**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-Q**





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





For
      the
      quarterly period ended September 30, 2008


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, a non-accelerated filer, or a smaller reporting company.
      See
      the definition of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ̈
            Accelerated filer ̈Non-accelerated filer ̈(Do not check if a smaller reporting company)
            Smaller reporting companyx





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


 ̈ Yes  x No





As
      of
      November 13, 2008 there were 28,197,106 shares of the registrant’s common stock
      outstanding.





**GVI
      Security Solutions, Inc.**


**FORM
      10-Q**




**TABLE
      OF CONTENTS**




**PART
                I. FINANCIAL INFORMATION**
            **3**Item
                1.
            Financial
                Statements.
            3Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4T.
            Controls
                and Procedures
            22**PART
                II. OTHER INFORMATION**
            **23**Item
                1A.
            Risk
                Factors
            23Item
                6.
            Exhibits.
            24




2


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





**GVI
      Security Solutions, Inc.**


**Condensed
      Consolidated Balance Sheets**




(In
      thousands, except share and per share amounts)





September 30,
              2008
            
            December 31,
              2007*(Unaudited)***ASSETS:**Current
                AssetsCash
                and equivalents
            
            $
            31
            
            $
            313Accounts
                receivable, net of allowances for doubtful accounts of $437 and $416,
                respectively
            
            
            7,832
            
            
            6,625Inventory,
                net
            
            
            12,875
            
            
            12,723Deferred
                Tax Assets, Current
            
            
            894
            
            
            907Prepaid
                and other current assets
            
            
            735
            
            
            1,184Total
                Current Assets
            
            
            22,367
            
            
            21,752Property
                and Equipment, net of accumulated depreciation of $1,499 and $1,374
                respectively
            
            
            177
            
            
            156Deferred
                tax assets, non-current
            
            
            681
            
            
            1,321Deferred
                loan origination fee, net
            
            
            69
            
            
            93Other
                assets
            
            
            34
            
            
            34Total
                Assets
            
            $
            23,328
            
            $
            23,356**LIABILITIES
                AND STOCKHOLDERS' EQUITY:**Current
                LiabilitiesAccounts
                payable
            
            $
            7,639
            
            $
            7,392Accrued
                expenses
            
            
            1,855
            
            
            1,849Capitalized
                lease obligations, current
            
            
            18
            
            
            51Total
                Current Liabilities
            
            
            9,512
            
            
            9,292Capital
                lease obligations, net of current portion
            
            
            -
            
            
            12Deferred
                tax liability, non-current
            
            
            1,244
            
            
            1,244Revolving
                credit facility
            
            
            8,938
            
            
            10,344Total
                Liabilities
            
            
            19,694
            
            
            20,892Commitments
                and ContingenciesStockholders'
                EquityPreferred
                stock, undesignated, $.001 par value, 3,000,000 shares authorized,
                none
                issued or outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value, 200,000,000 shares authorized, 28,197,106
                and
                28,147,106 shares issued and outstanding at September 30, 2008 and
                December 31, 2007 respectively
            
            
            28
            
            
            28Additional
                paid-in capital
            
            
            34,794
            
            
            34,574Accumulated
                deficit
            
            
            (31,188
            )
            
            (32,138
            )Total
                Stockholders' Equity
            
            
            3,634
            
            
            2,464Total
                Liabilities and Stockholders' Equity
            
            $
            23,328
            
            $
            23,356





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


3





**GVI
      Security Solutions, Inc.**


**Condensed
      Consolidated Statements of Operations**


**(unaudited)**


(in
      thousands, except share and per share amounts)





Three Months Ended September 30
            
            Nine Months Ended September 302008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            12,229
            
            $
            10,761
            
            $
            36,393
            
            $
            34,055Cost
                of Revenues
            
            
            8,559
            
            
            7,647
            
            
            25,496
            
            
            24,587Gross
                Profit
            
            
            3,670
            
            
            3,114
            
            
            10,897
            
            
            9,468Selling,
                General and Administrative Expenses
            
            
            2,989
            
            
            2,431
            
            
            8,699
            
            
            7,682Operating
                Income
            
            
            681
            
            
            683
            
            
            2,198
            
            
            1,786Interest
                Expense
            
            
            176
            
            
            196
            
            
            559
            
            
            808Income
                from operations before income taxes
            
            
            505
            
            
            487
            
            
            1,639
            
            
            978Income
                Tax Expense
            
            
            251
            
            
            13
            
            
            690
            
            
            36Net
                Income
            
            $
            254
            
            $
            474
            
            $
            949
            
            $
            942Basic
                income per common share:Net
                income per common share
            
            $
            0.01
            
            $
            0.02
            
            $
            0.03
            
            $
            0.03Weighted
                average common shares outstanding
            
            
            28,197,107
            
            
            28,147,000
            
            
            28,177,070
            
            
            27,997,000Diluted
                net income per common share:Net
                income per common share
            
            $
            0.01
            
            $
            0.01
            
            $
            0.03
            
            $
            0.03Weighted
                average common shares outstanding
            
            
            32,265,182
            
            
            33,473,000
            
            
            33,238,644
            
            
            33,592,000





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


4


**GVI
      Security Solutions, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**(unaudited)**


( In
      thousands )





Nine Months Ending September 30,2008
              
              2007Cash
                  Flows Provided by (Used In) Operating ActivitiesNet
                  Income
              
              $
              949
              
              $
              942Adjustments
                  to Reconcile Net Income to Net Cash Provided by (Used In) Operating
                  Activities:Depreciation
                  and amortization from continuing operations
              
              
              125
              
              
              185Amortization
                  of deferred loan origination fee
              
              
              24
              
              
              209Compensation
                  costs and expenses for stock and options issued
              
              
              210
              
              
              141Changes
                  in Assets and Liabilities:Accounts
                  receivable, net
              
              
              (1,207
              )
              
              654Inventory
              
              
              (152
              )
              
              (3,430
              )Prepaid
                  and other current assets
              
              
              450
              
              
              580Deferred
                  tax assets and liabilities, net
              
              
              653
              
              
              -Accounts
                  payable
              
              
              247
              
              
              668Accrued
                  expenses
              
              
              6
              
              
              (136
              )Net
                  cash provided by (used in) operating activities from continuing
                  operations
              
              
              1,305
              
              
              (187
              )Net
                  cash provided by (used in) operating activitiesof
                  discontinued operations
              
              
              -
              
              
              (218
              )Net
                  cash provided by (used in) operating activities
              
              
              1,305
              
              
              (405
              )Cash
                  Flows Used In Investing ActivitiesPurchase
                  of property and equipment
              
              
              (145
              )
              
              (2
              )Net
                  Cash Used In Investing Activities
              
              
              (145
              )
              
              (2
              )Cash
                  Flows (Used in) Provided by Financing ActivitiesIssuance
                  of common stock
              
              
              -
              
              
              1,036Issuance
                  of common stock upon exercise of warrants
              
              
              10
              
              
              -Net
                  proceeds from revolving credit facility
              
              
              (1,406
              )
              
              1,367Principal
                  payments of senior term note
              
              
              -
              
              
              (1,369
              )Principal
                  payments of capitalized lease obligations
              
              
              (45
              )
              
              (57
              )Net
                  Cash (Used In) Provided by Financing Activities
              
              
              (1,441
              )
              
              977Net
                  (decrease) increase in cash and equivalents
              
              
              (282
              )
              
