss before income tax provision |  | $                       | (2,540 | ) |      | $ | (1,684 | )
|                                 |  |                         |        |   |      |   |        |  
|Total assets                     |  | $                       | 8,631  |   |      | $ | 8,874  |  
|                                 |  |                         |        |   |      |   |        |  

Commercial Products and Services

Our aviation division designs, manufactures, certifies and installs a variety of commercial aircraft electrical, electronic and passenger cabin
modifications for the commercial aviation sector. The following are the base products currently being offered:

Cockpit Door
Surveillance System (CDSS)Our standard system is comprised of two touch sensitive 5, 6.4, 8.4 or 10 inch liquid crystal display (LCD) monitors mounted in front of the pilots or a single overhead mounted monitor. A system control unit
provides camera and video inputs for up to 16 cameras for installation in the cabin and cargo hold area. A unique feature to the system allows the flight attendant to electronically communicate with the cockpit from the passenger cabin area sending
signals as to cabin readiness for take off or landing or alerts for suspicious behavior or incidents of air rage. The controller displays alphanumeric messages to the screens of both pilots such as Cabin Ready, Cabin Secure,
or Alert. Either pilot may acknowledge the message by depressing the message on the touch sensitive monitor. Our firmware allows us to customize the messages and uses for each customer providing a distinct competitive advantage. The
system is designed with the capability to expand to provide audio transmission to the cockpit, video input to a digital video recorder and Electronic Flight Bag.

Electronic Flight BagElectronic Flight Bag creates a paperless cockpit. It is a means by which standard paper manuals, flight information, navigational charts, approach charts, departure
procedures, airport charts, arrival procedures, airspace charts, flight manuals, emergency manuals, checklist for departure and arrival, weight and balance performance charts are digitally recorded and archived within a hard drive server platform.
The system computes performance and route navigation, reduces take off preparation time, and decreases taxi time to the gate all of which reduce fuel consumption which is one of the highest expenses for the airline industry. Manuals and policies and
procedures are constantly revised and updated. There are three types of electronic flight bag; Class I is a portable computer system used for aircraft operations. Class II is a portable computer system which can be attached to a mounting device and
connected to the aircraft during normal operations. Class III is fully installed in the aircraft with user modifiable software and may host a variety of applications. The level of Class determines the level of applications and data that may be
utilized.

In Flight EntertainmentOur In Flight Entertainment programs consist of a Liquid Crystal Display (LCD)
monitor swap program as well as replacement hardware for the entire entertainment system. The LCD swap program replaces old CRT projection units with 17, 32 or 42 inch LCD monitors. Most wide body aircraft incorporate older CRT and projector style
video displays of in flight entertainment. Replacing the old CRTs with LCD monitors provides a significant reduction in weight and power consumption resulting in significant savings to the airlines.



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We have also have a media server with 120GB of hard drive for the operator who wishes to remove the
entire obsolete entertainment system. The media server provides for up to 58 long play movies, over 1,500 hours of audio content in fourteen different languages. Cost savings are achieved not only due to weight and power consumption but also the
labor to service, maintain, and revise content is decreased as the system requires only six minutes changing the content.

Cabling
and Wire HarnessWe provide lap top power applications to the passenger seats for commercial airlines. Our cable and harnesses are also used by in flight entertainment providers as well as various electronic systems provided by original
equipment manufacturers.

Installation ServicesWe have completed over 8,000 aircraft modifications in the design,
manufacturing, and certification of electrical applications. Our installation services provide a more efficient install by having our installation team travel to the aircraft instead of the aircraft coming to us. A primary value added feature to the
airline is the ability to return commercial aircraft into service in a more efficient manner as ground time for commercial aircraft reduces the airlines ability to generate revenues. Completing installations overnight at their in service
location, reduces the out of service time for the aircraft increasing the revenue for the airline. Not only do we install our own products but we also install original equipment manufacturers service bulletin modifications and product improvements
and upgrades. We are positioned to capitalize on the airlines continued movement to outsource their modification requirements.

The Market

Our primary customers consist of the domestic and international air carriers as well as original equipment manufacturers. The world
airline fleet comprises approximately 29,000 aircraft. Of the total world fleet, there are approximately 13,000 commercial jets, of which 6,000 operate with United States carriers, and 16,000 commercial turboprops. Additionally, our electronic
flight bag can be marketed in the private plane marketplace which comprises hundreds of thousands planes worldwide.

Aviation Division Strategy

Our strategy is to develop bundled products and services which meet the needs of commercial airlines due to mandated security and
maintenance regulations as well as products that improve aircraft operational efficiency.

We continue to develop value added applications
to our CDSS system such as digital video recording and cargo handling surveillance. The addition of digital video recording allows real-time viewing as well as remote viewing and recording of any surveillance events. Under development is a new
application for the DVR that will add automatic camera coverage and video documentation to the loading and unloading of aircraft cargo by outside contract handlers and suppliers. Historically, the loading and unloading of aircraft has resulted in
damage to aircraft. The damage is typically difficult to document resulting in disputes between the airlines and contract handlers and suppliers. The new DVR upgrade will automatically activate both cameras and digital video recorders when cargo
doors open. The data is archived aboard the aircraft and provides immediate reference to how damage occurred and who is responsible.

We
have completed our prototype for a Class III Electronic Flight Bag (EFB) system and are in the process of FAA approval. An Asian airline and a Middle East airline have agreed to beta test our new EFB product for possible deployment in their fleet.
We believe that the EFB will become the future data, management, maintenance, entertainment, flight safety and flight operation communication vehicle for all commercial airlines in the world. We believe we are the only aviation company with a fully
functional prototype Class III system.

We launched our new In-flight Entertainment signature series monitors which comes in 15.4,
30 and 42 flat screen LCD monitors that replaces the old CRT tubes.

We intend to expand our customer base by modifying our
CDSS system to expand into other commercial means of transportation such as shipping, bus, and railroad. Though we can not provide assurance as to the likelihood of success, we believe we are well positioned to move forward based on our experience
in the commercial aviation sector.

Marketing and Sales

We continue to expand our sales and marketing efforts where we see opportunity. We have five marketing representatives to increase worldwide recognition of our products and services. The marketing representatives are
located in Europe, Asia, and Latin America. Additionally, we have a marketing representative dedicated to the cable assemblies, wire



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harnesses, and avionic tray assemblies required by the original equipment manufacturers. We believe cable assemblies and wire harnesses can provide a solid
recurring revenue stream for our division. As an example, we have the initial orders from a major US airlines for the delivery of wire and cable harnesses for its fleet of Boeing 757 and 767 aircraft. The orders are the initial awards from an
anticipated multi-million two year retrofit program. Although our primary business has been the retrofit of in service aircraft, we are planning to develop our product offerings with Boeing and Airbus as options for newly delivered aircraft.

Competition

We operate within a niche
market in the aviation industry which is normally conducted by large original equipment manufacturers. We believe the significant regulatory and compliance requirements and downturn in the aviation industry after 9/11 has significantly reduced the
competitors in the airline modification sector. Our primary competitors include B.F. Goodrich and AD Aerospace. We believe our competitive advantages include the following: 1) our ability to provide a complete turn key solution offers a more
effective means of management and performance for airlines modification projects; 2) we are an FAA Parts Manufacturing Approved Facility which allow us to manufacture or fabricate installation kits (covered by the FAA Supplemental Type Certificate
for the specific modification) and deliver products and services to our customers more quickly and efficiently; 3) the flexibility and expandability of our product lines and investment in certifications specifically for CDSS and EFB provide a
distinct advantage over our competition allowing for quicker response to take advantage of market opportunities; and 4) we maintain lower overhead than the traditional original equipment manufacturer allowing us to be the low cost provider of our
products and services.

Manufacturing and Supply

We utilize both internal and external manufacturing capability. By way of the Supplemental Type Certificate and our FAA Part Manufacturing Facility we are authorized under the authority of the FAA to perform 100% of
our own manufacturing. However in consideration of scale, we concentrate on manufacturing services with high volume consideration and subcontract work where costs, delivery time and economy of scale is prudent. Under consideration of FAA rules, we
must certify each and every supplier and perform an annual audit of their facilities to maintain regulatory compliance even in cases where work is subcontracted.

We utilize multiple suppliers with the raw material base and commit all manufacturing services to a bid cycle among qualified candidates. We include a complete detailed statement of work for each job subcontracted
along with quality control supplier audits to ensure compliance with applicable rules and regulations. Additionally, in accordance with FAA guidelines, we must inspect each and every item that is manufactured under our STCs to ensure complete
compliance with our PMA authority.

CONTRACT MANUFACTURING

Our contract manufacturing division manufactures customized computing and digital recording systems for the industrial, business and consumer markets, with the capability of specialized, custom-manufacture of other
electronic products and systems. The substantial majority of the divisions business has been operating since the beginning of 2001 under the name of Best Logic. Best Logic is an ISO 9001:2000 certified company.

In addition to the quality of the products produced by our contract manufacturing division, we believe our major competitive advantages over other
contract manufacturers include our ability to globally source components to obtain favorable pricing based on our direct and indirect relationships with key suppliers, and our just-in-time manufacturing and scaleable production capabilities.

During 2006, the ability to globally source in an effective manner and obtain competitively-favorable pricing was secured in several
instances through transactions with companies that are owned or controlled by the Companys Chairman, Chief Financial Officer and majority stockholder, John Pan (Related Parties). Global sourcing is critical when pricing
discrepancies on components or subsystems occur between international markets, or when products are no longer available in North America, but are still available internationally. If such arrangements had not been available to us in 2006, we believe
our gross margins would have been negatively impacted. See Certain Relationships and Related Transactions.

With respect to the
industrial and business markets, we currently provide industrial computers to those companies that use customized solutions based on industrial computer architectures to integrate with their industrial equipment and application software for a
turnkey solution of their industrial applications. The major industrial and business application associated with our industrial computers has been X-Ray scanning equipment for use in airports. We believe we provide a



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majority of the industrial computers used in X-Ray scanning equipment currently being deployed in the United States. During 2006, in addition to our other
sales from the division described herein, we produced approximately $6.8 million of sales of industrial computers to industrial customers, which then integrated the computers into their industrial and business applications that were in turn sold to
their customers.

With respect to the consumer market, in 2006 we provided high-end consumer PCs directly to retail customers through our
brand, Vicious PC, and we provide basic-level consumer PCs through purchase orders from Avatar Technologies, Inc. (Avatar) and Prophecy Technologies (Prophecy), both Related Parties, which then distributed the PCs to its
customers for retail sales. In 2006, the Related Parties continued to secure contracts for consumer PCs with a large retail chain in Latin America and subcontracted the manufacturing of those consumer PCs to us. Based on these orders, we generated
sales of approximately $19.2 million for consumer PCs in 2006 and $17.8 million for basic level consumer PCs in 2005, all of which were ultimately delivered to retail stores for throughout Latin America. Avatar and Prophecy accounted for
approximately 69% and 54% of the Companys total net sales in 2006 and 2005, respectively. Although the retail PC program with the Related Parties generated significant revenues, the low margin nature of the business has not contributed the
return on investment required to maintain the program. Therefore, we have discontinued the program effective the beginning of 2007.

Contract
Manufacturing Division Strategy

We plan to leverage our experience, our competitive advantages, our technology capabilities from our
other division, our resources and our relationships in our effort to achieve the expansion of our industrial and higher margin consumer PC products. We have discontinued production of the lower margin basic level consumer PCs which was subcontracted
to us by the Related Parties to focus our resources on our higher margin product offerings. Although we cannot provide assurance as to the likelihood of our success, we believe we are well positioned to move forward with our strategy.

We plan to expand our marketing and sales efforts to sell industrial computers for not only X-Ray security equipment, but also for medical equipment and
instrumentation, biotech equipment, video surveillance equipment, homeland security systems, kiosks, digital signage solutions, ticketing automation, machine automation and robotic control, environmental monitoring equipment, diagnostic-testing and
measurement equipment, and gaming machines. In the industrial computer market, where there are more special requirements for products and testing, yet often with limited quantities, we believe we are more flexible and cost effective than our
competitors. In the consumer PC market we plan to continue seeking new product and market opportunities through our high end Vicious PC branded product offerings.

Operating Data

The following financial data relates to the contract manufacturing division results of operations and
assets as of and for the most recent years ended December 31, 2006 and 2005:



|                                          |  |                         |        |   |      |   |       
|----------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------
|                                          |  | Year ended December 31,
|($ in thousands)                          |  | 2006                    |        |   | 2005
|Net Sales                                 |  | $                       | 25,908 |   |      | $ | 28,074
|                                          |  |                        
|Cost of sales                             |  |                         | 23,916 |   |      |   | 25,120
|                                          |  |                         |        |   |      |   |       
|Gross profit                              |  |                         | 1,992  |   |      |   | 2,954 
|                                          |  |                        
|Operating Expenses                        |  |                         | 2,604  |   |      |   | 2,938 
|                                          |  |                         |        |   |      |   |       
|Income (loss) from operations             |  |                         | (612   | ) |      |   | 16    
|                                          |  |                        
|Other income (expense)                    |  |                         | (26    | ) |      |   | 5     
|                                          |  |                         |        |   |      |   |       
|Income/(Loss) before income tax provision |  | $                       | (638   | ) |      | $ | 21    
|                                          |  |                         |        |   |      |   |       
|Total assets                              |  | $                       | 1,998  |   |      | $ | 6,157 
|                                          |  |                         |        |   |      |   |       



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Commercial Products

Our contract manufacturing division designs, manufactures, and sells the following products and services for various security and other applications. We believe we are generally more flexible and cost effective than
our competition, while providing better support at an overall lower total cost than either in-house manufacturing, distributor integration or commercial manufacturers. The main base products used for customized industrial and consumer PCs are:

Industrial Computers

An industrial computer is a computer that is designed and built for industrial applications, unlike consumer PCs, which are built for office, education, or home use. An industrial computer will include proprietary hardware and proprietary
industrial application software and is typically integrated with other industrial equipment or products for a turnkey solution.

The
computers that we build for our industrial and commercial customers are customized for the needs of the particular customer. Our main products include: computers for X-Ray scanning equipment; computers for digital video equipment; computers for bio
medical equipment; and computers for ticket automation equipment. The architecture of our industrial computers use a variety of different configurations. The two main variables in those configurations include the motherboard and the enclosures. The
different types of motherboards include the ATX form-factor, the Micro ATX, Mini ITX, Nano ITX the single board computer EBX, and the PC/104-Plus, as well as small custom form-factor motherboards. The form-factor of the industrial computer can
either be a separate device that attaches to a larger apparatus or instrument, where the industrial computer serves as a control unit, or user-interface system console, such as is the case of X-Ray scanning equipment, where the industrial computer
sits inside the larger X-Ray device, and serves as its controller, and user interface console. Our different enclosures range from a regular desktop to mini tower, rack, wall, and panel mount, as well as customized enclosures to meet specific
customer requirements.

Consumer ComputersHigh- end Video Gaming PCs

We develop and manufacture PCs specifically designed for the PC gaming market, through the Vicious PC brand. We are a recognized PC brand in gaming
magazines such as PC Gamer, and we have received Editors choice awards for our systems. These PCs are designed for high graphic performance for gamers to play the latest video games locally or online. We provide products and complete gaming
solutions that include computer, sound system, LCD monitor and high performance peripherals.

Consumer ComputersBasic:Level

Our basic-level consumer PCs are built for general use at home and office. We do not brand these consumer PCs, but rather build them
specifically for branding by the particular retailer when we obtain a purchase order.

Marketing and Sales

We sell our products through a combination of direct sales and agents and manufacturer representatives in addition to our sales to Avatar. We have one
market sales manager and four inside sales personnel, and one manufacturer sales representative firm. We pursue potential sales leads identified internally or provided by our manufacturer representative. We have used a variety of marketing programs
to attract potential customers. These programs have included market research, direct marketing programs to current and prospective customers, advertising, participation in industry trade shows, conferences and seminars. To support sales efforts, we
have and will continue to produce promotional materials that include brochures, video presentations, data sheets and other technical descriptions.

Competition

We operate in the industrial, business and consumer PC, and contract manufacturing industries, which is very
competitive with manufacturers ranging from small, privately-held and managed operations, to multi-national corporations.

The most
important competitive factors we face include pricing, quality control, in-time, scaleable production capabilities and customer service. In particular, costs for component parts are constantly fluctuating based on worldwide demand and manufacturing
processes are continuously being evaluated and improved by our competitors worldwide.

We classify our competitors in three groups:
(1) industrial computer manufacturers; (2) commercial and consumer PC manufacturers; and (3) large and midsized electronic contract manufacturing service providers. The industrial computer manufacturers include Arrow, Avnet, Pioneer
Standard, and Bell Micro. The commercial and consumer PC manufactures include Dell, HP/Compaq, and IBM. The large and midsized electronic contract manufacturing service providers include Solectron, Flextronics, and Celestica.



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In order to obtain a competitive advantage in the market place, we continually manage component pricing
and operational costs and strive to provide scaleable, just-in-time production capabilities. We believe that we achieve a competitive advantage by providing superior quality and capacity over smaller competitors while providing superior customized
solutions and service over larger multi-national corporations. In the industrial computer market, where there are more special requirements for products and testing, yet often with limited quantities, management believes that the division is more
flexible and still more cost effective than its competitors.

Manufacturing and Supply

Our products are generally based on standardized consumer PC architectures and, therefore, can be produced relatively efficiently with
just-in-time type purchasing and assembly coordination. We have direct and indirect relationships with key computer components suppliers in the world. We also leverage our purchase of some key computer components through Avatar, one of
the Related Parties, to get more favorable pricing and credit terms. A significant disruption in the ability to obtain components from these vendors could negatively impact our ability to timely produce our products.

In addition, we utilize contract manufacturing equipment owned by one of the Related Parties under our facilities lease arrangement with such company.
For the foreseeable future, we will continue to be dependent on that equipment and the loss of use of that equipment would have a detrimental effect on our results of operations and business.

Research and Development

We believe we are an
innovative technology provider in several areas within the industrial computer, commercial computer, consumer PC and contract manufacturing markets. The architecture and technology deployed are engineered to meet specific customer needs. We
continuously review and improve manufacturing processes to provide high quality, cost effective manufacturing solutions, as well as a competitive product line.

We also gain development benefits by using the knowledge already developed from the team of engineers and scientists employed with our digital technology division. Through our combined efforts, we intend to maintain a
high level of investment in development of new solutions and enhancements.

THE MERGER

On July 28, 2003, our stockholders approved the Reorganization Agreement, which was included in the Definitive Proxy (14a) filed by the Company
on July 1, 2003, and the Merger was completed on August 8, 2003 in accordance with the agreement. The terms of the Merger provided for additional shares of Common Stock to be issued to the McDigit stockholders subject to a earn out based
on certain performance criteria in 2003, 2004 and 2005. No additional shares under the earn out formulas were issued to the McDigit stockholders.

AGREEMENT WITH INTERLOTT

On June 30, 2001, the pre-merger Company completed the sale of its lottery business to
Interlott. The pre-merger Companys lottery business encompassed substantially all of the pre-merger Companys operations through the date of sale. As part of the sale, Interlott agreed to pay us up to $9 million as a deferred payment and
up to $6 million as an earnout, subject to a number of restrictions.

The deferred payment is payable at the rate of $150,000 per month
during the five-year period commencing with the first full month following the closing if certain benchmark gross profits were received by Interlott on contracts provided to it at time of the sale. The asset purchase agreement for the sale sets
forth benchmark gross profit levels from revenue derived from a combination of contract extensions and new orders from previous lottery clients. These gross profit levels are cumulative from the beginning of the five-year period. We will receive the
full $150,000 monthly payment only as long as Interlotts cumulative gross profit from these contract extensions or new contracts equals or exceeds the cumulative benchmark gross profit level. If the cumulative gross profit is less than the
benchmark cumulative gross profit, the $150,000 is subject to reduction in accordance with the formula. If, during the five-year period when the deferred payment is being made, Interlotts gross profit from these sales subsequently reaches or
exceeds the benchmark cumulative gross profit level, we will recover any previous reductions taken from the monthly payments. We cannot assure you that we will collect all or any significant portion of the $9 million deferred payment. To date we
have only received approximately $29,000 in deferred payments received prior to the Merger. However, based on schedules provided to the Company from Interlott, we believe that deferred payments should have begun by the first quarter of 2003. We
requested additional information as a preliminary audit



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of the calculations and the specified actual gross profits earned by Interlott. Upon review of the information provided, we believe there may be a
substantial amount owed on the deferred payment. We have engaged an accounting firm to complete a detailed audit of the deferred payment calculations and prepared the information request and, when we have the resources and funding available, we plan
to conduct an on-site audit.

With respect to the earnout provision of the sale agreement, the earnout, if any, is payable in two stages
during the five years following the closing date. In the first stage, for which the maximum earnout is $3 million, we receive 10% of Interlotts gross revenue from new sales and leases of specified proprietary products provided to Interlott as
part of the sale. The second stage begins if we have received $3 million from Interlotts gross revenue from these products. If the second stage is reached, we are entitled to receive 10% of Interlotts gross revenue only from new sales
and leases of other specified products during the remainder of the five-year period. If Interlott generates revenue from these products and the revenue is used in the calculation of the deferred payment, which is described in the previous paragraph,
we are not entitled to a payment under the earnout from that revenue. No amounts under this provision have been paid to us through December 31, 2006, and the 5-year period expired in June 2006.

Pursuant to the asset purchase agreement, we also transferred to Interlott our patents and technology relating to our on-line technology. At the closing,
we entered into an on-line technology agreement, pursuant to which Interlott is to pay us a royalty based on Interlotts gross profit, if any, generated from the sale or lease of products that utilize the on-line technology. The percentage
royalty payable by Interlott ranges from 2.0% to 7.0% depending on Interlotts gross margins from those products. The online technology agreement is subject to other terms and conditions as stated in the sale agreement. There were no royalty
fees paid to the Company during the year ended December 31, 2006.

Concurrent with the planned audit of the deferred payment
calculations, we intend to conduct a review and possible audit of the earnout provision of the sale agreement and royalty fees relating to the on-line technology sold to Interlott. We have reseverd for the entire balance of the accrued receivable in
the amount of $400,000. Due to limited resources, we have postponed any further research and audit work until such time as the resources and funding become available to continue with the inquiry.

CARD DISPENSING EQUIPMENT

Part of the assets of the
pre-merger Company that are now part of the assets of consolidated Company include approximately 2,100 debit card dispensing machines, which are referred herein by their product name, Debit Card Retailer (DCR). The DCR is designed to provide high
security and high visibility using a minimum of floor or counter-top space. The machines are available in several models, which house either two, three or four bins and are able to accept various denominations of foreign and domestic currency. The
DCRs accommodate bill currencies. A customer inserts a bill into the DCR, receives credit, and then selects the denomination of prepaid phone card or other card/pass by pressing the button located immediately under the appropriate card display. The
DCR dispenses a single card to the buyer.

The DCRs in the past have been primarily used for dispensing phone cards. However, there are
many other debit cards, which can be dispensed using the DCR terminal, including bus and subway passes. Each card dispenser in a DCR stores approximately 400 cards, depending on the thickness of the cards, thus providing a maximum capacity of about
1,600 cards in our 4-card machine. The DCR includes a display that shows instructional and promotional messages and can also be equipped with the Grabber, a multi-color LED sign, which is mounted on top of the machine and includes a
built in memory. A customized message typically is input prior to installation of the machines. These messages can be changed on site using a hand-held remote control or loaded from a remote site with our optional Shadow communication
program.

The card dispensing equipment and related parts inventory were valued at the date of the Merger based on its minimum net
recoverable value, estimated by management to be approximately $1 million. Since the Merger we have reserved an additional $100,000 to adjust the net realizable value on the equipment and parts inventory to approximately $900,000. We did not pursue
the sale of the DCR products in 2005 or 2006. We continue to develop and evaluate marketing plans for either the redeployment or sale of the DCRs in 2007. If we redeploy the DCRs, we may commence operations that involve the sale of prepaid phone
cards. We currently have an inactive subsidiary, Global Telephony, to potentially support phone card operations. However, if we do, we anticipate such operations would represent a small part of our anticipated future businesses.

In the United States, most of the prepaid calling cards use an 800 number that is called for verification of the card by entering a PIN
number located on the card. Prepaid telephone cards generally allow card purchasers to buy blocks of calling time at a discount. The cards are more convenient, and the use of prepaid cards eliminates the need to maintain cash on hand to feed the pay
telephone when making a call. Prepaid telephone cards also reduce the risk of credit card fraud or theft, since a theft of a prepaid phone card results only in the loss of the face value of the card less any time already used. Although we believe
the market for prepaid phone cards remains large and viable, it also is very competitive.



