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Global Epoint Inc – ‘10KSB’ for 12/31/05

On:  Monday, 4/17/06, at 1:12pm ET   ·   For:  12/31/05   ·   Accession #:  1193125-6-81047   ·   File #:  1-15775

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/17/06  Global Epoint Inc                 10KSB      12/31/05    6:953K                                   RR Donnelley/FA

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 1: 10KSB       Form 10-Ksb for Fiscal Year Ended 12/31/2005        HTML    855K 
 2: EX-21       Subsidiaries                                        HTML      6K 
 3: EX-23.1     Consent of Haskell & White LLP                      HTML      7K 
 4: EX-31.1     CEO Certification Pursuant to Rule 13A-14(A)        HTML     14K 
 5: EX-31.2     CFO Certification Pursuant to Rule 13A-14(A)        HTML     14K 
 6: EX-32       CEO & CFO Certification Pursuant to 18 U.S.C.       HTML     11K 
                          Section 1350                                           

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

For the year ended December 31, 2005

-OR-

For the transition period from                      to                     

Commission File Number 001-15775

GLOBAL EPOINT, INC.

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

(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)

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, 2005 were $32,748,000

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, 2006, was $52,700,000

The number of shares outstanding of the registrant’s common stock as of April 3, 2006, was 15,319,853

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, 2005

TABLE OF CONTENTS

Table of Contents

Global ePoint, Sequent, McDigit, 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.

Our aviation division was initiated in April 2004 through the acquisition of certain assets from Insolvency Services Group, Inc. (“ISG”), which had acquired those assets from Greenick, Inc. d/b/a AirWorks, Inc. (“AirWorks”) pursuant to a general assignment. This assignment by AirWorks to ISG was part of an assignment for the benefit of creditors of AirWorks. Pursuant to the assignment from ISG, we acquired AirWorks’ flight support business including aircraft electronic and communications assets and operations, including intellectual property, and contracts and purchase orders from major airlines and aircraft manufacturers.

Additionally, in April 2004 we executed an Asset Purchase Agreement with Next Venture, Inc. d/b/a Sierra Group, a California corporation (“Next Venture”). Pursuant to that agreement we purchased substantially all of the assets used in Next Venture’s Perpetual digital division (“Perpetual”), including intellectual property and ongoing supply agreements. Perpetual is a systems integrator and supplier of digital video recording systems for commercial and industrial security surveillance. The acquisition expands our digital technology division product line and provides for entry into the commercial and industrial market for digital surveillance systems.

We have recently agreed to acquire the assets and certain liabilities of Tops Digital Security, Inc. (Tops). 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 acquisition will continue the expansion of our digital technology division product line.

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.

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

We formed our digital technology division to focus on the development of digital products and technologies for law enforcement, commercial and industrial security applications. On April 6, 2004, we acquired the assets of the Perpetual division of Next Venture, Inc. to continue the build out of product offerings within the commercial and industrial security marketplace.

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In the fourth quarter of 2004, we launched the new Perpetual Digital product line of digital video surveillance security products to be marketed through wholesale distribution. We have initiated an advertising campaign to generate brand awareness for our Perpetual Digital products. We intend to expand our advertising and promotional campaigns to continue the development of the Perpetual Digital brand and gain market acceptance for our product line.

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, including a pilot program involving six patrol cars operated by the Chicago Police Department, 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 recently announced agreement to acquire 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.

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 distribution 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.

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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, 2005 and 2004:

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

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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.

Perpetual Digital

In late 2004, we established the Perpetual Digital line of digital video surveillance security products that target the commercial and industrial market sectors. These products are marketed to security dealers, installers, and integrators and sold through the wholesale security distribution channel. The digital technology division intends to establish a network of wholesale security distributors and co-market our digital video surveillance systems with the distributor to the dealer, installer, and integrator; who in turn will provide our products to the end user.

In 2005, we continued our sales and marketing efforts by developing wholesale distribution partnerships, initiating our brand marketing campaign, and educating the market about our products. Throughout the year we continued to develop our product line, adding a wider variety of cameras and introducing LCD monitors. We will continue to cultivate our distribution channel with sales programs, training, and co-marketing programs, however in a parallel effort we will initiate direct marketing efforts to the end user market to provide a pull-through for our distribution channel. 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 for our distribution network.

Sequent Mobile

In 2005 and 2004, 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. 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 two brand names, Perpetual Digital and Sequent Mobile. 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.

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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 by the Perpetual Digital product line:

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.

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 IMS (Information 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

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handle or store. When a file is retrieved, the Sequent IMS can instantly detect any alteration or deletion with its authentication system. Sequent IMS also provides secure automated wireless upload of video files from vehicle mounted or remote Rangers 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.

The recently announced agreement to acquire Tops will provide us with a total solution for large enterprise video surveillance systems that are designed primarily for high quality video capture and central monitoring security operations in the high-end commercial, industrial, and government electronic security markets. The 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 in a high-security level project such as is used in museums, casino gaming and government installations. The Tops’ solution has proprietary video surveillance technology that efficiently integrates the ability to capture D1 quality video while maintaining a secure and fast system for recording, monitoring, managing, and archiving video surveillance.

