**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**___________________**





**FORM
      10-Q**




þ QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      quarterly period ended March 31, 2006


or





 ̈ TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      transition period from __________ to __________





Commission
      file number: 0-21295





GVI
      Security Solutions, Inc.


(Exact
      name of registrant as specified in its charter)





Delaware
            77-0436410(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer Identification No.)2801
                Trade Center Drive, Suite 120, Carrollton, Texas
            75007(Address
                of principal executive offices)
            (Zip
                code)





(972)
      245-7353


(Registrant’s
      telephone number, including area code)




___________________


(Former
      Name or Former Address, if Changed Since Last Report)







Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


þ Yes   ̈ No




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





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


 ̈ Yes þ No





As
      of May
      1, 2006 there were 51,089,783 shares of the registrant’s common stock
      outstanding.










**GVI
      Security Solutions, Inc.**




**FORM
      10-Q**




**TABLE
      OF CONTENTS**




**PART
                I. FINANCIAL INFORMATION**
            3Item
                1. Financial Statements.
            3Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            13Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk.
            14Item
                4. Controls and Procedures.
            14**PART
                II. OTHER INFORMATION**
            14Item
                1A. Risk Factors.
            16Item
                2. Unregistrered Sales of Equity Securities and Use of
                Proceeds.
            17Item
                6. Exhibits.
            15





2


**PART
      I. FINANCIAL INFORMATION**


**Item
      1. Financial Statements.**


**GVI
      Security Solutions, Inc.**


**Consolidated
      Balance Sheet**




(In
                thousands, except share and per share amounts)




ASSETS
            
            March
                31,
              2006
              (Unaudited)
            
            December
                31,
              2005Current
                AssetsCash
            
            $
            2,666
            
            $
            3,284Accounts
                receivable, net
            
            
            9,662
            
            
            7,688Inventory
            
            
            8,396
            
            
            7,127Other
                receivables
            
            
            74
            
            
            491Prepaid
                expenses and other current assets
            
            
            614
            
            
            426Refundable
                income taxes
            
            
            643
            
            
            643Current
                assets of discontinued operations
            
            
            2,963
            
            
            2,850Total
                Current Assets
            
            
            25,318
            
            
            22,509Property
                and Equipment, Net
            
            
            661
            
            
            748Other
                AssetsDeferred
                loan origination fee, net of accumulated amortization
            
            
            659
            
            
            809Goodwill
            
            
            544
            
            
            544Intangibles,
                net
            
            
            499
            
            
            532Investment
            
            
            50
            
            
            50Other
            
            
            34
            
            
            34Total
                Assets
            
            $
            27,465
            
            $
            25,226LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                LiabilitiesAccounts
                payable
            
            $
            10,088
            
            $
            7,035Debt
            
            
            2,292
            
            
            2,198Accrued
                expenses
            
            
            1,767
            
            
            1,490Liabilities
                of discontinued operations
            
            
            1,394
            
            
            70Total
                Current Liabilities
            
            
            15,541
            
            
            10,793Debt,
                Non-current portion
            
            
            9,572
            
            
            9,829Total
                Liabilities
            
            
            25,113
            
            
            20,622Commitments
                and ContingenciesStockholders'
                EquityPreferred
                stock, undesignated, $.001 par value, 3,000,000 shares authorized,
                none
                issued or outstanding
            
            
            --
            
            
            --Common
                stock, $.001 par value, 75,000,000 shares authorized; 50,258,003
                shares
                issued and outstanding at December 31, 2005 and 51,031,595 at March
                31,
                2006
            
            
            50
            
            
            50Additional
                paid-in capital
            
            
            23,
                095
            
            
            22,837Accumulated
                deficit
            
            
            (20,793
            )
            
            (18,283
            )Total
                Stockholders' Equity
            
            
            2,902
            
            
            4,604Total
                Liabilities and Stockholders' Equity
            
            $
            27,465
            
            $
            25,226





The
      Notes
      to Consolidated Financial Statements are an integral part of these
      statements





3


**GVI
      Security Solutions, Inc.**


**Consolidated
      Statements of Operations**


**(unaudited)**





(In
      thousands, except per share amounts)


Three
                Months Ended March 31,2006
            
            2005Revenues
            
            
            11,696
            
            
            10,325Cost
                of Revenues
            
            
            9,215
            
            
            7,895Gross
                Profit
            
            
            2,481
            
            
            2,430Selling,
                General and Administrative Expenses
            
            
            3,608
            
            
            3,740Operating
                Income (Loss)
            
            
            (1,127
            )
            
            (1,310
            )Interest
                Expense
            
            
            398
            
            
            113OtherIncome
                (Loss) from continuing operations before income taxes and income
                (loss) on
                discontinued operations
            
            
            (1,525
            )
            
            (1,423
            )Income
                Tax Expense (Benefit)
            
            
            23
            
            
            2Loss
                from continuing operations before income (loss) from discontinued
                operations
            
            
            (1,548
            )
            
            (1,425
            )Income
                (Loss) from discontinued operations, net of taxes
            
            
            (961
            )
            
            915Net
                Income (Loss)
            
            
            (2,509
            )
            
            (510
            )Basic
                and diluted income (loss) per shareContinuing
                operations
            
            $
            (0.03
            )
            $
            (0.03
            )Discontinued
                operations
            
            $
            (0.02
            )
            $
            0.02Net
                income (loss) per share (basic and diluted)
            