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EMPLOYEES

As of March 1, 2007, the Company and its subsidiaries employed 91 employees, all of which are full-time. There are 7 executives, 31 management and administrative positions, 29 manufacturing employees, 8 sales and marketing staff
members, and 16 software and hardware engineers. We have also entered into various consulting and service contracts with industry specific experts to provide the Company with the necessary technical skills and knowledge that are necessary to meet
the goals of our business plan.



|ITEM 1A. | CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING INFORMATION AND CERTAIN IMPORTANT FACTORS
|-------- | --------------------------------------------------------------------------------------------------------

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

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

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

We require additional funding of $5 million in the near term to continue to operate our business, and in the event we are unable to obtain such
financing we may be forced to radically restructure our operations or seek protection under the bankruptcy laws. As of December 31, 2006, due to the reclassification of $7.5 million for redemption demands on our Series C and E
preferred stock to short term loan payable, we had a net working capital deficit of $5.4 million and no cash or cash equivalents. Since then, our working capital position has worsened due to continuing losses from operations. We intend to improve
our working capital position by pursuing negotiations with the holders of our Series C, D and E preferred stock to resolve their redemption demands without the need to make the required redemption payments without cash payment. However, there can be
no assurance that we will be successful in resolving their redemption demands. There can also be no assurance that we will not receive additional redemption demands from other holders of our Series C and E preferred stock. We also intend to improve
our working capital position by pursuing various funding alternatives, however at this time there are no understandings or arrangements on the part of any third party to provide us with additional funding. In this regard, our recent delisting from
the Nasdaq Stock Market and the recently filed shareholder derivative lawsuit against our board of directors is likely to impair our ability to resolve the redemption demands of our preferred shareholders and successfully acquire funding from other
sources. In the meantime, we are solely dependent on our existing current assets to meet our operating expenses, capital expenditures, and other commitments, which we believe will provide sufficient funds only for six months assuming we do not fund
the required mandatory redemption payments

We believe that we require a minimum of $5 million of additional funding, in addition to any
funds needed to resolve the $6.3 million in redemption demands of our preferred, in order to fund our ongoing and planned operations over the next 12 months. In the event we are unable to acquire the required financing within the next few months,
our companys financial condition will be severely impacted and we may be unable to continue as a going concern. In that event, we may be forced to radically restructure our operations or seek protection under the bankruptcy laws. There can be
no guarantee that the funds we require will be available on commercially reasonable terms, if at all.



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

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



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



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



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

We have received redemption demands from holders of our preferred stock in excess of $6.3 million. On September 29, 2006, we received
redemption notices from certain holders of our Series C and Series E preferred stock demanding that we repurchase an aggregate of 136,908 shares of their Series C preferred stock, representing 27% of the issued and outstanding Series C preferred
stock, and 95,703 shares of their Series E preferred stock, representing 82% of the issued and outstanding Series E preferred stock. Subsequently, we received redemption notices demanding that we repurchase an additional 150,600 shares of Series C
preferred stock, 5,500 remaining shares of the Series D preferred stock and 6,175 shares of Series E preferred stock. Currently, the aggregate redemption amount under the notices received is $6,283,183 plus $163,972 accrued and unpaid dividends. All
demands for redemption were payable within sixty (60) days of the date the Company receives written notice from such stockholder of its election.

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

Currently, there are outstanding 501,917 shares of Series C preferred stock, 5,500 shares of Series D preferred stock and 117,314 shares of Series E preferred stock. Under the applicable provisions of the Certificates of Designations for
the Series C, D and E preferred stock, the redemption payment amounts for the Series C, D, and E preferred stock is $2.80 per share, $50 per share and $50 per share, respectively, plus accrued but unpaid dividends. In the event holders of all of the
Series C, D and E preferred stock are entitled to have their preferred stock redeemed, the aggregate redemption amount would be $7,484,851, plus accrued but unpaid dividends.

At this time, we have not redeemed any of the preferred stock pursuant to the demand notices. We intend to pursue negotiations with the holders of our
Series C, D and E preferred stock to resolve their redemption demands without the need to make the required redemption payments. However, there can be no assurance that we will be successful in resolving the redemption demands. There can also be no
assurance that we will not receive additional redemption demands from other holders of our Series C, D, and E preferred stock.

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



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

Our common stock has been delisted from the Nasdaq Capital Market and currently trades on the Pink Sheets.On July 19, 2006, we received a notice from the Listing Qualifications Staff of The Nasdaq
Stock Market, Inc. that our common stock was subject to potential delisting from the Nasdaq Capital Market. The Staffs determination to pursue the delisting of our common stock was based upon three factors: (1) shareholder approval issues
arising from the Staffs determination to aggregate our Series C, D, and E financings; (2) our failure to file listing of additional share forms for these financings on a timely basis; and (3) public interest
concerns related to the foregoing violations. We requested a hearing before the Nasdaq Listing Qualifications Panel (the Panel) to appeal the Staffs delisting determination and request continued listing on the Nasdaq Capital
Market. The hearing was held on September 7, 2006. On September 15, 2006, we received the decision of the Panel denying our request for continued listing on the grounds that we violated the Nasdaq shareholder approval rules. As a result,
our securities were delisted from the Nasdaq Capital Market effective with the open of business on Tuesday, September 19, 2006. Our common stock is currently quoted in the Pink Sheets under the trading symbol GEPT.PK.

Under the rules of The Nasdaq Stock Market we are entitled to appeal the decision of the Panel to the Nasdaq Listing and Hearing Review Council (the
Council). We elected to pursue the second appeal and submitted the necessary documents to the Council on October 27, 2006. The Council denied our appeal. We have initiated the process to transfer our common stock to the Over the
Counter Bulletin Board. However, there can be no assurances as to when, or whether, we will be successful in finding an alternate trading market for our common stock. The delisting has adversely affected the liquidity and trading price of our common
stock, which is likely to impair our future ability to raise necessary capital through equity or debt financing. Because the market for securities traded on the Pink Sheets is limited, potential investors may voluntarily refrain, or be prohibited,
from purchasing shares of our common stock or may agree to purchase our common stock solely on terms that are not beneficial to our long-term operations. If we are unable to obtain funding on terms favorable to us, or at all, we may be required to
sell our company, cease operations, or declare bankruptcy.

We rely on related parties for a substantial portion of our revenues and
as the primary source for our component and subsystem purchases. The loss of business from any of these related parties would adversely affect our business. In the ordinary course of our business, we purchase from, sell products to and
perform contract manufacturing services for a number of related parties that are owned or otherwise controlled by Mr. John Pan, our Chief Financial Officer, Chairman, and principal stockholder. For the years ended December 31, 2006 and
2005, we purchased approximately $17.4 and $15.3 million, respectively, worth of products from these related parties. This represents 59% and 53% of our overall cost of goods for the year ended December 31, 2006 and 2005, respectively. In
addition, during the fiscal year 2006 and 2005 we sold approximately $19.1 and $18 million, respectively, worth of products and contract manufacturing services to these related parties. This represents 58% and 55% of our overall sales for the year
ended December 31, 2006 and 2005, respectively. We believe that these related party relationships provide access to attractively priced components and products and an additional and a substantial amount of sales revenues. However, there are no
agreements, written or otherwise, between Global ePoint and these related parties obligating such parties to transact business with us in the future. As a result, these types of related party transactions could cease at any time. If our transactions
with these related parties cease, our business would be adversely affected.

Our current revenues and purchases are dependent on a
limited number of customers and suppliers, most of which are related parties. For the year ended December 31, 2006 and 2005, three customers accounted for 69% and 75% of the Companys sales, respectively. Two and one of these
customers in 2006 and 2005, respectively, was a related party. For the year ended December 31, 2006 and 2005, two and four vendors accounted for 69% and 70% of the Companys purchases, respectively. Two of these vendors were related
parties. Substantially all of our related party transactions are derived from our contract manufacturing division. If we were to lose one or more of these customers before we are able to secure sales from other customers, our income and financial
condition would be adversely affected. If we are unable to enter into and maintain satisfactory distribution arrangements with leading suppliers and an adequate supply of products, our sales could be adversely affected.



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Our issuance of preferred stock is dilutive to holders of our common stock, and could adversely
affect holders of our common stock. Our board of directors is authorized to issue series of shares of preferred stock without any action on the part of our stockholders, subject to the rules of the applicable stock market. Our board of
directors also has the power, without stockholder approval, to set the terms of any such series of shares of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends
or if we liquidate, dissolve or wind up our business and other terms. One of the principal allegations in the shareholders derivative lawsuit described above is that our board of directors breached its fiduciary duty in approving our sale of
the Series E preferred shares.

Currently, we have three series of preferred stock outstanding, C, D, and E, all of which may be converted
into shares of our common stock at any time at the option of the holders, which will result in dilution to holders of our common stock. In addition, all of the preferred shareholders are entitled to receive dividends on their shares of preferred
stock, and upon a liquidity event all classes of preferred stock are entitled to receive payment out of our assets before holders of our common stock. We are also required to redeem a portion of each series of our preferred stock periodically. The
dividend and redemption payments may be made, at our option, in shares of our common stock or in cash.

As of December 31, 2006, there
were 501,917 shares of Series C Preferred Stock outstanding, which are convertible into 501,917 shares of our common stock, 5,500 shares of Series D Preferred Stock outstanding, which are convertible into 66,106 shares of our common stock, and
117,314 shares of Series E Preferred Stock outstanding, which are currently convertible into 2,125,254 shares of our common stock. The conversion price of the Series C and Series D Preferred Stock is not adjustable except for standard anti-dilution
adjustments relating to stock splits, combinations and similar events. However, the conversion price of our Series E Preferred Stock will be adjusted downward if we issue shares of common stock, or securities convertible into shares of common stock,
at an effective price less than $2.76 per common share. If this occurs, the Series E Preferred Stock can be converted into a larger number of shares than stated above, resulting in even greater dilution to holders of our common stock. Upon a
liquidity event, the holders of our Series C Preferred Stock and Series D Preferred Stock are entitled to be paid out of our assets available for distribution to the stockholders an amount equal to $2.80 per share and $4.16 per share, respectively,
ahead of all shareholders except the holders of our Series E Preferred Stock. Upon a liquidity event, holders of our Series E Preferred Stock are entitled to receive $50.00 per share of Series E Preferred Stock ahead of all of our other
stockholders. Except as required by law, holders of our preferred stock have no voting rights.

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

We have also issued a warrant that allows for the issuance of a floating number of common shares and may be further dilutive to holders of our common stock, and could adversely affect holders of our common stock. In connection
with the Series E preferred share financing, we issued a warrant that allows the holders to purchase a floating number of shares of common stock at an exercise price of $0.01 per share, with the exact aggregate number of shares to be determined by
dividing $1,938,403 by the lowest of (A) $2.76 (as adjusted for stock splits, stock dividends, stock combinations and other similar events), (B) the closing price of our common stock on the trading day prior to the effective date of a
registration statement covering the resale of the shares, (C) the closing price of our common stock on the trading day prior to the day shareholder approval is obtained pursuant to the terms of the Series E preferred stock, or (D) if the
registration statement is not declared effective, the trading day prior to the day any shares of common stock issuable pursuant to such warrant can be sold under Rule 144. Since the number of shares of common stock issuable upon exercise of the
warrant will move with the market price of our common stock, we are unable to state the number of shares that may be issued upon exercise of the warrant. One of the allegations in the shareholder derivative lawsuit described above is that our board
of directors breached its fiduciary duties in approving the issuance of this warrant.

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

We are an emerging growth company with limited operating history. Following our acquisition of McDigit,
Inc. in August 2003, and having essentially ceased operations of our prior businesses, we recommenced operations as a new business engaged in designing and selling industrial, business and consumer computers and computing solutions; and digital



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video, audio and data transmission and recording products. In 2004, we acquired substantial operating assets included in our digital technology division and
aviation division. As a result, we have a limited history operating our current businesses and forecasting our sales. The future success of our business will depend on our ability to successfully operate our recently acquired businesses, all of
which are in highly competitive markets. Moreover, our digital technology division operates in a new and emerging market. As an emerging company, it will be necessary for us to implement additional operational, financial and other controls and
procedures in order to be successful.

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



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



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



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

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

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

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

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

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



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

Our business strategy includes acquiring certain businesses and entering into joint ventures and
strategic alliances. Failure to successfully integrate such businesses, joint ventures, or strategic alliances into our operations could adversely affect our business. In the past, we have acquired companies and assets and entered into
certain strategic alliances, including the purchase of assets from Next Venture, Inc., AirWorks, Inc. in April 2004. In April 2006, we completed the acquisition of substantially all of the assets of Tops Digital Security, Inc., and are engaged in
continuing negotiations involving the proposed acquisition of Astrophysics. We may also make additional acquisitions and enter into joint ventures in the future. While we believe we will effectively integrate such businesses, joint ventures, or
strategic alliances with our own, we may be unable to successfully do so and may be unable to realize expected cost savings and/or sales growth. Regarding the assets purchased from Next Venture and AirWorks, the acquired businesses are in emerging
markets and their performance is subject to the inherent volatility of such markets. Furthermore, AirWorks assets were purchased from an assignee for the benefit of creditors, which means that the business was not successful in the past. We
are in the process of integrating the Tops assets with our own, and we may encounter unforeseen costs and other difficulties related to that process. Acquisitions, joint ventures and strategic alliances may involve significant other risks and
uncertainties, including distraction of managements attention away from normal business operations, insufficient revenue generation to offset liabilities assumed and expenses associated with the transaction, and unidentified issues not
discovered in our due diligence process, such as product quality and technology issues and legal contingencies. In addition, in the case of acquisitions, we may be unable to effectively integrate the acquired companies marketing, technology,
production, development, distribution and management systems. Our operating results could be adversely affected by any problems arising during or from acquisitions or from modifications or termination of joint ventures and strategic alliances or the
inability to effectively integrate any future acquisitions.



|ITEM 2. | DESCRIPTION OF PROPERTIES
|------- | -------------------------

We lease approximately
17,000 square feet of office and warehouse space in the City of Industry, California under a lease agreement expiring in two years from a Related Party. Most of our corporate, administration and manufacturing for our contract manufacturing division
is conducted in that facility, which is substantially used to its capacity. Additionally, we rent manufacturing and assembly equipment from this Related Party for our contract manufacturing division. Rental expense, including the equipment related
expenses, was $23,000 per month plus utilities in 2006.

In May 2006, we leased approximately 32,500 square feet in City of Industry,
California and moved our aviation corporate, administration and manufacturing operations to the facility. The monthly rent expense is $22,700 pursuant to a lease that expires July 2009.

In May 2006, we leased on a month to month basis office space in Seoul Korea for research and development on our digital surveillance products for our
digital technology division. The monthly rent expense is $4,000 pursuant to a lease that expires April 2008.

In April 2006, we leased
approximately 7,450 square feet in Ontario, California in connection with our acquisition of Tops Digital Security, LLC to support corporate, administration and operations for Tops. In September 2006, we amended the lease to add an additional 7,450
square feet and moved administration and warehousing operations for our digital technology division. The monthly rent expense is $9,500 pursuant to a lease that expires April 2008.

In October 2005, we leased approximately 30,000 square feet in Tulsa, Oklahoma pursuant to a lease that expired April 2006 with two three month options
to extend the lease, the first option for which has been exercised. The monthly rent expense was $22,000 for hangar space within the Tulsa International Airport used for aircraft maintenance and installation services for our aviation division. The
lease expired and we terminated the operations.



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In September 2004, we leased office space for our research and development department. Monthly rent
expense for this space is $3,000 under a lease expiring on May 31, 2007.

In June 2004, we leased approximately 24,000 square feet of
in the City of Industry, California under a lease agreement from a Related Party. This space is used for corporate, administration and manufacturing conducted by our aviation division. The monthly rental expense for this space was $16,000 under a
lease expiring May 2007. We elected to terminate the lease in July 2006 and moved the aviation division operation to a new facility as detailed above.

In December 2003, we also leased from a Related Party 24,000 square feet of additional warehouse and office space in the City of Industry to accommodate growth in our contract manufacturing business. The monthly
rental expense for this additional office space was $16,000 under a lease which expired in December 2006. Beginning September 1, 2004 this space was subleased under the same terms and conditions and expired December 2006.

We also lease a 32,000 square feet facility in San Marcos, California, pursuant to a lease that expires in 2013. Approximately 26,000 square feet of the
facility is subleased to an unrelated tenant under a 10-year sublease agreement. The sublease terms provide for rent that exceeds our rent on the entire building. We use the remaining 6,000 square feet of the building for warehousing of our card
machine equipment.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

On November 10, 2006, the
Company was served with a complaint naming the Companys directors as co-defendants in a shareholder derivative lawsuit. The complaint alleges that the directors of the Company have committed breaches of their fiduciary duties and engaged in
abuse of control, corporate waste, unjust enrichment, gross mismanagement and violations of applicable Nasdaq marketplace rules in connection with the Companys placement of the Series E preferred stock and associated warrants in May 2006. In
addition, the complaint alleges that the Companys Chairman of the Board, Johnny Pan, engaged in insider trading in July and August of 2005. The complaint also alleges that the defendant directors caused the Company to issue false and
misleading statements of material facts concerning, among other things, the Companys forecasted revenue and earnings. The plaintiffs seek monetary damages for all losses suffered by them as a result of the alleged misconduct and injunctive
orders directing (i) the defendants to disgorge all profits and special benefits obtained by way of their alleged misconduct, including salaries, bonuses, stock options and proceeds from any stock sales, (ii) the Company reform and improve
its corporate governance and internal control procedures to apply with applicable law, and (iii) the implementation of constructive trusts over any proceeds from the defendants wrongful sales of the Companys common shares.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
|------- | -----------------------------------------------

Our annual meeting of stockholders was held on December 21, 2006. The following individuals were elected at the annual meeting to serve as directors of Global ePoint until their successors are elected and qualified. Shares voted in
favor of these directors and shares withheld were as follows:



|                     |  |                  |  |                 |  |                   |  |                 
|-------------------- |  | ---------------- |  | --------------- |  | ----------------- |  | ----------------
|Directors            |  | Shares Voted For |  | Shares Withheld |  | Shares Abstaining |  | Broker Non-Votes
|                     |  |                  | 
|Arik Arad            |  | 18,601,416       |  | 214,298         |  |                  |  |                
|Daryl F. Gates       |  | 18,607,191       |  | 208,523         |  |                  |  |                
|Joseph R. Hermosillo |  | 18,599,452       |  | 216,262         |  |                  |  |                
|Toresa Lou           |  | 18,553,478       |  | 262,236         |  |                  |  |                
|John Pan             |  | 18,553,150       |  | 262,564         |  |                  |  |                
|James D. Smith       |  | 18,596,562       |  | 219,152         |  |                  |  |                
|John Yuan            |  | 18,586,388       |  | 229,326         |  |                  |  |                



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##### Table of Contents

PART II



|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------

Our common stock was traded on the Nasdaq Capital Market under the symbol GEPT. Our securities were delisted from the Nasdaq Capital Market effective September 19, 2006. Our common stock is currently quoted in the Pink Sheets under the
trading symbol GEPT.PK.

The following table sets forth the high and low bid prices for our common stock, as reported on the
Nasdaq Capital Market through September 19, 2006 and the Pink Sheets thereafter, for the quarters presented. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, markdowns, or commissions and may not
necessarily represent actual transactions.



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|               |  | 2006
|               |  | High |      | Low
|First Quarter  |  | $    | 4.40 |     | $ | 3.01
|Second Quarter |  |      | 3.65 |     |   | 1.59
|Third Quarter  |  |      | 2.05 |     |   | 0.66
|Fourth Quarter |  |      | 0.85 |     |   | 0.28

The number of stockholders of record of our common stock, par value $.03 per share, as of
April 3, 2007, was 428.

We have never paid any cash dividends on our common stock and do not expect to do so in the foreseeable
future.

Unregistered Sales of Securities

We had the following unregistered sales of securities during 2006. These securities were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On June 8, 2006, the Company issued 100,000 shares of restricted Common Stock to a consulting firm in exchange a two year contract to perform
various professional services.



|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

OVERVIEW

Our operations currently consist of three divisions:



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



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



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

Our business strategy includes developing a full line of high value security products
deploying the latest technologies. We have spent significant resources with our research and development team developing a base platform for our security surveillance product line. Using this platform we hired additional offshore specialty engineers
to supplement our existing core research and development team to enable faster, more cost effective product development programs focused on security application solutions.

To implement planned technology advances and new product development, we continue to focus resources on new, proprietary digital compression technology,
Internet protocol applications, and database management applications. We believe these elements are keys to developing the secure network digital video technology that is expected to drive the



23



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##### Table of Contents

development of our next generation of digital video surveillance products. High-end software for intelligent management of data transmitted from secure
digital video networks is also planned as a component of our total digital video technology solutions. Our strategy is to use our research and development expertise to create new proprietary technologies for digital video applications, and also seek
to create intellectual properties for contract manufacturing customers, thereby enabling us to engage in both original equipment manufacturing and original design manufacturing. We are also looking for strategic acquisition candidates providing
digital video technologies and systems to expand and or enhance our product offerings and services.

We believe our competitive advantages
in parts and components pricing, quality control, just-in-time production capabilities, customer service, and scalable production processes will support a planned extension of the operations of our contract manufacturing divisionprimarily the
manufacture of specialized, custom-designed computers for industrial and commercial useto include designing and manufacturing a broad range of products and systems, including digital video technology products. We intend to leverage our current
contract manufacturing facilities to generate production-cost efficiencies for our digital video technology division. However, as described above in Item 1.ACautionary Statement Regarding Future Results, Forward-Looking Information
and Certain Important Factors and below in Liquidity and Capital Resources, we require additional capital of at least $5 million in the near term in order to continue operations and in the event we are unable to obtain additional
capital as and when needed we may be forced to curtail or suspend operations.

2006 was a difficult year relating to financing our
operations. We entered into our Series E preferred stock financing in order to continue with our product development, acquisitions and sales and marketing strategies. As a result of the transaction, we were delisted from the Nasdaq Capital Market
due to shareholder approval issues arising from the Nasdaqs determination to aggregate our Series C, D, and E financings and our failure to file listing of additional share forms for these financings on a timely basis.
Although we appealed the determination our appeals were denied and we were delisted from the Nasdaq Capital Market. Our common stock is currently quoted in the Pink Sheets under the trading symbol GEPT.PK. As a result of the delisting
substantially all of our preferred stockholders have submitted redemption demands which has resulted in a working capital deficit. We intend to improve our working capital position by negotiating with the holders of our Series C, D and E preferred
stock to resolve their redemption demands without the need to make the required redemption payments. We also intend to improve our working capital position by pursuing various funding alternatives. There can be no assurance, however that we will be
successful in resolving the preferred stockholders redemption demands without the need to make the required redemption payments or obtain additional working capital.

Even with these difficulties, there were several positive events in 2006 to move us forward. Key among them was our acquisition of Tops which expands of
our digital video surveillance product offerings to include large scale enterprise solutions. Tops is a true enterprise level digital video management system utilizing the latest data compression technology and provides us with new and strategic
opportunities as we move forward. Additionally within the digital technology division our Sequent Mobile products became one of the few mobile solutions to be certified by Motorola for their Motomesh Networks.

In our aviation division, in March 2007, we completed our FAA certification, and we have received our Supplemental Type Certificates (STC) for Boeing 757
and 767s for our In Flight Entertainment (IFE) retrofit program. This program replaces old CRT projector systems with state of the art LCD monitors and servers. Replacing these old systems is not only a passenger convenience but provides significant
weight savings for the aircraft resulting in substantial fuel cost savings for the airline. There are a large number of aircraft around the world still equipped with the old CRT systems providing us with a significant niche opportunity. With the STC
we expect to deliver, in 2007, on our current backlog for the IFE system with a large Latin American airline totaling $3.5 million. Additionally, with the STC completed we can now initiate a marketing and sales campaign to airlines around the world.
We are also expecting the FAA to mandate cockpit door surveillance systems for passenger aircraft. The mandate provides for a large opportunity for our cockpit door surveillance system. The FAA named us as one of only five companies which meet their
requirements for the system and estimated the U.S market for cockpit door surveillance systems to be $185 million and we believe the worldwide market to be approximately $500 million. We believe we are well positioned, subject to the receipt of
additional capital, to take advantage of these opportunities and are looking forward to the opportunities and challenges which lie ahead.