              570Cash
                  and equivalents, beginning of period
              
              
              313
              
              
              225Cash
                  and equivalents, end of period
              
              $
              31
              
              $
              795**SUPPLEMENTARY
                  CASH FLOW INFORMATION**Cash
                  paid for interest
              
              $
              579
              
              $
              618Cash
                  paid for income taxes
              
              
              61
              
              
              43**SUPPLEMENTAL
                  SCHEDULE OF NONCASH INVESTING AND FINANCING
                  ACTIVITIES**Accrued
                  obligation converted to common stock
              
              $
              -
              
              $
              20




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


5


**GVI
      Security Solutions, Inc.**


**Notes
      to Condensed Consolidated Financial Statements (unaudited)**


**Nine
      Months Ended September 30, 2008 and 2007**





**NOTE
      1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Nature
      of Business**





GVI
      Security Solutions, Inc. (“GVI” or “Company”) provides video surveillance and
      security solutions products, incorporating a complete line of video surveillance
      and detection systems, to the homeland security, professional and
      business-to-business market segments. The Company provides a combination of
      closed circuit televisions (CCTVs), digital video recorders (DVRs), software
      systems and networking products that enhance life safety for both government
      agencies and the private sector.




The
      Company’s customers include distributors and system integrators that specialize
      in video surveillance and security products and services, government agencies
      and private sector businesses.





**Basis
      of Presentation**





The
      accompanying unaudited condensed 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.





These
      condensed consolidated financial statements should be read in conjunction with
      the Company's Annual Report on Form 10-K for the fiscal year ended December
      31,
      2007.





**Principles
      of Consolidation**





The
      accompanying condensed consolidated financial statements include the accounts
      of
      GVI Security Solutions, Inc., and its wholly-owned subsidiaries GVI Security,
      Inc. and Rapor, Inc. (which was legally dissolved in December 2007). All
      material intercompany transactions, balances and profits have been
      eliminated.





**Revenue
      Recognition**





The
      Company’s primary source of revenue is from sales of its products. The Company
      recognizes revenue when the sales process is deemed complete and associated
      revenue has been earned. The Company’s policy is to recognize revenue when
      products have been shipped, risk of loss and title to the product transfers
      to
      the customer, the selling price is fixed and determinable and collectibility
      is
      reasonably assured. Net sales is comprised of gross revenue less expected
      returns, trade discounts and customer allowances, which include costs associated
      with off-invoice mark downs and other price reductions, as well as trade
      promotions. Related incentive costs are recognized at the later of the date
      on
      which the Company recognizes the related revenue or the date on which the
      Company offers the incentive.





The
      Company allows customers to return defective products when they meet certain
      established criteria as outlined in its sales terms and conditions. It is the
      Company’s practice to regularly review and revise, when deemed necessary, its
      estimates of sales returns, which are based primarily on actual historical
      return rates. The Company records estimated sales returns as reductions to
      sales, cost of sales, and accounts receivable and an increase to inventory.
      Returned products which are recorded as inventory are valued based upon the
      amount the Company expects to realize upon its subsequent disposition. The
      Company considers the physical condition and marketability of the returned
      products as major factors in estimating realizable value. Actual returns, as
      well as realized values on returned products, may differ significantly, either
      favorably or unfavorably, from Company estimates if factors such as customer
      inventory levels or competitive conditions differ from estimates and
      expectations and, in the case of actual returns, if economic conditions differ
      significantly from Company estimates and expectations.


6





At
      the
      time revenue is recognized, the Company also records reductions to revenue
      for
      customer incentive programs in accordance with the provisions of Emerging Issue
      Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given from a
      Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Such
      incentive programs include cash and volume discounts, price protection,
      promotional, cooperative and other advertising allowances. For those incentives
      that require the estimation of sales volumes or redemption rates, such as for
      volume rebates, the Company uses historical experience and internal and customer
      data to estimate the sales incentive at the time the revenue is recognized.
      In
      the event that the actual results of these items differ from the estimates,
      adjustment to the sales incentive accruals would be recorded.




**Inventory**





Inventory
      is stated at the lower of cost (first-in, first-out method) or market and
      consists of goods held for resale and parts used for repair work. Reserves
      are
      recorded for slow-moving, obsolete, nonsaleable or unusable items based upon
      a
      product-level review, in order to reflect inventory balances at their net
      realizable value. Inventory reserve balances at September 30, 2008 and December
      31, 2007 were approximately $2,305,000 and $2,346,000,
      respectively.





**Advertising**





Advertising
      costs are expensed as incurred. Certain advertising costs, which include various
      promotional incentives and trade show participation, for the nine months ended
      September 30, 2008 and 2007 were reimbursed by Samsung in the form of marketing
      incentives and partial reimbursement for trade show participation. Advertising
      costs, net of reimbursements, during the three month period ended September
      30,
      2008 and 2007 were $169,000 and $159,000, respectively, and during the nine
      month period ended September 30, 2008 and 2007 were $587,000 and $450,000,
      respectively.





**Income
      Taxes**




Income
      taxes consist of taxes currently payable plus deferred taxes related primarily
      to differences between the basis of property and equipment, inventory, and
      accounts receivable for financial and income tax reporting. Deferred taxes
      represent the future tax return consequences of those differences, which will
      be
      taxable or deductible when the assets and liabilities are recovered or
      settled.




Deferred
      tax liabilities and assets are classified as current or noncurrent based on
      the
      classification of the related asset or liability for financial reporting, or
      according to the expected reversal date of temporary differences not related
      to
      an asset or liability for financial reporting. Also, a valuation allowance
      is
      used, if necessary, to reduce deferred tax assets by the amount of any tax
      benefits that are not expected to be realized in the future based on available
      evidence.





**Credit
      Risk Concentration**




During
      the three months ended September 30, 2008, two customers accounted for
      $1,754,000 (14%) and $1,671,000 (14%), respectively, of the Company’s sales.
      During the three months ended September 30, 2007, two customers accounted for
      $2,053,000 (19%) and $1,613,000 (15%), respectively, of the Company’s sales.
      During the nine months ended September 30, 2008, two customers accounted for
      $7.3 million (20%) and $4.4 million (12%), respectively, of the Company’s sales.
      During the nine months ended September 30, 2007, two customers accounted for
      $6.4 million (18%) and $6.0 million (17%), respectively, of the Company’s sales.





As
      of
      September 30, 2008, two customers comprised $1,497,000 million (17%) and
      $1,270,000 million (14%), respectively, of the Company’s total outstanding gross
      accounts receivable balance. As of December 31, 2007, two customers comprised
      $1,513,000 (19%) and $1,248,000 (16%), respectively, of the Company’s total
      outstanding gross accounts receivable balance.





International
      sales accounted for approximately 34%, and 31% of the Company's sales during
      the
      nine months ended September, 2008 and 2007, respectively and 41% and 31% for
      the
      three months ended September 30, 2008 and 2007, respectively. All international
      sales took place in Latin America and Canada, with the majority of such sales
      occurring in Latin America. Sales in Mexico accounted for 17% and 12%,
      respectively, of the Company’s sales during the three and nine months ended
      September 30, 2008.