Marketing and Sales

In 2004, we developed and launched our fixed video surveillance product line called Perpetual Digital. Through 2005, we developed and established a distribution network and brand awareness marketing campaign. We will develop a national network of manufacturing representatives that will continue to expand our presence in the electronic security distribution market while focusing on developing sales opportunities with dealers and integrators in their geographic region. Our marketing efforts will focus on developing brand recognition and generating sales leads through a direct marketing campaign to end users in strategic vertical markets where our solutions provide a strong value proposition; such as the retail, law enforcement, transportation, and homeland security markets. Our marketing efforts will include end user trade shows, print and web advertising, and direct marketing campaigns. In addition, we will increase our channel marketing efforts with distributor specific trade shows, co-marketing programs, and sales incentive programs.

Going forward, we intend to enhance our sales and marketing programs through strategic alliances, acquisitions, and national distributor relationships.

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 Perpetual Digital product line is very strong, the marketplace is highly fragmented with over one hundred manufacturers including companies such as GE Security, Pelco, Panasonic, GVI, Samsung, Honeywell, and Dedicated Micros. We strongly believe

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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.

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. 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.

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. 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:

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 2005 of approximately $1.3 million and in 2004 of approximately $1.0 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

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carriers as well as original equipment manufacturers suppliers. Our products and services primarily relate to airline surveillance and security systems, new or upgraded communication systems, in flight entertainment systems, and comfort and convenience systems. Our 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, as an approved repair station. The complete list of products and services offered by our aviation division include:

As an FAA Certified Repair Station, we can perform aircraft modifications away from our facility. This is important because aircraft modifications for the purpose of completing market driven interior changes are highly irregular due to the need for the aircraft to remain in service. We devised a system of overnight installation and perform these interior modifications during the planned layover time of the aircraft. 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 cost 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, domestic or international.

Our aircraft modification expertise is segmented in 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

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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 the European aviation regulatory authorities, including the European Aviation Safety Agency (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 2006. The FAA estimates that the 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, 2005 and 2004:

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 holding 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

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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—In the fourth quarter of 2004, we introduced a new product line containing two segments. We introduced a Liquid Crystal Display (LCD) monitor swap program as well as a complete entertainment system. The LCD swap program replaces old CRT projection units with 15, 30 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.

We have also introduced 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.

Maintenance, Repair and Overhaul—We have leased 38,000 square feet of hangar space and 58,000 square feet of ramp space in Tulsa International Airport’s industrial park. This turnkey completion facility has the capability of combining exterior paint process with interior rework and installation activities. The highly controlled environment and strict standards not only ensures consistent paint application regardless of weather and climate changes but allows any aircraft work and installation to remain in a controlled environment from start to finish.

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

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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 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

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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 2004 and 2005, 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 2004 and 2005, 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 now provide a majority of the industrial computers used in X-Ray scanning equipment currently being deployed in the United States. During 2005, in addition to our other sales from the division described herein, we produced approximately $8.5 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 2004 and 2005 we provided high-end consumer PCs directly to retail customers through our brand, Vicious PC, and we provide basic-level consumer PCs through purchase

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orders from Avatar Technologies, Inc. (“Avatar”), one of the Related Parties, which then distributed the PCs to its customers for retail sales. In 2004 and 2005, Avatar, a consumer electronics products supplier, 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 $17.8 million from Avatar for consumer PCs in 2005 and $7.2 million in 2004, all of which were ultimately delivered to retail stores of Avatar’s customer throughout Latin America. Avatar accounted for approximately 54% and 36% of the Company’s total net sales in 2005 and 2004, respectively.

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. 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.

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, 2005 and 2004:

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.

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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. Our product categories include:

Lord Class:    The Lord Class is our top of the line Vicious PC, engineered for powerful performance and outstanding graphics has been recognized by several magazines, including PC Gamer, Computer Gaming World and Maximum PC. These machines are built to perform most game tasks and include a customized case to enhance overall perception. These machines include the latest components, such as QUAD NVIDIA SLI, Western Digital Raptor Serial ATA RAID 0 drives, and 19” or 22” flat screen monitors. The Lord Class has four Products: (1) Paladin SLI, with an Intel ^TM Pentium Extreme Edition 955 processor with dual core and Hyper-Threading technology; (2) Commando, with an AMD Athlon 64FX processor with 64 bit processing capabilities and dual channel memory architecture; (3) Commando QUAD SLI, quipped with revolutionary QUAD NVIDIA SLI 4-Video Card Technology; and (4) Commando SLI, AMD Athlon ^TM 64 processor with NVIDIA SLI dual video card platform, 2 X GeForce 7900 GTX 512 MB VGA running dual Serial ATA 10,000 RPM hard drives.

Master Class:    The Master Class is our mid-level Vicious PC that targets the mainstream consumer PC gamers. The Master Class category includes the following products: (1) Extreme, with advance Intel ^TM Pentium D dual core processor that operates at 3.2GHz; (2) Bushido, based on NVIDIA SLI Intel Edition platform and an enhanced air flow case; (3) Phantom, AMD Athlon ^TM 64 processor with nVidia 6600 GT PCI Express video cards which we believe is one of the best price / performance gaming PCs available; and (4) Assassin, based on NVIDIA SLI AMD Edition with NVIDIA 7900 GT 256 MB VGA and dual 160G Serial ATA II hard drives in RAID 0 mode.

Warrior Class:    The Warrior Class is our basic level Vicious PC that targets novice consumer PC gamers. The Warrior Class has the product: Ranger II, another AMD Athlon ^TM 64 processor based system that combines performance and quietness in a small form factor case.