RESULTS OF
OPERATIONSCOMBINED

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



24



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##### Table of Contents

For the year ended December 31, 2006

($ in thousands)



|                                     |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |         |  
|------------------------------------ |  | ----------------- | ------ | - | -------- | - | ------ | --------------------- |  | - | --------- | - |  | ----- | ------ | - |  | - | ------- | -
|                                     |  | DigitalTechnology |        |   | Aviation |   |        | ContractManufacturing |  |   | Corporate |   |  | Total |       
|Net sales                            |  | $                 | 2,031  |   |          | $ | 4,975  |                       |  | $ | 25,908    |   |  | $     |       |   |  | $ | 32,914  |  
|                                     |  |                   |        |   |         
|Cost of sales                        |  |                   | 1,251  |   |          |   | 4,431  |                       |  |   | 23,916    |   |  |       |       |   |  |   | 29,598  |  
|                                     |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |         |  
|                                     |  |                   |        |   |         
|Gross profit                         |  |                   | 780    |   |          |   | 544    |                       |  |   | 1,992     |   |  |       |       |   |  |   | 3,316   |  
|                                     |  |                   |        |   |         
|Operating expenses                   |  |                   | 4,727  |   |          |   | 3,084  |                       |  |   | 2,604     |   |  |       | 4,204  |   |  |   | 14,619  |  
|                                     |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |         |  
|                                     |  |                   |        |   |         
|Loss from operations                 |  |                   | (3,947 | ) |          |   | (2,540 | )                     |  |   | (612      | ) |  |       | (4,204 | ) |  |   | (11,303 | )
|                                     |  |                   |        |   |         
|Other income (expense)               |  |                   | (70    | ) |          |   |       |                       |  |   | (26       | ) |  |       | 185    |   |  |   | 89      |  
|                                     |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |         |  
|                                     |  |                   |        |   |         
|Loss before income tax provision     |  | $                 | (4,017 | ) |          | $ | (2,540 | )                     |  | $ | (638      | ) |  | $     | (4,019 | ) |  | $ | (11,214 | )
|                                     |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |         |  
|                                     |  |                   |        |   |         
|Total assets as of December 31, 2006 |  | $                 | 6,962  |   |          | $ | 8,631  |                       |  | $ | 1,998     |   |  | $     | 4,942  |   |  | $ | 22,533  |  
|                                     |  |                   |        |   |          |   |        |                       |  |   |           |   |  |       |        |   |  |   |         |  

For the year ended December 31, 2005

($ in thousands)



|                                          |  |                   |        |   |          |   |        |                       |  |           |        |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | - | -------- | - | ------ | --------------------- |  | --------- | ------ |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | DigitalTechnology |        |   | Aviation |   |        | ContractManufacturing |  | Corporate |        |  | Total |       
|Net sales                                 |  | $                 | 1,286  |   |          | $ | 3,388  |                       |  | $         | 28,074 |  | $     |       |   |  | $ | 32,748 |  
|                                          |  |                   |        |   |         
|Cost of sales                             |  |                   | 902    |   |          |   | 2,703  |                       |  |           | 25,120 |  |       |       |   |  |   | 28,725 |  
|                                          |  |                   |        |   |          |   |        |                       |  |           |        |  |       |        |   |  |   |        |  
|                                          |  |                   |        |   |         
|Gross profit                              |  |                   | 384    |   |          |   | 685    |                       |  |           | 2,954  |  |       |       |   |  |   | 4,023  |  
|                                          |  |                   |        |   |         
|Operating expenses                        |  |                   | 3,612  |   |          |   | 2,369  |                       |  |           | 2,938  |  |       | 2,352  |   |  |   | 11,271 |  
|                                          |  |                   |        |   |          |   |        |                       |  |           |        |  |       |        |   |  |   |        |  
|                                          |  |                   |        |   |         
|Income (loss) from operations             |  |                   | (3,228 | ) |          |   | (1,684 | )                     |  |           | 16     |  |       | (2,352 | ) |  |   | (7,248 | )
|                                          |  |                   |        |   |         
|Other income (expense)                    |  |                   | (23    | ) |          |   |       |                       |  |           | 5      |  |       | 29     |   |  |   | 11     |  
|                                          |  |                   |        |   |          |   |        |                       |  |           |        |  |       |        |   |  |   |        |  
|                                          |  |                   |        |   |         
|Income (loss) before income tax provision |  | $                 | (3,251 | ) |          | $ | (1,684 | )                     |  | $         | 21     |  | $     | (2,323 | ) |  | $ | (7,237 | )
|                                          |  |                   |        |   |          |   |        |                       |  |           |        |  |       |        |   |  |   |        |  
|                                          |  |                   |        |   |         
|Total assets as of December 31, 2005      |  | $                 | 4,795  |   |          | $ | 8,874  |                       |  | $         | 6,157  |  | $     | 5,820  |   |  | $ | 25,646 |  
|                                          |  |                   |        |   |          |   |        |                       |  |           |        |  |       |        |   |  |   |        |  

RESULTS OF OPERATIONSDIGITAL TECHNOLOGY DIVISION

For the Year Ended December 31, 2006 Compared to December 31, 2005

Revenues for the digital technology division increased to $2 million for the year ended December 31, 2006 compared to $1.3 million for the year ended
December 31, 2005. The increase in revenues is due to $1.2 million of revenue from our recently acquired Tops division offset by a $400,000 decline in sales of our fixed digital video surveillance products. Gross margins were 38% for the year
ended December 31, 2006 compared to 30% for the year ended December 31, 2005. The increase in gross margin is due the sales of the higher margin Tops enterprise solution.

Operating expenses increased to $4.7 million for the year ended December 31, 2006 from $3.6 million for the year ended December 31, 2005. The
increase in operating expenses is due to the acquisition of Tops which consisted of $311,000 selling expenses, $586,000 general and administrative expenses and $292,000 for research and development costs associated with our establishment of an
R&D facility in Korea to facilitate the development of the high-end Tops product line. Additionally, travel expenses increased $78,000 and insurance expenses increased $45,000. The increases in expenses were offset by a decrease in other
research and development costs of $74,000.



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The net result of the foregoing is that the digital technology division incurred a loss from operations
of $4.0 million for the year ended December 31, 2006 compared to a loss from operations of $3.3 million for the year ended December 31, 2005.

RESULTS OF OPERATIONSAVIATION DIVISION

For the Year Ended December 31, 2006 Compared to December 31,
2005

Revenues for the year ended December 31, 2006 totaled $5.0 million compared to $3.4 million for the year ended
December 31, 2005. The increase in sales is the result of an increase in aircraft maintenance services of $1.6 million, and a $0.4 million increase in sales of wire and harnesses offset by $0.4 million decrease in sales of other modification
equipment and services. Cost of goods sold was $4.4 million for the year ended December 31, 2006 compared to $2.7 million for the year ended December 31, 2005. The increase in cost of goods sold is due to the increase in maintenance
services operations. We established a maintenance operation in Tulsa, Oklahoma, in September 2005, to service a contract we obtained from a large Latin American airlines. The operation did not meet our expected profitability, therefore, we
discontinued and closed the maintenance facility in Tulsa Oklahoma at the end of 2006 upon completion of the contract. Gross margins for the year ended December 31, 2006 were 11% compared to 20% for the year ended December 31, 2005. The
decline in margins was due to the increase in lower margin maintenance services. We believe our overall gross margins will improve as our mix of business moves to equipment deliveries which have a higher margin. We have experienced delays in
obtaining FAA certifications for our IFE retrofit program causing delays in the shipment of the IFE equipment to a large Latin American airlines. In early 2007 we completed the certification process for the programs and expect to begin deliveries of
equipment in the second quarter of 2007.

Operating expenses totaled $3.1 million for the year ended December 31, 2006 compared to
$2.4 million for the year ended December 31, 2005. The increase is primarily due to additional costs associated with the maintenance services operation, including $87,000 in insurance expenses and $144,000 for permanent and temporary labor and
labor related costs. Additionally, bad debt expense increased $344,000 primarily due to settlement of disputed expense reimbursements with a major customer. Rent expense increased $58,000 as a result of moving the aviation corporate operations to a
new facility beginning June 2006, the increase in rent expense is due to rent related to our previous facility whose lease was cancelled in August 2006. These increases in operating expenses were offset by $143,000 decrease in advertising and
promotion, travel and entertainment expenses due to cost reductions from participation in trade shows in 2006.

As a result of the
foregoing, the aviation division incurred a loss from operations of $2.5 million for the year ended December 31, 2006 compared to a loss from operations of $1.7 million for the year ended December 31, 2005.

RESULTS OF OPERATIONSCONTRACT MANUFACTURING DIVISION

For
the Year Ended December 31, 2006 Compared to December 31, 2005

Net sales for the year ended December 31, 2006 decreased to $25.9 million
from $28.1 million in the year ended December 31, 2005. The decrease in sales was the result of a decrease in sales of industrial computer products from $5.7 million in the year ended December 31, 2006 compared to $8.5 million in the year
ended December 31, 2005. The decline in industrial computer sales is primarily due to the decline in sales from two of our major customers. One of our customers contracts expired in early 2007 and has not been renewed. We are in
discussions with the customer to obtain new contracts although at this time we have been unsuccessful and it is uncertain as to whether we will continue to provide our services to the customer in the future. Another major customers product
line has moved to high end/lower sales volume x-ray machines and discontinued their low end/higher sales volume x-ray machines, resulting in a decline in sales for our industrial PC. The decrease in net sales was offset by an increase in sales of
consumer computer products to $20.2 million in the year ended December 31, 2006 from $19.3 million in the year ended December 31, 2005. We have discontinued production of the lower margin basic level consumer PCs which was subcontracted to
us by the Related Parties to focus our resources on our higher margin product offerings. Sales of the basic level consumer PC products to our Related Party were $19.2 million and $17.8 million for the years ended December 31, 2006 and 2005,
respectively. The basic level consumer PC program was a low margin program, discontinuing the program additional resources to focus on our higher margin product offerings. Cost of sales was $23.9 million for the year ended December 31, 2006, or
92.3%, of sales compared to $25.1 million, or 89.5%, of sales for the corresponding year ended December 31, 2005. The increase in the cost of sales as a percentage of net sales was due to the increase in sales of lower margin consumer computer
products. As a result, gross margins for the year ended December 31, 2006 were 7.7% compared to 10.5% for the year ended December 31, 2005.



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Operating expenses for the year ended December 31, 2006 were $2.6 million, or 10.1% of sales,
compared to $2.9 million, or 10.5% of sales, for the year ended December 31, 2005. The decline in operating expenses is due to a decrease in selling expenses of $196,000 primarily due to a reduction in commission expenses as a result of lower
sales of industrial computer products in the year ended December 31, 2006 over 2005.

The net result was a loss from operations for
the contract manufacturing division was $638,000 for the year ended December 31, 2006 compared to income from operations of $21,000 for the year ended December 31, 2005.

RESULTS OF OPERATIONSCORPORATE

Corporate activities primarily relate to activities associated
with income and expense of non-core continuing business of the pre-merged public entity, as well as general overall corporate expenses. During the year ended December 31, 2006, corporate general and administrative costs totaled $4.2 million
compared to $2.3 million for the year ended December 31, 2005. The increase in corporate expenses was due to a $1.0 million increase in stock based compensation expense primarily from the amortized costs of previously issued employee stock
options as a result of our adoption of SFAS 123(R), $0.3 million increase in the general allowance for doubtful accounts, $0.2 million increase for damages and penalties related to defaults associated with our preferred stock offerings and $0.3
million to specifically reserve for the Interlott accrued receivable. We intend to pursue collection of the Interlott receivable when resources allow, although the uncertainty as to the realization of collection resulted in the requirement to
reserve the outstanding balance. The NASDAQ delisting proceedings and defense of the shareholder derivative lawsuit resulted in an increase of $0.2 million in legal expenses. Corporate personnel and other related expenses increased $0.1 million.
These expenses were partially offset by a decline of $0.1 million in professional fees and services associated with being a public company.

Other income increased $0.2 million due to the receipt of uncollected funds from the State of Pennsylvania from the pre-merged public entity.

The net result for corporate operations was a loss from operations of $4.0 million for the year ended December 31, 2006 compared to a loss from operations of $2.3 million for the year ended December 31,
2005.

SUMMARY

As a net result of the
combined operations of our digital technology division, aviation division, contract manufacturing division, and corporate activities, we incurred a net loss of $11.2 million, or $(0.64) per share. The conversion of our Series D Preferred Stock and
warrant exercise and simultaneous private placement sale of our Series E preferred stock generated a non-cash preferred dividend of $4.9 million, and the reclassification of our preferred stock to short term liabilities generated a non cash
preferred dividend of $3.4 million resulting in a net loss applicable to common stockholders of $19.9 million, or $(1.13) per share for the year ended December 31, 2006 compared to non-cash preferred dividends of $2.8 million in the year ended
December 31, 2005 and a net loss applicable to common stockholders of $10.1 million, or $(0.77) per share for the year ended December 31, 2005.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2006, due to the reclassification of $7.5
million of our Series C, D and E preferred stock to short term loans payable, the Company had a $5.4 million net working capital deficit and no cash or cash equivalents. Since then, our working capital position has worsened due to continuing losses
from operations. We intend to improve our working capital position by pursuing negotiations with the holders of our Series C, D and E preferred stock to resolve their redemption demands without the need to make the required redemption payments.
However, there can be no assurance that we will be successful in resolving their redemption demands. There can also be no assurance that we will not receive additional redemption demands from other holders of our Series C and E preferred stock. We
also intend to improve our working capital position by pursuing various funding alternatives, however at this time there are no understandings or arrangements on the part of any third party to provide us with additional funding. In this regard, our
recent delisting from the Nasdaq Stock Market and the recently filed shareholder derivative lawsuit against our board of directors is likely to impair our ability to resolve the redemption demands of our preferred shareholders and successfully
acquire funding from other sources. In the meantime, we are solely dependent on our existing current assets to meet our operating expenses, capital expenditures, and other commitments, which we believe will provide sufficient funds only for six
months from the date of this report assuming we do not fund the required mandatory redemption payments.

We believe that we require a
minimum of $5 million of additional funding, in addition to any funding required to resolve the $6.3 million in redemption demands of our preferred shareholders, in order to fund our ongoing and planned



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

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



| |  |  | the overall levels of sales of our products and gross profit margins;
| | - |  | ---------------------------------------------------------------------



| |  |  | market acceptance of the technology and products;
| | - |  | -------------------------------------------------



| |  |  | our business, product, capital expenditure and research and development plans, and product and technology roadmaps;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the overall levels of sales of our products and gross profit margins;
| | - |  | ---------------------------------------------------------------------



| |  |  | the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a competitive position in the marketplace;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | volume price discounts and customer rebates;
| | - |  | --------------------------------------------



| |  |  | the levels of inventory and accounts receivable that we maintain;
| | - |  | -----------------------------------------------------------------



| |  |  | acquisition opportunities;
| | - |  | --------------------------



| |  |  | capital improvements to new and existing facilities;
| | - |  | ----------------------------------------------------



| |  |  | technological advances;
| | - |  | -----------------------



| |  |  | our competitors responses to our products;
| | - |  | -------------------------------------------



| |  |  | our relationships with suppliers and customers; and
| | - |  | ---------------------------------------------------



| |  |  | the effectiveness of our expense and product cost control and reduction efforts.
| | - |  | --------------------------------------------------------------------------------

Net cash used by operations for the year ended December 31, 2006 was $6.6 million as compared to cash used by operations of $11.3 million for the
corresponding period in 2005. In the year ended December 31, 2006, the primary use of cash was funding the operating loss. In the fiscal year ended 2005, the primary use of cash was incurred to fund the operating loss and additional working
capital requirements of $2.0 million for the Aviation division to fund the aircraft maintenance and modification project for our Latin American airline customer.

Cash used in investing activities for the year ended December 31, 2006 consisted of $0.8 million compared to cash used of $2.1 million for the year ended December 31, 2005. For the year ended
December 31, 2006, the cash was comprised of the collection of $0.5 million on the note provided to Astrophysics, Inc. offset by of $1.3 million of cash used for the acquisition of fixed assets and other intangibles. For the year ended
December 31, 2005, cash was primarily used for a good faith deposit of $0.5 million and other costs of $0.2 million related to our intent to purchase Astrophysics, Inc. and an additional $0.5 million note provided to Astrophysics as per the
terms of the letter of intent. Additional cash of $0.7 million was required for the acquisition of fixed assets and other intangibles.

The
Companys wholly-owned subsidiary, Best Logic, LLC, executed a loan agreement with Far East National Bank pursuant to which the bank has agreed to loan Best Logic up to $1 million. Pursuant to a promissory note, dated March 9, 2005,
executed in connection with the loan agreement, interest on the outstanding principal balance of the loan will accrue at a variable rate equal to the lenders prime rate plus 2%. The initial interest rate was 10.25% per annum, subject to
change each time the lenders prime rate changes. Interest is payable monthly with all outstanding principal and accrued and unpaid interest due and payable in full on March 15, 2007. As of March 31, 2007, a total of $965,000 is
outstanding by Best Logic pursuant to the loan agreement. Best Logic is currently in default under the loan agreement. Best Logic is attempting to negotiate a work-out or extension of the loan, however there can be no assurance it will be able to do
so.

Net cash provided by financing activities for the year ended December 31, 2006 totaled $6.6 million as follows: the issuance of
our Series E preferred stock provided $3.6 million, the net proceeds from the exercise of stock warrants provided



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$4.5 million, and proceeds from the exercise of stock options provided $.7 million, all of which were offset by $.3 million to pay in full a loan to complete
the Tops acquisition, $.8 million offset of balances due to related parties and $1.1 million to pay preferred stock dividends and redemptions. As of December 31, 2006, the total outstanding balance on loans from related parties was $1.4
million.

Net cash provided by financing activities for the year ended December 31, 2005 totaled $13.2 million. In March 2005, our
Contract Manufacturing division obtained a $1 million bank line of credit to assist in the funding of our working capital requirements, all of which was used in operations as of December 31, 2005. In the second quarter of 2005, we completed the
private placement sales of Series B and Series C preferred stock resulting in aggregate net proceeds of $4.6 million. In November 2005, we completed the private placement sale of Series D preferred stock resulting in net proceeds of $5.7 million. An
additional $1.9 million was received through the exercise of previously issued stock options. As of December 31, 2005, the total outstanding balance on loans from related parties was $2.1 million.

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

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

On September 29, 2006, we received redemption notices from certain holders of our Series C and Series E preferred stock demanding
that we repurchase an aggregate of 136,908 shares of their Series C preferred stock, representing 27% of the issued and outstanding Series C preferred stock, and 95,703 shares of their Series E preferred stock, representing 82% of the issued and
outstanding Series E preferred stock. Subsequently, we received redemption notices demanding that we repurchase an additional 150,600 shares of Series C preferred stock, 5,500 remaining shares of the Series D preferred stock and 6,175 shares of
Series E preferred stock. As of March 31, 2007,, the aggregate redemption amount under the notices received is $6,283,183 plus $163,972 accrued and unpaid dividends.

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

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



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CONTRACTUAL CASH OBLIGATIONS

The following table outlines payments due under our significant contractual obligations over the next five years, exclusive of interest (in thousands):



|                                             |  |                        |        |   |                 |   |        |            |  |   |            |   |  |             |      |   |  |   |      |  
|-------------------------------------------- |  | ---------------------- | ------ | - | --------------- | - | ------ | ---------- |  | - | ---------- | - |  | ----------- | ---- | - |  | - | ---- | -
|                                             |  | Payments Due by Period |       
|                                             |  | Total                  |        |   | Less than1 year |   |        | 2  3Years |  |   | 4  5Years |   |  | After5Years |     
|Contractual Obligations at December 31, 2006 |  |                        |        |   |                 |   |        |            |  |   |            |   |  |             |      |   |  |   |      |  
|                                             |  |                        |        |   |                
|Loan payable                                 |  | $                      | 2,291  |   |                 | $ | 2,291  |            |  | $ |            |   |  | $           |      |   |  | $ |     |  
|                                             |  |                        |        |   |                
|Preferred Stock Reclassification             |  |                        | 7,546  |   |                 |   | 7,546  |            |  |   |           |   |  |             |     |   |  |   |     |  
|                                             |  |                        |        |   |                
|Long Term Debt                               |  |                        | 1,997  |   |                 |   |       |            |  |   | 1,970      |   |  |             | 27   |   |  |   |     |  
|                                             |  |                        |        |   |                
|Operating Leases                             |  |                        | 3,136  |   |                 |   | 896    |            |  |   | 1,133      |   |  |             | 649  |   |  |   | 458  |  
|                                             |  |                        |        |   |                
|Sublease Income                              |  |                        | (2,129 | ) |                 |   | (306   | )          |  |   | (645       | ) |  |             | (692 | ) |  |   | (486 | )
|                                             |  |                        |        |   |                
|Unconditional Purchase Obligations           |  |                        |       |   |                 |   |       |            |  |   |           |   |  |             |     |   |  |   |     |  
|                                             |  |                        |        |   |                
|Consulting Contractual Obligation            |  |                        | 300    |   |                 |   | 180    |            |  |   | 120        |   |  |             |     |   |  |   |     |  
|                                             |  |                        |        |   |                 |   |        |            |  |   |            |   |  |             |      |   |  |   |      |  
|                                             |  |                        |        |   |                
|Total Contractual Obligations                |  | $                      | 13,142 |   |                 | $ | 10,608 |            |  | $ | 2,578      |   |  | $           | (16  | ) |  | $ | (28  | )
|                                             |  |                        |        |   |                 |   |        |            |  |   |            |   |  |             |      |   |  |   |      |  

We leased five facilities as of December 31, 2006, one of which was substantially subleased,
and the other four of which housed the Companys corporate, manufacturing and warehouse requirements.

In June 2004, we borrowed
$1,000,000 from John Pan, our Chairman, Chief Financial Officer and President. Interest accrues on the unpaid principal balance of this loan at a rate equal to the prime rate at Bank of the West, plus 0.25%. As of December 31, 2006 the total
outstanding loan plus accrued interest totaled $1.2 million. We are required to accrue interest payments each month until the principal balance is paid in full, which was to occur no later than December 15, 2006. We are in discussions with
Mr. Pan to extend the terms of the loan.

CRITICAL ACCOUNTING POLICIES

Revenue recognition. For the sale of hardware products, sales are primarily recognized when shipped. A portion of this revenue may be
deferred if significant obligations are to be fulfilled in the future related to installation and technical support, in which case, such revenue is recognized when all obligations have been fulfilled. All rebates, sales returns, and discounts are
recorded separately, net of gross sales.

Reserve for uncollectible accounts. Management evaluates accounts receivable
periodically for potentially uncollectible receivables by considering factors including specific customer circumstances and plans, historical experiences, and expected future trends. As of December 31, 2006, management estimated the reserve for
uncollectible accounts to be $1.4 million.

Inventories. The Companys inventories include the cost of material,
direct labor, manufacturing overhead, parts and supplies, and terminals assembled or in the process of assembly. Inventory consists primarily of computer components parts video and data recording component parts, cockpit door surveillance system and
wire harness component parts, and work in process. Inventories are stated at the lower of average cost or market.



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Research and development. Research and development costs consist of engineering and
other costs directly related to the technical development of a product. Research and development costs are expensed as incurred. Costs related to modifications of existing products for a specific contract are capitalized. No research and development
costs were capitalized in 2006 or 2005.

Goodwill and Other Intangibles. We have a significant amount of goodwill and
intangible assets on our balance sheet related to acquisitions. At December 31, 2006 the net amount of $10.7 million of goodwill and intangible assets represented 47.4% of total assets. Goodwill represents the excess of costs over fair value of
assets of businesses acquired. We adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of August 8, 2003. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite
useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-lived Assets.

We have accumulated a total of $8.1 million of goodwill; $3.2 million resulted from the Merger, $2.8 million from the asset acquisition of Airworks,
$300,000 from the asset purchase of Perpetual, and $1.8 million for the asset purchase of Tops. The goodwill arising from the Merger and asset acquisitions, other than Tops, has been subject to its annual impairment test in 2006. Application of the
discounted cash flow methodology to management assumptions did not identify any impairment to the goodwill. We continually monitor for any potential indicators of impairment of goodwill and intangible assets and we have determined that no such
indicators have arisen to date. Any impairment loss could have a material adverse impact on our financial condition and results of operations.

Long-term assets. Long-term assets of the Company are reviewed as to whether their carrying value have become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash
flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 2006, the Company expects the
long-term assets to be fully recoverable.

Income taxes. The Company uses the asset and liability method of accounting
for income taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities.

The Company is taxed as a consolidated group from the date of the Merger forward. The consolidated group has generated net losses in 2006 and 2005.
Therefore, the Company has recognized the minimum California income tax and the franchise tax applicable to Best Logic, LLC.

Financial instruments. Considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts
that could be realized upon the disposition of the financial instruments. The use of market assumptions and or estimation methodologies may have a material effect on estimated fair value amounts. The carrying amount of cash and cash equivalents,
accounts receivable, accounts payable, customer deposits, and other items included on the consolidated balance sheet as of December 31, 2006 approximate their fair value due to their short-term nature.

Stockholders Equity. The Company has issued five series of preferred stock with stock warrants. Each issuance of preferred stock
was accounted for in accordance with EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Accordingly, the issuance and conversions of preferred stock have resulted in
$1.8 and $2.6 million of beneficial conversion for the years ended December 31, 2006 and 2005, respectively. The beneficial conversion has been recognized as a non-cash preferred stock dividend. Additionally, each of the issuances has been
reviewed and analyzed in accordance with FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and SEC Accounting Series Release No. 268, Presentation in Financial Statements of Redeemable
Preferred Stocks which require classification of financial instruments with certain characteristics as liabilities. Pursuant to the terms of the Certificates of Designations, if the Companys common stock is not listed on the New York Stock
Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq Capital Market or the OTC Bulletin Board for a period of seven consecutive trading days, holders of the outstanding preferred shares may elect that we repurchase their preferred
shares. Effective upon the opening of the market on September 19, 2006, the Companys securities were delisted from the Nasdaq Capital Market. Since that time, the Companys common stock has been trading on the electronic Pink Sheets.
As a result of the repurchase provisions, the preferred shares were reclassified as liabilities and included in current liabilities on the accompanying consolidated balance sheet.



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RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)
which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The
Company is currently evaluating the impact of adopting SFAS 159 on its financial position, cash flows, and results of operations.

In
September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108). This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach
that requires quantification of financial statement errors based on the effects on each of the companys balance sheets, statements of operations and related financial statement disclosures. The SAB permits existing public companies to record
the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with
the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through
the cumulative adjustment and how and when it arose. The Company is currently evaluating the impact SAB 108 may have on its financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Post Retirement Plans. SFAS No. 158 requires employers to recognize in its
statement of financial position an asset or liability based on the retirement plans over or under funded status. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. This Statement does not affect the
Companys financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Issues No. 157, Fair
Value Measurements (SFAS 157), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that the Company has not yet issued financial statements for that fiscal year, including any financial
statements for an interim period within that fiscal year. The Company is currently evaluating the impact SFAS 157 may have on its financial condition or results of operations.