7





The
      Company performs ongoing credit evaluations of its customers and generally
      requires no collateral from them. ****





**Use
      of Estimates**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosures of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. Significant estimates include
      those that relate to the valuation of inventory, accounts receivable, certain
      accruals and liabilities and the useful lives of property and
      equipment




**Earnings
      per Share**





Statement
      of Financial Accounting Standards No. 128, "Earnings per Share", requires
      presentation of basic earnings per share ("Basic EPS") and diluted earnings
      per
      share ("Diluted EPS"). Basic earnings (loss) per share is computed by dividing
      earnings (loss) available to common stockholders by the weighted average number
      of common shares outstanding during the period.





Diluted
      earnings per share reflects the potential dilution, using the treasury stock
      method, that could occur if securities or other contracts to issue common stock
      were exercised or converted into common stock or resulted in the issuance of
      common stock that then shared in the earnings of the Company. In computing
      diluted earnings per share, the treasury stock method assumes that outstanding
      options and warrants are exercised and the proceeds are used to purchase common
      stock at the average market price during the period. Options and warrants will
      have a dilutive effect under the treasury stock method only when the average
      market price of the common stock during the period exceeds the exercise price
      of
      the options and warrants.





The
      following is a reconciliation of the calculation of basic and diluted earnings
      per share for the three and nine months ended September 30, 2008 and
      2007.





**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Numerator**Net
                income, as reported
            
            $
            254
            
            $
            474
            
            $
            949
            
            $
            942**Denominator**Weighted
                average common shares outstanding
            
            
            28,197
            
            
            28,147
            
            
            28,177
            
            
            27,997Effect
                of dilutive securities:Warrants
            
            
            1,065
            
            
            1,203
            
            
            1,310
            
            
            1,490Common
                stock options
            
            
            3,003
            
            
            4,123
            
            
            3,751
            
            
            4,202Weighted
                average common shares and dilutive securities outstanding
            
            
            32,265
            
            
            33,473
            
            
            33,238
            
            
            33,592***Earnings
                per share – basic***Net
                income, as reported
            
            $
            0.01
            
            $
            0.02
            
            $
            0.03
            
            $
            0.03***Earnings
                per share – dilutive***Net
                income, as reported
            
            $
            0.01
            
            $
            0.01
            
            $
            0.03
            
            $
            0.03




Warrants
      to purchase approximately 885,000 and 735,000, respectively of shares of common
      stock at various prices exceeding $0.48 per share and $0.69 were outstanding
      during the three and nine months ended September 30, 2008 but were not included
      in the computation of diluted earnings per share for those periods because
      the
      respective warrant exercise prices were greater than the average market price
      of
      the common shares during those periods, and their effect would be anti-dilutive.
      Options to purchase approximately 759,000 and 409,000 share of common stock
      at
      various prices exceeding $0.48 and $0.69 per share were outstanding during
      the
      three and nine months ended September 30, 2008 but were not included in the
      computation of diluted earnings per share for this period because the respective
      option exercise prices were greater than the average market price of the common
      shares during this period, and their effect would be anti-dilutive.


8





Warrants
      to purchase approximately 135,000 shares of common stock at various prices
      exceeding $0.89 per share were outstanding during the three and nine months
      ended September 30, 2007 but were not included in the computation of diluted
      earnings per share for those periods because the respective warrant exercise
      prices were greater than the average market price of the common shares during
      those periods, and their effect would be anti-dilutive. Options to purchase
      approximately 299,000 and 149,000 share of common stock at various prices
      exceeding $0.76 and $0.89 per share were outstanding during the three months
      and
      nine months ended September 30, 2007 but were not included in the computation
      of
      diluted earnings per share for this period because the respective option
      exercise prices were greater than the average market price of the common shares
      during this period, and their effect would be anti-dilutive.




**Stock-Based
      Compensation**




The
      Company periodically issues stock options and warrants to employees and
      non-employees in capital raising transactions, for services and for financing
      costs. The Company adopted SFAS No. 123R effective January 1, 2006, and is
      using
      the modified prospective method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS No.
      123R
      for all share-based payments granted after the effective date and (b) based
      on
      the requirements of SFAS No. 123R for all awards granted to employees prior
      to
      the effective date of SFAS No. 123R that remain unvested on the effective date.
      The Company accounts for stock option and warrant grants issued and vesting
      to
      non-employees in accordance with EITF No. 96-18: "Accounting for Equity
      Instruments that are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
      Recognition for Certain Transactions involving Equity Instruments Granted to
      Other Than Employees” whereas the value of the stock compensation is based upon
      the measurement date as determined at either a) the date at which a performance
      commitment is reached, or b) at the date at which the necessary performance
      to
      earn the equity instruments is complete.




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





**Nine Months Ended**
              **September 30,****2008**
            
            **2007**Dividend
                yield
            
            
            -
            
            
            -Risk-free
                factors
            
            
            4.0
            %
            
            6.5
            %Volatility
                factors
            
            
            63
            %
            
            43
            %Option
                Lives in Years
            
            
            6.0
            
            
            6.0




**Fair
      Value Measurements**





Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting Standards
      (SFAS) No. 157, Fair Value Measurements. This Statement defines fair value
      for
      certain financial and nonfinancial assets and liabilities that are recorded
      at
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value measurements. This guidance applies to other
      accounting pronouncements that require or permit fair value measurements. On
      February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.157-2,
      Effective Date of FASB Statement No. 157. This Staff Position delays the
      effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
      years beginning after November 15, 2008 and interim periods within those fiscal
      years, except for those items that are recognized or disclosed at fair value
      in
      the financial statements on a recurring basis (at least annually). The adoption
      of SFAS No. 157 had no effect on the Company’s consolidated financial position
      or results of operations.


9


**Recent
      Accounting Pronouncements**





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities*an amendment of FASB Statement No. 133” (SFAS 161). This
      Statement requires enhanced disclosures about an entity’s derivative and hedging
      activities, including (a) how and why an entity uses derivative instruments,
      (b)
      how derivative instruments and related hedged items are accounted for under
      SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS
      133), and its related interpretations, and (c) how derivative instruments and
      related hedged items affect an entity’s financial position, financial
      performance, and cash flows. SFAS 161 is effective for financial statements
      issued for fiscal years and interim periods beginning after November 15, 2008.





In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141 (R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





The
      Company does not believe that the adoption of the above recent pronouncements
      will have a material effect on the Company’s consolidated results of operations,
      financial position, or cash flows.





**NOTE
      2 ~ CREDIT FACILITY**





On
      November 20, 2007, the Company entered into a Credit and Security Agreement
      with
      Wells Fargo Bank, National Association under which the Company was provided
      with
      a $15 million revolving credit facility. Aggregate amounts outstanding under
      the
      line of credit at September 30, 2008 and December 31, 2007 were approximately
      $8.9 million and $10.3 million respectively. Borrowings under the credit
      facility are secured by all of the Company’s assets. Upon closing, the Company
      paid Wells Fargo an origination fee of $37,500. The Company also pays Wells
      Fargo an annual fee equal to .25% of the average daily unused portion of the
      credit facility. Outstanding loans under the credit facility will become due
      on
      November 20, 2010.




Pursuant
      to the Credit and Security Agreement, among other things:




·
            Interest
                accrues on outstanding loans under the credit facility, at the Company’s
                option, at a per annum rate equal to the prime rate from time to
                time in
                effect (5.0% at September 30, 2008) plus .75% percent, or a LIBOR
                rate
                selected by the Company, plus 3.25%.