Mobil Gaming Notebooks:    In 2006, we advanced our laptop lines with the latest high performance processors and video cards: (1) Katana III, 17” WSXGA+ LCD with AMD Athlon ^TM 64 dual core processors and optional customized paint-jobs such as Camouflage and Orion Blue; (2) Ninja II, with an Intel Pentium 4 Desktop processor with EM64T processors, and a 17” WSXGA+ wide-screen LCD; (3) Ronin II, which utilizes desktop Intel ^TM Pentium 4 Prescott processor, a 15.4 wide-screen XVGA, and NVIDIA GeForce Go 6800 (4) Shogun II, the new Intel Centrino notebook that is lightweight, WiFi Wireless ready with the best video performance which powered by NVIDIA GeForce Go 7800 GTX. In 2006, we added surround sound systems in Katana III and Ninja II mobile gaming computer as well.

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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 and will continue to include 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.

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. For the foreseeable future we will continue to rely on purchases from Related Parties for our components and sub-assemblies. 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.

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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 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 are preparing the information request and 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, 2005.

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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, 2005.

Concurrent with the 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.

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 2004 or 2005. We continue to develop and evaluate plans for either the redeployment or sale of the DCRs in 2006. 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.

EMPLOYEES

As of March 1, 2006, the Company and its subsidiaries employed 145 employees, all of which are full-time. There are 5 executives, 43 management and administrative positions, 71 manufacturing employees, 10 sales and marketing staff members, and 16 software and hardware engineers. We have also entered into various consulting

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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 in the future to continue to operate our business.    As of December 31, 2005, the Company had net working capital totaling $5.2 million including cash of $780,000. As a means of increasing our return on capital and avoiding the dilution and costs associated with financings, we generally attempt to minimize the amount of working capital our business requires. We believe due to the increase in our backlog of orders we will require additional working capital financing of approximately $2 million, in addition to cash generated by operations, to meet our working capital needs for our current operations, capital expenditures, and commitments over the next 12 months. Additionally, we believe we will require $4 million for working capital to support our expected growth and pending acquisition (See Subsequent Events). We will endeavor to raise the additional required funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. We are currently evaluating term sheets in our possession and are currently in negotiations to meet our funding requirements. We believe we will be able to obtain the funding required to support our operations and growth, however, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Debt financing will increase expenses and must be repaid regardless of operating results. Equity financing could result in dilution to existing stockholders.

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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:

We have a history of significant operating losses, and we may be unable to achieve profitability.    We have a history of significant operating losses. For the years ended December 31, 2005 and 2004, we incurred net operating losses of $7.2 million and $5 million, respectively, and our operations used $11.3 million and $5.3 million of cash, respectively. As of December 31, 2005, we had an accumulated deficit of $11.8 million. Over the past few years, the great majority of our revenue has been derived from our contract manufacturing operations, which tend to provide low margins. Our current focus is on the development of sales of our higher margin digital and aviation products, however revenues from these two divisions totaled $4.6 million and $4 million in fiscal 2005 and 2004, respectively. As of December 31, 2005, we had a backlog of $10.7 million for orders for aviation products and we expect to achieve profitability in 2006 based on our expectation of increased sales of digital and aviation products. However, until such time as we are able to generate significantly increased sales of our digital and aviation products, we are likely to incur continued losses from operations.

We rely on related parties for a substantial portion of our revenues and as the primary source for our component and subsystem purchases. The loss of business from any of these related parties would adversely affect our business.    In the ordinary course of our business, we purchase from, sell products to and perform contract manufacturing services for a number of related parties that are owned or otherwise controlled by Mr. John Pan, our chief financial officer, chairman, and largest stockholder. During 2005 and 2004, we purchased approximately $15.3 and $5.7 million, respectively, worth of products from these related parties. This represents 53% and 35% of our overall cost of goods for the year ended December 31, 2005 and 2004, respectively. In addition, during 2005 and 2004, we sold approximately $18.0 and $7.6 million, respectively, worth of products and contract manufacturing services to these related parties. This represents 55% and 36% of our overall sales for the year ended December 31, 2005 and 2004, respectively. We believe that these related party relationships provide access to attractively priced components and products 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, 2005 and 2004, three customers accounted for 75% and 67%, respectively, of our sales. One of these customers in 2005 and 2004 was a related party, accounting for 54% and 34%, respectively, of our sales. During the year ended December 31, 2005 and 2004, four and three vendors accounted for 70% and 55%, respectively, of our purchases. Two of these vendors were related parties. Substantially all of our related party transactions are derived from our contract manufacturing division. If we were to lose one or more of these customers before we are able to secure sales from other customers, our income and financial condition would be adversely affected. If we are unable to enter into and maintain satisfactory distribution arrangements with leading suppliers and an adequate supply of products, our sales could be adversely affected.