In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation
and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact FIN 48 may
have on its financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets (SFAS No. 156), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at
fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits
at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entitys exposure to changes in the fair value
of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized
servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entitys fiscal year that begins after September 15, 2006, with earlier
adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. This Statement does not affect the Companys financial statements.



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In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, which amends SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the
contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a
derivative instrument. This Statement does not affect the Companys financial statements.



|ITEM 7. | CONSOLIDATED FINANCIAL STATEMENTS
|------- | ---------------------------------

Our consolidated
financial statements and related notes are contained on pages F-1 to F-27 of this report.



|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

On November 10, 2006, Haskell & White LLP (H&W), the independent registered public accounting firm of Global ePoint, Inc.
(the Company) for the fiscal years ended December 31, 2005 and December 31, 2004, resigned as the Companys independent registered public accounting firm. H&Ws resignation was effective upon the filing with the
Securities and Exchange Commission (SEC) of the Companys Quarterly Report on Form 10-QSB for the three-month and nine-month periods ended September 30, 2006, which was on November 20, 2006.

The audit reports of H&W on the Companys consolidated financial statements for the fiscal years ended December 31, 2005 and 2004 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or procedure, or accounting principles.

During each of the fiscal years ended December 31, 2005 and December 31, 2004 and the subsequent interim period from January 1, 2006 through November 20, 2006: (i) there were no disagreements
between the Company and H&W on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of H&W, would have caused H&W to
make reference to the subject matter of the disagreement in connection with its reports on the consolidated financial statements for such years; and (ii) there were no reportable events (as defined in Item 304(b) of Regulation
S-B).

On December 1, 2006, the Company engaged Vasquez & Company LLP, an independent registered public accounting firm to
provide audit and related accounting services.



|ITEM 8A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

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

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006. Based on our evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of December 31, 2006



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We are continuing to evaluate our internal controls as required by Sections 404(a) of the Sarbanes-Oxley
Act of 2002 which will require us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting for the year
ending December 31, 2007. We will be required to provide an auditors attestation report on our internal control over financial reporting beginning with the year ending December 31, 2008. In the course of our evaluation, we have identified
certain areas requiring improvement, which we are addressing. The Merger and additional acquisitions, as summarized in Footnote 2 in the Notes of the Consolidated Financial Statements, have resulted in the use of several different financial
recordation and reporting systems. Management is aware of the issue and has initiated the integration of the divisional financial recordation and reporting into a single consolidated financial reporting system. Additionally, there is a lack of
segregation of duties due to the small number of employees within the financial and administrative functions of the Company. Management will continue to evaluate the employees involved and the control procedures in place, the risks associated with
such lack of segregation and whether the potential benefits of adding employees to clearly segregate duties justifies the expense associated with such increases. These matters have been communicated to our Audit Committee and we are taking
appropriate steps to make necessary improvements and enhance the reliability of our internal controls over financial reporting.

There have
been no changes in our internal controls during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|ITEM 8B. | OTHER INFORMATION
|-------- | -----------------

None.



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PART III.



|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
|------- | ----------------------------------------------------------------------------------------------------------------

Executive Officers and Directors

Set forth below is
information regarding the Companys current Directors and Officers.



|                  |  |     |  |                                                                         |  |              
|----------------- |  | --- |  | ----------------------------------------------------------------------- |  | -------------
|Name              |  | Age |  | Position                                                                |  | DirectorSince
|Toresa Lou        |  | 47  |  | Director, Chief Executive Officer                                       |  | 2003         
|John Pan          |  | 59  |  | Chairman of the Board, President, Chief Financial Officer and Secretary |  | 2003         
|Daryl F. Gates    |  | 80  |  | Director                                                                |  | 2004         
|James D. Smith    |  | 70  |  | Director                                                                |  | 2004         
|John K. Yuan      |  | 52  |  | Director                                                                |  | 2003         
|Arik Arad         |  | 55  |  | Director                                                                |  | 2005         
|Joseph Hermosillo |  | 71  |  | Director                                                                |  | 2005         

Toresa Lou was elected as Chief Executive Officer of Global ePoint after the
Companys acquisition of McDigit in August 2003. Ms. Lou was a founder of McDigit and has been the President and Chief Executive Officer and a Director of McDigit since its incorporation in November 2002. As the President and Chief
Executive Officer of McDigit, Ms. Lou has been actively involved in the management and business development of the Company. Ms. Lou was the Chief Executive Officer of Avatar Technology, Inc., a privately-held computer manufacturing company
and wholesaler with extensive ties in the Far East, prior to joining Global ePoint, and she remains a consultant to that company. She has held this position since April 1999. From September 1992 through the present, she has served as Vice President
of Sales and Marketing at Prophecy Technology LLC, a privately-held international wholesaler and distributor of computer components. Ms. Lou received a M.S. in Accounting from Louisiana State University in 1986.

John Pan was elected as President, Chief Financial Officer, Chairman, and Secretary of Global ePoint after our acquisition of McDigit in
August 2003. Mr. Pan was a founder of McDigit and has been its Secretary and Chief Financial Officer and Director since its incorporation in November 2002. Mr. Pan is also the founder, President, Chief Financial Officer, and Director of
Best Logic LLC, a wholly owned subsidiary of McDigit. He has held these positions since November 2000. Prior to joining Global ePoint, Mr. Pan was the founder, Chief Financial Officer, President, and director of Avatar Technology, Inc., and he
remains chairman of that company. Mr. Pan is a founder, President and Chief Financial Officer of Prophecy Technology LLC, positions he has held since September 1992. Mr. Pan received his M.B.A. from Pepperdine University in 1986.

Daryl F. Gates has been a consultant to Global ePoint since November 2003. Mr. Gates served as Chief of the Los Angeles
Police Department from 1978 until his retirement in 1992 after 43 years of service with the LAPD. Chief Gates is widely recognized as the creator of the successful anti-drug program D.A.R.E. He also pioneered the concept and implementation of law
enforcements first SWAT unit and is known as an authority on terrorism and the control of civil disorders and riots. Since his retirement from the police force, Mr. Gates has been a consultant, public speaker, author and entrepreneur.
Mr. Gates is a graduate of the University of Southern California.

James D. Smith retired in 2002 as a judge for the Los
Angeles County Superior Court, a position he held since his appointment by Governor Deukmejian in 1987. From 1982 to 1987, Judge Smith served a municipal court judge in the Glendale Judicial District. He was an attorney in private practice from 1971
to 1982 and also served as a member of the Los Angeles Police Department for more than 24 years. He served in the U.S. military in Korea from 1955 to 1957. Judge Smith earned his J.D. from Southwestern University School of Law.

John Yuan has been the CEO/President of VisionFlow, Inc., a video semiconductor start up company since May 2003. Mr. Yuan was video
architect for Qualcomm before he co-founded VisionFlow. From June 1999 to July 2002, Mr. Yuan was a senior design manager and chief architect at Cirrus Logic in Austin, Texas, managing technical aspects of four different product lines and
providing technical advice on corporate acquisitions, licensing and strategic alliances. From June 1993 to June 1999, Mr. Yuan was a design manager and principal architect at Motorola Inc., where he led the development of multi-standard video
codes and PowerPC processors and assisted in business development and product promotion. Mr. Yuan has 23 years of experience in managing, promoting, and developing semiconductor products. Mr. Yuan received his Masters of Science in
Electrical Engineering and Physics from Texas Tech University.



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Arik Arad is currently President of Arocon, Inc., a global security company that develops
and markets a wide range of security solutions. From 2003 to 2005, Mr. Arad served as Executive Vice President of Arotech Corp., President and CEO of Arocon Security Corporation, a subsidiary of Arotech Corp., and Chairman of IES Interactive
and AoA- Armour of America. From 1992 to 2003, Mr. Arad acted as a liaison between the Shopping Centers Association of Israel and the Ministry of Defense in Israel. An expert on security and antiterrorism, Mr. Arad has more than 25 years
experience in working with government, military, law enforcement and Fortune 500 companies worldwide. His expertise includes assessing security requirements, security planning and implementation, security training programs and proactive security
follow-up. Mr. Arad is a graduate of Harvard Business School and Haifa University.

Joseph Hermosillo retired in 1996
from a career in the financial services industry spanning over 35 years. From 1991 to 1996, Mr. Hermosillo held positions as the Director of Special Markets (from 1995 to 1996) and Regional Vice President (from 1991 to 1995) with Charles
Schwab & Co., Inc. Prior to 1991, Mr. Hermosillo was employed by Security Pacific National Bank for nearly 29 years, most recently in the capacity of Regional Vice President. Mr. Hermosillo graduated from the Army Language
Institute of Monterey, California, majoring in Russian, while serving for the United State Air Force Security Service. In addition, Mr. Hermosillo is a graduate of Louisiana State University School of Banking and the American Institute of
Banking of Los Angeles.

Audit Committee Financial Expert

The current members of the Audit Committee are Joseph Hermosillo, James D. Smith Arik Arad and John Yuan, each of whom is an independent director under the recently adopted Nasdaq rules. Our Board has
determined that Joseph Hermosillo is a financial expert as defined by the rules and regulations of the Securities and Exchange Commission.

Code of Ethics

We have adopted a code of ethics that applies to the principal executive officer and principal financial and
accounting officer. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at 339 S. Cheryl Lane, City of Industry, CA 91789.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten-percent stockholders are required by SEC regulation to furnish us with copies of all Section 16 forms they file. Based solely on a review of copies of the Section 16 forms furnished to us with respect to year
ended December 31, 2006, we believe that the filing requirements applicable to our officers, directors, and greater than ten-percent beneficial owners were complied with.



|ITEM 10. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The compensation table
below includes compensation paid to our Chief Executive Officer and our two other highest paid executive officers for 2006. Other than as set forth in the table, we did not pay any other salary, bonus or other compensation to these individuals.



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Summary Compensation Table



|                                           |  |      |  |            |  |           |  |                |  |                 |  |                                         |  |                                              |  |                          |  |          
|------------------------------------------ |  | ---- |  | ---------- |  | --------- |  | -------------- |  | --------------- |  | --------------------------------------- |  | -------------------------------------------- |  | ------------------------ |  | ---------
|Name and Principal Position                |  | Year |  | Salary ($) |  | Bonus ($) |  | StockAwards($) |  | OptionAwards($) |  | Non-EquityIncentive PlanCompensation($) |  | NonqualifiedDeferredCompensationEarnings ($) |  | All OtherCompensation($) |  | Total ($)
|Toresa Lou, CEO                            |  | 2006 |  | 300,000    |  |          |  |               |  | 175,100         |  |                                        |  |                                             |  |                         |  | 475,100  
|                                           |  |      |  |            |  |           |  |                | 
|John Pan, CFO                              |  | 2006 |  | 250,000    |  |          |  |               |  | 175,100         |  |                                        |  |                                             |  |                         |  | 425,100  
|Daryl Gates, President since November 2006 |  | 2006 |  | 156,000    |  |          |  |               |  | 89,174          |  |                                        |  |                                             |  |                         |  | 245,174  

The dollar amount reflect the dollar amount recognized for financial statement reporting
purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R). Assumptions used in the calculation of this amount are included in footnote 11 to our audited financial statement for the fiscal year ended December 31,
2006 included elsewhere in this report.

In July 2004, our Board of Directors approved increases in compensation for John Pan, our
Chairman, Chief Financial Officer and President, and for Toresa Lou, our Chief Executive Officer, retroactive to January 1, 2004. The Board also granted Mr. Pan and Ms. Lou options to purchase shares of our common stock.

Mr. Pans annual salary was increased to $245,000, plus an annual bonus of up to 60% of his annual salary, or approximately $147,000, based
on Mr. Pans satisfaction of annual performance conditions to be determined by the Compensation Committee. In addition, Mr. Pan was granted an option to purchase 500,000 shares of Global ePoint common stock, at an exercise price equal
to $4.88 per share, the fair market value on the date of grant, exercisable for a term of eight years, of which 125,000 option shares are fully vested and immediately exercisable, with the remaining option shares to vest and become exercisable in
three increments of 125,000 each on the first three anniversaries of the grant date.

Ms. Lous annual salary was increased to
$295,000, plus an annual bonus of up to 60% of her annual salary, or approximately $177,000, based on Ms. Lous satisfaction of annual performance conditions to be determined by the Compensation Committee. In addition, Ms. Lou was
granted an option to purchase 500,000 shares of Global ePoint common stock, at an exercise price equal to $4.88 per share, the fair market value on the date of grant, exercisable for a term of eight years, of which 125,000 option shares are fully
vested and immediately exercisable, with the remaining option shares to vest and become exercisable in three increments of 125,000 each on the first three anniversaries of the grant date.

Daryl F. Gates has been appointed to the office of President of Global ePoint, Inc. (the Company), effective November 20, 2006,
replacing John Pan. As compensation for his services as President of the Company, Mr. Gates is receiving options to purchase 120,000 shares of the Companys common stock at an exercise price of $0.60 per share, vesting at a rate of 10,000
shares per month beginning on November 20, 2006. The options will be issued pursuant to the Companys 2005 Stock Incentive Plan and will expire on November 13, 2011. In addition to being an officer and a director of the Company,
Mr. Gates has served as a consultant to the Company since July 2003. From July 2003 through October 2003, the Company paid Mr. Gates a monthly consulting fee of $5,000. In November 2003, the Company entered into a one-year consulting
agreement with Mr. Gates pursuant to which the Company paid him a monthly consulting fee of $10,000 and granted him an option to purchase 60,000 shares of the Companys common stock at $6.47 per share. This option is exercisable until the
earlier of five years from the grant date or the date that Mr. Gates ceases providing consulting services to the Company. Effective November 1, 2004, the Company entered into a new consulting agreement with Mr. Gates pursuant to which
he receives a monthly consulting fee of $13,000. Pursuant to the consulting agreement, the Company also granted him options to purchase 60,000 shares of its common stock at an exercise price of $2.82 per share as compensation for his services from
November 1, 2004 through November 1, 2005, and an additional 60,000 shares of its common stock at an exercise price of $2.82 per share as compensation for his services from November 1, 2005 through November 1, 2006.



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Outstanding Equity Awards at Fiscal Year End



|            |  |                                                                |  |                                                                  |  |                                                                                       |  |                         |  |                     
|----------- |  | -------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------------------- |  | --------------------
|Name        |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable |  | EquityIncentivePlanAwards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions
(#) |  | OptionExercisePrice ($) |  | OptionExpirationDate
|Toresa Lou  |  | 375,000                                                        |  | 125,000                                                          |  |                                                                                      |  | 4.88                    |  | 7/31/2012           
|John Pan    |  | 375,000                                                        |  | 125,000                                                          |  |                                                                                      |  | 4.88                    |  | 7/31/2012           
|Daryl Gates |  | 60,000                                                         |  |                                                                 |  |                                                                                      |  | 6.47                    |  | 11/3/08             
|            |  | 66,000                                                         |  |                                                                 |  |                                                                                      |  | 2.82                    |  | 11/1/2009           
|            |  | 60,000                                                         |  |                                                                 |  |                                                                                      |  | 2.82                    |  | 11/1/2011           
|            |  | 13,333                                                         |  | 106,667                                                          |  |                                                                                      |  | 0.60                    |  | 11/20/2011          

Director Compensation

Non-Employee Director Compensation. In July 2004, the Board of Directors adopted a policy for compensating non-employee directors which became effective on January 1, 2005. Under the policy,
non-employee directors will be entitled to receive (i) a cash fee of $1,500 for each in-person meeting of the Board of Directors and $500 for each telephonic meeting and an additional $500 for each telephonic meeting in excess of one hour, and
(ii) options to purchase 20,000 shares of common stock, which will become fully vested upon the directors re-election at the next annual meeting of stockholders. In addition, members of Board committees will receive an option to purchase
5,000 shares of common stock for each committee assignment and additional options to purchase 5,000 shares of common stock as chairman of a committee

Employee Director Compensation. Directors who are employees of Global ePoint receive no fees for services provided in that capacity, but are reimbursed for out-of-pocket expenses in connection with
attendance at meetings of the Board of Directors and its committees.



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The compensation table below includes compensation paid to our Non-Employee Board of Directors for the
fiscal year ended December 31, 2006:



|               |  |                            |        |              |   |         |  |   |        
|-------------- |  | -------------------------- | ------ | ------------ | - | ------- |  | - | -------
|Name           |  | Fees Earnedor Paid in Cash |        | OptionAwards |   | Total  
|Arik Arad      |  | $                          | 17,000 |              | $ | 107,600 |  | $ | 124,600
|JR Hermosillo  |  |                            | 24,000 |              |   | 121,050 |  |   | 145,050
|James D. Smith |  |                            | 19,500 |              |   | 94,150  |  |   | 113,650
|John Yuan      |  |                            | 7,500  |              |   | 67,250  |  |   | 74,750 



|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

Security Ownership of Certain Beneficial Owners and Management

Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Information regarding ownership of our common stock by our security holders is based, in part, upon our
review of Forms 3, 4 and 5, and Schedules 13D and 13G filed with the Securities and Exchange Commission by such persons. Unless otherwise noted, and subject to applicable community property laws, each of the stockholders listed in the table
possesses sole voting and investment power with respect to the shares indicated and each persons address is the address of our corporate offices. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or member
of a group to acquire them within 60 days are treated as outstanding only when determining the amount and percent owned by such person or group.

The following table sets forth information regarding the beneficial ownership of the Companys common stock by each beneficial owner of more than 5% of the Companys common stock, each director of the Company, each executive
officer of the Company (the named executive officers) and the directors and executive officers as a group.



|                                                            |  |                                                                          |  |                 |  
|----------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | --------------- | -
|Beneficial Owner (1)                                        |  | Amount and Nature of Beneficial Ownershipof Common Stock as of 3/31/2007 |  | Percent ofClass |  
|Iroquois Capital LP (2)                                     |  | 5,871,496                                                                |  | 30.29           | %
|John Pan (4)                                                |  | 4,948,472                                                                |  | 25.05           |  
|Toresa Lou (3)                                              |  | 1,561,891                                                                |  | 7.80            |  
|John Yuan (5)                                               |  | 90,000                                                                   |  | *               |  
|Daryl F. Gates (6)                                          |  | 324,703                                                                  |  | *               |  
|James D. Smith (5)                                          |  | 75,000                                                                   |  | *               |  
|Joseph R, Hermosillo                                        |  | 45,000                                                                   |  | *               |  
|Arik Arad                                                   |  | 40,000                                                                   |  | *               |  
|All directors and executive officers as a group (7 persons) |  | 7,085,066                                                                |  | 33.8            | %

---

|* | Less than one percent.
|- | ----------------------

|(1) | Unless otherwise indicated, all shares are owned beneficially and of record by the person named above.(2) Includes the following securities: 1,547,319 shares underlying the Series E
Preferred Stock, 843,981shares issuable upon the exercise of warrants at an exercise price of $3.58 per share, 641,657shares issuable upon the exercise of warrants at an exercise price of $2.76 per share, and up to 2,133,465 shares issuable upon the
exercise of warrants at an exercise price of $0.01 per share. In addition, includes 42,858 shares beneficially held by Iroquois Capital, LP. Joshua Silverman has
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | voting and investment control over the securities held by Iroquois Capital, LP and Iroquois Master Fund Ltd. Mr. Silverman disclaims beneficial
ownership of the shares held by Iroquois Capital, LP and Iroquois Master Fund Ltd. 9,047 shares underlying the Series C Preferred Stock, 31,250 shares issuable upon the exercise of warrants at an exercise price of $6.91 per share., and 323,234
common shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents options to purchase shares of Common Stock issued to Auspex LLC, an entity controlled by Toresa Lou, issued in connection with the Companys acquisition of McDigit
in August 2003, pursuant to the Reorganization and Stock Purchase Agreement dated March 31, 2003 (the Reorganization Agreement). Under the Reorganization Agreement, McDigit was entitled to receive 1,511,015 options to purchase the
Companys Common Stock as part of the acquisition by Global. In August 2003, Global and McDigit executed the Stock Distribution Agreement pursuant to which the parties agreed that these options would be granted to Auspex LLC.
Pursuant to the Reorganization Agreement, the option was issued pari passu to, and in a number equal to, the outstanding options and warrants of the Company at time of closing of the acquisition. The option may only be exercised in the same number
as the number exercised from the existing options and warrants held at the time of closing. Between the closing date of the acquisition and April 9, 2007, 243,585 options that were outstanding upon the closing date of the acquisition have
expired, and therefore, an equal number of Auspex LLCs options under the Stock Distribution Agreement have expired. For purposes of this table, we have assumed that all of Auspex LLCs other options are currently exercisable. Also
includes 924,891common shares from the exercise of options pursuant to the agreement. Includes an additional 375,000 options to purchase common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes options to purchase 375,000 shares of common stock.
|--- | ------------------------------------------------------------

|(5) | Includes options to purchase 250,000 shares of Common Stock.
|--- | ------------------------------------------------------------

|(6) | Represents options to purchase 306,000 shares of Common Stock and 18,703 shares of Common Stock.
|--- | ------------------------------------------------------------------------------------------------

Equity Compensation Plan Information

In 2006, we maintained five equity compensation plans under
which our equity securities were authorized for issuance to our employees, directors or consultants: the 1993 Stock Option Plan, the 1994 Stock Option Plan, the 1994 Stock Option Plan for Directors and the 2004 Stock Option Plan and 2005 Stock
Option Plan. All five of these plans were approved by our stockholders.



|                                                           |  |                                                                                          |  |                                                                          |      |                                                                                                                                        |          
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and
rights |  | Weighted averageexercise price ofoutstanding options,warrants and rights |      | Number of securitiesremaining available forfuture issuance under equitycompensation plans(excluding securities reflectedin column (a))
|                                                           |  | (a)                                                                                      |  | (b)                                                                      |      | (c)                                                                                                                                   
|Equity compensation plans approved by security holders (1) |  | 2,491,000                                                                                |  | $                                                                        | 4.08 |                                                                                                                                        | 2,717,000
|Total                                                      |  | 2,491,000                                                                                |  | $                                                                        | 4.08 |                                                                                                                                        | 2,717,000

---

|(1) | As of March 2003, the 1993 Stock Option Plan expired and no further grants will be made under this plan. As of April 2004, the 1994 Stock Option Plan and the 1994 Stock Option Plan
for Directors expired and no further grants will be made under these plans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|-------- | ------------------------------------------------------------------------

We have transacted a substantial majority of our business with companies that are owned or controlled by Mr. John Pan, our Chairman, Chief Financial Officer and largest stockholder (we refer to these companies in
this report as related parties). These transactions allow us to leverage sales opportunities and component and sub-system purchasing relationships of these related companies. As a result, we believe that we achieve the benefits of
economies of scale associated with shared facilities, administration, and sales, and the benefits associated with the use of the related parties network of global contacts, sales opportunities and purchasing power.

We do not have any written agreements with any of the related parties and therefore there are no long-term obligations in place on which we can rely.
These related-party transactions are generally based on purchase orders or verbal agreement between Global ePoint and the related parties. The related parties are not obligated to continue working with us in the future. If a material amount of these
types of transactions are not effected in the future, our operating results and business would be materially and adversely affected. We cannot make any guarantees that we will be able to leverage the related parties relationships and
purchasing power for these types of beneficial transactions in the future.



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In order to ensure that each transaction with a related party is fair to and in the best interests of the
company and its stockholders, our Board of Directors appointed the audit committee, consisting solely of independent members of our Board of Directors, to review and approve all transactions between Global ePoint and any related parties. Based on
the committees review and approval, we believe that we received market rates or better and that all transactions with related parties have been on terms that were fair to the company and our stockholders.

We have reviewed our related party transactions in accordance with Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities,
which requires the primary beneficiary of a variable interest entity (VIE) to consolidate the VIE under certain circumstances. In accordance with FIN 46R, we have evaluated the Companys relationships and interest in entities that
might be considered variable interest entities as defined by FIN 46R and concluded that no prerequisite conditions exist; therefore, none have been consolidated.

FACILITIES LEASING ARRANGEMENT

We share office and warehouse facilities in buildings owned or controlled by Mr. John
Pan, our Chairman, Chief Financial Officer and largest stockholder, which facilities are also partially occupied by another company controlled by Mr. Pan. We also use and pay rent to Mr. Pan for the use of our manufacturing and assembly
equipment. We recorded occupancy costs and equipment rental expenses to Mr. Pan totaling $441,000 and $519,000 for the fiscal years ended December 31, 2006 and 2005, respectively. Occupancy costs paid to Mr. Pan are based on the
square footage occupied and a price per square foot verbally agreed upon.

PURCHASES FROM RELATED PARTIES

During 2006 and 2005, we purchased from related parties components and finished products totaling approximately $17.4 and $15.3 million respectively. The
related parties can generally purchase components in greater quantity than we can on our own and thereby can pass through to the Company the more favorable pricing due to its volume discounts. Of our total purchases from related parties, a majority
constitute purchases of various component parts, such as memory, CPUs, hard drives and motherboards, and finished products from Avatar Technology, Inc. (Avatar) and Prophecy Technology, LLC (Prophecy). Of the total purchases in 2006 and 2005,
approximately $13.5 and $10.8 million, respectively, were from Avatar, and approximately $3.9 and $4.4 million, respectively, were from Prophecy. These related parties have long-term, volume purchasing relationships with certain component suppliers
that allow them to sell components to us at terms that are not otherwise available to us in the general market.