·
            In
                the event the Company achieves Net Income (as defined in the Credit
                Agreement), of $1,000,000 in the year ending December 31, 2008, the
                interest rate under the credit facility will be prospectively reduced
                by
                .50% per annum.





·
            Aggregate
                loans (plus the face amount of letters of credit) outstanding under
                the
                credit facility at any time may not exceed the lesser of $15 million
                or a
                borrowing base equal to the sum of 85% of “Eligible Accounts” plus the
                lesser of (i) 60% of “Eligible Inventory” (valued at the lower of cost or
                market), (ii) 85% of the “Net Orderly Liquidation Value of Eligible
                Inventory,” and (iii) $8.5 million. As of September 30, 2008, the
                Company’s borrowing base supported approximately $13.1 million of
                borrowings.


10





·
            The
                Company will be required to pay a prepayment fee to Wells Fargo if
                the
                credit facility is terminated prior to maturity. Such fee ranges
                from
                $300,000 if the credit facility is terminated prior to November 20,
                2008,
                to $37,500 if the credit facility is terminated after November 20,
                2009
                but prior to the maturity date.





·
            The
                Company is required to comply with a number of affirmative, negative
                and
                financial covenants. Among other things, these covenants restrict
                the
                Company’s ability to pay dividends, require the Company to achieve minimum
                quarterly Net Income as set forth in the Credit Agreement, and require
                the
                Company to maintain a minimum Debt Service Coverage Ratio (as defined
                in
                the Credit Agreement) as of the last day of each quarter of not less
                than
                1.25 to 1.0. As of September 30, 2008, the Company was in compliance
                with
                all such covenants.




**NOTE
      3** **~** **CAPITALIZED
      LEASES**





The
      Company has entered into separate capital lease obligations in conjunction
      with
      the acquisition of warehouse racking and office furniture. These assets have
      original capitalized values of $519,000, and have payment terms ranging from
      48
      to 60 months.





Future
      minimum lease payments under noncancelable capital lease obligations at
      September 30, 2008 were as follows ($ in thousands):




2008
            
            $
            62009
            
            
            12Total
                payments
            
            
            18Less
                amounts relating to interest
            
            
            1Total
                capital lease obligations
            
            
            17Less
                current portion
            
            
            17Capital
                lease obligations, noncurrent
            
            
            -





**NOTE
      4 ~ INCOME TAXES**





The
      reconciliation of the federal statutory rate to the effective income tax rate
      applicable to income (loss) from continuing operations is as follows:





Three Months Ended
              September 30:
            
            Nine Months Ended
              September 30:2008
            
            2007
            
            2008
            
            2007US
                Statutory tax rate – provision (benefit)
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %Increases
                (decreases) resulting from:State
                income taxes
            
            
            12.4
            
            
            0.9
            
            
            4.6
            
            
            1.3Changes
                in A/R & inventory reserves
            
            
            -
            
            
            0.8
            
            
            -
            
            
            (9.4
            )Net
                operating loss deductions
            
            
            -
            
            
            (36.1
            )
            
            -
            
            
            (30.0
            )Depreciation
            
            
            -
            
            
            (0.1
            )
            
            -
            
            
            (1.4
            )Other
                – net
            
            
            3.3
            
            
            2.0
            
            
            3.3
            
            
            5.4Effective
                income tax rate
            
            
            49.7
            %
            
            2.7
            %
            
            41.9
            %
            
            3.8
            %




The
      Company records income taxes using the asset and liability approach, whereby
      deferred tax assets, net of valuation allowances, and liabilities are recorded
      for the future tax consequences of temporary differences between financial
      statement and tax bases of assets and liabilities and for the benefit of net
      operating loss carry forwards.


11


The
      Company incurred significant operating losses during the three years prior
      to
      2007, which generated net operating loss carry-forwards which may be available
      for future utilization. Internal Revenue Code Section 382 places a limitation
      on
      the utilization of Federal net operating loss and other credit carry-forwards
      when an ownership change, as defined by the tax law, occurs. Generally, this
      occurs when a greater than 50 percentage point change in ownership occurs.
      In
      October 2006, as a result of the completion of the Company’s private placement
      transaction, the investors in the private placement as a group became the
      beneficial owners of approximately 96% of the Company’s outstanding shares,
      after consideration of the conversion of convertible promissory notes issued
      to
      those investors in conjunction with the transaction. Accordingly, the actual
      utilization of net operating loss carry-forwards and other deferred tax assets
      for tax purposes will be limited annually under Code Section 382 to a percentage
      of the fair market value of the Company at the date of this ownership change,
      and this effect has reduced the amount of these loss carry-forwards which the
      Company will be able to utilize to offset against future taxable income. As
      a
      result, at December 31,
      200 7, the
      Company has a
      federal net operating loss carry-forward of approximately $4.0 million expiring
      2026. Approximately $2.4 million of the federal net operating loss carry-forward
      is available for utilization in 2008. The remaining $1.6 million can be utilized
      at a rate of approximately $89,000 annually over the following 18 years ending
      2026. In addition, the company has State net operating loss carry-forwards
      of
      approximately $1.7 million which expire 2025. A valuation allowance has been
      provided against the net deferred tax assets available after the year ending
      December 31, 2008, due to the uncertainty of the Company’s ability to generate
      long-term taxable income. The company expects to reduce its valuation allowance
      if and when it believes that it is more likely than not that it will be
      realized.





Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”)
—an interpretation of FASB Statement No. 109, Accounting for Income Taxes.” The
      Interpretation addresses the determination of whether tax benefits claimed
      or
      expected to be claimed on a tax return should be recorded in the financial
      statements. Under FIN 48, the Company may recognize the tax benefit from an
      uncertain tax position only if it is more likely than not that the tax position
      will be sustained on examination by the taxing authorities, based on the
      technical merits of the position. The tax benefits recognized in the financial
      statements from such a position should be measured based on the largest benefit
      that has a greater than fifty percent likelihood of being realized upon ultimate
      settlement. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties on income taxes, accounting in interim periods and
      requires increased disclosures. At the date of adoption, and as of March 31,
      2008, the Company does not have a liability for unrecognized tax
      benefits.




The
      Company files income tax returns in the U.S. federal jurisdiction and various
      states. The Company is subject to U.S. federal or state income tax examinations
      by tax authorities for five years after 2002. During the periods open to
      examination, the Company has net operating loss and tax credit carry forwards
      for U.S. federal and state tax purposes that have attributes from closed
      periods. Since these NOLs and tax credit carry forwards may be utilized in
      future periods, they remain subject to examination.




The
      Company’s policy is to record interest and penalties on uncertain tax provisions
      as income tax expense. As of September 30, 2008, the Company has no accrued
      interest or penalties related to uncertain tax positions.





**NOTE
      5 ~ COMMITMENTS & CONTINGENCIES**





***General***





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 records its estimated sales tax liability and includes
      that amount as an accrued obligation until paid.





The
      Company is also 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.





***Lease
      and Rents***





The
      Company leases warehouse and office space under an operating lease agreement
      which expires on September 30, 2009. Under the terms of the lease, the Company
      paid no rent for nine months, and then pays monthly rent of $25,704 for the
      remainder of the ninety-nine month lease. The Company records rent on a
      straight-line basis over the life of the lease and records the difference
      between amounts paid and expense recorded as a deferred lease liability.