There can be no assurance that we will complete our proposed acquisition of Astrophysics, but in the event we are able to do so, our shareholders will undergo significant equity dilution.    On May 27, 2005, we entered into a non-binding letter of intent to acquire Astrophysics, Inc., a leading designer and manufacturer of X-ray scanning security systems. Pursuant to the letter of intent, we propose to acquire all of the assets, subject to

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all of the liabilities, of Astrophysics in exchange for $10 million of cash and issuance of our common shares in an amount equal to 50.1% of our issued and outstanding common shares after giving effect to the acquisition of Astrophysics and a proposed $25 million equity financing. Astrophysics will also receive, for no additional consideration, the right to receive additional common shares upon the exercise or conversion of our warrants, stock options and convertible securities that are outstanding as of the close of the transaction. The letter of intent requires us to raise $25 million of capital prior to the close of the Astrophysics acquisition, of which $10 million would be paid to Astrophysics, $10 million would be contributed to the business of Astrophysics and the balance would be applied to our general working capital. The letter of intent originally contemplated that the parties would enter into a definitive agreement by June 30, 2005, which date was later extended to July 15, 2005. As of the date of this report, we have not entered into a definitive agreement to acquire Astrophysics. While we are continuing our discussions with Astrophysics, the parties have reached an impasse and there can be no assurance we will reach a definitive agreement concerning our proposed acquisition of Astrophysics. However, if we are successful in acquiring Astrophysics on the terms set forth in the letter of intent dated May 27, 2005, our shareholders will experience significant equity dilution due to the number of shares we will need to issue in connection with our acquisition of Astrophysics and the $25 million equity financing associated with the proposed transaction.

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

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

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

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

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

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

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

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

Our business strategy includes acquiring certain businesses and entering into joint ventures and strategic alliances. Failure to successfully integrate such businesses, joint ventures, or strategic alliances into our operations could adversely affect our business.    In the past, we have acquired companies and assets and entered into certain strategic alliances, including the purchase of assets from Next Venture, Inc. and AirWorks, Inc. in April 2004. We are negotiating a proposed acquisition of Astrophysics and may make additional acquisitions and enter into joint ventures in the future. While we believe we will effectively integrate such

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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. 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 2005.

In October 2005, we leased approximately 30,000 square feet in Tulsa, Oklahoma pursuant to a lease that expires April 12, 2006 with two three month options to extend the lease, the first option for which has been exercised. The monthly rent expense is $22,000 for hangar space within the Tulsa International Airport used for aircraft maintenance and installation services for our aviation division.

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 is $16,000 under a lease expiring May 2007.

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 in May 31, 2007.

In December 2003, we also began leasing 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 expiring in December 2006. Beginning September 1, 2004 this space was subleased under the same terms and conditions.

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

As of December 31, 2005, Global ePoint and its subsidiaries were not involved in any material litigation or regulatory proceedings. Management is not aware of any material threatened or pending litigation that might exist.

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

Our annual meeting of stockholders was held on December 30, 2005. 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:

Shareholders adopted our 2005 Stock Incentive Plan, with shares voted as follows:

Shareholders ratified the appointment of our independent registered public accounting firm, with shares voted as follows:

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PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the Nasdaq Capital Market under the symbol GEPT.

The following table sets forth the high and low bid prices for our common stock, as reported on the Nasdaq Capital Market, 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.

The number of stockholders of record of our common stock, par value $.03 per share, as of April 3, 2006, was 438.

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

We had the following unregistered sales of securities during 2005. These securities were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On May 20, 2005, the Company completed the private placement sale of Series B 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 to pursuant to an aggregate of 267,857 common shares at an exercise price of $3.50 per share over a three year period.

On June 8, 2005, the Company completed the private placement sale to ten institutional investors of units consisting of shares of Series C Convertible Preferred Stock and warrants to purchase shares of common stock for aggregate gross proceeds of $3.5 million. Related issuance costs of approximately $237,000 resulted in net proceeds of approximately $3.3 million. Pursuant to the Securities Purchase Agreement, the Company collectively issued to the investors 1,250,004 shares of Series C preferred stock at a price of $2.80 per share. The Series C preferred stock is convertible into shares of common stock at $2.80 per share. The Company also granted to the investors warrants to purchase 625,004 shares of common stock over a three year period at an exercise price of $3.50 per share. The $3.50 per share purchase price, the conversion ratio of the Series C preferred stock, and the exercise price of the warrants are not subject to adjustment, except for standard anti-dilution relating to stock splits, combinations and the like. 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. H.C. Wainwright & Co., a NASD registered broker dealer, acted as placement agent in connection with the private placement. We 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 our common stock over a three year period at an exercise price of $3.50 per share.

Effective July 19, 2005, options to purchase 30,000 shares of Common Stock were issued to a consulting firm. The options have an exercise price of $3.50 per share and are exercisable over a five year period commencing on the date of issuance.

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On November 7, 2005 the Company completed the sale of its Series D convertible preferred stock and warrants to purchase common stock to certain institutional investors for gross proceeds to the Company of $6 million. The shares of Series D Preferred Stock are convertible into shares of the Company’s common stock at the rate of $4.16 per share. The Company also issued warrants to purchase 721,157 shares of the Company’s common stock at $4.33 per share. Neither the $4.16 per share conversion price in the Series D Preferred Stock nor the exercise price of the warrants are subject to adjustment, except for standard anti-dilution relating stock splits, combinations and the like. Holders of the Series D Preferred Stock are entitled to receive dividends in the amount of six percent (6%) per year. The dividends may be paid in cash or, at the Company’s option, in shares of its common stock. In addition, the Company is required to begin redeeming the Series D Preferred Stock in August 2006. The redemption price may be paid in cash, or, at the Company’s option, in shares of its common stock, and will be equal to the purchase price of the shares being redeemed, plus all related accrued and unpaid dividends. 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 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. The Company has the right to redeem the Series D Preferred Stock at a price equal to 105% of the purchase price of the shares of Series D Preferred Stock. H.C. Wainwright & Co., a NASD registered broker dealer, acted as placement agent in connection with the private placement. We 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.