SALE ARRANGEMENTS

During 2006 and 2005, we sold approximately $19.1 and $18.0 million, respectively, of products and contract manufacturing services to related parties.
Included in these amounts were sales of $15.4 and $17.6 million, respectively, to Avatar and $3.8 and $0.2 million, respectively, to Prophecy.

Avatar and Prophecy Technology, LLC provide distribution of computer components around the world, as well as consumer PCs in selected markets. In both 2006 and 2005, these entities secured major contracts for consumer PCs with a large
retail chain in Latin America and, as a result, subcontracted the manufacturing of the consumer PCs to us. Our contract manufacturing division generated sales of approximately $19.1 and $17.6 million in 2006 and 2005, respectively, from these
entities for consumer PCs, all of which were ultimately delivered to retail stores of their customers throughout Latin America.

The
following schedule provides a summary of balances with the related parties as of December 31, 2006 and transactions with related parties during the years ended December 31, 2006 and 2005:



|                                                   |  |                       |  
|-------------------------------------------------- |  | --------------------- | -
|(Thousands of dollars)                             |  | As ofDecember 31,2006
|Balances due from Related Parties were as follows: |  |                       |  
|(B) (100% owned by CFO/Chairman)                   |  | $                     | 
|(C) (100% owned by CFO/Chairman)                   |  |                       | 



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|                                                 |  |   |     |  
|------------------------------------------------ |  | - | --- | -
|(D) (95% owned by CFO/Chairman)                  |  |   | 139 |  
|                                                 |  |   |     |  
|Total                                            |  | $ | 139 |  
|                                                 |  |   |     |  
|Balances due to Related Parties were as follows: |  |   |     |  
|(B) (100% owned by CFO/Chairman)                 |  | $ | 78  |  
|(C) (100% owned by CFO/Chairman)                 |  |   | (33 | )
|(D) (95% owned by CFO/Chairman)                  |  |   |    |  
|                                                 |  |   |     |  
|Total                                            |  | $ | 45  |  
|                                                 |  |   |     |  



|                                                        |  |                                 |        |      |   |       
|------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------
|                                                        |  | For the year ended December 31,
|(Thousands of dollars)                                  |  | 2006                            |        | 2005
|Product purchases from Related Parties were as follows: |  |                                 |        |      |   |       
|(B) (100% owned by CFO/Chairman)                        |  | $                               | 13,531 |      | $ | 10,821
|(C) (100% owned by CFO/Chairman)                        |  |                                 |       |      |   |      
|(D) (95% owned by CFO/Chairman)                         |  |                                 | 3,909  |      |   | 4,470 
|                                                        |  |                                 |        |      |   |       
|Total                                                   |  | $                               | 17,440 |      | $ | 15,291
|                                                        |  |                                 |        |      |   |       
|Product sales to Related Parties were as follows:       |  |                                 |        |      |   |       
|(B) (100% owned by CFO/Chairman)                        |  | $                               | 15,388 |      | $ | 17,754
|(C) (100% owned by CFO/Chairman)                        |  |                                 |       |      |   |       
|(D) (95% owned by CFO/Chairman)                         |  |                                 | 3,766  |      |   | 220   
|                                                        |  |                                 |        |      |   |       
|Total                                                   |  | $                               | 19,154 |      | $ | 17,974
|                                                        |  |                                 |        |      |   |       



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OTHER RELATED PARTY TRANSACTIONS

Mr. John Pan, the Companys Chairman, Chief Financial Officer and majority stockholder, made pre-Merger advances to McDigit amounting to approximately $341,000, of which $196,000 was repaid during 2003. All
of the loans relate to pre-Merger activities. As of December 31, 2006, the remaining balance on these loans was $145,000. The loans are unsecured and, currently, payable on demand. However, the Company intends to replace these loans with
convertible promissory notes with an interest rate and other terms subject to Board approval.

In June 2004, we borrowed $1,000,000 from
John Pan, our Chairman, Chief Financial Officer and President. Interest accrues on the unpaid principal balance of this loan at a rate equal to the prime rate at Bank of the West, plus 0.25%. The aggregate interest rate was 8.50% as of
December 31, 2006. As of December 31, 2006 the outstanding loan and accrued interest totaled $1.2 million. We are required to accrue interest payments each month until the principal balance is paid in full no later than December 15,
2006. The loan has matured and we are in discussions with Mr. Pan to extend the terms of the loan.



|ITEM 13. | EXHIBITS
|-------- | --------

The exhibits to this Annual Report on
Form 10-KSB are listed in the Exhibit Index contained at the end of this report. The Exhibit Index indicates each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-KSB.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

On
November 10, 2006, Haskell & White LLP (H&W), the independent registered public accounting firm of Global ePoint, Inc. (the Company) for the fiscal years ended December 31, 2005 and December 31,
2004, resigned as the Companys independent registered public accounting firm. H&Ws resignation was effective upon the filing with the Securities and Exchange Commission (SEC) of the Companys Quarterly Report on Form
10-QSB for the three-month and nine-month periods ended September 30, 2006 which was filed on November 20, 2006. On December 1, 2006, the Company engaged Vasquez & Company LLP (Vasquez), an independent registered
public accounting firm to provide audit and related accounting services. No fees were paid to Vasquez through the year ended December 31, 2006. The following table sets forth the aggregate fees billed to us for services rendered to us for the
years ended December 31, 2006 and 2005 by our independent registered public accounting firm, H&W:



|                      |  |      |         |      |   |        
|--------------------- |  | ---- | ------- | ---- | - | -------
|Fee Category          |  | 2006 |         | 2005
|1) Audit Fees         |  | $    | 245,390 |      | $ | 198,840
|2) Audit-Related Fees |  | $    |        |      | $ |       
|3) Tax Fees           |  |      |        |      |   |       
|4) All Other Fees     |  | $    |        |      | $ |       

Audit fees include fees and expenses incurred in connection with audits and quarterly reviews of
our consolidated financial statements and review of and preparation of consents for registration statements filed with the Securities and Exchange Commission.

Our Audit Committee approves all audit fees, audit-related fees, tax fees and special engagement fees. The Audit Committee approved 100% of such fees for each of the years ended December 31, 2006 and 2005.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to annual report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |                     |  |                        
|-------------------- |  | ------------------- |  | -----------------------
|                     |  | GLOBAL EPOINT, INC.
|                     |  |                    
|Date: April 17, 2007 |  | By:                 |  | /s/ TORESA LOU         
|                     |  |                     |  | Toresa Lou,            
|                     |  |                     |  | Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities on April 17, 2007.



|                        |  |                                                                                                                                         
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|Signature               |  | Title                                                                                                                                   
|                        | 
|/s/ TORESA LOU          |  | Chief Executive Officer (principal executive officer) and Director                                                                      
|Toresa Lou              | 
|                        | 
|/s/ JOHN PAN            |  | Chief Financial Officer (principal financial officer and principal accounting officer), Secretary and Chairman of the Board of Directors
|John Pan                | 
|                        | 
|/s/ JOSEPH R HERMOSILLO |  | Director                                                                                                                                
|Joseph R. Hermosillo    | 
|                        | 
|/s/ ARIK ARAD           |  | Director                                                                                                                                
|Arik Arad               | 
|                        | 
|/s/ DARYL F. GATES      |  | President Director                                                                                                                      
|Daryl F. Gates          | 
|                        | 
|/s/ JAMES D. SMITH      |  | Director                                                                                                                                
|James D. Smith          | 
|                        | 
|/s/ JOHN K. YUAN        |  | Director                                                                                                                                
|John K. Yuan            | 



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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



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|                                                                                               |  | Page 
|                                                                                               | 
|Reports of Independent Registered Public Accounting Firms                                      |  | F-2-3
|Consolidated Balance Sheet                                                                     |  | F-4  
|Consolidated Statements of Operations for the Years Ended December 31, 2006 and 2005           |  | F-5  
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2006 and 2005 |  | F-6  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2006 and 2005           |  | F-7  
|Notes to Consolidated Financial Statements                                                     |  | F-8  



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS

Global ePoint, Inc. and Subsidiaries

We have audited the
accompanying consolidated balance sheet of Global ePoint, Inc. and Subsidiaries (the Company) as of December 31, 2006, and the related consolidated statements of operations, stockholders equity and comprehensive income (loss)
and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Global ePoint, Inc. and
Subsidiaries as of December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has recurring losses, the Company reclassified all of its preferred stock as current liability because of mandatory redemption, and the Company has negative working capital. These matters raise substantial doubt
about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of the
uncertainty.

/s/ VASQUEZ & COMPANY LLP

Los
Angeles, California

April 16, 2007



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Global ePoint, Inc. and
Subsidiaries

We have audited the accompanying consolidated statements of operations, stockholders equity and comprehensive income (loss) and cash
flows of Global ePoint, Inc. and Subsidiaries (the Company) for the year ended December 31, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of the Companys operations and its cash flows for the year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 7, the Company has engaged in significant related party transactions.

/s/ HASKELL & WHITE LLP

Irvine, California

March 31, 2006



F-3



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2006



|                                                                                                         |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | - | ------- | -
|(Thousands of dollars, except per share amounts)                                                         |  |   |        
|                                                                                                         | 
|ASSETS                                                                                                   |  |   |         |  
|CURRENT ASSETS:                                                                                          |  |   |         |  
|Accounts receivable, net                                                                                 |  | $ | 2,692   |  
|Accounts receivablerelated parties                                                                      |  |   | 139     |  
|Inventories                                                                                              |  |   | 5,362   |  
|Other current assets                                                                                     |  |   | 776     |  
|                                                                                                         |  |   |         |  
|Total current assets                                                                                     |  |   | 8,969   |  
|                                                                                                         |  |   |         |  
|Property, plant and equipment, net                                                                       |  |   | 789     |  
|Card dispensing equipment and related parts                                                              |  |   | 885     |  
|Goodwill                                                                                                 |  |   | 8,104   |  
|Other intangibles                                                                                        |  |   | 2,571   |  
|Deposits and other assets                                                                                |  |   | 1,215   |  
|                                                                                                         |  |   |         |  
|Total other assets                                                                                       |  |   | 13,564  |  
|                                                                                                         |  |   |         |  
|Total assets                                                                                             |  | $ | 22,533  |  
|                                                                                                         |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                     |  |   |         |  
|CURRENT LIABILITIES:                                                                                     |  |   |         |  
|Accounts payable                                                                                         |  | $ | 3,420   |  
|Accounts payablerelated parties                                                                         |  |   | 7       |  
|Accrued expenses                                                                                         |  |   | 1,054   |  
|Customer deposits                                                                                        |  |   | 103     |  
|Due to related parties                                                                                   |  |   | 38      |  
|Due to stockholder                                                                                       |  |   | 1,311   |  
|Loans payable                                                                                            |  |   | 981     |  
|Mandatorily Redeemable Preferred Stock                                                                   |  |   | 7,485   |  
|                                                                                                         |  |   |         |  
|Total current liabilities                                                                                |  |   | 14,399  |  
|                                                                                                         |  |   |         |  
|NON-CURRENT LIABILITIES                                                                                  |  |   | 1,997   |  
|                                                                                                         |  |   |         |  
|Total liabilities                                                                                        |  |   | 16,396  |  
|                                                                                                         |  |   |         |  
|Commitments and Contingencies (Notes 11, 13, and 14)                                                     |  |   |         |  
|STOCKHOLDERS EQUITY:                                                                                    |  |   |         |  
|Common stock, $0.03 par value, 50,000,000 shares authorized and 19,413,812 shares issued and outstanding |  |   | 581     |  
|Paid-in capital                                                                                          |  |   | 28,596  |  
|Accumulated other comprehensive loss                                                                     |  |   | (56     | )
|Accumulated deficit                                                                                      |  |   | (22,984 | )
|                                                                                                         |  |   |         |  
|Total stockholders equity                                                                               |  |   | 6,137   |  
|                                                                                                         |  |   |         |  
|Total liabilities and stockholders equity                                                               |  | $ | 22,533  |  
|                                                                                                         |  |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005



|                                                 |  |                     |         |   |                  |   |         |  
|------------------------------------------------ |  | ------------------- | ------- | - | ---------------- | - | ------- | -
|(Thousands of dollars, except per share amounts) |  | For the years ended |        
|                                                 |  | December 31,2006    |         |   | December 31,2005 |  
|Sales                                            |  | $                   | 13,761  |   |                  | $ | 14,994  |  
|Sales- related parties                           |  |                     | 19,153  |   |                  |   | 17,754  |  
|                                                 |  |                     |         |   |                  |   |         |  
|Total net sales                                  |  |                     | 32,914  |   |                  |   | 32,748  |  
|                                                 |  |                     |         |   |                  |   |         |  
|Cost of sales                                    |  |                     | 11,210  |   |                  |   | 11,768  |  
|Cost of sales- related parties                   |  |                     | 18,388  |   |                  |   | 16,957  |  
|                                                 |  |                     |         |   |                  |   |         |  
|Total cost of sales                              |  |                     | 29,598  |   |                  |   | 28,725  |  
|                                                 |  |                     |         |   |                  |   |         |  
|Gross profit                                     |  |                     | 3,316   |   |                  |   | 4,023   |  
|                                                 |  |                     |         |   |                  |   |         |  
|Operating expenses:                              |  |                     |         |   |                  |   |         |  
|Selling and marketing                            |  |                     | 2,741   |   |                  |   | 2,981   |  
|General and administrative                       |  |                     | 9,757   |   |                  |   | 6,615   |  
|Research and development                         |  |                     | 1,646   |   |                  |   | 1,268   |  
|Depreciation and amortization                    |  |                     | 475     |   |                  |   | 407     |  
|                                                 |  |                     |         |   |                  |   |         |  
|Total operating expenses                         |  |                     | 14,619  |   |                  |   | 11,271  |  
|                                                 |  |                     |         |   |                  |   |         |  
|Loss from operations                             |  |                     | (11,303 | ) |                  |   | (7,248  | )
|Other income (expense)                           |  |                     | 89      |   |                  |   | 11      |  
|                                                 |  |                     |         |   |                  |   |         |  
|Loss before income tax provision                 |  |                     | (11,214 | ) |                  |   | (7,237  | )
|Income tax provision                             |  |                     |        |   |                  |   | 17      |  
|                                                 |  |                     |         |   |                  |   |         |  
|Net loss                                         |  |                     | (11,214 | ) |                  |   | (7,254  | )
|Preferred stock dividend                         |  |                     | (8,652  | ) |                  |   | (2,819  | )
|                                                 |  |                     |         |   |                  |   |         |  
|Net loss applicable to common stockholders       |  | $                   | (19,866 | ) |                  | $ | (10,073 | )
|                                                 |  |                     |         |   |                  |   |         |  
|Loss per share - basic                           |  |                     | $(1.13) |   |                  |   | $(0.77) |  
|                                                 |  |                     |         |   |                  |   |         |  
|Loss per share - fully diluted                   |  |                     | $(1.13) |   |                  |   | $(0.77) |  
|                                                 |  |                     |         |   |                  |   |         |  
|Weighted average shares and share equivalents    |  |                     | 17,622  |   |                  |   | 13,163  |  
|                                                 |  |                     |         |   |                  |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME/(LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005



|                                                                               |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   |        |                          |  |   |     |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | --------------- | - |  | ------------ | ------ | ------------------------ | ------ | ------ | --------------------------------- | - | --- | ------------------------------------- | - | ------ | ------------------------ |  | - | --- | - |  | - | ------- | - |  | - | ------- | -
|(Thousands of dollars and shares)                                              |  | Preferred Stock |   |  | Common Stock |        | AdditionalPaid inCapital |        |        | AccumulatedOtherComprehensiveLoss |   |     | RetainedEarnings/(AccumulatedDeficit) |   |        | TotalStockholdersEquity | 
|                                                                               |  | Shares          |   |  | Amount       |        |                          | Shares |        | Amount                            |   |     |                                       |  
|Balances, December 31, 2004                                                    |  | 34              |   |  | $            | 2,672  |                          |        | 12,123 |                                   | $ | 363 |                                       | $ | 12,635 |                          |  | $ |    |   |  | $ | (4,517  | ) |  | $ | 11,153  |  
|                                                                               |  |                 |   |  |              |        |                          |       
|Common stock issued upon options exercise                                      |  |                |   |  |              |       |                          |        | 1,246  |                                   |   | 37  |                                       |   | 1,843  |                          |  |   |    |   |  |   |        |   |  |   | 1,880   |  
|Common stock and option based compensation                                     |  |                |   |  |              |       |                          |        | 30     |                                   |   | 1   |                                       |   | 130    |                          |  |   |    |   |  |   |        |   |  |   | 131     |  
|Series B Preferred stock issued May 20, 2005, net of $146 in related costs     |  | 15              |   |  |              | 1,025  |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   |    |   |  |   | 305     |   |  |   | 1,330   |  
|Series C Preferred stock issued June 8, 2005, net of $237 in related costs     |  | 1,250           |   |  |              | 2,451  |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   |    |   |  |   | 575     |   |  |   | 3,026   |  
|Series D Preferred stock issued November 7, 2005, net of $258 in related costs |  | 120             |   |  |              | 3,960  |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   |    |   |  |   | 692     |   |  |   | 4,652   |  
|Warrants                                                                       |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   |        |                          |  |   |     |   |  |   |         |   |  |   |         |  
|Issued with Series B Preferred Stock offering                                  |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   | 329    |                          |  |   |    |   |  |   |        |   |  |   | 329     |  
|Issued with Series C Preferred Stock offering                                  |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   | 812    |                          |  |   |    |   |  |   |        |   |  |   | 812     |  
|Issued with Series D Preferred Stock offering                                  |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   | 1,782  |                          |  |   |    |   |  |   |        |   |  |   | 1,782   |  
|Preferred Stock Conversion                                                     |  | (443            | ) |  |              | (4,470 | )                        |        | 1,928  |                                   |   | 59  |                                       |   | 4,412  |                          |  |   |    |   |  |   | 1,083   |   |  |   | 1,084   |  
|Net loss from operations                                                       |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   |    |   |  |   | (7,254  | ) |  |   | (7,254  | )
|Preferred stock dividend                                                       |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   | (165   | )                        |  |   |    |   |  |   | (2,654  | ) |  |   | (2,819  | )
|                                                                               |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   |        |                          |  |   |     |   |  |   |         |   |  |   |         |  
|                                                                               |  |                 |   |  |              |        |                          |       
|Balances- December 31, 2005                                                    |  | 976             |   |  |              | 5,638  |                          |        | 15,327 |                                   |   | 460 |                                       |   | 21,778 |                          |  |   |    |   |  |   | (11,770 | ) |  |   | 16,106  |  
|                                                                               |  |                 |   |  |              |        |                          |       
|Common stock issued upon options exercise                                      |  |                |   |  |              |       |                          |        | 586    |                                   |   | 17  |                                       |   | 714    |                          |  |   |    |   |  |   |        |   |  |   | 731     |  
|Common stock and option based compensation                                     |  |                |   |  |              |       |                          |        | 100    |                                   |   | 3   |                                       |   | 1,181  |                          |  |   |    |   |  |   |        |   |  |   | 1,184   |  
|Common stock issued upon warrants exercise                                     |  |                |   |  |              |       |                          |        | 1,096  |                                   |   | 33  |                                       |   | 699    |                          |  |   |    |   |  |   |        |   |  |   | 732     |  
|Common stock issued for acquisitions                                           |  |                |   |  |              |       |                          |        | 603    |                                   |   | 18  |                                       |   | 1,985  |                          |  |   |    |   |  |   |        |   |  |   | 2,003   |  
|Series E Preferred stock issued May 25, 2006, net of $108 in related costs     |  | 128             |   |  |              | 3,561  |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   |    |   |  |   | 1,828   |   |  |   | 5,389   |  
|Warrants:                                                                      |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   |        |                          |  |   |     |   |  |   |         |   |  |   |        |  
|Issued with Series E Preferred Stock offering                                  |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   | 1,114  |                          |  |   |    |   |  |   | 572     |   |  |   | 1,686   |  
|Issued to induce conversion of warrants                                        |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   | 1,734  |                          |  |   |    |   |  |   | 1,855   |   |  |   | 3,589   |  
|Preferred stock conversions                                                    |  | (406            | ) |  |              | (4,333 | )                        |        | 1,639  |                                   |   | 48  |                                       |   | 3,222  |                          |  |   |    |   |  |   | 556     |   |  |   | (507    | )
|Preferred stock redemptions                                                    |  | (73             | ) |  |              | (435   | )                        |        |       |                                   |   |    |                                       |   | (297   | )                        |  |   |    |   |  |   |        |   |  |   | (732    | )
|Preferred stock reclassified to short term debt                                |  |                |   |  |              | (4,431 | )                        |        |       |                                   |   |    |                                       |   | (3,054 | )                        |  |   |    |   |  |   | 3,363   |   |  |   | (4,122  | )
|Net loss                                                                       |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   |    |   |  |   | (11,214 | ) |  |   | (11,214 | )
|Other Comprehensive Loss                                                       |  |                |   |  |              |       |                          |        |       |                                   |   |    |                                       |   |       |                          |  |   | (56 | ) |  |   |        |   |  |   | (56     | )
|Preferred stock dividend                                                       |  |                |   |  |              |       |                          |        | 63     |                                   |   | 2   |                                       |   | (480   | )                        |  |   |    |   |  |   | (8,174  | ) |  |   | (8,652  | )
|                                                                               |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   |        |                          |  |   |     |   |  |   |         |   |  |   |         |  
|Balances- December 31, 2006                                                    |  | 625             |   |  | $            | (0     | )                        |        | 19,414 |                                   | $ | 581 |                                       | $ | 28,596 |                          |  | $ | (56 | ) |  | $ | (22,984 | ) |  | $ | 6,137   |  
|                                                                               |  |                 |   |  |              |        |                          |        |        |                                   |   |     |                                       |   |        |                          |  |   |     |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial statements.

F-6



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005



|                                                                                             |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Thousands of dollars)                                                                       |  | 2006 |         |   | 2005 |  
|CASH FLOWS (USED)/PROVIDED BY OPERATING ACTIVITIES:                                          |  |      |         |   |      |   |         |  
|Net loss                                                                                     |  | $    | (11,214 | ) |      | $ | (7,254  | )
|Adjustments to reconcile net loss to net cash flows (used)/provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                                |  |      | 475     |   |      |   | 407     |  
|Provision for bad debts                                                                      |  |      | 1,141   |   |      |   | 83      |  
|Stock based compensation                                                                     |  |      | 1,037   |   |      |   | 131     |  
|Increase/(decrease) in cash from changes in:                                                 |  |      |         |   |      |   |         |  
|Accounts receivable                                                                          |  |      | 1,487   |   |      |   | (1,924  | )
|Accounts receivablerelated parties                                                          |  |      | 2,427   |   |      |   | 2,806   |  
|Inventory                                                                                    |  |      | 212     |   |      |   | (1,255  | )
|Other current assets                                                                         |  |      | 70      |   |      |   | (292    | )
|Accounts payable                                                                             |  |      | 23      |   |      |   | 1,050   |  
|Accounts payablerelated parties                                                             |  |      | (2,369  | ) |      |   | (4,742  | )
|Accrued expenses                                                                             |  |      | 124     |   |      |   | (268    | )
|Customer deposits                                                                            |  |      | 37      |   |      |   | (59     | )
|                                                                                             |  |      |         |   |      |   |         |  
|Net cash used by operating activities                                                        |  |      | (6,550  | ) |      |   | (11,317 | )
|                                                                                             |  |      |         |   |      |   |         |  
|CASH FLOWS PROVIDED/(USED) BY INVESTMENT ACTIVITIES:                                         |  |      |         |   |      |   |         |  
|Additions to property and equipment                                                          |  |      | (269    | ) |      |   | (126    | )
|Goodwill and other intangibles                                                               |  |      | (978    | ) |      |   | (599    | )
|Decrease in /(additions to) other assets                                                     |  |      | 443     |   |      |   | (1,339  | )
|                                                                                             |  |      |         |   |      |   |         |  
|Net cash used by investing activities                                                        |  |      | (804    | ) |      |   | (2,064  | )
|                                                                                             |  |      |         |   |      |   |         |  
|CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES:                                          |  |      |         |   |      |   |         |  
|Loan payable                                                                                 |  |      | 1,670   |   |      |   | (20     | )
|Net borrowings from related parties                                                          |  |      | (814    | ) |      |   | (87     | )
|Advances from stockholder                                                                    |  |      | 74      |   |      |   | 1,092   |  
|Proceeds from exercise of stock options                                                      |  |      | 731     |   |      |   | 1,880   |  
|Net proceeds from preferred stock offerings                                                  |  |      | 3,594   |   |      |   | 7,436   |  
|Net proceeds from the exercise of stock warrants                                             |  |      | 2,466   |   |      |   | 2,923   |  
|Preferred stock dividend payments                                                            |  |      | (304    | ) |      |   |        |  
|Preferred stock redemption                                                                   |  |      | (843    | ) |      |   |        |  
|                                                                                             |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                                                    |  |      | 6,574   |   |      |   | 13,224  |  
|                                                                                             |  |      |         |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    |  |      | (780    | ) |      |   | (157    | )
|CASH AND CASH EQUIVALENTS, beginning of period                                               |  |      | 780     |   |      |   | 937     |  
|                                                                                             |  |      |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                                     |  | $    | 0       |   |      | $ | 780     |  
|                                                                                             |  |      |         |   |      |   |         |  
|                                                                                             |  |     
|SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:                      |  |      |         |   |      |   |         |  
|                                                                                             |  |     
|Beneficial conversion included in preferred stock dividend                                   |  | $    | 5,189   |   |      | $ | 2,654   |  
|                                                                                             |  |      |         |   |      |   |         |  
|Preferred stock dividend                                                                     |  | $    | 3,254   |   |      | $ |        |  
|                                                                                             |  |      |         |   |      |   |         |  
|Increase in preferred stock dividend payable                                                 |  | $    | 209     |   |      | $ | 165     |  
|                                                                                             |  |      |         |   |      |   |         |  
|Preferred stock reclassified to short term debt                                              |  | $    | 7,485   |   |      | $ |        |  
|                                                                                             |  |      |         |   |      |   |         |  
|Tops Digital Security, Inc acquisition                                                       |  | $    | 2,003   |   |      | $ |        |  
|                                                                                             |  |      |         |   |      |   |         |  
|Compensation on consulting agreement                                                         |  | $    | 149     |   |      | $ |        |  
|                                                                                             |  |      |         |   |      |   |         |  
|Income taxes paid                                                                            |  | $    | 13      |   |      | $ | 17      |  
|                                                                                             |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005



|1. | Summary of significant accounting policies
|-- | ------------------------------------------

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

Principles of consolidation The accompanying consolidated
financial statements include 100% of the accounts of the Company and its wholly-owned subsidiaries, McDigit Inc., which was incorporated under the laws of the state of California in November 2002, Best Logic LLC (Best Logic), which was
organized in California in November 2000, Global AirWorks, Inc. which is incorporated under the laws of the state of California in April 2004, Tops Digital Securities, LLC which was incorporated under the laws of Nevada in March 2006 and Global
Telephony, which was incorporated under the laws of Nevada in 2001, and are collectively referred to as the Company in these consolidated financial statements. Some of the related parties discussed in Note 7 may be considered variable
interest entities in accordance with FIN 46R Consolidation of Variable Interest Entities, however, the Company is not the primary beneficiary of such entities. Therefore, the related party entities are not included in the consolidated
group. All significant inter-company balances and transactions have been eliminated.