            $
            (0.05
            )
            $
            (0.01
            )Shares
                Used in Calculation of Net Income (Loss)
            
            
            50,636
            
            
            49,047Per
                share




The
      Notes
      to Consolidated Financial Statements are an integral part of these
      statements





4


**GVI
      Security Solutions, Inc.**


**Consolidated
      Statements of Cash Flows**


**(unaudited)**





(In
                thousands)
            
            Three
                Months Ended March 31,2006
            
            2005Cash
                Flows From (Used) by Operating ActivitiesNet
                Income (Loss)
            
            $
            (2,509
            )
            $
            (510
            )Adjustments
                to Reconcile Net Income (Loss) to Net CashUsed
                In Operating Activities(Income)
                loss from discontinued operations, net of tax
            
            
            961
            
            
            (915
            )Depreciation
                and amortization from continuingoperations
            
            
            236
            
            
            308Amortization
                of deferred loan origination fee
            
            
            150
            
            
            150Compensation
                costs of stock and options issued
            
            
            257
            
            
            --Changes
                in Assets and LiabilitiesAccounts
                receivable
            
            
            (1,974
            )
            
            1,053Inventory
            
            
            (1,269
            )
            
            (3,487
            )Other
                receivables
            
            
            417
            
            
            643Prepaids
                and other current assets
            
            
            (188
            )
            
            (1,178
            )Accounts
                payable
            
            
            3,053
            
            
            343Accrued
                expenses
            
            
            277
            
            
            (782
            )Net
                cash (used in)/provided by operating activities from continuing
                operations
            
            
            (589
            )
            
            (4,375
            )Net
                cash (used in) provided by operating activities ofof
                discontinued operations
            
            
            250
            
            
            (216
            )Net
                cash used in operating activities
            
            
            (339
            )
            
            (4,591
            )Cash
                Flows From (Used) by Investing ActivitiesPurchase
                of property and equipment
            
            
            (116
            )
            
            (4
            )Net
                Cash Used in Investing Activities
            
            
            (116
            )
            
            (4
            )Cash
                Flows From (Used) by Financing ActivitiesProceeds
                from line of credit
            
            
            9,872
            
            
            5,100Payments
                of loan/line of credit
            
            
            (9,990
            )
            
            (5,110
            )Repayments
                of capitalized lease obligations
            
            
            (45
            )
            
            (43
            )Net
                Cash Provided (Used) by Financing Activities
            
            
            (163
            )
            
            (53
            )Net
                Decrease in Cash
            
            
            (618
            )
            
            (4,648
            )Cash,
                Beginning of Period
            
            
            3,284
            
            
            13,398Cash,
                End of Period
            
            $
            2,666
            
            $
            8,750SUPPLEMENTARY
                CASH FLOW INFORMATIONCash
                paid for interest
            
            $
            178
            
            $
            26Cash
                paid for income taxes
            
            
            2
            
            
            2SUPPLEMENTAL
                SCHEDULE OF NONCASH INVESTING ANDFINANCING
                ACTIVITIESDebt
                principal payment converted to common stock
            
            
            --
            
            $
            67Restricted
                cash paid to satisfy stock repurchase obligation
            
            
            --
            
            
            10,000




The
      Notes
      to Consolidated Financial Statements are an integral part of these
      statements




5


**GVI
      Security Solutions, Inc.**


**Notes
      to Consolidated Financial Statements**





NOTE
      1 ~
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





**Basis
      of Presentation**





These
      consolidated financial statements should be read in conjunction with a reading
      of the Company's Annual Report on Form 10-KSB for the fiscal year ended December
      31, 2005.





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles applicable to interim
      financial information and with the requirements of Form 10-Q of the Securities
      and Exchange Commission. Accordingly, they do not include all of the information
      and footnotes required by accounting principles generally accepted in the United
      States of America for complete financial statements. Interim results are not
      necessarily indicative of results for a full year. In the opinion of management,
      all adjustments considered necessary for a fair presentation of the financial
      position and the results of operations and cash flows for the interim periods
      have been included.





**Going
      Concern Considerations**





The
      accompanying financial statements have been presented in accordance with U.S.
      GAAP, which assumes the continuity of the Company as a going concern. During
      the
      years ended December 31, 2005 and 2004, and the quarter ended March 31, 2006,
      the Company experienced, and continues to experience, negative cash flow and
      operating losses. These factors raise substantial doubt about the Company’s
      ability to continue as a going concern. Management intends to monitor the
      Company’s cash position carefully and evaluate its future operating cash
      requirements with respect to its strategy, business objectives and performance.





The
      Company’s operating results in 2006 will be dependent upon its ability to
      continue to provide quality products and services in sufficient volume at
      attractive prices and maintain customer loyalty. Management believes that the
      Company will need to raise additional capital in the near future to finance
      its
      operations. In addition, in order to reduce its cash utilization, the Company
      has implemented measures to reduce operating costs, including a reduction in
      sales and marketing expenses, support and other general and administrative
      expenses.