12




The
      minimum annual rentals under the non-cancelable lease for the periods subsequent
      to September 30, 2008 are as follows ($ in thousands):





Years Ending December 31:
            
            Amount2008
            
            
            832009
            
            
            250$
            333





***Vendor
      Agreement***





On
      October 2, 2006, the Company entered into a new Product Distribution Agreement
      (“Agreement”) with Samsung, under which the Company was granted the right to
      distribute Samsung’s complete line of professional video surveillance and
      security products in North, Central and South America (“Territory”) through
      December 31, 2010. Pursuant to the Agreement, Samsung has agreed to a limited
      non-compete in the Territory. The Agreement also provides for minimum annual
      purchase amounts of $21 million, $27 million, $32.4 million, $38.9 million,
      and
      $46.7 million for the years ending December 31, 2006, 2007, 2008, 2009, and
      2010, respectively, and allows Samsung to terminate the Agreement at any time
      if
      the Company does not achieve the annual minimum purchase amounts, as well as
      upon the Company’s breach of any of its other obligations thereunder. For the
      years ended December 31, 2006 and December 31, 2007, the Company exceeded its
      minimum purchasing commitment under the agreement. For the years ended December
      31, 2006 and December 31, 2007, the Company purchased approximately $21.3
      million and $28 million, respectively under the Distributorship Agreement with
      Samsung. During the nine months ended September 30, 2008 the Company purchased
      approximately $18.0 million under the Distributorship Agreement with Samsung.




Samsung
      has established a credit limit under which the Company purchases products.
      During the year ended 2007, the limit was approximately $6.5 million. In January
      2008, the limit was increased to approximately $10 million. The Company must
      pay
      in advance of shipment when the credit limit has been met or exceeded. As of
      September 30, 2008, $6.5 million was due to Samsung under this agreement.




**NOTE
      6 ~ STOCK INCENTIVE PLANS**





In
      February 2004, the Company adopted its 2004 Long-Term Stock Plan and reserved
      118,798 shares of Common Stock for issuance thereunder. In September 2006 the
      shares available under this Plan increased from 118,798 to 200,000, in October
      2006 the shares available were increased under this Plan to 5,900,000. In July
      2008, the Company adopted its 2008 Long-Term Stock Plan and reserved 1,000,000
      shares of Common Stock for issuance thereunder.




A
      summary
      of the status and activity of the Company’s stock options for the nine months
      ended September 30, 2008 is presented below:





Nine Months Ended
              September 30, 2008Shares
            
            Weighted
              Ave
              Exercise
              PriceOutstanding
                at January 1, 2008:
            
            
            5,962,218
            
            $
            1.07Granted
            
            
            160,000
            
            $
            0.50Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding
                at September 30, 2008:
            
            
            6,122,218
            
            $
            1.05Options
                Exercisable at September 30, 2008:
            
            
            4,031,012
            
            $
            1.44




13


During
      the three months ended September 30, 2008, the Company granted options to
      purchase an aggregate of 110,000 shares of Common Stock to its non-employee
      directors. In addition, the Company issued an option to purchase 50,000 shares
      of Common Stock to an employee during the three months ended September 30,
      2008.





The
      aggregate intrinsic values of outstanding and exercisable stock options at
      September 30, 2008 were approximately $1,179,990 and $1,039,196
      respectively.





The
      following table summarizes information about stock options outstanding as of
      September 30, 2008:


Outstanding Options
              
              Exercisable OptionsExercise
                Prices
              
              Shares
                Outstanding
                at September
                30, 2008
              
              Weighted-average
                Remaining
                Contractual Life
              
              Number
                Outstanding at
                September 30,
                2008$
              0.20
              
              
              5,363,591
              
              
              8.0
                  years
              
              
              3,687,468.46
              
              
              110,000
              
              
              10.3
                  years
              
              
              9,166.60
              
              
              350,000
              
              
              3.4
                  years
              
              
              193,749.80
              
              
              150,000
              
              
              9.2
                  years
              
              
              59,167.95
              
              
              100,000
              
              
              9.2
                  years
              
              
              39,44415.93
              
              
              4,637
              
              
              4.8
                  years
              
              
              4,63742.50
              
              
              2,000
              
              
              6.5
                  years
              
              
              1,50075.00
              
              
              13,366
              
              
              6.2
                  years
              
              
              13,366>
                  130.00
              
              
              28,625
              
              
              5.3
                  years
              
              
              28,6256,122,218
              
              
              7.9
                  years
              
              
              4,037,122





There
      were no stock options exercised during the three months ended September 30,
      2008. The Company recognized compensation expense from the vesting of issued
      stock options of approximately $71,000 for the nine months ended September
      30,
      2008, and had estimated future compensation expense from these stock options
      of
      approximately $183,000 at September 30, 2008 which will be recognized over
      the
      remaining estimated weighted useful life of 19 months.





**NOTE
      7 ~ WARRANTS**





A
      summary
      of the activity and status of the Company’s warrants for the nine months ended
      September 30, 2008 is presented below.





Nine Months Ended
              September 30, 2008Shares
            
            Weighted
              Ave
              Exercise
              PriceOutstanding
                at January 1, 2008:
            
            
            2,259,592
            
            $
            5.38Granted
            
            
            500,000
            
            
            1.01Exercised
            
            
            50,000
            
            
            0.20Forfeited
            
            
            -
            
            
            -Outstanding
                at September 30, 2008:
            
            
            2,709,592
            
            $
            4.67Exercisable
                at September 30, 2008:
            
            
            2,534,592
            
            $
            4.93




14




During
      the nine months ended September 30, 2008, two individuals exercised warrants
      to
      purchase an aggregate of 50,000 shares of our Common Stock at a price of $.20
      per share.




The
      aggregate intrinsic value of outstanding warrants at September 30, 2008 was
      approximately $365,000.





A
      summary
      of the Company’s outstanding warrants at September 30, 2008 is as
      follows:





Description
            
            Shares
            
            Approx.
              Remaining
              Term
              (Years)
            
            Exercise PriceLaurus
                Master Fund
            
            
            26,800
            
            
            2.8
            
            
            $30.00Laurus
                finder’s fee
            
            
            1,880
            
            
            2.7
            
            
            $175.00ESI
            
            
            60,000
            
            
            3.1
            
            
            $75.00Rapor
                shareholders
            
            
            27,079
            
            
            3.2
            
            
            $152.00Oct.
                2004 bridge financing
            
            
            15,333
            
            
            1.1
            
            
            $75.00Consultant
            
            
            3,500
            
            
            1.1
            
            
            $175.00
                – $ 250.00Consulting
                fee paid to director
            
            
            1,825,000
            
            
            1.0
            
            
            $0.20Consultant
            
            
            100,000
            
            
            3.5
            
            
            $0.60Consultant
            
            
            150,000
            
            
            4.0
            
            
            $0.82Consultant
            
            
            300,000
            
            
            2.3
            
            
            $1.15Consultant
            
            
            50,000
            
            
            4.8
            
            
            $0.60Consultant
            
            
            150,000
            
            
            4.9
            
            
            $0.852,709,592


15


**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: reliance on* *primary
      supplier* *;
      credit limits imposed by primary supplier; outstanding indebtedness; effective
      integration of recently acquired operations and personnel; expansion risks;
      effective internal processes and systems; reliance on two key customers; 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 2007 Annual Report on Form 10-K.*




*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* *.*





**Summary
      of Our Business**




We
      provide video surveillance products and systems for a variety of applications
      and for use in numerous markets including educational institutions, retail
      stores and warehouses, gaming establishments, theme parks, public works
      projects, bank branches and offices, and many other homeland security
      applications.