Going Concern The financial statements
were prepared assuming that the Company is a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

Working Capital Resources As of December 31,
2006, the Company reclassified all $7.5 million of its mandatorily redeemable Series C, D and E preferred stock to short term liabilities, of which, the Company has received redemption demands totaling $6.3 million. Due to the reclassification of
the preferred stock, the Company had a $5.4 million net working capital deficit. Additionally, the Company had no cash or cash equivalents. Since December 31, 2006, the Companys working capital position has worsened due to continuing
losses from operations. The Company intends to improve its working capital position by pursuing negotiations with the holders of its Series C, D and E preferred stock to resolve their redemption demands without the need to make the required
redemption payments in cash. However, there can be no assurance that the Company will be successful in resolving their redemption demands. There can also be no assurance that the Company will not receive additional redemption demands from other
holders of its Series C, D, and E preferred stock. The Company also intends to improve its working capital position by pursuing various funding alternatives, however at this time there are no understandings or arrangements on the part of any third
party to provide the Company with additional funding. In this regard, the recent delisting from the Nasdaq Stock Market and the recently filed shareholder derivative lawsuit against the Companys board of directors is likely to impair its
ability to resolve the redemption demands of the preferred shareholders and successfully acquire funding from other sources. In the meantime, the Company is solely dependent on its existing current assets to meet its operating expenses, capital
expenditures, and other commitments, which the Company believes will provide sufficient funds only for six months assuming the Company does not fund the required mandatory redemption payments.

The Company believes that it requires a minimum of $5.0 million of additional funding, in addition to funds the Company may need to resolve the $6.3
million in redemption demands of its preferred, in order to fund its ongoing and planned operations over the next 12 months. In the event the Company is unable to acquire the required financing within the next few months, the Companys
financial condition will be severely impacted and the Company may be unable to continue as a going concern. In that event, the Company may be forced to radically restructure its operations or seek protection under the bankruptcy laws. There can be
no guarantee that the funds the Company requires will be available on commercially reasonable terms, if at all.

Revenue
recognition For the sale of hardware products, sales are primarily recognized when shipped. A portion of this revenue may be deferred if significant obligations are to be fulfilled in the future related to installation and technical
support, in which case, such revenue is recognized when all obligations have been fulfilled. All rebates, sales returns, and discounts are recorded separately, net of gross sales.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash and cash equivalents The Company considers all highly liquid investments with
an original maturity of three months or less and which are readily convertible into cash, to be cash equivalents.

Reserve for
uncollectible accounts Management evaluates accounts receivable periodically for potentially uncollectible receivables by considering factors including specific customer circumstances and plans, historical experiences, and expected
future trends. As of December 31, 2006, management estimated the reserve for uncollectible accounts to be $1.4 million.

Inventories The Companys inventories include the cost of material, direct labor, manufacturing overhead, parts and supplies, and terminals assembled or in the process of assembly. Inventory consists primarily of
computer component parts video and data recording component parts, cockpit door surveillance system and wire harness component parts, and work in process. Inventories are stated at the lower of average cost or market.

Property and equipment Property and equipment are stated at cost and depreciation is computed over the estimated useful lives ranging
from 3 to 10 years for the individual assets. The Company uses the straight-line method of depreciation.

The related cost and accumulated
depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. Maintenance and repairs are expensed currently, while major renewals and betterments are capitalized.

Research and development Research and development costs consist of engineering and other costs directly related to the
technical development of a product. Research and development costs are expensed as incurred. Costs related to modifications of existing products for a specific contract are capitalized. No research and development costs were capitalized in 2006 or
2005.

Advertising Costs Marketing-related advertising costs are expensed as incurred and amounted to $204,000 and
$222,000 during the years ended December 31, 2006 and 2005, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Freight Costs and Reimbursements of Freight Costs In accordance with Emerging Issues Task Force No. 00-10, Accounting for Shipping
and Handling Fees and Cost, reimbursements of freight charges are recorded in sales in the accompanying consolidated statements of operations. Freight-out costs have been recorded as cost of sales in the accompanying consolidated statements of
operations.

Goodwill and Other Intangibles We have a significant amount of goodwill and intangible assets on our
balance sheet related to acquisitions. At December 31, 2006 the net amount of $10.7 million of goodwill and intangible assets represented 47.4% of total assets. Goodwill represents the excess of costs over fair value of assets of businesses
acquired. We adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase combination determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

The Company has accumulated a total of $8.1 million of goodwill; $3.2 million resulted from the Merger, $2.8 million from the asset acquisition of
Airworks and $300,000 from the asset purchase of Perpetual and $1.8 million form the asset purchase of Tops. The goodwill arising from the Merger and Airworks and Perpetual acquisitions has been subject to its annual impairment test in 2006.
Application of the discounted cash flow methodology to Management assumptions did not identify any impairment to the goodwill. No impairment to goodwill was identified therefore there was no loss charged to operations for 2006 or 2005. We
continually monitor for any potential indicators of impairment of goodwill and intangible assets and we have determined that no such indicators have arisen to date. Any impairment loss could have a material adverse impact on our financial condition
and results of operations.

Long-term assets Long-term assets of the Company, including amortizable intangible assets,
are reviewed as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 2006, the Company expects the long-term assets to be fully recoverable.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income taxes The Company uses the asset and liability method of accounting for
income taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities.

The Company is taxed as a consolidated group from the date of the Merger forward. The consolidated group has generated net losses in 2006 and 2005.
Therefore, the Company has recognized the minimum California income tax and the franchise tax applicable to Best Logic, LLC.

Financial instruments The disclosures of estimated fair value were determined using available market information and appropriate methodologies; however, considerable judgment is necessary to interpret market data and
develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon the disposition of the financial instruments. The use of market assumptions and or
estimation methodologies may have a material effect on estimated fair value amounts. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, customer deposits, and other items included on the accompanying
consolidated balance sheets approximate their fair value due to their short-term nature.

Use of estimates The
preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. Amounts requiring significant estimates reported in
the accompanying financial statements include reserves for uncollectible receivables, inventory obsolescence, equipment values and useful lives, intellectual property, and goodwill.

Stockholders Equity The Company has issued five series of preferred stock with stock warrants. Each issuance of preferred stock
was accounted for in accordance with EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Accordingly, the issuance and conversions of preferred stock have resulted in an
aggregate $1.8 million and $2.6 million of beneficial conversion for the years ended December 31, 2006 and 2005, respectively. The beneficial conversions have been recognized as a non-cash preferred stock dividend. Additionally, each of the
issuances has been reviewed and analyzed in accordance with FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity and SEC Accounting Series Release No. 268, Presentation in Financial
Statements of Redeemable Preferred Stocks. Accordingly, the Company reclassified the instruments as liabilities as the de-listing from the NASDAQ stock exchange provided for the holders of the preferred stock the option to redeem their shares.

Accounting for stock options In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 123R, Share-Based Payment which addresses the accounting for employee stock options. SFAS No. 123R requires that the cost of all employee stock options, as well as other equity-based
compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. The Company uses the Black Scholes model, including an estimated 3% forfeiture rate, to calculate the estimated cost of the employee
stock options at the time of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period).

Effective January 1, 2006 the Company adopted the fair value recognition provisions of SFAS 123R using the modified-prospective transition method.
Under the modified-prospective transition method prior periods of the Companys financial statements are not restated for comparison purposes. In addition, the measurement, recognition and attribution provisions of SFAS No. 123R apply to
new grants and grants outstanding on the adoption date. Estimated compensation expense for outstanding grants at the adoption date will be recognized over the remaining vesting period using the compensation expense calculated for the pro forma
disclosure purposes under SFAS 123, Accounting for Stock-Based Compensation. The Company recorded expenses for stock based compensation of $1.0 million for the year ended December 31, 2006. Prior to the adoption of SFAS
No. 123(R), the Company elected to follow Accounting Principles Board Opinion No. (APB) 25, Accounting for Stock Issued to Employees and related interpretations in accounting for its employee stock options. No stock-based employee
compensation cost for stock options is reflected in net income prior to 2006 as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table illustrates the pro forma effect on net income and earnings per share if the fair
value method had been applied to all outstanding and unvested awards for the year ended December 31, 2005:



|                                                                                                     |  |                                     |         |  
|---------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | -
|                                                                                                     |  | For the year endedDecember 31, 2005 |        
|As reported, net loss applicable to common stockholders                                              |  | $                                   | (10,073 | )
|                                                                                                     | 
|Stock-based employee compensation determined under the fair value method, net of related tax effects |  |                                     | (649    | )
|                                                                                                     |  |                                     |         |  
|Pro forma                                                                                            |  | $                                   | (10,722 | )
|                                                                                                     |  |                                     |         |  
|Loss per common share, basic and fully diluted:                                                      |  |                                     |         |  
|As reported                                                                                          |  | $                                   | (0.77   | )
|Pro forma                                                                                            |  | $                                   | (0.81   | )

Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings
Per Share requires presentation of basic earnings per share and dilutive earnings per share. The computation of basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of
outstanding common shares during the period. Diluted earnings per share gives the effect to all dilutive potential common shares outstanding during the period. The computation of diluted earnings per share does not assume conversion, exercise or
contingent exercise of securities that would have an anti-dilutive effect on losses. Accordingly shares underlying options, warrants, and preferred stock conversions, aggregating approximately 12.5 million shares, have not been included as they
are anti-dilutive.

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



|                                         |  |                 |         |   |                     |        |                 |   |       |  
|---------------------------------------- |  | --------------- | ------- | - | ------------------- | ------ | --------------- | - | ----- | -
|                                         |  | Loss(Numerator) |         |   | Shares(Denominator) |        | Per-shareAmount |  
|For the year ended December 31, 2006:    |  |                 |         |   |                     |        |                 |   |       |  
|Basic and fully diluted loss per share   |  |                 |         |   |                     |        |                 |   |       |  
|Loss applicable to common stockholders   |  | $               | (19,866 | ) |                     | 17,622 |                 | $ | (1.13 | )
|                                         |  |                 |        
|For the year ended December 31, 2005:    |  |                 |         |   |                     |        |                 |   |       |  
|Basic and fully diluted income per share |  |                 |         |   |                     |        |                 |   |       |  
|Loss applicable to common stockholders   |  | $               | (10,073 | ) |                     | 13,163 |                 | $ | (0.77 | )



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



2. Pending and completed merger and acquisitions

On March 31, 2006, the Company entered into an Agreement and Plan of Reorganization (the Purchase Agreement) with Tops Digital Security,
Inc. (Tops) a privately held total solutions provider of large enterprise video surveillance systems that are designed primarily for high quality video capture and central monitoring security operations in the high-end commercial,
industrial, and government electronic security markets. Pursuant to the Purchase Agreement the Company acquired substantially all of the assets and certain liabilities of Tops solely in exchange for shares of its common stock. The shares of common
stock, valued at $4.00 per share, comprising the purchase price are issuable in two installments. The first installment of 603,421 shares was issued at the closing date. The second installment of up to 375,000 shares is based on an earnout formula
and is issuable on the 15 month anniversary of the closing of the acquisition, which will be July 1, 2007. The number of shares issuable pursuant to the Purchase Agreement is subject to adjustment based on (i) the amount of liabilities
assumed by the Company, (ii) the amount by which the net income generated by the Tops assets for the first 12 months following the closing date is less than $2,500,000, and (iii) the amount by which the volume-weighted average trading
price of the Companys common stock exceeds $4.00 per share for the 10 trading days preceding the 15 month anniversary of the closing date

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



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

On May 27, 2005, the Company entered into a non-binding letter of intent to acquire
Astrophysics, Inc. (Astrophysics), a leading designer and manufacturer of X-ray scanning security systems.

Upon the execution of the
letter of intent, the Company paid Astrophysics a non-refundable deposit of $500,000 and loaned Astrophysics $500,000. The loan to Astrophysics was repaid to the Company in February 2006. The letter of intent has expired, however the Company is
continuing its discussions with Astrophysics in the hope of completing the acquisition. There can be no assurance the parties will reach an agreement concerning the Companys acquisition of Astrophysics.

3. Recent accounting pronouncements

In February
2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159) which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of
adopting SFAS 159 on its financial position, cash flows, and results of operations.

In September 2006, the United States Securities
and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). This SAB provides
guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement
errors based on the effects on each of the companys balance sheets, statements of operations and related financial statement disclosures. The SAB permits existing public companies to record the



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments
to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed
disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company is currently evaluating the impact SAB 108 may have on its financial condition or results of
operations.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Post Retirement Plans. SFAS No. 158 requires employers to recognize in its statement of financial position an asset or liability based on the retirement plans over or under funded status. SFAS No. 158 is effective for
fiscal years ending after December 15, 2006. This Statement does not affect the Companys financial statements.

In September
2006, the FASB issued Statement of Financial Accounting Issues No. 157, Fair Value Measurements (SFAS 157), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that the Company has
not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently evaluating the impact SFAS 157 may have on its financial condition or results of
operations.

In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact
FIN 48 may have on its financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting
for Servicing of Financial Assets (SFAS NO. 156), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially
measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities;
(4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entitys exposure to changes
in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all
separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entitys fiscal year that begins after September 15,
2006, with earlier adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. This Statement does not affect the Companys financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133,
Accounting for Derivatives Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 155 amends SFAS No. 133 to
narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also
amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. This Statement does not affect the Companys
financial statements.



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|4. | Inventories
|-- | -----------

Inventories consisted of the following
as of December 31, 2006 (in thousands):



|                                                                  |  |   |      
|----------------------------------------------------------------- |  | - | -----
|Computer component parts                                          |  | $ | 1,317
|Video and data recording component parts                          |  |   | 2,829
|Cockpit door surveillance system and wire harness component parts |  |   | 1,216
|                                                                  |  |   |      
|Total                                                             |  | $ | 5,362
|                                                                  |  |   |      



|5. | Property and equipment
|-- | ----------------------

Property and equipment
consisted of the following as of December 31, 2006 (in thousands):



|                                |  |   |       |  
|------------------------------- |  | - | ----- | -
|Furniture and equipment         |  | $ | 539   |  
|Computer equipment and software |  |   | 361   |  
|Building improvements           |  |   | 499   |  
|Tooling and demo units          |  |   | 34    |  
|Vehicles                        |  |   | 118   |  
|                                |  |   |       |  
|Totals                          |  |   | 1,551 |  
|Less accumulated depreciation   |  |   | (762  | )
|                                |  |   |       |  
|Property and equipment, net     |  | $ | 789   |  
|                                |  |   |       |  



|6. | Business concentrations
|-- | -----------------------

Cash
balances The Company at times maintains cash in bank accounts in excess of federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risks for cash
in bank accounts.

Sales and purchases For the years ended December 31, 2006 and 2005, three customers accounted
for 69% and 75% of the Companys sales, respectively, and 25% of the accounts receivable as of December 31, 2006. For the years ended December 31, 2006 and 2005, two and four vendors accounted for 69% and 70% of the Companys
purchases, respectively, and 2% of the accounts payable as of December 31, 2006. A substantial amount of sales and purchase transactions are conducted with related parties, as discussed in Note 7.



|7. | Related Party transactions
|-- | --------------------------

Pre-Merger
Loans Mr. John Pan, the Companys Chairman, Chief Financial Officer and principal stockholder, made pre-Merger advances to McDigit amounting to approximately $341,000, of which $196,000 was repaid during 2003. All of the loans
relate to pre-Merger activities. As of December 31, 2006, the remaining balance on these loans was $145,000. The loans are unsecured and, currently, payable on demand. However, the Company intends to replace these loans with convertible
promissory notes with an interest rate and other terms subject to Board approval.

Rent agreement Mr. John Pan, the
Companys Chairman, Chief Financial Officer and principal stockholder, leases a facility to the Company, through a controlled entity, and to Avatar Technologies, Inc. (Avatar), a Related Party (as defined below). Facility rental
costs, including additional square footage to accommodate more offices for administrative staff, equipment for production and assembly, and warehouse space, totaled $355,000 and $433,000 for the years ended December 31, 2006 and 2005,
respectively. Rental costs for manufacturing and assembly equipment were approximately $86,000 for the years ended December 31, 2006 and 2005.

Loan Payable In June 2004, the Company borrowed $1,000,000 from John Pan, the Companys Chairman, Chief Financial Officer and President. Interest accrues on the unpaid principal balance of this loan at a rate equal
to the prime rate at Bank of the West, plus 0.25%. The aggregate interest rate was 8.50% as of December 31, 2006. The Company is required to accrue interest payments each month until the principal balance is paid in full, which must occur no
later than December 15, 2006. The Company is negotiating with Mr. Pan to extend the term of the loan.

Other
arrangements The Company had various sales and purchase transactions with companies that are owned or controlled by the Companys Chairman, Chief Financial Officer and principal stockholder, Mr. John Pan (Related
Parties). Those types of transactions occurred with the Related Parties prior to the completion of the Merger and have continued subsequent to the Merger, although there can be no assurances that these arrangements will continue given that the
Related



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Parties are not obligated to continue dealing with the Company. Substantially all of our related party transactions are through our contract manufacturing
division. One of those transactions, a subcontracted purchase order, allowed the Company to manufacture computers for distribution into Latin America through one of the Related Parties. This sub contracted purchase order was completed in January
2007. Another ongoing transaction allows the Company to use Related Parties to globally source computer components for the Companys manufacturing business. The Related Parties can generally purchase components in greater quantity than the
Company can on its own and thereby can provide the Company with more favorable pricing due to volume discounts.

The outstanding balances
due from and to Related Parties as of December 31, 2006 were as follows:



|                                                   |  |                       |     |  
|-------------------------------------------------- |  | --------------------- | --- | -
|(Thousands of dollars)                             |  | As ofDecember 31,2006 |    
|Balances due from Related Parties were as follows: |  |                       |     |  
|(B) (100% owned by CFO/Chairman)                   |  | $                     |    |  
|(C) (100% owned by CFO/Chairman)                   |  |                       |    |  
|(D) (95% owned by CFO/Chairman)                    |  |                       | 139 |  
|                                                   |  |                       |     |  
|Total                                              |  | $                     | 139 |  
|                                                   |  |                       |     |  
|Balances due to Related Parties were as follows:   |  |                       |     |  
|(B) (100% owned by CFO/Chairman)                   |  | $                     | 78  |  
|(C) (100% owned by CFO/Chairman)                   |  |                       | (33 | )
|(D) (95% owned by CFO/Chairman)                    |  |                       |    |  
|                                                   |  |                       |     |  
|Total                                              |  | $                     | 45  |  
|                                                   |  |                       |     |  



|                                                        |  |                                 |        |      |   |       
|------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------
|                                                        |  | For the year ended December 31,
|(Thousands of dollars)                                  |  | 2006                            |        | 2005
|Product purchases from Related Parties were as follows: |  |                                 |        |      |   |       
|(B) (100% owned by CFO/Chairman)                        |  | $                               | 13,531 |      | $ | 10,821
|(C) (100% owned by CFO/Chairman)                        |  |                                 |       |      |   |      
|(D) (95% owned by CFO/Chairman)                         |  |                                 | 3,909  |      |   | 4,470 
|                                                        |  |                                 |        |      |   |       
|Total                                                   |  | $                               | 17,440 |      | $ | 15,291



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                  |  |   |        |  |   |       
|------------------------------------------------- |  | - | ------ |  | - | ------
|Product sales to Related Parties were as follows: |  |   |        |  |   |       
|(B) (100% owned by CFO/Chairman)                  |  | $ | 15,388 |  | $ | 17,754
|(C) (100% owned by CFO/Chairman)                  |  |   |       |  |   |       
|(D) (95% owned by CFO/Chairman)                   |  |   | 3,766  |  |   | 220   
|                                                  |  |   |        |  |   |       
|Total                                             |  | $ | 19,154 |  | $ | 17,974
|                                                  |  |   |        |  |   |       



|8. | Card dispensing equipment and related parts
|-- | -------------------------------------------

The
Companys card dispensing equipment (known as DCR machines) and related parts substantially consists of refurbished DCR machines that were previously under lease agreements with customers. The card dispensing equipment and related parts
inventory were valued, as of December 31, 2006, based on its minimum net recoverable value, estimated by management to be approximately $885,000. The Company is reviewing marketing plans for the sale of the DCR machines in 2007 and believes the
carrying amount of the assets are fully recoverable as of December 31, 2006.



|9. | Income taxes
|-- | ------------

The Company had net operating losses
(NOL) of approximately $39 million related to federal income tax and approximately $25 million related to state jurisdictions as of December 31, 2006. Utilization of net operating losses, which begin to expire at various times
starting in 2011, may be limited by Section 382 of the Internal Revenue Code. Such limitations could result in the eventual permanent loss of all or a portion of the NOL benefit.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

The Company has provided a full valuation allowance on the net deferred tax asset
because of uncertainty regarding its realizability. This asset primarily consists of net operating losses and allowances not deductible for income tax purposes.

Following is a reconciliation of the income tax expense expected (based on the statutory federal income tax rate) to the actual income tax provision recorded as of December 31, 2006 and 2005 (in thousands):



|                                                                                  |  |      |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | 2006 |        |   | 2005 |  
|Income tax (benefit) from continuing operations computed at statutory rate of 34% |  | $    | (3,758 | ) |      | $ | (2,466 | )
|Expired net operating losses                                                      |  |      |       |   |      |   |       |  
|State income taxes                                                                |  |      | (644   | ) |      |   | (422   | )
|Reportable under pass through LLC                                                 |  |      | 19     |   |      |   | 13     |  
|Other                                                                             |  |      | 16     |   |      |   | 4      |  
|Change in valuation allowance for deferred tax assets, net                        |  |      | 4,390  |   |      |   | 2,888  |  
|                                                                                  |  |      |        |   |      |   |        |  
|Provision for income taxescurrent                                                |  | $    | 23     |   |      | $ | 17     |  
|                                                                                  |  |      |        |   |      |   |        |  



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deferred income tax assets and the related valuation allowance as of December 31, 2006 and 2005,
result from the following temporary differences (in thousands):



|                                 |  |      |         |   |      |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                 |  | 2006 |         |   | 2005 |  
|Net operating loss carryforwards |  | $    | 15,644  |   |      | $ | 11,060  |  
|Inventory and other reserves     |  |      | 845     |   |      |   | 728     |  
|State taxes                      |  |      | (815    | ) |      |   | (504    | )
|Valuation allowance              |  |      | (15,674 | ) |      |   | (11,284 | )



|10. | Segment reporting
|--- | -----------------

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



|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|----------------------------------------- |  | ----------------- | ------- | -------- | - | --------------------- |  | --------- | ------ | ----- | - | ------- |  | - | --------
|For the year ended December 31, 2006      |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|($ in thousands)                          |  |                   |         |          |   |                       |  |           |        |      
|                                          |  | DigitalTechnology |         | Aviation |   | ContractManufacturing |  | Corporate |        | Total
|Net sales                                 |  | $                 | 2,031   |          | $ | 4,975                 |  | $         | 25,908 |       | $ |        |  | $ | 32,914  
|Cost of sales                             |  |                   | 1,251   |          |   | 4,431                 |  |           | 23,916 |       |   |        |  |   | 29,598  
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Gross profit                              |  |                   | 780     |          |   | 544                   |  |           | 1,992  |       |   |        |  |   | 3,316   
|Operating expenses                        |  |                   | 4,727   |          |   | 3,084                 |  |           | 2,604  |       |   | 4,204   |  |   | 14,619  
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Loss from operations                      |  |                   | (3,947) |          |   | (2,540)               |  |           | (612)  |       |   | (4,204) |  |   | (11,303)
|Other income (expense)                    |  |                   | (70)    |          |   |                      |  |           | (26)   |       |   | 185     |  |   | 89      
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Loss before income tax provision          |  | $                 | (4,017) |          | $ | (2,540)               |  | $         | (638)  |       | $ | (4,019) |  | $ | (11,214)
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Total assets as of December 31, 2006      |  | $                 | 6,962   |          | $ | 8,631                 |  | $         | 1,998  |       | $ | 4,942   |  | $ | 22,533  
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|                                          |  |                   |         |          |  
|For the year ended December 31, 2005      |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|($ in thousands)                          |  |                   |         |          |   |                       |  |           |        |      
|                                          |  | DigitalTechnology |         | Aviation |   | ContractManufacturing |  | Corporate |        | Total
|Net sales                                 |  | $                 | 1,286   |          | $ | 3,388                 |  | $         | 28,074 |       | $ |        |  | $ | 32,748  
|Cost of sales                             |  |                   | 902     |          |   | 2,703                 |  |           | 25,120 |       |   |        |  |   | 28,725  
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Gross profit                              |  |                   | 384     |          |   | 685                   |  |           | 2,954  |       |   |        |  |   | 4,023   
|Operating expenses                        |  |                   | 3,612   |          |   | 2,369                 |  |           | 2,938  |       |   | 2,352   |  |   | 11,271  
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Income (loss) from operations             |  |                   | (3,228) |          |   | (1,684)               |  |           | 16     |       |   | (2,352) |  |   | (7,248) 
|Other income (expense)                    |  |                   | (23)    |          |   |                      |  |           | 5      |       |   | 29      |  |   | 11      
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Income (loss) before income tax provision |  | $                 | (3,251) |          | $ | (1,684)               |  | $         | 21     |       | $ | (2,323) |  | $ | (7,237) 
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         
|Total assets as of December 31, 2005      |  | $                 | 4,795   |          | $ | 8,874                 |  | $         | 6,157  |       | $ | 5,820   |  | $ | 25,646  
|                                          |  |                   |         |          |   |                       |  |           |        |       |   |         |  |   |         



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



11. Stockholders equity

Preferred stock Global ePoint is authorized to issue up to 442,682 shares of Preferred Stock without further stockholder approval; the
rights, preferences and privileges of which would be determined at the time of issuance.

On May 20, 2005, the Company completed the
private placement sale of convertible preferred stock and common stock purchase warrants to three equity funds managed by M.A.G. Capital, LLC. The gross proceeds from the transaction were $1.5 million. Related issuance costs of approximately
$146,000 resulted in net proceeds of approximately $1.35 million. The preferred stock is convertible into common shares at $2.80 per share. The Company also sold to the investors warrants for an aggregate of 267,857 common shares at an exercise
price of $3.50 per share over a three year period. In accordance with applicable accounting guidelines, management allocated the net proceeds based on the relative fair values of the equity instruments. Management used the Black-Scholes model to
compute the fair value of the warrants assuming 85.6% volatility and 3.72% risk free rate which resulted in a $353,000 fair value for the 267,857 warrants issued. The warrants have an exercise price $3.50 per share. The remaining $1.1 million was
allocated to the Series B preferred stock resulting in an effective conversion price for the embedded options contained within the Series B preferred stock of $2.06 per share. The effective conversion price resulted in the embedded options being
in-the-money at issuance creating a $305,000 beneficial conversion to the holders of the Series B preferred stock. The beneficial conversion is treated as a non-cash preferred stock dividend. As of December 31, 2005 all of the Series B
preferred stock has been converted into common stock.

On June 8, 2005, the Company completed the private placement sale to ten
institutional investors of units consisting of shares of Series C Convertible Preferred Stock and warrants to purchase shares of common stock for aggregate gross proceeds of $3.5 million. Related issuance costs of approximately $237,000 resulted in
net proceeds of approximately $3.3 million. Pursuant to the Securities Purchase Agreement, the Company collectively issued to the investors 1,250,004 shares of Series C preferred stock at a price of $2.80 per share of which 748,087 shares have been
converted into common stock or redeemed since issuance. The Series C preferred stock is convertible into shares of common stock at $2.80 per share. The Company also granted to the investors warrants to purchase 625,004 shares of common stock over a
three year period at an exercise price of $3.50 per share. The $3.50 per share purchase price, the conversion ratio of the Series C preferred stock, and the exercise price of the warrants are not subject to adjustment, except for standard
anti-dilution relating to stock splits, combinations and the like. In accordance with applicable accounting guidelines, management allocated the net proceeds based on the relative fair values of the equity instruments. Management used the
Black-Scholes model to compute the fair value of the warrants assuming 85.6% volatility and 3.60% risk free rate which resulted in an $869,000 fair value for the 687,504 warrants issued. The warrants have an exercise price $3.50 per share. The
remaining $2.4 million was allocated to the Series C preferred stock resulting in an effective conversion price for the embedded options contained within the Series C preferred stock of $2.10 per share. The effective conversion price resulted in the
embedded options being in-the-money at issuance creating a $575,000 beneficial conversion to the holders of the Series C preferred stock. The beneficial conversion was treated as a non-cash preferred stock dividend.

Holders of the Series C preferred stock are entitled to receive dividends in the amount of six percent (6%) per annum, payable semiannually starting
December 31, 2005. The dividends may be paid in cash or, at the Companys option, in shares of its common stock. The Company was required to redeem the Series C preferred stock on a monthly basis beginning in March 2006, at a rate of
1/30th of the outstanding shares per month. The redemption price is equal to the purchase price of the shares being redeemed, plus all related accrued and unpaid dividends and is payable in cash or, at the Companys option, shares of its common
stock. In addition, the Company may choose to redeem the Series C preferred stock at any time at a price equal to 105% of the purchase price, plus all related accrued and unpaid dividends.

Pursuant to the terms of the Certificates of Designations, if the Companys common stock is not listed on the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market, Nasdaq Capital Market or the OTC Bulletin Board for a period of seven consecutive trading days, holders of the outstanding preferred shares may elect that the Company repurchase its preferred shares. Effective
upon the opening of the market on September 19, 2006, the Companys securities



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



were delisted from the Nasdaq Capital Market. Since that time, the Companys common stock has been trading on the electronic Pink Sheets. There are
outstanding 501,917 shares of Series C preferred stock. Beginning September 29, 2006, the Company has received demands for redemption on an aggregate 287,508 Series C preferred shares with an aggregate redemption amount of $805,022 plus $12,210
accrued but unpaid dividends. If the holders of all Series C preferred shares outstanding as of December 31, 2006 request redemption, the aggregate redemption amount of all Series C preferred shares outstanding as of December 31, 2006
would be $1.4 million, plus $55 thousand of accrued but unpaid dividends. All demands for redemption payments are due within sixty (60) days of the date the Company receives written notice from such stockholder of its election and to date the
redemption demands have not been paid. The preferred shares were reclassified as liabilities resulting in a beneficial conversion of $0.4 million which was recorded as a non cash preferred dividend. The preferred stock is included in current
liabilities on the accompanying consolidated balance sheet.

H.C. Wainwright & Co., a NASD registered broker dealer, acted as
placement agent in connection with the private placement. The Company agreed to pay H.C. Wainwright placement agent fees consisting of $175,000 in cash, plus warrants to purchase up to 62,500 shares of its common stock over a three year period at an
exercise price of $3.50 per share.

On November 7, 2005 the Company completed the sale of its Series D convertible preferred stock and
warrants to purchase common stock to five institutional investors for gross proceeds to the Company of $6 million. Related issuance costs of approximately $258,000 resulted in net proceeds of approximately $5.7 million. The Company issued 120,000
shares of Series D Preferred Stock convertible into shares of the Companys common stock at the rate of $4.16 per share of which 114,500 shares have been converted to common stock. The Company also issued warrants (A warrants) to
purchase 721,157 shares of the Companys common stock at $4.33 per share. The Company also granted the investors the right to purchase, during the 90 business days following the registration of the common shares underlying the Series D
Preferred Stock, 1,442,311 additional shares of common stock (B warrants) at the purchase price of $5.25 per share along with warrants (C warrants) to purchase 721,157 shares of the Companys common stock at $6.00 per
share. The C warrants were only exercisable upon the exercise of the B warrants. The B and C warrants have expired unexercised. Neither the $4.16 per share conversion price in the Series D Preferred Stock nor the exercise price of the warrants are
subject to adjustment, except for standard anti-dilution relating stock splits, combinations and the like.

Holders of the Series D
Preferred Stock are entitled to receive dividends, payable semi-annually, in the amount of six percent (6%) per year. The dividends may be paid in cash or, at the Companys option, in shares of its common stock. The Company must redeem the
Series D preferred stock, on a quarterly basis, which began August 2006, at a rate of 8.333% of the preferred shares originally issued per quarter. The redemption price is equal to the purchase price of the shares being redeemed, plus all related
accrued and unpaid dividends and is payable in cash or, at the Companys option, shares of its common stock. In addition, the Company may choose to redeem the Series D preferred stock at any time at a price equal to 105% of the purchase price,
plus all related accrued and unpaid dividends.

Pursuant to the terms of the Certificates of Designations, if the Companys common
stock is not listed on the New York Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq Capital Market or the OTC Bulletin Board for a period of seven consecutive trading days, holders of the outstanding preferred shares may
elect that the Comapny repurchase their preferred shares. Effective upon the opening of the market on September 19, 2006, the Companys securities were delisted from the Nasdaq Capital Market. Since that time, the Companys common
stock has been trading on the electronic Pink Sheets. There are outstanding 5,500 shares of Series D preferred stock for which the Company has received redemption demands. The aggregate redemption amount is $275 thousand plus $13 thousand accrued
but unpaid dividends. All demands for redemption payments are due within sixty (60) days of the date the Company receives written notice from such stockholder of its election and to date the redemption demand has not been paid. The preferred
shares were reclassified as liabilities resulting in a beneficial conversion of $0.1 million which was recorded as a non cash preferred dividend. The preferred stock is included in current liabilities on the accompanying consolidated balance sheet.

In accordance with SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity the Series D preferred stock has been classified as equity. Additionally, in accordance with SFAS No. 150, at the time the related mandatory redemption requirements have been met, the shares will be reclassified as liabilities.
Management used the Black-Scholes model to compute the fair value of the warrants assuming 94.5% volatility and 4.46% risk free rate which resulted in an $1.8 million fair value for the warrants and options issued. No value was assigned to the C
warrants given the contingent nature of such warrants. The remaining $3.9 million was allocated to the Series D preferred stock resulting in an effective conversion price for the embedded options contained within the Series D preferred stock of
$2.85 per share. The effective conversion price resulted in the embedded options being in-the-money at issuance creating a $692,000 beneficial conversion to the holders of the Series D preferred stock. The beneficial conversion was treated as a
non-cash preferred stock dividend.



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The rights of the holders of the Series D preferred stock are pari passu to the rights of the holders
of the Series C preferred stock. H.C. Wainwright & Co., a NASD registered broker dealer, acted as placement agent in connection with the private placement. The Company agreed to pay H.C. Wainwright placement agent fees consisting of
$150,000 in cash, plus warrants to purchase up to 36,058 shares of our common stock over a three year period at an exercise price of $4.33 per share.

On May 25, 2006, the Company completed the sale of Series E convertible preferred stock and warrants to purchase common stock to five institutional investors for gross proceeds to the Company of $3.8 million.
Related issuance costs of approximately $188,000 resulted in net proceeds of approximately $3.6 million. At the same time, the investors agreed to convert into shares of the Companys common stock all 114,000 shares of the Series D preferred
stock held by them at the conversion price of $4.16 per share. The Series E preferred stock has an initial conversion price of $2.76 per share and is initially convertible into a total of 2,318,424 shares of the Companys common stock. In
connection with the sale of the Series E preferred stock, the Company issued warrants to purchase an aggregate of 1,159,208 shares of common stock at an exercise price of $3.58 per share. In addition to standard anti-dilution adjustments for stock
splits, combinations and the like, the exercise prices of the warrants and the conversion price of the Series E preferred stock are subject to adjustment if the Company issues shares of common stock, or securities convertible into shares of common
stock, at an effective price less than $3.58 or $2.76, respectively. The Company has the right to redeem the Series E preferred stock at a price equal to 105% of the stated value of the shares of Series E preferred stock.

The conversion of the Series D preferred stock and issuance of the Series E preferred stock and warrants was accounted for according to EITF Topic No.
D-42 The Effect on the calculation of EPS for the redemption of induced conversion of preferred stock. Consequently, the fair value of all securities and other consideration transferred in the issuance of the Series E convertible
preferred stock over the fair value of securities issuable pursuant to the original conversion terms of the Series D preferred stock was subtracted from net earnings to arrive at net earnings available to common shareholders. Management used the
Black-Scholes model to compute the fair value of the warrants assuming 84.6% volatility and 4.95% risk free rate which resulted in a $1.7 million fair value for the warrants. The non-cash charge of $3.0 million, of which $1.8 million is considered a
beneficial conversion to the holders of the Series E preferred stock, is included in preferred stock dividends in the consolidated statement of operations for the year ended December 31, 2006.

Holders of the Series E preferred stock are entitled to receive dividends payable semi-annually, beginning June 30, 2006. The dividends are
calculated on a floating rate of London Interbank Offer Rate (Libor) plus 3.00% such rate to be set two business days prior to the beginning of the applicable dividend period. The initial dividend rate was established at 8.0813%. The
dividends may be paid in cash or, at the Companys option, in shares of its common stock. In addition, the Company began redeeming the Series E preferred stock on a quarterly basis in September 2006 at a rate of 8.333% of the preferred shares
originally issued per quarter. The redemption price may be paid in cash, or, at the Companys option, in shares of its common stock, and is equal to the purchase price of the shares being redeemed, plus all related accrued and unpaid dividends.
In accordance with SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity the Series E preferred stock has been classified as equity. Additionally, in accordance with SFAS
No. 150, at the time the related mandatory redemption requirements have been met, the shares will be reclassified as liabilities. Additionally, in accordance with the guidelines from the SECs Current Accounting and Disclosure Issues in
the Division of Corporate Finance on December 1, 2005, the warrants have been classified as equity in the accompanying consolidated balance sheet.

The Company is subject to 1% liquidated damages to the extent the registration statement for the underlying shares is not declared effective by the SEC as of August 21, 2006. The liquidated damages are payable
monthly until such time as the registration statement is declared effective or the shares may be sold without restriction pursuant to Rule 144(k) under the Securities Act. The SEC has not declared the registration statement effective and the Company
may be subject to liquidated damages in the aggregate amount of $98,000 as of December 31, 2006. The rights of the holders of the Series E preferred stock are senior to the rights of the holders of the Series C and D preferred stock.

There are outstanding 117,314 shares of Series E preferred stock. Beginning September 29, 2006, the Company has received demands for
redemption on an aggregate of 101,878 Series E preferred shares with an aggregate redemption amount of $5,093,900 plus $123,751 accrued but unpaid dividends. If the holders of all Series E preferred shares outstanding as of September 30, 2006
request redemption, the aggregate redemption amount of all Series E preferred shares outstanding as of September 30, 2006 would be $5.9 million, plus $142 thousand of accrued but unpaid dividends. All demands for redemption payments are due
within sixty (60) days of the date the Company receives written notice from such stockholder of its election and to date the redemption demands have not been paid. The preferred shares were reclassified as current liabilities resulting in a
beneficial conversion of $2.8 million which was recorded as a non cash preferred dividend. The preferred stock is included in current liabilities on the accompanying consolidated balance sheet.



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GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Common stock Global ePoint is authorized to issue 50,000,000 share of $.03 par
value common stock of which 19,383,047 shares are issued and outstanding as of December 31, 2006.

Stock option
plans Global ePoint has two employee stock option plans whereby options to purchase 1,157,500 shares of Global ePoints Common Stock were allowed to be granted to certain executives and employees, and an option plan for directors
under which options for 175,000 shares of Global ePoints Common Stock may be issued to directors of Global ePoint. Substantially all the options outstanding for these plans are held by directors and former executives of the Company. One stock
option plan covering 157,500 of the options expired in 2003 and the remaining stock option plans expired in 2004.

The Company adopted an
Employee Stock Incentive Plan in 2004. The Incentive Plan authorized options to purchase 2 million shares of Global ePoints common stock all of which have been issued in accordance with the plan. Substantially all of the options
outstanding under this plan were issued to directors or employees of the Company. One million of the options issued in accordance with the plan expire in 2012 the remaining options expire in 2009. Additionally, the Company adopted a new Employee
Stock Incentive Plan in 2005. The 2005 Incentive Plan authorized options to purchase 3 million shares of Global ePoints common stock of which 325,000 options have been issued as of December 31, 2006. The Company also adopted an
Employee Purchase Plan in 2004. The Plan authorizes the purchase of 250,000 common shares. The purpose of the Employee Stock Purchase Plan is to provide eligible employees with an opportunity to acquire an ownership interest in the Company through
the purchase of Common Stock of the Company on favorable terms through payroll deductions. As of December 31, 2006, no shares have been purchased through the Employee Purchase Plan.

Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R), which require the measurement and recognition of compensation expense
based on estimated fair value of all stock-based payment awards including stock options, employee stock purchases under employee stock purchase plans and non-vested stock awards (such as restricted stock). Prior to the adoption of SFAS 123(R), the
Company accounted for its stock-based compensation awards using the intrinsic method under APB 25 and related guidance (see Note 1).

Information regarding these option plans and grants as of December 31, 2006 and 2005, respectively, follows:



|                                      |  |                 |   |  |                              |      |                                          |      |                         |  
|------------------------------------- |  | --------------- | - |  | ---------------------------- | ---- | ---------------------------------------- | ---- | ----------------------- | -
|                                      |  | Number ofShares |   |  | WeightedAverageExercisePrice |      | Weighted AverageRemainingContractualLife |      | AggregateIntrinsicValue
|Options outstanding December, 31,2004 |  | 2,725,000       |   |  | $                            | 3.61 |                                          |      |                         |  
|Granted                               |  | 364,000         |   |  |                              | 3.69 |                                          |      |                         |  
|Exercised                             |  | (630,000        | ) |  |                              | 1.79 |                                          |      |                         |  
|Forfeited                             |  | (70,000         | ) |  |                              | 3.70 |                                          |      |                         |  
|                                      |  |                 |   |  |                              |      |                                          |      |                         |  
|Options outstanding December 31, 2005 |  | 2,389,000       |   |  |                              | 4.09 |                                          |      |                         |  
|                                      |  |                 |   |  |                              |      |                                          |      |                         |  
|Granted                               |  | 325,000         |   |  |                              | 2.42 |                                          |      |                         |  
|Exercised                             |  | (181,000        | ) |  |                              | 1.26 |                                          |      |                         |  
|Forfeited                             |  | (42,000         | ) |  |                              | 3.47 |                                          |      |                         |  
|                                      |  |                 |   |  |                              |      |                                          |      |                         |  
|Options outstanding December 31, 2006 |  | 2,491,000       |   |  |                              | 4.08 |                                          | 4.06 |                         | 
|                                      |  |                 |   |  |                              |      |                                          |      |                         |  
|Exercisable at December 31, 2006      |  | 2,039,083       |   |  | $                            | 4.17 |                                          | 3.89 |                         | 
|                                      |  |                 |   |  |                              |      |                                          |      |                         |  



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Cash received from options exercised under all stock-based payment arrangements for the years ended
December 31, 2006 and 2005 was $0.7 million and $1.4 million, respectively. The fair value of stock based compensation expense totaling $1.0 million was included in general and administrative expenses in the consolidated statement of operations
for the year ended December 31, 2006

At December 31, 2006, the exercise prices of options granted under and outside the Plans ranged
from $0.60 to $6.50, with a weighted-average remaining contractual life of 4.06 years. The following table summarizes information concerning outstanding and exercisable options as of December 31, 2006:



|                         |  |                              |  |                                                                   |  |                              |      |                              |           |                                                                    |      |                              |   |     
|------------------------ |  | ---------------------------- |  | ----------------------------------------------------------------- |  | ---------------------------- | ---- | ---------------------------- | --------- | ------------------------------------------------------------------ | ---- | ---------------------------- | - | ----
|Range of Exercise Prices |  | NumberOutstandingat 12/31/06 |  | Options OutstandingWeighted Avg.RemainingContractual Life InYears |  | WeightedAverageExercisePrice |      | NumberOutstandingat 12/31/06 |           | Exercisable Options Weighted Avg.RemainingContractual Life InYears |      | WeightedAverageExercisePrice
|$0.60  1.91             |  | 321,000                      |  | 2.72                                                              |  | $                            | 1.27 |                              | 214,333   |                                                                    | 1.65 |                              | $ | 1.60
|2.80  3.20              |  | 390,000                      |  | 2.88                                                              |  |                              | 2.96 |                              | 351,000   |                                                                    | 2.84 |                              |   | 2.96
|3.50  3.77              |  | 175,000                      |  | 4.75                                                              |  |                              | 3.72 |                              | 175,000   |                                                                    | 4.75 |                              |   | 3.72
|4.85  5.00              |  | 1,530,000                    |  | 4.68                                                              |  |                              | 4.89 |                              | 1,223,750 |                                                                    | 4.60 |                              |   | 4.89
|6.47 or greater          |  | 75,000                       |  | 1.67                                                              |  |                              | 6.48 |                              | 75,000    |                                                                    | 1.67 |                              |   | 6.48
|                         |  |                              |  |                                                                   |  |                              |      |                              |           |                                                                    |      |                              |   |     
|Total                    |  | 2,491,000                    |  | 4.08                                                              |  | $                            | 4.06 |                              | 2,039,083 |                                                                    | 3.89 |                              | $ | 4.17
|                         |  |                              |  |                                                                   |  |                              |      |                              |           |                                                                    |      |                              |   |     

The following table summarizes the Companys nonvested options as of December 31, 2006
and changes during the year ended December 31, 2006:



|                               |  |          |   |  |                                    |     
|------------------------------ |  | -------- | - |  | ---------------------------------- | ----
|Nonvested Options              |  | Shares   |   |  | WeightedAverageGrantDate FairValue
|Nonvested at January 1, 2006   |  | 670,250  |   |  | $                                  | 1.36
|Granted                        |  | 106,667  |   |  |                                    | 0.45
|Vested                         |  | (325,000 | ) |  |                                    | 1.36
|Canceled                       |  |         |   |  |                                    |    
|                               |  |          |   |  |                                    |     
|Nonvested at December 31, 2006 |  | 451,917  |   |  | $                                  | 1.16
|                               |  |          |   |  |                                    |     

As of December 31, 2006, there was $0.4 million of total unrecognized compensation expense
related to nonvested stock-based compensation awards granted under the 2004 and 2005 Plans. Substantially all of that expense is expected to be recognized in 2007.

Fair Value Disclosure

The Company uses the Black-Scholes option pricing model to calculate the fair-value of each
option grant. The expected volatility for 2006 was based on historical volatility of the Companys common stock., the expected term is equal to



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the contractual term of the stock option. The risk-free interest rate is based on U.S. Treasury constant maturity
with a term equal to the expected term of the option assumed at the date of grant. Forfeitures are estimated at the date of grant based on historical experience. The weighted-average fair values of stock options granted have been estimated utilizing
the following assumptions:



|                         |      |                          |   |      |      |  
|------------------------ | ---- | ------------------------ | - | ---- | ---- | -
|                         |      | Years ended December 31, |  
|                         | 2006 |                          |   | 2005 |     
|Expected dividend        |      | 0.0                      | % |      | 0.0  | %
|Risk free interest rate  |      | 4.5                      | % |      | 3.7  | %
|Expected volatility      |      | 94.0                     | % |      | 83.4 | %
|                         |      |                         
|Expected term (in years) |      | 5.0                      |   |      | 5.0  |  

Stock warrants Global ePoint has granted warrants to purchase Common Stock to
investors, consultants, lenders and creditors.

Information regarding these warrants for the years ended December 31, 2006 and 2005
follows:



|                  |        |            |   |                               |   |        |  |           |                               |  |   |     
|----------------- | ------ | ---------- | - | ----------------------------- | - | ------ |  | --------- | ----------------------------- |  | - | ----
|                  |        | 2006       |   | 2005                         
|                  | Shares |            |   | WeightedAverageExercise Price |   | Shares |  |           | WeightedAverageExercise Price
|Beginning balance |        | 4,366,044  |   |                               | $ | 4.85   |  | 736,184   |                               |  | $ | 4.43
|Issued            |        | 2,255,023  |   |                               |   | 3.18   |  | 3,876,044 |                               |  |   | 4.78
|Exercised         |        | (1,095,815 | ) |                               |   | 4.02   |  | (196,184  | )                             |  |   | 1.68
|Forfeited         |        | (2,199,526 | ) |                               |   | 5.48   |  | (50,000   | )                             |  |   | 5.53
|                  |        |            |   |                               |   |        |  |           |                               |  |   |     
|Ending balance    |        | 3,325,726  |   |                               | $ | 3.58   |  | 4,366,044 |                               |  | $ | 4.85
|                  |        |            |   |                               |   |        |  |           |                               |  |   |     

For the two-year period ended December 31, 2006, the following warrants were issued and
included in the above table:

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



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



issuable upon exercise of the warrants and conversion of the Series E preferred stock is declared effective. The exercise prices of warrant B and warrant C
are subject to adjustment if the Company issues shares of common stock, or securities convertible into shares of common stock, at an effective price less than the then-current exercise price of such warrants.