**Discontinued
      Operations**





In
      the
      first quarter of 2006, the Company’s board approved a plan to discontinue its
      Retail Channel business. This business is accounted for as discontinued
      operations and, accordingly, its operations are segregated in the accompanying
      financial statements. The Company expects to complete the disposition of all
      related assets and liabilities by the end of 2006. In connection with the
      discontinuance of the Retail Channel business for the year ended December 31,
      2005, the Company wrote down assets identified with the retail business by
      approximately $1.4 million, net of applicable tax benefit, to net realizable
      value. The write down to net realizable value was based on management’s best
      estimates of the amounts expected to be realized on the disposition of all
      related assets and liabilities held for disposition from the discontinued
      operations. The amounts the Company will ultimately realize, if any, could
      differ from the amounts assumed in arriving at the loss anticipated on disposal
      of the assets and liabilities of the discontinued operations.





Net
      returns and allowances recorded for the discontinued Retail Channel business
      for
      the three months ended March 31, 2006 were approximately $500,000. The results
      of the discontinued operations do not include any allocation of corporate
      overhead from the Company during the periods presented.






**Stock-Based
      Compensation**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) 123R, “Share-Based
      Payment.” This statement requires that the cost resulting from all share-based
      payment transactions be recognized in the financial statements. This statement
      establishes fair value as the measurement objective in accounting for
      share-based payment arrangements and requires all entities to apply a fair-value
      based measurement method in accounting for share-based payment transactions
      with
      employees except for equity instruments held by employee share ownership plans.




6


Prior
      to
      the January 1, 2006 adoption of SFAS 123R, the Company accounted for
      stock-based compensation using the intrinsic value method prescribed in
      Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for
      Stock Issued to Employees” and related interpretations. Accordingly, no
      compensation expense had been recognized for stock options since all options
      granted had an exercise price equal to the market price on the date of grant.
      As
      permitted by SFAS 123, “Accounting for Stock-Based Compensation,” stock-based
      compensation was included as a pro forma disclosure in the notes to the
      consolidated financial statements.




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of SFAS 123R, using the modified prospective method. Under this method, the
      provisions of SFAS 123R apply to all awards granted or modified after the date
      of adoption and all previously granted awards not yet vested as of the date
      of
      adoption. Prior periods have not been restated.





The
      following table illustrates the effect on operating results and per share
      information had the Company accounted for share-based compensation in accordance
      with SFAS 123 for the three months ended March 31, 2005 (in thousands,
      except per share amounts):




**Three Months**
              **Ended**
              **March 31,**
              **2005**Net
                loss as reported
            
            $
            (510
            )Option-based
                employee compensation, net of related taxes
            
            
            13Pro
                forma net loss
            
            $
            (523
            )Basic
                and diluted net income (loss) per share—as reported
            
            $
            (0.01
            )Basic
                and diluted net income (loss) per share—pro forma
            
            $
            (0.01
            )




The
      Company uses the Black-Scholes option pricing model to estimate the fair value
      of option awards with the following weighted average assumptions for the period
      indicated :




**Three Months Ended**
              **March 31,****2006**
            
            **2005**Dividend
                yield
            
            
            -
            %
            
            -
            %Risk-free
                factors
            
            
            4.7
            %
            
            3.5
            %Volatility
                factors
            
            
            47
            %
            
            74
            %Option
                Lives in Years
            
            
            6.0
            
            
            3
                .0





As
      a
      result of adopting SFAS 123(R) on January 1, 2006, the Company’s quarterly
      loss before taxes, and its net loss for the three months ended March 31,
      2006, were both approximately  $240,000
      lower, respectively, than if the Company had continued to account for options
      under the combination of APB Opinion No. 25 and SFAS 123 for its stock
      option plans. The change to basic and diluted loss per share was less than
      ($0.01).





7





NOTE
      2 ~
      CREDIT FACILITIES





Laurus
      Debt/Lines of Credit




On
      May
      27, 2004, the Company closed a $15 million convertible debt financing with
      Laurus Master Fund, Ltd. under which the Company was provided with a $5 million
      term loan and a $10 million accounts receivable loan facility. At closing,
      the
      Company borrowed $5 million under the term loan and $10 million under the
      receivable facility, and used $10,016,000 of the proceeds to repay in full
      the
      indebtedness outstanding under the prior revolving credit agreement with
      Comerica Bank. Additional proceeds of the financing were used to increase
      working capital, pay closing fees to Laurus in the aggregate amount of $617,500,
      and pay a finder's fee in the amount of $800,000. As part of the transaction,
      Laurus was also issued a seven-year warrant to purchase 940,000 shares of Common
      Stock at a price of $3.50 per share. The Company also issued a similar warrant
      to purchase 94,000 shares of Common Stock to the finder. Borrowings under the
      Laurus financing are secured by all assets of the Company. At March 31, 2006,
      $2.8 million in principal was outstanding under the Term Loan and $ 8.8 million
      in principal was outstanding under the accounts receivable facility. The
      agreements with Laurus prohibit the payment of dividends on the Company’s common
      stock, and contain other customary affirmative and negative
      covenants.




The
      term
      loan is evidenced by a Secured Convertible Term Note and, subject to monthly
      adjustments as set forth below, bears interest at an initial rate per annum
      equal to the prime rate (as reported in the Wall Street Journal), plus two
      percent, subject to a floor of six percent. Interest on the term loan is payable
      monthly. Amortizing payments of principal on the term loan commenced September
      1, 2004, with a final payment due on May 27, 2007 as set forth in the table
      below.