ITEM 6.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our operations currently consist of three divisions:

We acquired the assets of the Perpetual division of Next Venture, Inc. d/b/a Sierra Group and the flight support business of Greenick, Inc. d/b/a AirWorks, Inc in April 2004. The Perpetual business is a systems integrator and supplier of digital video recording systems for commercial and industrial security surveillance and is part of our digital technology division. Our AirWorks business provides digital video surveillance solutions to the aircraft industry as well as other electronic and aircraft maintenance solutions and is part of our aviation division. The goal of these acquisitions is to enhance our digital technology based product lines in support of expanding our presence within the homeland security marketplace.

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

To implement planned technology advances and new product development, we continue to focus resources on new, proprietary digital compression technology, Internet protocol applications, and database management

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

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

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-reverse-acquisition company, as well as general overall corporate expenses.

For the year ended December 31, 2005

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RESULTS OF OPERATIONS—DIGITAL TECHNOLOGY DIVISION

For the Year Ended December 31, 2005 Compared to December 31, 2004

The focus of our Digital Technology division is on the development of digital products and technologies for law enforcement, commercial and industrial security applications. On April 6, 2004, we acquired the assets of the Perpetual division of Next Venture, Inc. to continue the build out of product offerings within the commercial and industrial security marketplace.

In the fourth quarter of 2004, we launched the new Perpetual Digital product line of digital video surveillance security products to be marketed through wholesale distribution. We have initiated an advertising campaign to generate brand awareness for our Perpetual Digital products. We intend to continue to expand our advertising and promotional campaigns to develop the Perpetual Digital brand and gain market acceptance for our product line.

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, including a pilot program involving six patrol cars operated by the Chicago Police Department, but have not generated significant revenues to date. We believe, the same advantages of digital technology, and our products in particular, are relevant in other mobile applications, including fire trucks, ambulances, mass transit, on-highway shipping and package delivery, and in other applications. We believe that the potential for terrorist attacks on subway systems and other forms of public transportation will result in government mandates for the installation of surveillance systems, although such mandates have not yet materialized and these markets have not yet developed.

We are also developing additional stationary applications for our digital surveillance technology within the retail, commercial/industrial sectors, and in other markets. We believe that demand in many of these markets will be driven by government mandates to install surveillance systems for anti-terrorism or law enforcement measures, or as a result of cost savings available to business owners arising out of theft or loss reduction, lower insurance premiums, or other savings. In the banking sector, for example, a mandate has recently been passed in Mexico requiring digital surveillance systems to be installed in all bank branches, with monitoring at a central location. 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.

Our Digital Technology division is in its early stages of growth, and continues to concentrate on developing and acquiring new products and technologies with an emphasis on security applications to target these high growth, high margin markets. The developmental nature of this division requires that we make investments in new products, staff our sales team and other parts of the organization, establish our distribution channels, build relationships with customers and potential customers, market our products, and make other investments. Because we continued to make such investments in 2005, our financial results continued to show losses and may continue to do so in the future.

Revenues for the Digital Technology division for the year ended December 31, 2005 totaled $1.3 million, which were flat with 2004’s revenues. Substantially all of the revenue generated in each of 2005 and 2004 was through the Perpetual product offerings which were acquired in April 2004. Gross margins for the year ended December 2005 were 29.8% compared to 26.2% for the year ended December 2004.

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Research and development costs in the Digital Technology division increased to $1.3 million for the year ended December 31, 2005 from approximately $1.0 million for the same period of 2004. The increase is due to the addition of research and development resources in China totaling $170,000, offset by a $28,000 decline in salaries and personnel related expenses for the domestic research and development staff, an increase in material and other product development costs of $82,000 and a $27,000 increase in travel expenses. Our investment in research and development has resulted in the launch of the first phase of our new digital video recorder product line, a four channel mobile digital video recorder and we have begun marketing the product through several channels.

Selling expenses in the division increased $353,000 for the year ended December 31, 2005 to $1.3 million from $942,000 for the same period of the prior year. The increase was the result of additional sales personnel and related costs from the launch of the Perpetual Digital product line.

The division’s general and administrative expenses totaled $932,000 in 2005 compared to $842,000 for the year ended December 31, 2004. The increase is due to a $65,000 increase in general liability and other insurance expenses and $97,000 increase in professional services primarily due to property security services as there were no comparable expenses in the year ended December 31, 2004. In addition, rent expense increased $52,000 reflecting the full year rent expense for Perpetual Digital office and warehouse and the provision for warranty increased $36,000. These increases in expenses were offset by a $97,000 decrease in salaries and other related expenses for administrative personnel and a $68,000 reduction in the provision for bad debt.

The Perpetual Digital product launch and expansion of our sales force along with our continued investment in research and development resulted in a loss before income tax provision of $3.2 million for the Digital Technology division for the year ended December 31, 2005 compared to a loss before income tax provision of $2.5 million for the equivalent period ended December 31, 2004. The division’s products have been well received by customers and are available for sale but they are addressing markets that are in their early stage of development and have not generated significant revenues to date. We plan to increase our investment in sales and marketing and believe this will result in substantive sales growth for our digital video surveillance products.