The conversion of the warrants and issuance of the warrants B and C was accounted for according to EITF Topic No. D-42 The Effect on the
calculation of EPS for the redemption of induced conversion of preferred stock. Consequently, the fair value of the issuance of the warrants B and C over the fair value of securities issuable pursuant to the original conversion terms of the
converted warrants was subtracted from net earnings to arrive at net earnings available to common shareholders. Management used the Black-Scholes model to compute the fair value of the warrant C assuming 84.6% volatility and 4.95% risk free rate
which resulted in a $1.7 million fair value for the warrants. The warrant B was valued at its fixed dollar amount of $1.9 million. The non-cash charge of $1.8 million is included in preferred stock dividends in the consolidated statement of
operations for the year ended December 31, 2006.

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

Effective
November 7, 2005, warrants to purchase 721,157 shares of Common Stock were issued as a result of the issuance of the Series D Preferred Stock. The warrants have an exercise price of $4.33 per share and are exercisable over a three year period
commencing on the date of issuance. As detailed above, 685,099 warrants were exercised in the May 25, 2006 voluntary offer of conversion. The Company also granted warrants to purchase, during the 90 business days following the registration of
the common shares underlying the Series D Preferred Stock, 1,442,311 additional shares of common stock at the purchase price of $5.25 per share along with warrants to purchase 721,157 shares of the Companys common stock at $6.00 per share
exercisable over a three year period commencing on the date of the purchase of the additional shares. These warrants expired unexercised.

Effective June 8, 2005, warrants to purchase 625,004 shares of Common Stock were issued as a result of the issuance of the Series C Preferred Stock. The warrants have an exercise price of $3.50 per share and are exercisable over a
three year period commencing on the date of issuance. As detailed above, 410,716 warrants were exercised in the May 25, 2006 voluntary offer of conversion.

Effective May 20, 2005, warrants to purchase 267,857 shares of Common Stock were issued as a result of the issuance of the Series B Preferred Stock. The warrants have an exercise price of $3.50 per share and are
exercisable over a three year period commencing on the date of issuance.

Other stock options Pursuant to the Merger
agreement and as part of the consideration of the Merger, the Company issued options to purchase 1,511,015 shares of Common Stock to Auspex, LLC, an entity owned by the Companys CEO, (the Auspex Options). The Merger agreement
required that options be issued to Auspex pari passu to, and in a number equal to, the outstanding options and warrants of the Company (the Determining Options) at the time of stockholder approval of the Merger. The options granted
pursuant to the Merger agreement may only be exercised when, and if, the Determining Options are exercised. Whenever a Determining Option expires or is otherwise cancelled, the similar number of Auspex Options are likewise cancelled.

Information regarding the Auspex Options follows:



|                  |        |          |   |                              |   |        |  |           |                              |  |   |     
|----------------- | ------ | -------- | - | ---------------------------- | - | ------ |  | --------- | ---------------------------- |  | - | ----
|                  |        | 2006     |   | 2005                        
|                  | Shares |          |   | WeightedAverageExercisePrice |   | Shares |  |           | WeightedAverageExercisePrice
|Beginning Balance |        | 662,000  |   |                              | $ | 1.40   |  | 1,221,100 |                              |  | $ | 1.71
|Exercised         |        | (400,000 | ) |                              |   | 1.26   |  | (559,100  | )                            |  |   | 2.09
|Expired           |        |         |   |                              |   |       |  |          |                              |  |   |    
|                  |        |          |   |                              |   |        |  |           |                              |  |   |     
|Ending balance    |        | 262,000  |   |                              | $ | $1.61  |  | 662,000   |                              |  | $ | 1.40
|                  |        |          |   |                              |   |        |  |           |                              |  |   |     



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pursuant to the Private Placement sale of 500,000 investment units on December 22, 2004, the
Company issued Additional Investment Rights to purchase 400,000 shares of Common Stock. The additional investment rights had an exercise price of $5.00 per share and were exercisable for ninety trading days from February 14, 2005. These rights
expired unexercised.

The following table summarizes information about the fixed-price warrants, and other stock options outstanding at
December 31, 2006:



|                         |                        |             |                                               |             |                             |   |                        |  |                                               |  |                             |  |   |     
|------------------------ | ---------------------- | ----------- | --------------------------------------------- | ----------- | --------------------------- | - | ---------------------- |  | --------------------------------------------- |  | --------------------------- |  | - | ----
|Range of Exercise Prices |                        | Outstanding |                                               | Exercisable
|                         | Outstandingat 12/31/06 |             | WeightedAvg.RemainingContractualLife In Years |             | Weighted Avg.Exercise Price |   | Exercisableat 12/31/06 |  | WeightedAvg.RemainingContractualLife In Years |  | Weighted Avg.Exercise Price
|$0.60  1.91             |                        | 583,000     |                                               | 2.09        |                             | $ | $1.42                  |  | 275,333                                       |  | 1.49                        |  | $ | 1.56
|2.76  3.20              |                        | 1,485,815   |                                               | 4.00        |                             | $ | 2.81                   |  | 1,446,815                                     |  | 4.02                        |  |   | 2.81
|3.50  3.77              |                        | 1,878,853   |                                               | 3.56        |                             | $ | 3.57                   |  | 1,878,853                                     |  | 3.56                        |  |   | 3.57
|4.33 5.00               |                        | 1,906,058   |                                               | 3.90        |                             | $ | 4.85                   |  | 1,599,808                                     |  | 3.68                        |  |   | 4.85
|6.47  6.91              |                        | 225,000     |                                               | 1.21        |                             | $ | 6.77                   |  | 225,000                                       |  | 1.21                        |  |   | 6.77
|                         |                        |             |                                               |             |                             |   |                        |  |                                               |  |                             |  |   |     
|Total                    |                        | 6,078,726   |                                               | 3.55        |                             | $ | 3.70                   |  | 5,425,809                                     |  | 3.52                        |  | $ | 3.77
|                         |                        |             |                                               |             |                             |   |                        |  |                                               |  |                             |  |   |     



|12. | Other Financing Transactions
|--- | ----------------------------

On March 9,
2005, the Companys wholly-owned subsidiary, Best Logic, LLC, entered into a loan agreement with Far East National Bank pursuant to which the bank has agreed to loan Best Logic up to $1,000,000. Pursuant to a promissory note, dated
March 9, 2005, executed in connection with the loan agreement, interest on the outstanding principal balance of the loan will accrue at a variable rate equal to the lenders prime rate plus 2%. As of December 31, 2006 the interest
rate is 10.25% per annum, subject to change each time the lenders prime rate changes. Interest is payable monthly with all outstanding principal and accrued and unpaid interest due and payable in full on March 15, 2007. As of
December 31, 2006, a total of $965,000 has been advanced to Best Logic pursuant to the loan agreement. Best Logic is currently in default under the loan agreement. Best Logic is attempting to negotiate a work-out or extension of the loan,
however there can be no assurance it will be able to do so.

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



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



13. Commitments and Contingencies

Lease commitments:

Global ePoint
leases certain facilities under month-to-month arrangements and one facility under an operating lease expiring in April 2013. Rent expense for all facilities totaled $1 million and $0.8 million for the years ended December 31, 2006 and 2005,
respectively. The Company subleases one of its facilities under an operating lease expiring in April 2013. Rental income totaled $305,000 and $286,000 in 2006 and 2005, respectively. Future minimum rentals under non-cancelable operating leases, as
of December 31, 2006, are as follows (in thousands):



|                         |  |              |       |                |   |      
|------------------------ |  | ------------ | ----- | -------------- | - | -----
|Year ending December 31, |  | LeaseExpense |       | SubleaseIncome
|2007                     |  | $            | 896   |                | $ | 306  
|2008                     |  |              | 632   |                |   | 317  
|2009                     |  |              | 501   |                |   | 328  
|2010                     |  |              | 319   |                |   | 340  
|2011                     |  |              | 330   |                |   | 352  
|Thereafter               |  |              | 458   |                |   | 486  
|                         |  |              |       |                |   |      
|Total                    |  | $            | 3,136 |                | $ | 2,129
|                         |  |              |       |                |   |      

Other commitments and contingencies:

On November 10, 2006, the Company was served with a complaint naming the Companys directors as co-defendants in a shareholder derivative
lawsuit. The complaint alleges that the directors of the Company have committed breaches of their fiduciary duties and engaged in abuse of control, corporate waste, unjust enrichment, gross mismanagement and violations of applicable Nasdaq
marketplace rules in connection with the Companys placement of the Series E preferred stock and associated warrants in May 2006. In addition, the complaint alleges that the Companys Chairman of the Board, Johnny Pan, engaged in insider
trading in July and August of 2005. The complaint also alleges that the defendant directors caused the Company to issue false and misleading statements of material facts concerning, among other things, the Companys forecasted revenue and
earnings. The plaintiffs seek monetary damages for all losses suffered by them as a result of the alleged misconduct and injunctive orders directing (i) the defendants to disgorge all profits and special benefits obtained by way of their
alleged misconduct, including salaries, bonuses, stock options and proceeds from any stock sales, (ii) the Company reform and improve its corporate governance and internal control procedures to apply with applicable law, and (iii) the
implementation of constructive trusts over any proceeds from the defendants wrongful sales of the Companys common shares.

In
February 2004, the Company entered into a product development and marketing agreement with a company providing next-generation remote video and control products, solutions and services. The strategic relationship provides Global ePoint with the
right to manufacture and market products of the Company in consideration for a $250,000 investment in common stock of the Company. The initial investment of $100,000 in common stock was to be used for general working capital the remaining $150,000
shall be used by Global ePoint to build hardware products for the company of which $59,000 has been invested as of December 31, 2006. Additional shares of the company will be issued as benchmark costs are reached in the development of the
hardware products. The initial investment of $100,000 is offset by unrealized holding losses of $76,000 the remaining $24,000 is included in the other assets caption of the accompanying consolidated balance sheet.

Effective August 1, 2003, the Company entered into a consulting agreement with a company, whose principal stockholder is the former chief executive
officer of Global ePoint (the Consultant). Pursuant to such agreement, through August 31, 2008, the Consultant is to serve in an advisory capacity to the Company under the title of Advisory Director. The Consultant shall receive a
minimum annual base fee of $180,000. Should the pre-tax income of the Company for any calendar year equal or exceed $5 million, the Consultant shall receive an additional $10,000. The Consultant is entitled to all of the following bonuses:
(i) ten percent of the net monetary award received by the Company, if any, in connection with a potential gain contingency related to a lawsuit in which the Company is the plaintiff, with one-half of such payment reducing the payments made
under (ii); (ii) five percent of the Companys pre-tax income over $500,000, up to a maximum of $300,000. In addition to the aforementioned compensation, the Consultant is entitled to three percent of the value of any Strategic
Transaction, as defined, into which the Company enters. Should the Company terminate the consulting agreement or if the Consultant terminates the consulting agreement for good reason, the Company must pay to the Consultant a minimum of $990,000.



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##### Table of Contents

GLOBAL EPOINT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company provides indemnifications of varying scope and size to certain customers against claims
of intellectual property infringement made by third parties arising from the use of the Companys products. Management evaluates estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as
interpreted by FASB Interpretation No. 45. Management considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. As of December 31, 2006, the
Company has not encountered material costs as a result of such obligations and has not accrued any liabilities related to such indemnifications in the accompanying consolidated financial statements.

During 2003, the Company entered into a Letter of Understanding with a company for an exclusive manufacturing and non-exclusive sales and marketing
arrangement. The chairman and chief executive officer of this company was a member of the Companys board of directors in 2005. The Company has made a $300,000 investment in such company, which is included in the other assets caption of the
accompanying consolidated balance sheet.



|14. | Subsequent Events
|--- | -----------------

On January 15, 2007, the
Companys wholly-owned subsidiary, Global Airworks, Inc., entered into a loan agreement with Hu Cheng-Lien, an individual, to loan Global Airworks, Inc. up to $1,500,000. Pursuant to a promissory note, dated January 15, 2007, executed in
connection with the loan agreement, interest on the outstanding principal balance of an advance will accrue at an interest rate equal to 10%. Interest is payable at the maturity date of each advance which is 180 days from the date of each advance.
As of March 31, 2007, a total of $1,210,000 has been advanced to Global Airworks, Inc. pursuant to the loan agreement.

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



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##### Table of Contents

EXHIBIT INDEX



|         |  |                                                                                                                |  |                                                                                                                   
|-------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
|Item No. |  | Description                                                                                                    |  | Method of Filing                                                                                                  
|2.1      |  | Asset Purchase Agreement, dated as of April 5, 2004, by and among Global ePoint and Next Venture, Inc.         |  | Incorporated by reference to Registrants Form 8-K, dated April 5, 2004.                                          
|         |  |                                                                                                               
|2.2      |  | Bill of Sale, dated April 26, 2004, by and among Global ePoint, Inc. and Insolvency Services Group, Inc.       |  | Incorporated by reference to Registrants Form 8-K, dated April 26, 2004                                          
|         |  |                                                                                                               
|2.3      |  | Asset Agreement, dated April 24, 2004, by and among Global ePoint and Greenick, Inc., effective April 15, 2004 |  | Incorporated by reference to Registrants Form 8-K, dated April 26, 2004                                          
|         |  |                                                                                                               
|2.4      |  | Addendum to Asset Agreement, dated as of April 21, 2004, by and among Global ePoint and Greenick, Inc.         |  | Incorporated by reference to Registrants Form 8-K, dated April 26, 2004                                          
|         |  |                                                                                                               
|2.5      |  | Second Addendum to Asset Agreement, dated as of May 10, 2004, between Global ePoint and Greenick, Inc.         |  | Incorporated by reference to Registrants Form 8-K, dated April 26, 2004                                          
|         |  |                                                                                                               
|2.6      |  | Agreement dated April 21, 2004, by and among Global ePoint, Inc. and Greenick, Inc.                            |  | Incorporated by reference to Registrants Form 8-K, dated April 26, 2004                                          
|         |  |                                                                                                               
|3(i).1   |  | Amended and Restated Articles of Incorporation dated March 1, 1993                                             |  | Incorporated by reference to Registrants Annual Report on Form 10-KSB for the year ended December 31, 1993       
|         |  |                                                                                                               
|3(i).2   |  | Certificate of Amendment to Articles of Incorporation dated August 6, 1996                                     |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended September 30, 1996
|         |  |                                                                                                               
|3(i).3   |  | Certificate of Amendment to Amended and Restated Articles of Incorporation dated December 22, 2000             |  | Incorporated by reference to Registrants Annual Report on Form 10-KSB for the year ended December 31, 2000       
|         |  |                                                                                                               
|3(i).4   |  | Certificate of Amendment to Amended and Restated Articles of Incorporation dated July 28, 2003                 |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003
|         |  |                                                                                                               
|3(i).5   |  | Certificate of Designations of Preferences and Rights of Series A Convertible Preferred Stock                  |  | Incorporated by reference to Registrants Current Report on Form 8-K dated August 11, 2004                        
|         |  |                                                                                                               
|3(i).6   |  | Certificate of Designations of Series B Convertible Preferred Stock                                            |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005    
|         |  |                                                                                                               
|3(i).7   |  | Amendment to Certificate of Designation of Preferences and Rights of Series A Convertible Preferred Stock      |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 9, 2005                        



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##### Table of Contents

|        |  |                                                                                                                                                                                          |  |                                                                                                                           
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|3(i).8  |  | Certificate of Designation of Preferences and Rights of Series B Convertible Preferred Stock                                                                                             |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 9, 2005                                
|        |  |                                                                                                                                                                                         
|3(i).9  |  | Certificate of Designation of Preferences and Rights of Series C Convertible Preferred Stock                                                                                             |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 9, 2005                                
|        |  |                                                                                                                                                                                         
|3(i).10 |  | Certificate of Designation of Preferences and Rights of Series D Convertible Preferred Stock                                                                                             |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on November 14, 2005                           
|        |  |                                                                                                                                                                                         
|3(i).11 |  | Amendment to Certificate of Designation of Preferences and Rights of Series D Convertible Preferred Stock                                                                                |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on January 3, 2006                             
|        |  |                                                                                                                                                                                         
|3(i).12 |  | Certificate of Designation of Preferences and Rights of Series E Convertible Preferred Stock                                                                                             |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on May 25, 2006                                
|        |  |                                                                                                                                                                                         
|3.2.1   |  | Restated By-Laws dated March 1, 1993                                                                                                                                                     |  | Incorporated by reference to Registrants Amendment No. 2 to the Registration Statement on Form S-2 filed on June 21, 1993
|        |  |                                                                                                                                                                                         
|3.2.2   |  | Restated By-Laws Amendment thereto dated May 27, 1993                                                                                                                                    |  | Incorporated by reference to Registrants Annual Report on Form 10-KSB for the year ended December 31, 1993               
|        |  |                                                                                                                                                                                         
|4.1*    |  | Global ePoint, Inc. 2004 Stock Incentive Plan                                                                                                                                            |  | Incorporated by reference to Appendix C to Registrants Definitive Proxy Statement filed on December 10, 2004             
|        |  |                                                                                                                                                                                         
|4.2*    |  | Global ePoint, Inc. 2004 Employee Stock Purchase Plan                                                                                                                                    |  | Incorporated by reference to Appendix D to Registrants Definitive Proxy Statement filed on December 10, 2004             
|        |  |                                                                                                                                                                                         
|4.3*    |  | Global ePoint, Inc. 2005 Stock Incentive Plan                                                                                                                                            |  | Incorporated by reference to Appendix A to Registrants Definitive Proxy Statement filed on December 15, 2005             
|        |  |                                                                                                                                                                                         
|10.1    |  | Form of Indemnification Agreement between Registrant and its officers and directors                                                                                                      |  | Incorporated by reference to Registrants Amendment No. 2 to the Registration Statement on Form S-2 filed on June 21, 1993
|        |  |                                                                                                                                                                                         
|10.2    |  | Subscription Agreement by and among Global ePoint, Inc. and Mercator Advisory Group LLC, Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP and Monarch Pointe Fund, Ltd.        |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on August 11, 2004                             
|        |  |                                                                                                                                                                                         
|10.3    |  | Registration Rights Agreement by and among Global ePoint, Inc. and Mercator Advisory Group LLC, Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP and Monarch Pointe Fund,
Ltd. |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on August 11, 2004                             
|        |  |                                                                                                                                                                                         
|10.4    |  | [Form of] Warrant to Purchase Common Stock granted to Mercator Advisory Group LLC, Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP and Monarch Pointe Fund, Ltd.              |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on August 11, 2004                             



E-2



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##### Table of Contents

|     |  |                                     |  |                                                                                                
|---- |  | ----------------------------------- |  | -----------------------------------------------------------------------------------------------
|10.5 |  | Securities Purchase Agreement       |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on December 23, 2004
|     |  |                                    
|10.6 |  | Form of Additional Investment Right |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on December 23, 2004
|     |  |                                    
|10.7 |  | Form of Warrant                     |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on December 23, 2004

E-2

Table of
Contents



|         |  |                                                                                                                       |  |                                                                                                               
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|Item No. |  | Description                                                                                                           |  | Method of Filing                                                                                              
|10.8     |  | Lease dated January 1,2004 between Avatar Technology, Inc. and Best Logic, LLC                                        |  | Incorporated by reference to Registrants Annual Report on Form 10-KSB for the year ended December 31, 2004   
|         |  |                                                                                                                      
|10.9     |  | Lease dated January 1, 2004 between Avator Technology, Inc. and McDigit, Inc.                                         |  | Incorporated by reference to Registrants Annual Report on Form 10-KSB for the year ended December 31, 2004   
|         |  |                                                                                                                      
|10.10    |  | Lease dated May 28, 2004 between Max Properties, LLC and Global Airworks, Inc.                                        |  | Incorporated by reference to Registrants Annual Report on Form 10-KSB for the year ended December 31, 2004   
|         |  |                                                                                                                      
|10.11    |  | Subscription Agreement by and among Global ePoint, Inc. and Purchasers of Series B Convertible Preferred Stock        |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005
|         |  |                                                                                                                      
|10.12    |  | Registration Rights Agreement by and among Global ePoint, Inc. and Purchasers of Series B Convertible Preferred Stock |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005
|         |  |                                                                                                                      
|10.13    |  | Warrant to Purchase Common Stock granted to and Purchasers of Series B Convertible Preferred Stock                    |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005
|         |  |                                                                                                                      
|10.14    |  | Promissory Note executed between Best Logic, LLC and Far East National Bank                                           |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005
|         |  |                                                                                                                      
|10.15    |  | Business Loan Agreement executed between Best Logic, LLC and Far East National Bank                                   |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005
|         |  |                                                                                                                      
|10.16    |  | Commercial Security Agreement executed between Best Logic, LLC and Far East National Bank                             |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005
|         |  |                                                                                                                      
|10.17    |  | Commercial Guaanty executed between Best Logic, LLC and Far East National Bank                                        |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005



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##### Table of Contents

|      |  |                                                                                                                       |  |                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|      |  |                                                                                                                      
|10.18 |  | Securities Purchase Agreement by and among Global ePoint, Inc. and Purchasers of Series C Convertible Preferred Stock |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 9, 2005      
|      |  |                                                                                                                      
|10.19 |  | Registration Rights Agreement by and among Global ePoint, Inc. and Purchasers of Series C Convertible Preferred Stock |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 9, 2005      
|      |  |                                                                                                                      
|10.20 |  | Form of Warrant granted to Purchasers of Series C Convertible Preferred Stock                                         |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 9, 2005      
|      |  |                                                                                                                      
|10.21 |  | Secured Promissory Note                                                                                               |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 14, 2004     
|      |  |                                                                                                                      
|10.22 |  | Security Agreement                                                                                                    |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 14, 2004     
|      |  |                                                                                                                      
|10.23 |  | Subordination Agreement                                                                                               |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on June 14, 2004     
|      |  |                                                                                                                      
|10.24 |  | Securities Purchase Agreement                                                                                         |  | Incorporated by reference to Registrants Current Report on Form 8-K/A filed on October 12, 2005

E-3

Table of
Contents



|         |  |                                                                                                                                               |  |                                                                                                      
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------
|Item No. |  | Description                                                                                                                                   |  | Method of Filing                                                                                     
|10.25    |  | Subscription Agreement by and among Global ePoint, Inc. and Purchasers of Series B Convertible Preferred Stock                                |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB/A filed on October 12, 2005
|         |  |                                                                                                                                              
|10.26    |  | Securities Purchase Agreement by and among Global ePoint, Inc. and Purchasers of Series D Convertible Preferred Stock                         |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on November 14, 2005      
|         |  |                                                                                                                                              
|10.27    |  | Registration Rights Agreement by and among Global ePoint, Inc. and Purchasers of Series D Convertible Preferred Stock                         |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on November 14, 2005      
|         |  |                                                                                                                                              
|10.28    |  | Form of Warrant A granted to Purchasers of Series D Convertible Preferred Stock                                                               |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on November 14, 2005      
|         |  |                                                                                                                                              
|10.29    |  | Form of Warrant B granted to Purchasers of Series D Convertible Preferred Stock                                                               |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on November 14, 2005      
|         |  |                                                                                                                                              
|10.30    |  | Form of Warrant C granted to Purchasers of Series D Convertible Preferred Stock                                                               |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on November 14, 2005      
|         |  |                                                                                                                                              
|10.31    |  | Agreement and Plan of Reorganization dated March 27, 2006 between Global ePoint, Inc. and certain shareholders of Tops Digital Security, Inc. |  | Incorporated by reference to Registrants Quarterly Report on Form 10-QSB filed on May 22, 2006      



E-4



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##### Table of Contents

|      |  |                                                                                                                       |  |                                                                                           
|----- |  | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|10.32 |  | Securities Purchase Agreement by and among Global ePoint, Inc. and Purchasers of Series E Convertible Preferred Stock |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on May 25, 2006
|      |  |                                                                                                                      
|10.33 |  | Registration Rights Agreement by and among Global ePoint, Inc. and Purchasers of Series E Convertible Preferred Stock |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on May 25, 2006
|      |  |                                                                                                                      
|10.34 |  | Form of Warrant A granted to Purchasers of Series E Convertible Preferred Stock                                       |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on May 25, 2006
|      |  |                                                                                                                      
|10.35 |  | Form of Warrant B granted to Purchasers of Series E Convertible Preferred Stock                                       |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on May 25, 2006
|      |  |                                                                                                                      
|10.36 |  | Form of Additional Warrant granted to Purchasers of Series E Convertible Preferred Stock                              |  | Incorporated by reference to Registrants Current Report on Form 8-K filed on May 25, 2006
|      |  |                                                                                                                      
|10.37 |  | Loan Agreement dated January 15, 2007 between Global Airworks and Hu Cheng-Lien                                       |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|10.38 |  | Security Agreement dated January 15, 2007 between Global Airworks and Hu Cheng-Lien                                   |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|21    |  | Subsidiaries                                                                                                          |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|23.1  |  | Consent of Vasquez & Company LLP                                                                                      |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|23.2  |  | Consent of Haskell & White LLP                                                                                        |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|31.1  |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934            |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|31.2  |  | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934            |  | Filed herewith                                                                            
|      |  |                                                                                                                      
|32    |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350                |  | Filed herewith                                                                            

---

|* | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------



E-5