Period
              Principal
                  AmountApril
                  2006 through May 2006
              $150,000
                  per monthJune
                  2006 through April 2007
              $190,000
                  per monthMay
                  2007
              $435,000




The
      interest rate under the Term Note is subject to downward adjustment at the
      end
      of each month as follows. If at the end of the applicable month the Company
      has
      registered the shares of Common Stock underlying the Term Note with the SEC,
      interest payable on the term loan will be adjusted downward by 200 basis points
      (two percent) for each incremental 25 percent increase in the market price
      of
      the Common Stock, at the end of the month, in excess of the conversion price
      under the Term Note.





Amounts
      outstanding under the Term Note were convertible into Common Stock at Laurus's
      option at a conversion price initially equal to $2.70 per share. In December
      2004 the conversion price was reduced to $1.91 under the terms of the
      anti-dilution feature of the Term Note. In addition, subject to (i) having
      an
      effective registration statement with respect to the shares of Common Stock
      underlying the Term Note, and (ii) limitations based on trading volume of the
      Common Stock, scheduled principal and interest payments under the Term Note
      will
      be made in shares of Common Stock valued at the conversion price. Prepayments
      under the Term Note are subject to a premium in the amount of 20% of the
      principal being prepaid.





Subject
      to monthly adjustments as set forth below, borrowings under the receivable
      facility bear interest at a rate per annum equal to the prime rate plus two
      percent. In addition, the interest rate under the receivable facility is subject
      to downward adjustment at the end of each month in the same manner as provided
      for under the Term Note. If the market price of the Common Stock exceeds the
      fixed conversion price at the end of a month, the interest rate under the
      receivable facility will be reset to equal the prime rate minus two percent.
      The
      receivable facility terminates, and borrowings thereunder become due, on May
      27,
      2007.





Amounts
      outstanding under the receivable facility were convertible to Common Stock
      at
      Laurus's option at a conversion price initially equal to $3.38 per share. In
      December 2004 the conversion price was reduced to $2.22 under the terms of
      the
      anti-dilution feature of the facility. To the extent the Company repays loans
      outstanding under the receivable facility and/or Laurus converts loans under
      the
      receivable facility into Common Stock, the Company may reborrow or make
      additional borrowings under the receivable facility, provided that aggregate
      loans outstanding under the receivable facility at any time may not exceed
      the
      lesser of $10 million or a borrowing base equal to the sum of 83.7% of "eligible
      accounts" plus 60% of "eligible inventory" (with borrowings based on eligible
      inventory limited to $3.5 million). Eligible accounts are generally gross
      accounts receivable less foreign receivables and domestic receivables over
      90
      days from invoice date. Eligible inventory is substantially all finished goods
      inventory.





Loan
      Origination Fees





The
      loan
      origination and finders fees of $1.8 million for the Laurus loans and line
      of
      credit were capitalized and will be amortized to interest expense over three
      years. Included in loan origination fees is compensation of $112,000 relating
      to
      the issuance of warrants to purchase 1,034,000 shares of the Company's common
      stock.





8


Capitalized
      Leases





There
      are
      four capital leases for a trade show booth, warehouse racking, and two office
      furniture leases that have original capitalized values of $519,000. These leases
      will be paid over terms ranging from 24 to 60 months and payments will be
      allocated to debt and interest expense over the term of the leases.





Amortization
      Table: ($ in thousands)





2006
            
            2007
            
            2008
            
            2009Capital
                Leases
            
            $
            73
            
            $
            77
            
            $
            51
            
            $
            12




NOTE
      3 ~
      COMMITMENTS & CONTINGENCIES





Sales
      to
      certain consumers of video surveillance and other security products may be
      subject to sales tax requirements and possible audits by state taxing
      authorities. The Company estimates that any liability that it may have for
      sales
      taxes would not have a material effect on its financial condition or results
      of
      operations.





The
      Company is also a party to other disputes in the normal course of business.
      Management believes the ultimate resolution of such disputes will not have
      a
      material effect on the financial statements.





Termination
      Agreement with Nazzareno E. Paciotti





On
      March
      28, 2006, the Company and Nazzareno E. Paciotti, entered into a Mutual
      Separation Agreement whereby the parties mutually agreed to the termination
      of
      Mr. Paciotti’s employment with the Company and to his resignation as a director
      and officer of the Company and its subsidiaries. Under the terms of the Mutual
      Separation Agreement, Mr. Paciotti will receive severance payments equal to
      one
      year of his annual base salary of $300,000 payable over 12 months. In addition,
      under the separation agreement, Mr. Paciotti is entitled to continue to receive
      medical benefits through January 24, 2008. At December 31, 2005, approximately
      $335,000 had been accrued for this obligation, and at March 31, 2006 this amount
      was still accrued in full. The Company also agreed that Mr. Paciotti’s options
      to purchase 625,000 shares of Common Stock would vest in full and be exercisable
      in full until December 31, 2006. Mr. Paciotti agreed to release the Company
      in
      full from any and all claims and to continue to be bound by the confidentiality
      and non-solicitation terms of his employment agreement.








NOTE
      4 ~
      2004 STOCK INCENTIVE PLAN





On
      July
      22, 2003, the predecessor company, GVI Security, Inc., adopted the GVI Security,
      Inc. 2003 Stock Incentive Plan and granted options to purchase 23,000 shares
      of
      common stock of the GVI Security, Inc. under that plan. As a result of Merger,
      and after giving effect to the 1-for-65 reverse stock split, which occurred
      in
      April 2004, the options for 23,000 shares of the GVI Security, Inc. stock were
      converted to options to purchase 2,821,452 shares of Common Stock of the Company
      at a price of $.3185 per share. In February 2004, the Company adopted its 2004
      Long-Term Stock Plan and reserved up to 5,939,913 shares of Common Stock (after
      giving effect to the Reverse Stock Split) for issuance thereunder.