RESULTS OF OPERATIONS—AVIATION DIVISION

For the Year Ended December 31, 2005 Compared to December 31, 2004

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

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

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avoids revenue loss for the airline. We have captured majority market shares in Germany and England, and believe that we are well positioned to capture a significant share of the US market.

We have obtained all FAA Supplemental Type Certificates (STC) for the installation of CDSS on a majority of the Boeing aircraft types and all Airbus aircraft (except the A380, their latest aircraft model). Therefore, any new orders will not require any engineering or certification work, but simply manufacturing and shipping. As previously discussed, we have $2.8 million in contracts with a Scandinavian airline pending the EASA/JAA mandate for flight deck door monitoring systems.

We have developed and are marketing digital technology solutions such as our Electronic Flight Bag (EFB) and In Flight Entertainment (IFE) systems. Generally, these systems provide increased aircraft operating efficiency and significant weight savings by replacing old, heavier technology. One of the major costs for the airlines is fuel costs, these new solutions provide a return on investment to the airlines as significant weight reduction leads to substantial savings by decreasing the fuel burn of the aircraft. Our EFB product provides electronic weather mapping, finds favorable wind patterns, and optimizes the trim of the aircraft to make weight and balance adjustments, all of which contribute to fuel savings. Our system automates flight information and is easier for pilots to use than paper records and supplemental calculations. In addition to these advantages, our EFB eliminates over 70 pounds of charts and records carried on board, representing a considerable annual fuel savings for a typical jetliner. In addition to commercial passenger and cargo air transport, we believe the EFB is also attractive in private aviation applications, where pilots generally have less automation available to them and where the ease and speed of accessing electronic records may offer safety advantages.

We believe that our IFE product is attractive to airlines due to the elimination of hundreds of pounds of weight in replacing old cathode ray tube monitors with modern flat panel display systems. We believe the payback to the airline in fuel savings alone for the installation of our IFE and EFB systems is less than one year. With the significant rise in fuel costs for airlines in 2005, we believe the cost savings offered by these products will provide an important marketing advantage for these products going forward.

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

We received purchase orders for $12.2 million from a major Latin American airline for aircraft modification, maintenance and retrofit services in 2005. Our backlog, as of December 31, 2005, was $10.7 million. Substantially all of this backlog relates to the modification and retrofit services for the Latin American airline. We expected to deliver a significant amount of IFE equipment related to the project in the fourth quarter of 2005. This equipment required FAA certification prior to shipment. We received notice from the FAA that due to budgetary constraints and lack of manpower, projects requiring certification would be deferred for review for 90 days. This delay in FAA review has caused a delay in our expected equipment shipments for the project. We are working with the FAA to complete the necessary certifications and we expect to finish the project in 2006.

The Aviation division’s operations began on April 26, 2004. Accordingly, the following discussion of this division’s results of operations, for the year ended December 31, 2005, is compared to the results of operations for the period from April 26, 2004 through December 31, 2004 (approximately eight months).

Revenues for the year ended December 31, 2005 totaled $3.4 million compared to $2.8 million for the eight month period ended December 31, 2004. The increase in sales is the result of an increase in aircraft maintenance services of $.8 million and $.7 million of modification equipment offset by a reduction is sales of CDSS systems of $1 million. The decline in CDSS sales is due to the pending FAA mandate as many customers are deferring orders pending the issuance of the mandate.

Cost of goods sold was $2.7 million for the year ended December 31, 2005 compared to $1.6 million for the eight months ended December 31, 2004. Gross margins were 20.2% for the year ended December 31, 2005

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compared to 42.9% for the period ended December 31, 2004. The decline in margins and increase in cost of goods sold is the result of the increase in sales of lower margin aircraft maintenance services. Delays in shipment of higher margin equipment due to the delay in FAA certification process resulted in a higher than expected sales mix of our lower margin maintenance services causing the decrease in gross margins in 2005. As we complete the FAA certification and delivery of higher margin equipment in 2006, we expect a significant improvement in the sales mix for our higher margin products resulting in substantially improved gross margins.

Operating expenses totaled $2.4 million for the year ended December 31, 2005 compared to $1.7 million for the eight months ended December 31, 2004. The increase is a result of a full year operating activity in 2005 compared to eight months of operations in 2004.

As a result, the aviation division incurred a loss before income tax provision of $1.7 million in the year ended December 31, 2005 compared to a loss before income tax provision of $487,000 for the eight months ended December 31, 2004.

RESULTS OF OPERATIONS—CONTRACT MANUFACTURING DIVISION

For the Year Ended December 31, 2005 Compared to December 31, 2004

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

Net sales for the year ended December 31, 2005 increased to $28.1 million from $17.0 million in the year ended December 2004. The increase in net sales was primarily due to the increase in sales of consumer computer products to $17.8 million in the year ended December 31, 2005 from $7.2 million in the year ended December 31, 2004. Sales of industrial computer products increased to $8.5 million in the year ended December 31, 2005 from $8.1 million in the year ended December 31, 2004. Cost of sales was $25.1 million for the year ended December 31, 2005, or 89.5% of sales compared to $14 million, or 82.3% of sales for the corresponding year ended December 2004. The increase in the cost of sales as a percentage of net sales was due to the increase in sales of low margin consumer computer products. As a result, gross margins for the year ended 2005 were 11.5% compared to 17.7% for the year ended 2004.