Our
      product line includes cameras designed for specific applications, recording
      systems, displays, management software and other necessary ancillary products.
      These products can be configured as a system that is scalable as customer needs
      expand or become more complex in nature.





We
      primarily target the middle market where a typical customer’s need is for a
      system that incorporates from four cameras to ninety-four cameras in any one
      location. We offer a premium brand and a wide product range with an attractive
      product feature set that is backed by a strong service and support platform.
      Our
      customers include distributors and system integrators that specialize in the
      supply and/or installation of video surveillance and other physical security
      products, such as access control and intrusion detection.





We
      represent Samsung Electronics as the primary distributor of their branded
      security and surveillance products in the Americas. We also sell a line of
      complementary products under the GVI brand in those territories. Samsung
      Electronics has been and continues to be our primary supplier of the video
      security products that we distribute. In October 2006, we entered into a new
      agreement with Samsung under which we have been granted the right to distribute
      Samsung’s complete line of professional video surveillance and security products
      in North, Central and South America through December 31, 2010. Samsung has
      agreed to a limited non-compete in these territories.





In
      order
      to serve our customers with timely delivery and after sales service, we operate
      sales and distribution centers in Dallas, Texas, Mexico City, Mexico, Sao Paulo,
      Brazil and Bogotá, Colombia. We also operate a customer call center in Dallas
      Texas.





**Our
      Products**




Our
      suite
      of video surveillance and integrated security solutions includes a full line
      of
      cameras, which include motion detection, low-light and Infrared illuminated,
      day/night and high resolution, waterproof and weather-resistant cameras, vandal
      resistant domes; high-speed, remote-controlled dome cameras and casings; as
      well
      as a complete range of lenses; all of which can be fully integrated into
      existing security systems. Our full product line includes a range of displays;
      real-time and time-lapse DVR’s, video transmission equipment; digital video
      processors, switchers and video management systems; digital video recording
      software; and hardware and software that enable intelligent video
      surveillance.


16





**Strategies**




Our
      objective is to provide our customers and partners with a wide range of security
      products designed to install, operate and service with relative ease while
      meeting the needs of the end user. Our goal is to provide our customers with
      excellent service and superior technology at competitive prices.





We
      believe that by delivering the highest levels of customer service along with
      effective solutions for the markets that we address, we can strengthen our
      reputation as a reliable and cost-effective provider in the electronic security
      systems industry and develop customer loyalty. We strive to anticipate and
      meet
      our customers’ needs by increasing the range of products and services we offer,
      by entering into new business alliances and by pursuing acquisitions of
      complementary businesses enabling us to offer new products and services. Our
      goals include further developing our expertise and products in the security
      video sector, as well as developing other security or ancillary products to
      supplement and complement our existing product line. However, there can be
      no
      assurance that we will consummate any additional acquisitions or that any
      business we acquire will be successful. In addition, the acquisition of a
      business through the issuance of our securities will result in dilution to
      our
      existing stockholders.





**Distribution
      and Marketing**




We
      offer
      our products and services through local, regional and national system
      integrators and distributors who resell our products to professional security
      providers. System integrators utilize our products to develop and install a
      fully integrated security suite for end users. We also utilize regional sales
      executives who often support sales across all of our product offerings. We
      use a
      combination of our internal sales force and independent representatives to
      sell
      our products to our customers.





**THREE
      MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
      2007**




**NET
      REVENUES**





Net
      revenues increased approximately $1.4 million, or 13% to approximately $12.2
      million in the three months ended September 30, 2008 from approximately $10.8
      million in the three months ended September 30, 2007. The increase in revenue
      reflects 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**





Total **** cost
      of
      goods sold increased approximately $912,000 or 12% to approximately $8.6 million
      for the three months ended September 30, 2008, from approximately $7.6 million
      in the three months ended September 30, 2007. This increase was due to increased
      sales during the three month period ended September 30, 2008. The increase
      was
      partially offset by higher product margins during the three month period ended
      September 30, 2008.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the three months ended September 30, 2008 increased approximately
      $556,000 to approximately $3.7 million from approximately $3.1 million for
      the
      three months ended September 30, 2007, and gross profit as a percentage of
      revenues increased to approximately 30.0% for the three months ended September
      30, 2008 compared with approximately 28.9% for the three months ended September
      30, 2007.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses increased approximately $558,000, or 23%,
      to approximately $3.0 million in the three months ended September 30, 2008
      from
      approximately $2.4 million in the three months ended September 30, 2007, as
      follows:





**Sales
      and Marketing.** Sales
      and
      marketing expenses increased approximately $248,000, or 18%, to approximately
      $1.7 million in the three months ended September 30, 2008 from approximately
      $1.4 million in the three months ended September 30, 2007. The increase was
      primarily due to increased net marketing expense, increased personnel expense,
      increased commission expense, and an increase in expenses to operate
      international sales offices.





**General
      and Administrative.** General
      and administrative expenses increased approximately $310,000, or 31% to $1.3
      million in the three months ended September 30 2008 from approximately $1.0
      million in the three months ended September 30, 2007. The increase was primarily
      due to an increase in third party fees, personnel related expenses, and bad
      debt
      accruals.


17





**INTEREST
      EXPENSE**





Net
      interest expense for the three months ended September 30, 2008 decreased 11%
      to
      approximately $176,000 from approximately $196,000 in the three months ended
      September 30, 2007. This decrease is primarily a result of the lower interest
      rate on the Wells Fargo credit facility in effect for the three months ended
      September 30, 2008 compared with the interest rate on the Laurus facility in
      effect for the three months ended September 30, 2007. The decrease was partially
      offset by the higher average loan balance outstanding during the three months
      ended September 30, 2008 compared with the three months ended September 30,
      2007.





**INCOME
      TAX EXPENSE**





We
      reflected a provision for federal, state and local income tax of approximately
      $251,000 for the three months ended September 30, 2008, as compared to recording
      an expense of approximately $13,000 for the three months ended September 30,
      2007. Provisions for tax recorded in the three months ended September 30, 2008
      relate to both federal income taxes and state franchise taxes that were
      estimated to be due in various states in which we are licensed and transact
      business. The Company’s estimated effective tax rate for the three months ended
      September 30, 2008 was approximately 50%. The annual effective rate used to
      calculate the provision during the three months ended September 30, 2008 was
      slightly higher due to a change in state apportionment associated with the
      2007
      tax filing, which was filed during the three months ended September 30, 2008.
      The company's current effective tax rate of September 30, 2008 is approximately
      42%.





For
      the
      three month period ending September 30, 2007, we did not record any federal
      income tax liability with respect to our net income in that period due to the
      availability of loss carry-forwards.





**NET
      INCOME**





As
      a
      result of the items discussed above, we earned net income of approximately
      $254,000 for the three months ended September 30, 2008 compared with net income
      of approximately $474,000 for the three months ended September 30,
      2007.





**NINE
      MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
      200** **7**




**NET
      REVENUES FROM CONTINUING OPERATIONS**





Net
      revenues increased approximately $2.3 million or 7% to approximately $36.4
      million in the nine months ended September 30, 2008 from approximately $34.1
      million in the nine months ended September 30, 2007. The increase in revenue
      reflects 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**





Total **** cost
      of
      goods sold increased approximately $909,000 or 4% to approximately $25.5 million
      for the nine months ended September 30, 2008, from approximately $24.6 million
      in the nine months ended September 30, 2007. This increase was due to increased
      sales during the nine month period ended September 30, 2008. The increase was
      partially offset by higher product margins during the nine month period ended
      September 30, 2008.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the nine months ended September 30, 2008 increased approximately
      $1.4
      million to approximately $10.9 million from approximately $9.5 million for
      the
      nine months ended September 30, 2007, and gross profit as a percentage of
      revenues increased to approximately 29.9% for the nine months ended September
      30, 2008 compared with approximately 28.7% for the nine months ended September
      30, 2007.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses increased approximately $1.0 million or
      13%, to approximately $8.7 million in the nine months ended September 30, 2008
      from approximately $7.7 million in the nine months ended September 30, 2007,
      as
      follows:


18





**Sales
      and Marketing.** Sales
      and
      marketing expenses increased approximately $1 million, or 25%, to approximately
      $5.0 million in the nine months ended September 30, 2008 from approximately
      $4.0
      million in the nine months ended September 30, 2007. The increase was
      primarily due to increased net marketing expense, increased personnel expense,
      increased commission expense, and an increase in expenses to operate
      international offices.





**General
      and Administrative.** General
      and administrative expenses were flat, at approximately $3.7 million in both
      the
      nine months ended September 30, 2008 and September 30, 2007.





**INTEREST
      EXPENSE**





Net
      interest expense for the nine months ended September 30, 2008 decreased 37%
      to
      approximately $559,000 from approximately $808,000 in the nine months ended
      September 30, 2007. This decrease is primarily a result of a reduction in
      amortized loan fees during the nine months ended September 30, 2008 of
      approximately $201,000, compared with the nine months ended September 30, 2007.
      The remaining decrease was attributable to the lower interest rate on the Wells
      Fargo credit facility in effect for the nine months ended September 30, 2008
      compared with the interest rate on the Laurus facility in effect for the nine
      months ended September 30, 2007. The decrease was partially offset by the higher
      average loan balance outstanding during the nine months ended September 30,
      2008
      compared with the nine months ended September 30, 2007.





**INCOME
      TAX EXPENSE**





We
      reflected a provision for federal, state and local income tax of approximately
      $690,000 for the nine months ended September 30, 2008, as compared to recording
      an expense of approximately $36,000 for the nine months ended September 30,
      2007. Provisions for tax recorded in the nine months ended September 30, 2008
      relate to both federal income taxes and state franchise taxes that were
      estimated to be due in various states in which we are licensed and transact
      business. The Company’s estimated effective tax rate for the nine months ended
      September 30, 2008 was approximately 42%.





For
      the
      nine month period ending September 30, 2007, we did not record any federal
      income tax liability with respect to our net income in that period due to the
      availability of loss carry-forwards.





**NET
      INCOME**





As
      a
      result of the items discussed above, we earned net income of approximately
      $949,000 for the nine months ended September 30, 2008 compared with net income
      of approximately $942,000 for the nine months ended September 30,
      2007.





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      September 30, 2008, we had cash and equivalents of approximately $31,000, a
      working capital surplus of approximately $12.9 million, and an outstanding
      balance of $8.9 million under the Wells Fargo revolving credit facility. In
      comparison, at December 31, 2007, we had cash and equivalents of approximately
      $313,000, a working capital surplus of approximately $11.5 million, and an
      outstanding balance under the Wells Fargo revolving credit facility of
      approximately $10.3 million. Additionally, we had borrowing availability under
      the credit facility of approximately $4.2 million at September 30, 2008, as
      compared with borrowing availability of $1.9 million at December 31, 2007.




Cash
      decreased from $313,000 at December 31, 2007 to $31,000 at September 30, 2008
      primarily as a result of (i) net payments under our revolving line of credit
      of
      $1.4 million, (ii) an increase in accounts receivable of approximately $1.2
      million, and (iii) an increase in inventory of approximately $152,000. These
      factors were partially offset by (i) net income of approximately $1.0 million,
      and (ii) an increase in accounts payable of approximately $246,000. Management
      believes that cash generated from operations, together with borrowings available
      under the Credit Agreement with Wells Fargo, will provide us with adequate
      financing to fund operations and meet our cash requirements through the end
      of
      2008.




**$15
      Million Wells Fargo Revolving Credit Facility**




On
      November 20, 2007, through our wholly-owned subsidiary GVI Security, Inc.,
      we
      entered into a Credit and Security Agreement with Wells Fargo Bank, National
      Association under which we were provided with a $15 million revolving credit
      facility. On November 21, 2007, we borrowed approximately $10.3 million under
      the credit facility, using approximately $8.6 million of the proceeds to repay
      in full all of our outstanding indebtedness to Laurus Master Fund. In addition,
      we used $1.7 million of the initial loan proceeds to increase our working
      capital. Borrowings under the credit facility are secured by all of our assets.
      Upon closing, we paid Wells Fargo an origination fee of $37,500. We also pay
      Wells Fargo an annual fee equal to .25% of the average daily unused portion
      of
      the credit facility. Outstanding loans under the credit facility will become
      due
      on November 20, 2010.


19




Pursuant
      to the Credit Agreement, among other things:




·
            Interest
                accrues on outstanding loans under the credit facility, at our option,
                at
                a per annum rate equal to the prime rate from time to time in effect
                (5.0%
                at September 30, 2008) plus .75% percent, or a LIBOR rate selected
                by us,
                plus 3.25%.





·
            In
                the event we achieve Net Income (as defined in the Credit Agreement),
                of
                $1,000,000 in the year ending December 31, 2008, the interest rate
                under
                the credit facility will be prospectively reduced by .50% per
                annum.





·
            Aggregate
                loans (plus the face amount of letters of credit) outstanding under
                the
                credit facility at any time may not exceed the lesser of $15 million
                or a
                borrowing base equal to the sum of 85% of “Eligible Accounts” plus the
                lesser of (i) 60% of “Eligible Inventory” (valued at the lower of cost or
                market), (ii) 85% of the “Net Orderly Liquidation Value of Eligible
                Inventory,” and (iii) $8.5 million.





·
            We
                will be required to pay a prepayment fee to Wells Fargo if the credit
                facility is terminated prior to maturity. Such fee ranges from $300,000
                if
                the credit facility is terminated prior to November 20, 2008, to
                $37,500
                if the credit facility is terminated after November 20, 2009 but
                prior to
                the maturity date.





·
            We
                are required to comply with a number of affirmative, negative and
                financial covenants. Among other things, these covenants restrict
                our
                ability to pay dividends, require us to achieve minimum quarterly
                Net
                Income as set forth in the Credit Agreement, and require us to maintain
                a
                minimum Debt Service Coverage Ratio (as defined in the Credit Agreement)
                as of the last day of each quarter of not less than 1.25 to 1.0.
                As of
                September 30, 2008, we were in compliance with all loan
                covenants.




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      condensed consolidated financial statements have been prepared in accordance
      with generally accepted accounting principles. To prepare these financial
      statements, we must make estimates and assumptions that affect the reported
      amounts of assets and liabilities. These estimates also affect our reported
      revenues and expenses. Judgments must be made about the disclosure of contingent
      liabilities as well. Actual results could be significantly different from these
      estimates. We believe that the following discussion addresses the critical
      accounting policies that are necessary to understand and evaluate our reported
      financial results.





**Revenue
      Recognition**





The
      Company’s primary source of revenue is from sales of its products. The Company
      recognizes revenue when the sales process is deemed complete and associated
      revenue has been earned. The Company’s policy is to recognize revenue when
      products have been shipped, risk of loss and title to the product transfers
      to
      the customer, the selling price is fixed and determinable and collectibility
      is
      reasonably assured. Net sales is comprised of gross revenue less expected
      returns, trade discounts and customer allowances, which include costs associated
      with off-invoice mark downs and other price reductions, as well as trade
      promotions. Related incentive costs are recognized at the later of the date
      on
      which the Company recognizes the related revenue or the date on which the
      Company offers the incentive.





The
      Company allows customers to return defective products when they meet certain
      established criteria as outlined in its sales terms and conditions. It is the
      Company’s practice to regularly review and revise, when deemed necessary, its
      estimates of sales returns, which are based primarily on actual historical
      return rates. The Company records estimated sales returns as reductions to
      sales, cost of sales, and accounts receivable and an increase to inventory.
      Returned products which are recorded as inventory are valued based upon the
      amount the Company expects to realize upon its subsequent disposition. The
      Company considers the physical condition and marketability of the returned
      products as major factors in estimating realizable value. Actual returns, as
      well as realized values on returned products, may differ significantly, either
      favorably or unfavorably, from Company estimates if factors such as customer
      inventory levels or competitive conditions differ from estimates and
      expectations and, in the case of actual returns, if economic conditions differ
      significantly from Company estimates and expectations.


20





At
      the
      time revenue is recognized, the Company also records reductions to revenue
      for
      customer incentive programs in accordance with the provisions of Emerging Issue
      Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given from a
      Vendor to a Customer (Including a Reseller of the Vendor’s Products).” Such
      incentive programs include cash and volume discounts, price protection,
      promotional, cooperative and other advertising allowances. For those incentives
      that require the estimation of sales volumes or redemption rates, such as for
      volume rebates, the Company uses historical experience and internal and customer
      data to estimate the sales incentive at the time the revenue is recognized.
      In
      the event that the actual results of these items differ from the estimates,
      adjustment to the sales incentive accruals would be recorded.





**Inventory**





Inventory
      is stated at the lower of cost (first-in, first-out method) or market and
      consists of goods held for resale and parts used for repair work. Reserves
      are
      recorded for slow-moving, obsolete, nonsaleable or unusable items based upon
      a
      product-level review, in order to reflect inventory balances at their net
      realizable value.





**Long-Lived
      Assets**




The
      acquisition of long-lived assets, including furniture and fixtures, office
      equipment, plant equipment, leasehold improvements, computer hardware and
      software and in-store fixtures, is recorded at cost and this cost is depreciated
      over the asset’s estimated useful life. We continually evaluate whether events
      and circumstances have occurred that indicate the remaining estimated useful
      life of long-lived assets may warrant revision or that the remaining balance
      may
      not be recoverable. These factors may include a significant deterioration of
      operating results, changes in business plans or changes in anticipated cash
      flows. When factors indicate that an asset should be evaluated for possible
      impairment, we review long-lived assets to assess recoverability from future
      operations using undiscounted cash flows. Impairments are recognized in earnings
      to the extent that the carrying value exceeds fair value.




**Stock-Based
      Compensation**




In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards 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. Effective January 1,
      2006, we 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.




Determining
      the appropriate fair value model and calculating the fair value of stock-based
      payment awards require the input of highly subjective assumptions, including
      the
      expected life of the stock-based payment awards and stock price volatility.
      We
      use the Black-Scholes option-pricing model to value compensation expense. The
      assumptions used in calculating the fair value of stock-based payment awards
      represent management’s best estimates, but the estimates involve inherent
      uncertainties and the application of management judgment. As a result, if
      factors change and we use different assumptions, our stock-based compensation
      expense could be materially different in the future.




**New
      Accounting Pronouncements**




In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141 (R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.


21


In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities*an amendment of FASB Statement No. 133” (SFAS 161). This
      Statement requires enhanced disclosures about an entity’s derivative and hedging
      activities, including (a) how and why an entity uses derivative instruments,
      (b)
      how derivative instruments and related hedged items are accounted for under
      SFAS
      No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS
      133), and its related interpretations, and (c) how derivative instruments and
      related hedged items affect an entity’s financial position, financial
      performance, and cash flows. SFAS 161 is effective for financial statements
      issued for fiscal years and interim periods beginning after November 15, 2008.





The
      Company does not believe that the adoption of the above recent pronouncements
      will have a material effect on the Company’s consolidated results of operations,
      financial position, or cash flows.




**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 September 30, 2008. 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 Wells Fargo bear interest at a fluctuating
      rate
      of interest related to the “prime” and LIBOR rates in effect from time to time.
      Accordingly, increases in these rates will increase our interest expense under
      our agreements with Wells Fargo. We do not use interest rate hedging contracts
      to manage our exposure to changes in interest rates.




**Item
      4T. Controls and Procedures.**




Our
      management has evaluated, with the participation of our Chief Executive Officer
      and Chief Financial Officer, the effectiveness of our disclosure controls and
      procedures as of the end of the period covered by this report. Based on that
      evaluation, our Chief Executive Officer and Chief Financial Officer have
      concluded that our disclosure controls and procedures were effective as of
      the
      end of the period covered by this report.




We
      do not
      expect that our disclosure controls and procedures or internal control over
      financial reporting will prevent all errors and all fraud. A control system,
      no
      matter how well conceived and operated, can provide only reasonable assurance
      that the objectives of the system are met and cannot detect all deviations.
       Because of the inherent limitations in all control systems, no evaluation
      of control can provide absolute assurance that all control issues and instances
      of fraud or deviations, if any, within the Company have been detected.




There
      were no changes in our internal controls over financial reporting that occurred
      during our most recently completed fiscal quarter that has materially affected,
      or are reasonably likely to materially affect, our internal control over
      financial reporting.


22




**PART
      II. OTHER INFORMATION**




**Item
      1A. Risk Factors**





In
      addition to the risk factor set forth below, the “Risk Factors” discussed in
      Part I, Item 1A of our Annual Report on Form 10-K for the year ended December
      31, 2007, could materially affect our business, financial condition and future
      results. The risks described in this report and in the Annual Report on Form
      10-K are not the only risks we face. 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.




***Changes
      in the general economy, including the global financial crisis that accelerated
      in the third quarter of 2008, may negatively impact our business.***





We
      sell
      our security products to companies and industries that may experience financial
      difficulty, particularly in light of conditions in the credit markets and the
      overall economy. If our customers experience financial difficulty, we could
      have
      difficulty recovering amounts owed to us from these customers, and demand for
      our products from these customers could decline. If our suppliers experience
      financial difficulty, we could have difficulty fulfilling our customers’ orders.
      Furthermore, continued issues involving liquidity and capital adequacy affecting
      lenders could affect our ability to fully access our credit facility or obtain
      additional credit. These conditions could adversely affect our financial
      position and results of operations.


23




**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


24


**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:
                November 13, 2008
            By:
            /s/
                Joseph RestivoName:
                Joseph Restivo
              Title:
                Chief Financial Officer


25


**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


26