In
      addition, in February 2004, the Company granted options for common stock
      exercisable under the plan of 2,675,000 at $2.60 per share (post-reverse stock
      split).





In
      January 2005, the Company granted options for common stock exercisable under
      the
      2004 Long-Term Stock Plan of 837,500 at $1.50 per share.





In
      July
      2005, the Company granted to certain employees and consultants options of
      580,000 shares of Common Stock exercisable at $.85 per share. These options
      were
      not granted under a plan.





In
      March
      2006, the Company granted to certain employees options of 3,750,000 shares
      of
      Common Stock exercisable at $.16 to $.80 per share.




9


A
      summary
      of the status of the Company’s stock options as of December 31, 2005, and the
      changes during the three months ended March 31, 2006, is presented
      below.


Number
                  of
              
              Range
                  ofShares
              
              Exercise
                  PricesOutstanding
                  at January 1, 2006
              
              
              4,221,874
              
              $
              0.32
                  - 65.00Granted
              
              
              3,750,000
              
              $
              0.16
                  --0.80Exercised
              
              
              --
              
              $
              --Forfeited
              
              
              (199,115
              )
              $
              0.85
                  - 65.00Outstanding
                  at March 31, 2006
              
              
              7,772,759
              
              $
              0.16
                  - 65.00Options
                Exercisable
                at March 31, 2006
              
              
              5,352,462Weighted-average
                  fair value of options remaining exercisable at March 31,
                  2006
              
              
              
              
              
              $
                0.06


The
      following table summarizes information about stock options outstanding as of
      March 31, 2006:




Outstanding
                  Options
              
              Exercisable
                  OptionsNumber
              
              Weighted-Outstanding
              
              average
              
              Numberat
              
              Remaining
              
              Outstanding
                  atExercise
              
              March
                  31,
              
              Contractual
              
              March
                  31,Prices
              
              2006
              
              Life
              
              2006Over
                  $32.00
              
              
              250,000
              
              
              10.0
                  years
              
              
              125,0000.30
              
              
              1,000,000
              
              
              10.0
                  years
              
              
              1,000,0000.32
              
              
              749,522
              
              
              7.6
                  years
              
              
              562,1420.50
              
              
              250,000
              
              
              10.0
                  years
              
              
              125,0000.52
              
              
              1,000,000
              
              
              10.0
                  years
              
              
              500,0000.78
              
              
              250,000
              
              
              10.0
                  years
              
              
              125,0000.80
              
              
              1,000,000
              
              
              10.0
                  years
              
              
              500,0000.85
              
              
              460,000
              
              
              8.4
                  years
              
              
              142,5001.50
              
              
              822,500
              
              
              9.0
                  years
              
              
              675,8332.60
              
              
              1,975,000
              
              
              8.1
                  years
              
              
              1,581,250Over
                  $32.00
              
              
              15,737
              
              
              3.7
                  years
              
              
              15,7377,772,759
              
              
              
              
              
              5,352,462






10


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




*Statements
      contained in this Quarterly Report on Form 10-Q, other than the historical
      financial information, constitute “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995. All such
      forward-looking statements involve known and unknown risks, uncertainties or
      other factors which may cause actual results, performance or achievement of
      the
      Company to be materially different from any future results, performance or
      achievement expressed or implied by such forward-looking statements. Primary
      risk factors include, but are not limited to: ability to continue as a going
      concern; uncertainty of future profitability, reliance on primary supplier;
      outstanding indebtedness; effective integration of recently acquired operations
      and personnel; expansion risks; effective internal processes and systems; the
      ability to attract and retain high quality employees; changes in the overall
      economy; rapid change in technology; the number and size of competitors in
      its
      markets; law and regulatory policy; the mix of products and services offered
      in
      the Company's target markets; and other risks described herein and in the
      Company’s 2005 Annual Report on Form 10-KSB.*




*The
      following discussion of results of operations and financial condition is based
      upon, and should be read in conjunction with, our consolidated condensed
      financial statements and accompanying notes thereto included elsewhere herein.*





**THREE
      MONTHS ENDED MARCH 31, 200** **6
      Compared to Three Months Ended March 31, 2005** ****




**NET
      REVENUES FROM CONTINUING OPERATIONS**





Net
      revenues increased approximately $1.4 million, or 13.3% to approximately $11.7
      million in the three months ended March 31, 2006 from approximately $10.3
      million in the three months ended March 31, 2005. Sales of professional products
      increased approximately $1.7 million, or 18.1%, and enterprise solutions
      revenues decreased $200,000, or 71.5%. The increase in revenues of our
      professional products reflected increased sales to distributors, integrators
      and
      installers of a variety of products manufactured by Samsung Electronics as
      well
      as other manufacturers.


**COST
      OF GOODS SOLD FROM CONTINUING OPERATIONS**





Total **** cost
      of
      goods sold increased approximately $1.3 million or 16.7% to approximately $9.2
      million for the three months ended March 31, 2006, from approximately $7.9
      million in the three months ended March 31, 2005. This increase was due to
      the
      increased revenue volume, cost of technical support, warranty cost, and assembly
      cost, as well as a favorable inventory adjustment in 2005 of approximately
      $350,000 for which there was no comparable adjustment in 2006.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the three months ended March 31, 2006 increased to approximately
      $2.5
      million from approximately $2.4 for the three months ended March 31, 2005,
      and
      gross profit as a percentage of revenues (i.e. gross margins)  decreased
      to 21.2% for the three months ended March 31, 2006 compared with 23.5% for
      the
      three months ended March 31, 2005.




**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses decreased 3.6% to approximately $3.6
      million in the three months ended March 31, 2006 from approximately $3.7 million
      in the three months ended March 31, 2005, as follows:




**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased 20.6% to approximately $1.5 million in the three
      months ended March 31, 2006, from approximately $1.9 million in the three months
      ended March 31, 2005. The decrease was primarily due to; (i) elimination of
      approximately $180,000 of quarterly expense related to the licensing agreement
      with Cybasec Ltd. entered into January 1, 2005, which was not renewed for 2006,
      (ii) decreases of approximately $85,000 in sales and marketing staff salaries
      and related benefits, (iii) a decrease of approximately $59,000 in advertising
      costs and trade show expense, and (iv) a decrease of $103,000 in sample and
      demonstration equipment cost.





11


**General
      and Administrative.** General
      and administrative expenses increased 14.7% to approximately $2.1 million for
      the three months ended March 31, 2006 from approximately $1.8 for the three
      months ended March 31, 2005. Major items resulting in the increased
      general and administrative expense were (i) stock based compensation expense
      of
      approximately $240,000, recorded due to the adoption of SFAS123R effective
      January 1, 2006, with no comparable expense in 2005, (ii) approximately $207,000
      in personnel termination costs during the quarter, (iii) additional increase
      of
      approximately $109,000 in administrative salaries, including for new Chief
      Executive and Chief Financial Officers, (iv) $54,000 of non-employee directors
      fees for which there was not an equivalent expense in 2005, and (v) increased
      travel expenses of $64,000. These increases were offset by (i) a decrease in
      legal, accounting, and other professional fees of approximately $213,000, (ii)
      a
      reduction of $41,000 in insurance expense, and (iii) decrease in office expenses
      of $40,000 .





**INTEREST
      EXPENSE**





Interest
      expense for the three months ended March 31, 2006 increased 252% to
      approximately $398,000 from approximately $113,000 in the three months ended
      March 31, 2005. The increase was due to higher outstanding borrowings and a
      higher average interest rate during the three months ended March 31, 2006
      compared with the three months ended March 31, 2005. The higher average interest
      rates resulted from a higher prime interest rate during the period as well
      as
      the interest rate provisions applicable to borrowings under the receivable
      facility. As a result of the conversion price under the facility exceeding
      the
      market price of our Common Stock for the three months ended March 31, 2006,
      the
      interest rate for the period was equal to the prime rate plus two percent.
      The
      amount of interest expense for the three months ended March 31, 2006 reflects
      an
      offset of approximately $17,500 of interest income earned on bank balances
      during the period. Interest income earned for the three months ended March
      31,
      2005 was approximately $63,000.





**INCOME
      TAX EXPENSE (BENEFIT)**





The
      provision for federal, state and local income tax is an expense of approximately
      $23,000 for the three months ended March 31, 2006 compared to an expense of
      approximately $2,000 for the three months ended March 31, 2005. The $23,000
      expense relates to state franchise taxes that are not determined based on net
      income. Any provision for federal and state tax benefits due to our loss for
      the
      three months ended March 31, 2006 would be offset by an equal increase in a
      valuation allowance. **** We
      established this allowance because, in light of our history, including our
      losses following our merger in February 2004, there is uncertainty whether
      we
      will have  future
      income against which we can offset our losses to reduce our tax expense in
      future periods.





**DISCONTINUED
      OPERATIONS**





Loss
      from
      discontinued operations, net of tax, was approximately $960,000 for the three
      months ended March 31, 2006, compared to income from discontinued operations
      of
      approximately $900,000 for the three months ended March 31, 2005. The loss
      for
      the three months ended March 31, 2006 reflects an aggregate of $500,000 of
      negative revenues and reserves we accrued in connection with returns of retail
      products we sold in prior periods, and the write down of returned retail
      inventories. We are currently evaluating our obligations to accept product
      returns from our former distributor to the Retail Channel. In comparison to
      our
      negative revenues for the three months ended March 31, 2006, we had net revenues
      of approximately $13.6 million for the three months ended March 31, 2005.
      Operating results from discontinued operations do not include any allocation
      of
      corporate overhead.




**NET
      INCOME**





As
      a
      result of the items discussed above there was a net loss of approximately $2.5
      million for the three months ended March 31, 2006 compared with a net loss
      of
      approximately $500,000 for the three months ended March 31, 2005.





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      March
      31, 2006, we had cash and cash equivalents of approximately $2.7 million,
      working capital of approximately $9.9 million, an outstanding balance of $2.8
      million under the Laurus Term Loan, and outstanding balances under the revolver
      facility from Laurus of approximately $8.8 million, with additional borrowing
      availability of $400,000 under such facility. In comparison, at December 31,
      2005, we had cash and cash equivalents of approximately $3.3 million, working
      capital of approximately $11.7 million, an outstanding balance of $3.3 million
      under the Laurus Term Loan, and outstanding balances under the revolver facility
      from Laurus of approximately $8.5 million, with no additional borrowing
      availability under such facility.




Cash
      decreased from $3.3 million at December 31, 2005 to $2.6 million at March 31,
      2006 primarily as a result of (i) an increase in inventory, from $7.1 million
      at
      December 31, 2005 to $8.4 million at March 31, 2006, and (ii) an increase in
      accounts receivable from $7.7 million at December 31, 2005 to $9.7 million
      at
      March 31, 2006, primarily as a result of higher revenues in the period than
      in
      the previous period. These factors were partially offset by an increase in
      accounts payable from $7.0 million at December 31, 2005 to $10.1 million at
      March 31, 2006.




12


Historically,
      GVI has funded its operations primarily through cash generated from operations,
      the proceeds of borrowings under secured revolving credit facilities and with
      the proceeds of equity offerings.




**Laurus
      Financing**




On
      May
      27, 2004, we closed a $15 million convertible debt financing with Laurus Master
      Fund, Ltd. under which we were provided with a $5 million term loan and a $10
      million accounts receivable loan facility. At closing, we borrowed $5 million
      under the term loan and $10 million under the receivable facility, and used
      $10,016,000 of the proceeds to repay in full the indebtedness outstanding under
      our revolving credit agreement with Comerica Bank. Additional proceeds of the
      financing were used to increase working capital, pay closing fees to Laurus
      in
      the aggregate amount of $617,500, and pay a finder's fee in the amount of
      $800,000. As part of the transaction, Laurus was also issued a seven-year
      warrant to purchase 940,000 shares of our Common Stock at a price of $3.50
      per
      share. We issued a similar warrant to purchase 94,000 shares of Common Stock
      to
      the finder at a price of $3.50 per share. Borrowings under the Laurus financing
      are secured by all of our assets.




The
      term
      loan is evidenced by a Secured Convertible Term Note and, subject to monthly
      adjustments as set forth below, bears interest at an initial rate per annum
      equal to the prime rate (as reported in the Wall Street Journal), plus two
      percent, subject to a floor of six percent. Interest on the term loan is payable
      monthly. Amortizing payments of principal on the term loan commenced September
      1, 2004. Remaining monthly payments are set forth in the table
      below.


Period
              Principal
                  AmountApril
                  2006 through May 2006
              $150,000
                  per monthJune
                  2006 through April 2007
              $190,000
                  per monthMay
                  2007
              $435,000




The
      interest rate under the Term Note is subject to downward adjustment at the
      end
      of each month as follows. Interest payable on the term loan will be adjusted
      downward by 200 basis points (two percent) for each incremental 25 percent
      increase in the market price of our Common Stock, at the end of the month,
      in
      excess of the conversion price under the Term Note.




Amounts
      outstanding under the Term Note are convertible into Common Stock at Laurus's
      option at a conversion price initially equal to $2.70 per share, and currently
      equal to $1.91 per share. In addition, subject to (i) having an effective
      registration statement with respect to the shares of Common Stock underlying
      the
      Term Note, and (ii) limitations based on trading volume of the Common Stock,
      scheduled principal and interest payments under the Term Note will be made
      in
      shares of Common Stock valued at the conversion price. Prepayments under the
      Term Note are subject to a premium in the amount of 20% of the principal being
      prepaid.




Subject
      to monthly adjustments as set forth below, borrowings under the receivable
      facility bear interest at a rate per annum equal to the prime rate plus two
      percent. If the market price of Common Stock exceeds the conversion price at
      the
      end of a month, the interest rate under the receivable facility will be reduced
      to equal the prime rate minus two percent. In addition, the interest rate under
      the receivable facility is subject to downward adjustment at the end of each
      month in the same manner as provided for under the Term Note. The receivable
      facility terminates, and borrowings thereunder become due, on May 27,
      2007.




Amounts
      outstanding under the receivable facility are convertible to Common Stock at
      Laurus's option at a conversion price initially equal to $3.38 per share, and
      currently equal to $2.22 per share. To the extent we repay loans outstanding
      under the receivable facility and/or Laurus converts loans under the receivable
      facility into Common Stock, we may reborrow or make additional borrowings under
      the receivable facility, provided that aggregate loans outstanding under the
      receivable facility at any time may not exceed the lesser of $10 million or
      a
      borrowing base equal to the sum of 83.7% of "eligible accounts" plus 60% of
      "eligible inventory" (with borrowings based on eligible inventory limited to
      $3.5 million). Eligible accounts are generally gross accounts receivable less
      foreign receivables and domestic receivables over 90 days from invoice date.
      Eligible inventory is substantially all finished goods inventory.




13


The
      conversion prices under the Term Note and the receivable facility are subject
      to
      equitable adjustment for stock splits, stock dividends and similar events,
      and
      "weighted average" adjustment for future stock issuances (other than stock
      issuances in specifically excepted transactions) in accordance with a formula
      specified under our agreements with Laurus.




**Going
      Concern Considerations**





The
      accompanying unaudited condensed consolidated financial statements have been
      presented in accordance with U.S. GAAP, which assumes the continuity of the
      Company as a going concern. During the three months ended March 31, 2006 and
      in
      the prior fiscal years, the Company experienced, and continues to experience,
      negative cash flow and operating losses. These factors raise substantial doubt
      about the Company’s ability to continue as a going concern. Our new
      management has taken steps to both reduce certain costs and increase sales
      of
      our professional products. However, we have increased compensation costs in
      2006
      associated with the hiring of our new Chief Executive Officer and Chief
      Financial Officer, we may incur additional costs for other management personnel,
      and we may continue to incur costs relating to our discontinued retail channel
      operations. We will need to raise additional capital in the near future to
      finance our operations and sustain our business model. We may not be able to
      obtain additional financing on acceptable terms, or at all. In addition, any
      financing we obtain in the future may result in dilution to our existing
      stockholders.




**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk** ****




Foreign
      Currency Exchange Risk





Our
      results of operations and cash flows are not subject in any material
      respect **** to
      fluctuations due to changes in foreign currency exchange rates. We do not
      currently have any foreign currency hedging contracts in place, nor did we
      enter
      into any such contracts during the three months ended March 31, 2006. To date,
      exchange rate fluctuations have had little impact on our operating results
      and
      cash flows.





Interest
      Rate Sensitivity







As
      disclosed above, our loans with Laurus bear interest at a fluctuating rate
      of
      interest related to the “prime” rate in effect from time to time. Accordingly,
      increases in the prime rate will increase our interest expense under our
      agreements with Laurus. We do not use interest rate hedging contracts to manage
      our exposure to changes in interest rates.






**Item
      4. Controls and Procedures.**




Ou r
      Chief
      Executive and Chief Financial Officer s ha ve concluded, based on their evaluation
      as of March 31,
      200 6 ,
      that
      our disclosure controls and procedures are effective to reasonably ensure
      that information required to be disclosed by us in the reports we file or submit
      under the Securities Exchange Act of 1934, as amended, is recorded, processed,
      summarized and reported  within
      the time periods specified in the SEC’s rules and forms.




There
      were no significant changes in our internal controls over financial reporting
      that occurred during our first fiscal
      quarter that has materially affected, or is reasonably likely to materially
      affect, our internal
      control over financial reporting.




**PART
      II. OTHER INFORMATION**





**Item
      1A. Risk Factors**





**RETURNS
      OF PRODUCTS PREVIOUSLY SOLD BY US IN THE RETAIL CHANNEL MAY RESULT IN LOSSES
      FROM DISCONTINUED OPERATIONS IN FUTURE PERIODS**





Following
      the discontinuance of our Retail Channel operations, we continue to receive
      returns of our retail products from the distributor to whom we previously sold
      those products. As a result, we have agreed to refund the purchase price of
      those products to this distributor and written down the value of the inventory
      returned to us to reflect saleable value. This resulted in a loss from
      discontinued operations, net of tax, of approximately $960,000 for the three
      months ended March 31, 2006. To the extent we continue to accept returns of
      products from this distributor, we will generate additional losses from
      discontinued operations in future periods.





14


In
      addition, you should carefully consider the “Risk Factors” discussed in Part I,
      Item 1 of our Annual Report on Form 10-KSB for the year ended December 31,
      2005,
      which could materially affect our business, financial condition or future
      results. The risks described in this report and in our Annual Report on Form
      10-KSB are not the only risks facing us. Additional risks and uncertainties
      not
      currently known to us or that we currently deem to be immaterial also may
      materially adversely affect our business, financial condition and/or operating
      results **.**





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





Pursuant
      to our Nonemployee Directors Stock Plan adopted by our board of Directors in
      October 2005, we issued shares of our Common Stock to our nonemployee directors
      during the period of January 1 to March 31, 2006 as set forth in the table
      below. These issuances were exempt from registration under Section 4(2) of
      the
      Securities Act of 1933, as amended.


Date
                  of Issuance
              
              Number
                  of Shares Issued to eachNon-Employee
                  Director
              
              Total
                  Number of SharesIssued
                  to Non-Employee DirectorsJanuary
                  15, 2006
              
              3,448
              
              20,688February
                  15, 2006
              
              3,030
              
              18,180March
                  15, 2006
              
              3,704
              
              22,224




In
      addition, pursuant to Alliance and Subscription Agreements we entered into
      with
      E&S International Enterprises, Inc. (“ESI”) in May 2005, ESI and a related
      party were provided the right to be issued up to 3,000,000 shares of common
      stock upon attaining certain sales goals provided for in the Agreement. As
      a
      result of goals achieved January 2, 2006, 712,500 of these shares of Common
      Stock were issued to ESI on February 15, 2006. This issuance was exempt from
      registration under Section 4(2) of the Securities Act.








**Item
      6. Exhibits.** ****




Number
            
            Description31.1
            
            Certification
                of Steven Walin, Chief Executive Officer of the Registrant, pursuant
                to
                Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
                193431.2
            
            Certification
                of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                to
                Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
                193432.1
            
            Certification
                of Steven Walin, Chief Executive Officer of the Registrant, pursuant
                to
                Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
                193432.2
            
            Certification
                of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                to
                Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
                1934







15





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.









**GVI
                SECURITY SOLUTIONS, INC.**Date:
                May 15, 2006
            By:/s/
                Joseph RestivoName:
                Joseph Restivo
              Title:
                Chief Financial Officer








**EXHIBIT
      INDEX**




Number
              
              Description31.1
              
              Certification
                  of Steven Walin, Chief Executive Officer of the Registrant, pursuant
                  to
                  Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act
                  of
                  193431.2
              
              Certification
                  of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                  to
                  Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act
                  of
                  193432.1
              
              Certification
                  of Steven Walin, Chief Executive Officer of the Registrant, pursuant
                  to
                  Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act
                  of
                  193432.2
              
              Certification
                  of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                  to
                  Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act
                  of
                  1934