Operating expenses for the year ended December 31, 2005 were $2.9 million, or 10.5% of sales, compared to $3.3 million or 19.4% of sales for the year ended December 31, 2004. The decrease in operating expenses is due to a decrease in the provision for bad debt of $267,000 in the year ended December 31, 2005 over fiscal 2004. In 2004 a provision was required due to the uncertainty of the ability to collect certain balances related to one of our largest customers, which was not a Related Party. No such provision was required in 2005. Rent expense decreased $94,000 for the year ended December 31, 2005 compared to the year ended December 31, 2004 due to the subleasing of excess of warehouse and office space beginning the fourth quarter of 2004.

As a result, income before income tax provision for the contract manufacturing division was $21,000 for the year ended December 31, 2005 compared to a loss before income tax provision of $294,000 for the year ended December 31, 2004.

RESULTS OF OPERATIONS—CORPORATE

Corporate activities primarily relate to activities associated with income and expense of non-core continuing business of the pre-reverse-acquisition company, as well as general overall corporate expenses. During the year

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ended December 31, 2005, corporate general and administrative costs totaled $2.4 million compared to $1.8 million for the year ended December 31, 2004. Professional fees associated with being a public company were $1 million for the year ended December 31, 2005 compared to $.7 million for the year ended December 31, 2004. The increase was primarily due to an increase in costs related to public relations and corporate promotion. Additionally, executive compensation increased $79,000 and travel and other expenses increased $100,000 in fiscal 2005 over fiscal 2004.

There was $29,000 of other income for the year ended 2005 compared to $146,000 of other income in the comparable period of 2004, which primarily related to earn-out revenue from contingent payments based on performance of the company that acquired Global ePoint’s prior business.

The net result for corporate operations was a loss before income tax provision of $2.3 million for the year ended December 31, 2005 compared to a loss before income tax provision of $1.7 million for the year ended December 31, 2004.

SUMMARY

As a net result of the combined operations of our Digital Technology division, Aviation division, Contract Manufacturing division, and corporate activities, Global ePoint incurred a loss before income tax provision of $7.2 million or $(.55) per share, for the year ended December 31, 2005 compared to a loss before income tax provision of $5.0 million or $(.46) per share for the year ended December 31, 2004. The non-cash preferred dividend for the year ended December 31, 2005 was $2.8 million resulting in a loss applicable to common stockholders of $10.1 million, or $(.77) per share compared to a non-cash preferred dividend of $1.7 million and a loss applicable to common stockholders of $6.7 million, or $(.61) for the year ended December 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used by operations for the year ended December 31, 2005 was $11.3 million as compared to $5.3 million for the corresponding period of 2004. 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. For the fiscal year ended 2004, cash was primarily used to fund working capital requirements and operating losses.

Cash used in investing activities for the year ended December 31, 2005 consisted of $2.1 million compared to $4.6 million for the year ended December 31, 2004. The cash was primarily used for a good faith deposit of $500,000 and other costs of $163,000 related to our potential acquisition of Astrophysics, Inc. and an additional $500,000 note provided to Astrophysics,, Inc. Additional cash of $725,000 was required for the acquisition of fixed assets and other intangibles. Cash used in investing activities for the year ended December 31, 2004 consisted of $805,000 for the purchase of equipment and other assets and $3.8 million for acquisitions.

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. Net cash received from financing activities for the year ended December 31, 2004 totaled $9.2 million. On August 5, 2004, we completed the private placement sale of convertible preferred stock and common stock purchase warrants resulting in net proceeds to us of $4.9 million. Additionally, on December 22, 2004 we completed the private placement sale of common stock, common stock warrants and additional investment rights resulting in net proceeds of $2.3 million. The proceeds from the

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offerings were used to fund working capital requirements. The remaining $2.1 million of cash received from financing activities was borrowed from related parties. As of December 31, 2004, the total outstanding balance on loans and advances from related parties was $1.9 million.

As of December 31, 2005, the Company had net working capital totaling $5.2 million including cash of $780,000. As a means of increasing our return on capital and avoiding the dilution and costs associated with financings, we generally attempt to minimize the amount of working capital our business requires. We believe due to the increase in our backlog of orders we will require additional working capital financing of approximately $2 million, in addition to cash generated by operations, to meet our working capital needs for our current operations, capital expenditures, and commitments over the next 12 months. Additionally, we believe we will require $4 million for working capital to support our expected growth and pending acquisition of Tops Digital Security, Inc. (See Subsequent Events).

If we are to be successful in acquiring Astrophysics, we will require an additional funding. We will endeavor to raise the additional required funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. We are currently evaluating term sheets in our possession and are currently in negotiations to meet our funding requirements. We believe we will be able to obtain the funding required to support our operations and growth, however, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Debt financing will increase expenses and must be repaid regardless of operating results. Equity financing could result in dilution to existing stockholders. Our future capital requirements may vary materially from those now planned. We anticipate that the amount of capital that we will need in the future will depend on many factors, including:

In addition, we may require additional capital to accommodate planned future growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, assets, products, or technologies.

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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):

We leased four facilities and one storage as of December 31, 2005, 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, 2005 the total outstanding loan plus accrued interest totaled $1.1 million. We are required to accrue interest payments each month until the principal balance is paid in full, which must occur no later than December 15, 2006.

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, 2005, management estimated the reserve for uncollectible accounts to be $518,000.

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 cost, on a first-in, first-out basis or market.

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 2005 or 2004.

Goodwill and Other Intangibles.    We have a significant amount of goodwill and intangible assets on our balance sheet related to acquisitions. At December 31, 2005 the net amount of $8.1 million of goodwill and intangible assets represented 31.5% 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

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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 $6.3 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. The goodwill arising from the Merger and asset acquisitions has been subject to its annual impairment test in 2005. Application of the discounted cash flow methodology to management assumptions did not identify any impairment to the Merger 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, 2005, 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 2005 and 2004. 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, 2005 approximate their fair value due to their short-term nature.

Stockholders’ Equity.    The Company has issued four 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 $2.6 and $1.6 million of beneficial conversion as of December 31, 2005 and 2004, 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, requiring classification of financial instruments with certain characteristics as liabilities. A review of the characteristics of each preferred stock issuance did not require reclassification of the instruments as liabilities.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statements based on their fair values beginning with the first interim or annual reporting period after

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December 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS No. 123(R) as of January 1, 2006. Under SFAS No. 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The permitted transition methods include either retrospective or prospective adoption. Under the retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS No. 123(R), while the retrospective methods would record compensation expense for all unvested stock options beginning with the first period presented. Using the prospective method of adoption, SFAS No. 123(R) is expected to have a pre-tax expense of approximately $440,000 on operating income in 2006.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4” (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect that adoption of SFAS No. 151 will have a material effect on its consolidated financial position, or results of operations.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (SFAS No. 153). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for periods beginning after June 15, 2005. The adoption of this statement did not have a material impact on our consolidated financial position or results of operations.

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”) Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143”. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application for the interim financial information is permitted but not required. Early adoption of FIN 47 is encouraged. The adoption of this statement did not have a material impact on our consolidated financial position or results of operations.

In May 2005, the FASB issued FAS No. 154 (“FAS 154”), Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FAS Statement No. 3. APB No. 20, Accounting Changes, and FAS No. 3, Reporting Accounting Changes in Interim Financial Statements, required the inclusion of the cumulative effect of changes in accounting principle in net income in the period of change. FAS 154 establishes, unless impracticable, retrospective application to prior periods’ financial statements as the required method for reporting a voluntary change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of FAS No. 154 will have a material impact on our consolidated financial position or results of operations.

On February 16, 2006, the FASB issued FAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (FAS 155), an amendment of FAS 140 and FAS 133. FAS 155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and

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accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The Statement will be effective for all instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of the Company’s fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company’s 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. The Company does not expect the adoption of FAS 155 to have a material impact on our consolidated financial position or results of operations.

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

Not applicable

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 the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2005.

We are continuing to evaluate our internal controls as required by Sections 404(a) of the Sarbanes-Oxley Act of 2002 which become effective for the Company in 2007. 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.

Based on our continuing evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2005. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date we completed our evaluation.

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PART 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.

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.

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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.

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 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) 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, 2005, we believe that the filing requirements applicable to our officers, directors, and greater than ten-percent beneficial owners were complied with.

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ITEM 10.    EXECUTIVE COMPENSATION

The compensation table below includes compensation paid to our Chief Executive Officer and all other executive officers for 2003 through 2005.

The salaries set forth below for the Chief Executive Officer and Chief Financial Officer for 2003 were paid for a partial year subsequent to our acquisition of McDigit. Other than as set forth in the table, we did not pay any other salary, bonus or other compensation to these individuals.

Summary Compensation Table

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.

Options Granted in 2005

There were no option grants for the fiscal year ended December 31, 2005.

Option Exercises In 2005 and Fiscal Year-End Option Values

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The value of unexercised in-the-money options is based on the difference between the fair market value of the shares of common stock underlying the options at December 31, 2005, and the exercise price of such options. Options are in-the-money if the market price of the shares exceeds the option exercise price.

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 of the Board, 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.

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.

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.

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Equity Compensation Plan Information

In 2005, 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.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have transacted a substantial majority of our business with companies that are owned or controlled by Mr. John Pan, our Chairman, President, 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

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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.

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, President, 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 $519,000 and $492,000 for the fiscal years ended December 31, 2005 and 2004, 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 2005 and 2004, we purchased from related parties components and finished products totaling approximately $15.3 and $5.7 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 2005 and 2004, approximately $10.8 and $1.7 million, respectively, were from Avatar, and approximately $4.4 and $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 2005 and 2004, we sold approximately $18.0 and $7.6 million, respectively, of products and contract manufacturing services to related parties. Included in these amounts were sales of $17.6 and $7.2 million, respectively, to Avatar and $0.2 and $0.3 million, respectively, to Prophecy.

Avatar provides distribution of computer components around the world, as well as consumer PCs in selected markets. In both 2005 and 2004, Avatar secured major contracts for consumer PCs with a large retail chain in

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Latin America and, as a result, subcontracted the manufacturing of the consumer PCs to us. Our contract manufacturing division generated sales of approximately $17.6 and $7.2 million in 2005 and 2004, respectively, from Avatar for consumer PCs, all of which were ultimately delivered to retail stores of Avatar’s customers throughout Latin America.

The following schedule provides a summary of balances with the related parties as of December 31, 2005 and transactions with related parties during the years ended December 31, 2005 and 2004: