**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, 2006




or





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





For
      the
      transition period from __________ to __________





Commission
      file number: 0-21295





GVI
      Security Solutions, Inc.


(Exact
      name of registrant as specified in its charter)





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





(972)
      245-7353


(Registrant’s
      telephone number, including area code)






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




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




þ Yes   ̈ No




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




Large
      accelerated filer o   Accelerated
      filer o    Non-accelerated
      filer x





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). o Yes  x No





As
      of
      November 13, 2006 there were 178,275,973 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
              15Item
                  3. Quantitative and Qualitative Disclosures About Market
                  Risk
              22Item
                  4. Controls and Procedures.
              22**PART
                  II. OTHER INFORMATION**
              **22**Item
                  1A. Risk Factors.
              22Item
                  2. Unregistrered Sales of Equity Securities and Use of
                  Proceeds.
              23Item
                  6. Exhibits.
              23


2


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





**GVI
      Security Solutions, Inc.**


**Condensed
      Consolidated Balance Sheet**


(In
        thousands, except share and per share amounts)





(Unaudited)
              September
                30,
              2006
            
            December
                31,
              2005**ASSETS:**Current
                AssetsCash
            
            $
            1,618
            
            $
            3,284Accounts
                receivable, net
            
            
            6,305
            
            
            7,688Inventory
            
            
            3,091
            
            
            7,127Refundable
                income tax receivable
            
            
            -
            
            
            643Prepaids
                and other current assets
            
            
            639
            
            
            917Current
                assets of discontinued operations
            
            
            -
            
            
            2,850Total
                Current Assets
            
            
            11,653
            
            
            22,509Property
                and Equipment, net
            
            
            461
            
            
            748Deferred
                loan origination fee, net
            
            
            359
            
            
            809Goodwill
            
            
            -
            
            
            544Intangibles,
                net
            
            
            -
            
            
            532Other
                assets
            
            
            32
            
            
            84Total
                Assets
            
            $
            12,505
            
            $
            25,226**LIABILITIES
                AND STOCKHOLDERS' EQUITY:**Current
                LiabilitiesAccounts
                payable
            
            $
            6,320
            
            $
            7,036Accrued
                expenses
            
            
            1,695
            
            
            1,490Capitalized
                lease obligations, current
            
            
            76
            
            
            118Senior
                term note, current
            
            
            1,669
            
            
            2,080Liabilities
                of discontinued operations
            
            
            400
            
            
            70Total
                Current Liabilities
            
            
            10,160
            
            
            10,794Capital
                lease obligations, net of current portion
            
            
            82
            
            
            139Revolving
                credit facility
            
            
            6,327
            
            
            8,495Senior
                term note, net of current portion
            
            
            456
            
            
            1,195Total
                Liabilities
            
            
            17,025
            
            
            20,623Commitments
                and ContingenciesStockholders'
                (Deficit) 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 and 53,275,973
                issued and outstanding at September 30, 2006; 75,000,000 shares authorized
                and 50,258,003 shares issued and outstanding at December 31, 2005
            
            
            53
            
            
            50Additional
                paid-in capital
            
            
            23,701
            
            
            22,837Accumulated
                deficit
            
            
            (28,274
            )
            
            (18,284
            )Total
                Stockholders' (Deficit) Equity
            
            
            (4,520
            )
            
            4,603Total
                Liabilities and Stockholders' (Deficit) Equity
            
            $
            12,505
            
            $
            25,226





The
      Notes
      to 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 per share
                amounts)Three
                Months Ended
              September
                30
            
            Nine
                Months Ended
              September
                302006
            
            2005
            
            2006
            
            2005Revenues
            
            $
            10,067
            
            $
            10,936
            
            $
            32,920
            
            $
            31,144Cost
                of Revenues
            
            
            9,445
            
            
            9,390
            
            
            28,360
            
            
            26,638Gross
                Profit
            
            
            622
            
            
            1,546
            
            
            4,560
            
            
            4,506Selling,
                General and Administrative Expenses
            
            
            2,794
            
            
            3,934
            
            
            9,865
            
            
            11,187Impairment
                of goodwill and other intangible assets
            
            
            977
            
            
            -
            
            
            977
            
            
            -Operating
                Loss
            
            
            (3,149
            )
            
            (2,388
            )
            
            (6,282
            )
            
            (6,681
            )Interest
                Expense
            
            
            399
            
            
            315
            
            
            966
            
            
            708Loss
                from continuing operations before income taxes and income (loss)
                from
                discontinued operations
            
            
            (3,548
            )
            
            (2,703
            )
            
            (7,248
            )
            
            (7,389
            )Income
                Tax Expense
            
            
            22
            
            
            32
            
            
            68
            
            
            55Loss
                from continuing operations before income (loss) from discontinued
                operations
            
            
            (3,570
            )
            
            (2,735
            )
            
            (7,316
            )
            
            (7,444
            )Income
                (loss) from discontinued operations, net of taxes
            
            
            576
            
            
            147
            
            
            (2,674
            )
            
            1,495Net
                loss
            
            $
            (2,994
            )
            $
            (2,588
            )
            $
            (9,990
            )
            $
            (5,949
            )Basic
                and diluted loss per shareContinuing
                operations
            
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.13
            )
            $
            (0.15
            )Discontinued
                operations
            
            $
            0.01
            
            $
            0.00
            
            $
            (0.05
            )
            $
            0.03Net
                loss per share (basic and diluted)
            
            $
            (0.05
            )
            $
            (0.05
            )
            $
            (0.18
            )
            $
            (0.12
            )Shares
                Used in Calculation of Net Loss per share
            
            
            53,232
            
            
            50,125
            
            
            51,679
            
            
            50,125




The
      Notes
      to 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 302006
            
            2005Cash
                Flows Provided By (Used In) Operating ActivitiesNet
                Loss
            
            $
            (9,990
            )
            $
            (5,949
            )Adjustments
                To Reconcile Net Loss to Net Cash Provided By (Used In) Operating
                Activities:Loss
                (Income) from discontinued operations, net of tax
            
            
            2,674
            
            
            (1,495
            )Depreciation
                and amortization from continuingoperations
            
            
            381
            
            
            396Loss
                on retirement of assets
            
            
            50
            
            
            -Impairment
                of goodwill and intangible assets
            
            
            977
            
            
            -Amortization
                of deferred loan origination fee
            
            
            450
            
            
            450Compensation
                costs and expenses for stock and options issued
            
            
            567
            
            
            -Changes
                in Assets and LiabilitiesAccounts
                receivable, net
            
            
            1,383
            
            
            797Inventory
            
            
            4,036
            
            
            1,047Refundable
                income tax receivable
            
            
            643
            
            
            -Prepaids
                and other current assets
            
            
            278
            
            
            372Other
                assets
            
            
            2
            
            
            -Accounts
                payable
            
            
            (716
            )
            
            (4,914
            )Accrued
                expenses
            
            
            205
            
            
            (918
            )Net
                Cash Provided By (Used In) Operating Activities From Continuing
                Operations
            
            
            941
            
            
            (10,214
            )Net
                Cash Provided By (Used In) Operating ActivitiesOf
                Discontinued Operations
            
            
            506
            
            
            (1,271
            )Net
                Cash Provided By (Used In) Operating Activities
            
            
            1,447
            
            
            (11,485
            )Cash
                Flows Provided By (Used In) Investing ActivitiesPurchase
                of property and equipment
            
            
            (45
            )
            
            (207
            )Proceeds
                from sale of investment
            
            
            50
            
            
            -Net
                Cash Provided By (Used in) Investing Activities
            
            
            5
            
            
            (207
            )Cash
                Flows Provided By (Used In) Financing ActivitiesNet
                proceeds from (repayments of) revolving credit facility
            
            
            (2,168
            )
            
            3,465Principal
                payments of Senior term note
            
            
            (850
            )
            
            (908
            )Principal
                payments of capitalized lease obligations
            
            
            (99
            )
            
            (126
            )Net
                Cash (Used In) Provided by Financing Activities
            
            
            (3,117
            )
            
            2,431Net
                Decrease in Cash
            
            
            (1,666
            )
            
            (9,261
            )Cash,
                Beginning of Period
            
            
            3,284
            
            
            13,398Cash,
                End of Period
            
            $
            1,618
            
            $
            4,137**SUPPLEMENTARY
                CASH FLOW INFORMATION**Cash
                paid for interest
            
            $
            691
            
            $
            258Cash
                paid for income taxes
            
            
            2
            
            
            31**SUPPLEMENTAL
                SCHEDULE OF NONCASH INVESTING AND****FINANCING
                ACTIVITIES**Debt
                principal payment converted to common stock
            
            $
            300
            
            $
            67Restricted
                cash paid to satisfy stock repurchase obligation
            
            $
            —
            
            $
            10,000




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**





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





**Nature
      of Business**





The
      Company provides video surveillance security solutions that are deployed in
      the
      commercial and homeland security market segments. Products are sold primarily
      to
      distributors and system integrators that specialize in providing security
      products and services to these business segments.





**Basis
      of Presentation**





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





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





Certain
      reclassifications have been made to the 2005 financial statements for
      consistency purposes, including reclassifications of certain revenue and expense
      amounts relating to the three and nine month periods ending September 30, 2005.
      These reclassifications include (1) classification of net freight billed to
      customers as a reduction of costs of revenue, and (2) classification of certain
      warehousing, technical support and assembly expenses as costs of revenue.





**Principles
      of Consolidation**





The
      accompanying consolidated financial statements include the accounts of GVI
      Security Solutions, Inc., and its wholly-owned subsidiaries GVI Security, Inc.
      and Rapor, Inc. All material intercompany transactions, balances and profits
      have been eliminated.





**Going
      Concern Considerations**





The
      accompanying financial statements have been presented in accordance with U.S.
      GAAP, which assumes the continuity of the Company as a going concern. During
      the
      years ended December 31, 2005 and 2004, and the nine months ended September
      30,
      2006, the Company experienced, and continues to experience, negative cash flow
      and operating losses, which have resulted in a significant reduction in the
      Company’s cash balances. These factors raise substantial doubt about the
      Company’s ability to continue as a going concern. Subsequent to September 30,
      2006, the Company raised $5 million in gross proceeds in a private placement
      of
      common stock and convertible notes. The Company may need to raise additional
      capital in the future to finance its operations, and management can not provide
      assurance that the Company will be successful in this effort.





**Discontinued
      Operations**





In
      the
      first quarter of 2006, the Company’s board approved a plan to discontinue its
      Retail Channel business. This business is accounted for as discontinued
      operations and, accordingly, its operations are segregated in the accompanying
      financial statements. In connection with the discontinuance of the Retail
      Channel business for the nine months ended September 30, 2006 and the year
      ended
      December 31, 2005, the Company wrote down assets identified with the retail
      business by approximately $2.2 million and $1.4 million, respectively, net
      of
      applicable tax benefit, to net realizable value. In addition, net returns and
      allowances recorded for the discontinued Retail Channel business for the nine
      months ended September 30, 2006 were approximately $900,000, all of which
      occurred in the first six months of 2006. The write down to net realizable
      value
      was based on management’s best estimates of the amounts expected to be realized
      on the disposition of all related assets and liabilities held for disposition
      from the discontinued operations. The results of the discontinued operations
      do
      not include any allocation of corporate overhead during the periods
      presented.




6




On
      September 13, 2006, the Company entered into an agreement with its former
      distributor to the retail channel, whereby the Company transferred to this
      distributor substantially all of its remaining retail inventory in exchange
      for
      the termination of the parties’ respective remaining obligations under an
      alliance agreement. The Company has written off all remaining net assets
      associated with the Retail Channel business, and has accrued a reserve of
      $400,000 for estimated remaining obligations associated with completing the
      termination of this business channel.





**Income
      Taxes**





The
      Company has incurred significant operating losses over the past several fiscal
      years, which has 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, assuming full conversion of convertible promissory notes
      issued to these investors in conjunction with the transaction. Accordingly,
      the
      actual utilization of net operating loss carry-forwards and other deferred
      tax
      assets for tax purposes may 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.





Income
      tax expense for the three and nine month periods ending September 30, 2006
      and
      2005 relate to state and local franchise taxes that are due to various states
      and municipalities in which the Company is licensed and transacts
      business.





**Intangible
      Assets**





The
      Company adopted the provisions of FASB Statement No. 142, “Goodwill and Other
      Intangible Assets,” (SFAS 142) effective January 1, 2005. SFAS No.142 required
      that goodwill and intangible assets with indefinite useful lives no longer
      be
      amortized, but instead tested for impairment using the guidance for measuring
      impairment set forth in this statement.





The
      Company tested for impairment using the guidance for impairment set forth in
      SFAS 142, and it was determined by the Company, based on testing results
      obtained from an independent third party, that there was no impairment at
      December 31, 2005.





During
      the quarter ended September 30, 2006, management concluded that the Rapor
      product line no longer fit the Company’s existing distribution channels and
      market strategy and, accordingly, recorded impairment costs of approximately
      $1
      million resulting from the write-off of goodwill totaling $544,436, and the
      write-off of the remaining net book value of the trademark and technology
      associated with Rapor products totaling $433,000.





**Concentration
      of Risks**





***Samsung
      Electronics Distribution Agreement***




The
      Company was party to a product distribution agreement with Samsung Electronics
      Co. Ltd. (“Samsung”) that gave the Company the exclusive right to sell Samsung
      products in the professional channel, as well as the exclusive right to sell
      Samsung products in the retail channel to a major national retailer. The
      exclusive right to sell Samsung products to the major national retailer expired
      on December 31, 2005. In January 2006 Samsung also terminated the remaining
      exclusivity associated with the professional market as a result of the Company’s
      failure to achieve minimum purchase requirements in accordance with the
      distribution agreement. In the first quarter of 2006, Company management elected
      to discontinue its retail business, and no longer sells Samsung
      retail  products.





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 and $27 million for the years ending December
      31, 2006 and 2007, 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.





7





***Credit
      Risk Concentration***




At
      September 30, 2006, approximately $1,664,000 (20%) and $2,224,000 (26%),
      respectively, of the Company's accounts receivable were due from two particular
      customers. 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, accrued
      liabilities and the useful lives of property and equipment.




**Stock-Based
      Compensation**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS
      123R”). 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.




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




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




The
      following table illustrates the effect on operating results and per share
      information had the Company accounted for share-based compensation in accordance
      with SFAS 123 for the three and nine months ended September 30, 2005 (in
      thousands, except per share amounts):




**Nine
                Months**
              **Ended**
              **September
                30,**
              **2005**
            
            **Three
                Months**
              **Ended**
              **September
                30,**
              **2005**Net
                loss as reported
            
            $
            (5,949
            )
            $
            (2,588
            )Option-based
                employee compensation, net of related taxes
            
            
            41
            
            
            7Pro
                forma net loss
            
            $
            (5,990
            )
            $
            (2,595
            )Basic
                and diluted net (loss) per share—as reported
            
            $
            (0.12
            )
            $
            (0.05
            )Basic
                and diluted net (loss) per share—pro forma
            
            $
            (0.12
            )
            $
            (0.05
            )




8


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




**Nine Months Ended**
              **September
                30,****2006**
            
            **2005**Dividend
                yield
            
            
            -
            %
            
            -
            %Risk-free
                factors
            
            
            4.7
            %
            
            3.5
            %Volatility
                factors
            
            
            47
            %
            
            74
            %Option
                Lives in Years
            
            
            6.0
            
            
            3.0





As
      a
      result of adopting SFAS 123(R) on January 1, 2006, the Company’s third
      quarter loss before taxes, and its net loss for the nine months ended September
      30, 2006, were approximately $0 and  $261,000
      lower, respectively, than if the Company had continued to account for options
      under the combination of APB Opinion No. 25 and SFAS 123 for its stock
      option plans. The change to basic and diluted loss per share was less than
      ($0.01).





**NOTE
      2 ~ SUBSEQUENT EVENTS**





**Convertible
      Subordinated Debt Financing**





On
      October 6, 2006, the Company completed a $5 million private placement,
      consisting of 100 units (“Units”) at a price of $50,000 per unit. Each Unit
      consists of 1,250,000 shares of Common Stock and a 6% Subordinated Secured
      Convertible Promissory Note (“Convertible Notes”) in the principal amount of
      $45,000, convertible into 11,250,000 shares of Common Stock at a conversion
      price equal to $.004. The conversion price is subject to equitable adjustments
      for stock splits, stock dividends, and similar events. The Company may repay
      the
      Convertible Notes at maturity through the issuance of common stock, so long
      as
      the market price of the common stock is no less than 150% of the conversion
      price at maturity. The
      Convertible Notes may not be converted into Common Stock until the Company
      effects an amendment to its certificate of incorporation effecting a reverse
      stock split providing for a sufficient number of authorized shares of Common
      Stock to permit such conversion. The conversion price of the Convertible Notes
      was less than the market price of the Company’s common stock on the date of the
      transaction. In accordance with EITF 98-5 the Company recognized a debt discount
      of $4.5 million associated with the beneficial conversion feature of the
      Convertible Notes. Additionally, the
      Company issued warrants to purchase an aggregate of 93,750,000 shares of Common
      Stock at a price of $.004 per share as a consulting fee to a company controlled
      by a new stockholder. Pursuant to EITF 96-18, this warrant has been valued
      at
      the fair value of the services provided resulting in a charge to earnings in
      the
      quarter ending December 31, 2006 of $375,000. The warrants are subject to
      pro-rata adjustment upon completion of the Company’s 50-for-1 reverse split.





Assuming
      the (1) issuance of the Units, including the discount associated with beneficial
      conversion feature of the Convertible Notes and consulting charges associated
      with the warrant issuance, and (2) conversion of the Convertible Notes,
      resulting in the recognition of the debt discount as interest expense, had
      occurred at September 30, 2006, the Company’s Pro Forma Condensed Balance Sheet
      would be as follows. This presentation is not indicative of that which would
      have been attained had the transaction occurred at an earlier date.





September
                30, 2006, as presented
            
            Pro
                Forma Adjustments
            
            (Pro
                Forma) September 30, 2006ASSETS:Current
                Assets:Cash
                and equivalents
            
            $
            1,618
            
            $
            5,000
            
            $
            6,618Accounts
                receivable
            
            
            6,305
            
            
            -
            
            
            6,305Inventory
            
            
            3,091
            
            
            -
            
            
            3,091Other
                current assets
            
            
            639
            
            
            -
            
            
            639Total
                current assets
            
            $
            11,653
            
            $
            5,000
            
            $
            16,653Deferred
                loan origination fees, net
            
            
            359
            
            
            -
            
            
            359Property
                and other assets
            
            
            493
            
            
            -
            
            
            493Total
                assets
            
            $
            12,505
            
            $
            5,000
            
            $
            17,505LIABILITIES
                & EQUITY:
              Current
                Liabilities:Accounts
                payable
            
            $
            6,320
            
            $
            -
            
            $
            6,320Accrued
                expenses
            
            
            1,695
            
            
            -
            
            
            1,695Convertible
                term note, current
            
            
            1,669
            
            
            -
            
            
            1,669Other
                current liabilities
            
            
            476
            
            
            -
            
            
            476Total
                current liabilities
            
            $
            10,160
            
            $
            -
            
            $
            10,160Convertible
                revolving credit facility
            
            
            6,327
            
            
            -
            
            
            6,327Subordinated
                Convertible Notes, net
            
            
            -
            
            
            -
            
            
            -Other
                liabilities
            
            
            456
            
            
            -
            
            
            456Total
                liabilities
            
            $
            17,025
            
            $
            -
            
            $
            17,025Total
                Stockholders’ equity
            
            $
            (4,520
            )
            $
            5,000
            
            $
            480Total
                liabilities & Stockholders’ equity
            
            $
            12,505
            
            $
            5,000
            
            $
            17,505




9




Approximately
      $3 million of the proceeds of the private placement were immediately used to
      pay
      past due amounts owed Samsung for security products previously purchased by
      the
      Company, and approximately $108,000 was paid to a consulting group owned and
      controlled by the Company’s former Chairman. The balance of the net proceeds
      from the private placement will be used primarily for working capital, fund
      operating losses and to pay expenses incurred in connection with the private
      placement.





In
      conjunction with the closing of the private placement described above, five
      of
      the Company’s directors resigned and were replaced by five new directors.





The
      investors in the private placement have agreed to exercise the conversion option
      immediately upon the effectiveness of the Company’s 50-for-1 reverse stock
      split, which the Company expects to occur on or about November 27, 2006.
      Assuming completion of the reverse stock split and note conversion, the
      investors in the private placement as a group would be the beneficial owners
      of
      approximately 96% (approximately 80% assuming full conversion of all outstanding
      options and warrants) of the outstanding shares of the Company’s Common Stock.





**Employment
      Agreements**





Simultaneously
      with the private placement, the Company entered into amendments to the
      employment agreements of both the Chief Executive Officer and Chief Financial
      Officer, by which the Company agreed to issue to each of the two officers an
      option to purchase 94,089,763 shares of the Company’s Common Stock at an
      exercise price of $.004 per share vesting over a three-year period, and have
      amended the definition of “Cause” for termination purposes under each of the
      employment agreements to include the Company’s incurrence of a net loss, as
      defined in the amendments, in the quarter ending June 30, 2007. The new options
      may not be exercised until such time as the Company has available for issuance
      a
      sufficient number of unissued shares of authorized Common Stock so as to permit
      such exercise. These options are subject to pro-rata adjustment upon completion
      of the Company’s 50-for-1 reverse split. Pursuant to the amendments, the two
      officers agreed to forfeit all stock options previously granted to them under
      their employment agreements as well as the right to be issued additional stock
      options upon the closing of a private placement of the Company’s
      securities.




**NOTE
      3 ~ LAURUS CREDIT FACILITY**




Senior
      Debt and Line of Credit




On
      May
      27, 2004, the Company closed a $15 million convertible debt financing with
      Laurus under which the Company was provided with a $5 million term loan and
      a
      $10 million revolving credit facility. At closing, the Company borrowed $5
      million under the term loan and $10 million under the revolving credit facility,
      and used $10,016,000 of the proceeds to repay in full the indebtedness
      outstanding under the prior revolving credit agreement with Comerica Bank.
      Additional proceeds of the financing were used to increase working capital,
      pay
      closing fees to Laurus in the aggregate amount of $617,500, and pay a finder's
      fee in the amount of $800,000. As part of the transaction, Laurus was also
      issued a seven-year warrant to purchase 940,000 shares of Common Stock at a
      price of $3.50 per share. The Company also issued a similar warrant to purchase
      94,000 shares of Common Stock to the finder. Both the shares and exercise price
      of these warrants are subject to prorata adjustment upon completion of the
      Company’s 50-for-1 reverse split. Borrowings under the Laurus financing are
      secured by all assets of the Company. At September 30, 2006, $2.1 million in
      principal was outstanding under the Term Loan and $6.3 million in principal
      was
      outstanding under the revolving credit facility. The agreements with Laurus
      prohibit the payment of dividends on the Company’s Common Stock, and contain
      other customary affirmative and negative covenants.




10





The
      loan
      documents with Laurus required the Company’s Common Stock to be quoted on the
      NASD Over the Counter Bulletin Board by July 27, 2004, which date was extended
      to September 27, 2004 and further extended to December 31, 2004. In
      consideration for extending the deadlines, the Company issued Laurus additional
      seven-year warrants to purchase an aggregate of 400,000 shares of Common Stock
      at a price of $3.50 per share, subject to prorata adjustment upon completion
      of
      the Company’s 50-for-1 reverse split. The fair value of these warrants at date
      of issue was expensed. The Company’s Common Stock began being quoted on the NASD
      Over the Counter Bulletin Board on December 13, 2004.




The
      term
      loan is evidenced by a Secured Convertible Term Note (“Term Note”) and bears
      interest at a rate per annum equal to the prime rate (as reported in the Wall
      Street Journal), plus two percent, subject to a floor of six percent. Interest
      on the term loan is payable monthly.




Prior
      to
      the October 2006 amendment described below, the interest rate under the Term
      Note was subject to downward adjustment at the end of each month so that if
      at
      the end of the applicable month the Company had registered the shares of Common
      Stock underlying the Term Note with the SEC, interest payable on the Term Note
      would be adjusted downward by 200 basis points (two percent) for each
      incremental 25 percent increase in the market price of the Common Stock, at
      the
      end of the month, in excess of the conversion price under the Term Note.




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





Borrowings
      under the revolving credit facility bear interest at a rate per annum equal
      to
      the prime rate plus two percent. In addition, prior to the October 2006
      amendment described below, the interest rate under the revolving credit facility
      was previously subject to downward adjustment at the end of each month in the
      same manner as provided for under the Term Note. The revolving credit facility
      terminates, and borrowings thereunder become due, on December 31,
      2007.





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





Pursuant
      to an amendment, dated as of May 26, 2006, between the Company and Laurus,
      (i)
      payments of principal due to Laurus for the months of June 2006 through December
      2006 under the Term Note were reduced from $190,000 per month to $100,000 per
      month, (ii) the final payment of principal due to Laurus under the Term Note
      on
      May 27, 2007 was correspondingly increased from $435,000 to $1,065,000, and
      (iii) the exercise price of warrants previously issued to Laurus to purchase
      an
      aggregate of 1,340,000 shares of the Company’s Common Stock was reduced from
      $3.50 to $0.60. Pursuant to a further Amendment, dated as of June 22, 2006,
      the
      conversion price of $300,000 of principal under the Term Note was reduced to
      $0.15 from $1.91, and Laurus converted such amount of principal into 2,000,000
      shares of the Company’s Common Stock. The principal so converted was applied to
      the payments of principal that would otherwise have been due under the Term
      Note
      for the months of July, August and September 2006. As a result of the reduction
      in the exercise price of the warrants, the Company recorded an interest charge
      of approximately $76,000 in the second quarter of 2006. In addition, the Company
      also recorded a charge of approximately $20,000 from the reduction of the
      conversion price of $300,000 of convertible term debt principal in June 2006.





On
      October 4, 2006, in connection with the private placement referred to above,
      the
      Company entered into an Omnibus Amendment and Consent with Laurus, pursuant
      to
      which Laurus consented to the issuance of the Convertible Notes in the private
      placement. In addition, Laurus agreed to further amendments to the Company’s
      revolving credit facility and term loan agreements under which (i) the ability
      of Laurus to convert the Company’s revolving credit facility and term loan into
      Common Stock was eliminated; (ii) the maturity date of both the revolving credit
      facility and Term Note was extended from May 24, 2007 until December 31, 2007;
      (iii) prepayment penalties with respect to both the revolving credit facility
      and Term Note were eliminated; and (iv) monthly principal payments of $152,000
      will be due under the Term Note for the months of January 2007 through December
      2007.





11




Accordingly,
      after giving effect to the amendments above, amortizing payments of principal
      on
      the Term Note, which commenced September 1, 2004, are provided below as
      follows:




**Period**
              
              **Principal
                  Amount**October
                  2006 through December 2006
              
              $
              100,000
                  per monthJanuary
                  2007 through December 2007
              
              $
              152,083
                  per month





**Loan
      Origination Fees**





The
      Company incurred and capitalized origination and finders fees associated with
      the Laurus credit facility of approximately $1.8 million. These fees are
      amortized into interest expense on the straight line basis over the initial
      term
      of the loan of three years. Also included in the capitalized origination fees
      is
      compensation of approximately $112,000 relating to the issuance of warrants
      to
      purchase 1,034,000 shares of the Company’s Common Stock. These fees will be
      fully amortized in May 2007.




**NOTE 4 ~
      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 $316,000, and have payment terms ranging from
      48
      to 60 months.





Future
      minimum lease payments under noncancelable capital lease obligations at
      September 30, 2006 were as follows ($ in thousands):




2006
            
            $
            212007
            
            
            832008
            
            
            532009
            
            
            12169Less
                amounts relating to interest
            
            
            11Total
                capital lease obligations
            
            
            158Less
                current portion
            
            
            76Capital
                lease obligations, noncurrent
            
            $
            82





**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 estimates that any liability that it may have for
      sales
      taxes would not have a material effect on its financial condition or results
      of
      operations.




12




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 six months, and then pays monthly rent of $25,704 for the
      remainder of the sixty-six month lease. Accordingly, the effects of the rent
      deferral have been accrued.





The
      minimum annual rentals under the non-cancelable lease for the remaining periods
      ended years ended December 31 are as follows ($ in thousands):





2006
            
            $
            772007
            
            
            3082008
            
            
            3082009
            
            
            231$
            924





***Termination
      Agreement with Nazzareno E. Paciotti***





On
      March
      28, 2006, the Company and Nazzareno E. Paciotti, entered into a Mutual
      Separation Agreement whereby the parties mutually agreed to the termination
      of
      Mr. Paciotti’s employment with the Company and to his resignation as a director
      and officer of the Company and its subsidiaries. Under the terms of the Mutual
      Separation Agreement, Mr. Paciotti was entitled to receive severance payments
      equal to one year of his annual base salary of $300,000 payable over 12 months.
      In addition, under the separation agreement, Mr. Paciotti was entitled to
      continue to receive medical benefits through January 24, 2008. At December
      31,
      2005, approximately $335,000 was accrued for this obligation, and at June 30,
      2006 approximately $250,000 remained on the obligation. The Company also agreed
      that Mr. Paciotti’s options to purchase 625,000 shares of Common Stock would
      vest in full and be exercisable in full until December 31, 2006. Mr. Paciotti
      agreed to release the Company in full from any and all claims and to continue
      to
      be bound by the confidentiality and non-solicitation terms of his employment
      agreement.





In
      September 2006 the Company entered into agreement with Mr. Paciotti whereby
      the
      Company paid Mr. Paciotti a one-time payment of $85,925 in satisfaction of
      all
      remaining obligations under the Mutual Separation Agreement, which resulted
      in
      an increase to earnings of $128,888 in the quarter ended September 30, 2006.





***Employment
      Agreements***





On
      October 4, 2006, in connection with the private placement noted earlier, the
      Company entered into amendments to the employment agreements of both the Chief
      Executive Officer and Chief Financial Officer, by which the Company agreed
      to
      issue to each of the two officers an option to purchase 94,089,763 shares of
      the
      Company’s Common Stock at an exercise price of $.004 per share vesting over a
      three-year period, and have amended the definition of “Cause” for termination
      purposes under each of the employment agreements to include the Company’s
      incurrence of a net loss, as defined in the amendments, in the quarter ending
      June 30, 2007. The new options may not be exercised until such time as the
      Company has available for issuance a sufficient number of unissued shares of
      authorized Common Stock so as to permit such exercise. Pursuant to the
      amendments, the two officers agreed to forfeit all stock options previously
      granted to them under their employment agreements as well as the right to be
      issued additional stock options upon the closing of a private placement of
      the
      Company’s securities.





**NOTE 6
      ~ 2004 STOCK INCENTIVE PLAN**





In
      February 2004, the Company adopted its 2004 Long-Term Stock Plan and reserved
      up
      to 5,939,913 shares of Common Stock for issuance thereunder. In June 2006 the
      shares available under this Plan increased from 5,939,913 to 10,000,000, and
      in
      October 2006 the shares available under this Plan increased to
      295,000,000.




13




In
      March
      2006, the Company granted to the Chief Executive Officer and Chief Financial
      officer certain employees options to purchase a total of 3,750,000 shares of
      Common Stock exercisable at $.16 to $.80 per share. These options were not
      granted under a plan.




A
      summary
      of the status of the Company’s stock options as of December 31, 2005, and the
      changes during the six months ended September 30, 2006, is presented below.


Number
                    ofShares
              
              Range
                  of Exercise PricesOutstanding
                  at January 1, 2006
              
              
              4,221,752
              
              $
              0.32
                  - 65.00Granted
              
              
              3,750,000
              
              $
              0.16
                  -0.80Exercised
              
              
              -
              
              $
              -Forfeited
              
              
              (908,702
              )
              $
              0.32
                  -2.60Outstanding
                  at September 30, 2006
              
              
              7,063,050
              
              $
              0.16
                  - 65.00Options
                  Exercisable at September 30, 2006
              
              
              5,097,633Weighted-average
                  fair value of options remaining exercisable at September 30,
                  2006
              
              
              
              
              $
              0.05





The
      following table summarizes information about stock options outstanding as of
      September 30, 2006:


Outstanding
                  Options
              
              Exercisable
                  OptionsExercise
                  Prices
              
              Number
                  Outstanding At September 30,2006
              
              Weighted-average
                  Remaining Contractual Life
              
              Number
                  Outstanding at September 30,2006$
              0.16
              
              250,000
              
              9.5
                  years
              
              125,0000.30
              
              1,000,000
              
              9.4
                  years
              
              1,000,0000.32
              
              566,742
              
              6.8
                  years
              
              566,7420.50
              
              250,000
              
              9.5
                  years
              
              125,0000.52
              
              1,000,000
              
              9.4
                  years
              
              500,0000.78
              
              250,000
              
              9.5
                  years
              
              125,0000.80
              
              1,000,000
              
              9.4
                  years
              
              500,0000.85
              
              100,000
              
              8.5
                  years
              
              50,0001.50
              
              815,000
              
              8.3
                  years
              
              668,3332.60
              
              1,825,000
              
              7.4
                  years
              
              1,431,250Over
                  $32.00
              
              6,308
              
              3.2
                  years
              
              6,3087,063,050
              
              
              
              5,097,633




As
      noted
      earlier, subsequent to September 30, 2006, the Company entered into amendments
      to the employment agreements of both the Chief Executive Officer and Chief
      Financial Officer, by which the Company agreed to issue to each of the two
      officers an option to purchase 94,089,763 shares of the Company’s Common Stock
      at an exercise price of $.004 per share vesting over a three-year period. In
      addition, another 94,089,763 shares were made available for distribution to
      other key management members. Under the terms of the amendment, the two officers
      agreed to forfeit previously issued and outstanding options totaling 3,750,000,
      which were granted in the quarter ending March 31, 2006.





All
      outstanding options are subject to prorata adjustment upon completion of the
      Company’s 50-for-1 reverse split.




14




**NOTE 7
      ~ WARRANTS**





Summary
      of the Company’s outstanding warrants at September 30, 2006 are as
      follows:





Description
            
            Shares
            
            Approx.
                Remaining Term (Years)
            
            Exercise
                PriceLaurus
                Master Fund
            
            
            1,340,000
            
            
            4.8
            
            $
            0.60Laurus
                Finder’s Fee
            
            
            94,000
            
            
            4.7
            
            $
            3.50ESI
            
            
            3,000,000
            
            
            5.1
            
            $
            1.50Rapor
                shareholders
            
            
            1,353,925
            
            
            5.2
            
            $
            3.04Oct.
                2004 bridge financing
            
            
            766,665
            
            
            3.1
            
            $
            1.50Consultant
            
            
            175,000
            
            
            3.1
            
            $
            3.50
                - 5.00Other
            
            
            13,743
            
            
            0.7
            
            $
            7.80
                - 32.506,743,333




As
      noted
      previously, in conjunction with the private placement transaction completed
      subsequent to September 30, 2006, the Company issued five-year warrants to
      purchase an aggregate of 93,750,000 shares of Common Stock at a price of $.004
      as a consulting fee to a Company controlled by a new stockholder. The warrants
      may not be exercised until such time as the Company has available for issuance
      a
      sufficient number of unissued shares of authorized common stock so as to permit
      such exercise, and are subject to prorata adjustment upon completion of the
      Company’s 50-for-1 reverse split.




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




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




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





**THREE
      MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,
      2005**




**NET
      REVENUES FROM CONTINUING OPERATIONS**





Net
      revenues decreased approximately $869,000, or 8% to approximately $10.1 million
      in the three months ended September 30, 2006 from approximately $10.9 million
      in
      the three months ended September 30, 2005. The decrease was attributable to
      (i)
      a decrease of approximately $350,000, or 3%, in sales of professional products,
      and (ii) a decrease of approximately $565,000, or 94%, in enterprise solutions
      revenues. During the quarter ended September 30, 2006, our principal
      professional product supplier, Samsung, suspended shipment of products as a
      result of a reduction in our credit limit, causing us to maintain lower levels
      of inventory during the quarter. These lower levels of inventory negatively
      impacted sales to the professional channel. As noted below, o n
      October
      2, 2006, we entered into a new Product Distribution Agreement with Samsung,
      under which we were 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. In conjunction with this agreement
      and
      our payment of $3 million for past-due amounts, Samsung resumed shipments to
      us. The
      reduction in enterprise solutions revenues reflects sales of the Rapor portal
      during the three months ended September 30, 2005, with no corresponding sales
      in
      the three months ended September 30, 2006. During
      the quarter ended September 30, 2006, management concluded that the Rapor
      product line no longer fit our existing distribution channels and market
      strategy and, accordingly wrote-off goodwill, trademarks and technology associated with this product
      line.
      We are currently evaluating opportunities to dispose of our Rapor products,
      and
      have discussed the licensing and/or sale of this business line with several
      parties. Also, we continue to introduce new products to complement our existing
      professional line, and will continue to focus on the professional market through
      various channels.




15




**COST
      OF GOODS SOLD FROM CONTINUING OPERATIONS**





Total **** cost
      of
      goods sold increased approximately $55,000 or 1% to approximately $9.5 million
      for the three months ended September 30, 2006, from approximately $9.4 million
      in the three months ended September 30, 2005. This increase was due primarily
      to
      adjustments to reflect slow-moving inventory to their net realizable value
      reflected in the three months ended September 30, 2006 totaling approximately
      $1
      million, with no such adjustment reflected in the three months ended September
      30, 2005. The increase was offset by lower sales volume in the enterprise
      solutions channels, as well as improved gross margins in the professional
      channel generated from the sale of new camera and digital video recorder
      products.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the three months ended September 30, 2006 decreased to approximately
      $622,000 from approximately $1.5 million for the three months ended September
      30, 2005, and gross profit as a percentage of revenues decreased to
      approximately 6.2% for the three months ended September 30, 2006 compared with
      approximately 14.1% for the three months ended September 30, 2005. Had we not
      reflected the $1 million slow-moving inventory adjustment in the three months
      ending September 30, 2006, our gross margins would have been approximately
      17%
      for this three month period.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses decreased approximately $1.1 million,
      or
      28%, to approximately $2.8 million in the three months ended September 30,
      2006
      from approximately $3.9 million in the three months ended September 30, 2005,
      as
      follows:





**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately $1.3 million, or 50%, to
      approximately $1.2 million in the three months ended September 30, 2006 from
      approximately $2.5 million in the three months ended September 30,
      2005. The decrease was primarily due to (i) the elimination of
      approximately $190,000 of quarterly expense related to the licensing agreement
      with Cybasec Ltd. entered into January 1, 2005, which was not renewed for 2006,
      (ii) decreases of approximately $310,000 in sales and marketing staff salaries
      and related benefits, (iii) a decrease of approximately $530,000 in promotional
      expenses, and (iv) a decrease of approximately $200,000 in travel and other
      sales administration costs.





**General
      and Administrative.** General
      and administrative expenses increased approximately $200,000, or 15%, to
      approximately $1.6 million for the three months ended September 30, 2006 from
      approximately $1.4 million for the three months ended September 30, 2005.
      The increase in general and administrative expenses was primarily the
      result of an increase in bad debt expense of approximately $157,000, as well
      as
      increases in various other administrative expenses.




**IMPAIRMENT
      OF LONG-LIVED ASSETS**





During
      the three months ended September 30, 2006, the Company recorded impairment
      costs
      of approximately $1 million. These costs resulted from the write-off of goodwill
      of approximately $544,000, as well as the write-off of the remaining net book
      values of trademark and technology associated with the Rapor products of
      approximately $433,000. No similar impairment expenses were recorded in the
      three months ended September 30, 2005.




16




**INTEREST
      EXPENSE**





Net
      interest expense for the three months ended September 30, 2006 increased 26%
      to
      approximately $399,000 from approximately $315,000 in the three months ended
      September 30, 2005. This increase is a result of a higher average interest
      rate
      during the three months ended September 30, 2006 compared with the three months
      ended September 30, 2005. The higher average interest rates resulted from a
      higher prime interest rate during the period as well as the interest rate
      provisions applicable to borrowings under the revolving credit facility.





**INCOME
      TAX EXPENSE (BENEFIT)**





We
      recorded a provision for federal, state and local income tax of approximately
      $22,000 for the three months ended September 30, 2006, which was 31% lower
      as
      compared to an expense of approximately $32,000 for the three months ended
      September 30, 2005. The $22,000 tax expense relates to state franchise taxes
      that are due in various states in which we are licensed and transact business.
      We believe that any provision for federal and state tax benefits due to our
      loss
      for the three months ended September 30, 2006 would be offset by an equal
      increase in a valuation allowance as a result of our past recurring operating
      losses.





**DISCONTINUED
      OPERATIONS**





Income
      from discontinued operations, net of tax, was approximately $576,000 for the
      three months ended September 30, 2006, compared to income from discontinued
      operations of approximately $147,000 for the three months ended September 30,
      2005, an increase of 292%. The income recorded for the three months ended
      September 30, 2006 reflects (i) the transfer of approximately $500,000 of
      inventory in settlement of a dispute with our former distributor to the retail
      channel, and (ii) the elimination of a $1.1 million liability for potential
      future returns of retail products in connection with that settlement. In
      comparison, income for the three months ended September 30, 2005 was the result
      of a one-time reimbursement of $600,000 from a major supplier of our retail
      product line, offset by the effects of negative net revenue resulting from
      returns in excess of gross sales during this period. Operating results from
      discontinued operations do not include any allocation of corporate overhead.





**NET
      INCOME**





As
      a
      result of the items discussed above there was a net loss of approximately $3.0
      million for the three months ended September 30, 2006 compared with a net loss
      of approximately $2.6 million for the three months ended September 30,
      2005.





**NINE
      MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
      2005** ****




**NET
      REVENUES FROM CONTINUING OPERATIONS**





Net
      revenues increased approximately $1.8 million, or 6% to approximately $32.9
      million in the nine months ended September 30, 2006 from approximately $31.1
      million in the nine months ended September 30, 2005. The increase reflects
      a
      $2.9 million increase, or 9%, in sales of professional products, offset by
      a
      decrease of approximately $1.2 million, or 91%, in enterprise solutions
      revenues. The increase in revenues of our professional products reflected
      increased sales to distributors, integrators and installers of a variety of
      products manufactured by Samsung Electronics as well as other manufacturers.
      The
      reduction in enterprise solutions revenues reflects sales of the Rapor portal
      during the nine months ended September 30, 2005, with no corresponding sales
      in
      the nine months ended September 30, 2006. As previously noted, during
      the quarter ended September 30, 2006, management concluded that the Rapor
      product line no longer fit our existing distribution channels and market
      strategy, and accordingly, wrote-off goodwill and intangibles associated with this product line. We are
      currently reviewing opportunities to dispose of our Rapor products, and have
      discussed the licensing and/or sale of this business line with several parties.
      We continue to introduce new products to complement our existing lines, and
      will
      continue to focus on the professional market through various
      channels.




17




**COST
      OF GOODS SOLD FROM CONTINUING OPERATIONS**




Total **** cost
      of
      goods sold increased approximately $1.7 million, or 6% to approximately $28.4
      million for the nine months ended September 30, 2006, from approximately $26.6
      million in the nine months ended September 30, 2005. This increase was due
      to
      the increased revenue volume from the sale of professional products, partially
      offset by improved margins on professional products, which resulted in an
      overall increase in cost of sales for professional products of $1.2 million
      for
      the nine months ending September 30, 2006 as compared to the nine month period
      ending September 30, 2005. In addition, cost of sales related to enterprise
      sales decreased $850,000 for the period ending September 30, 2006 as compared
      to
      the comparable period in 2005 as a result of the absence of sales of the Rapor
      product in 2006. Also, we recorded adjustments to reflect slow-moving inventory
      to their net realizable value in the nine months ended September 30, 2006
      totaling approximately $1 million, with no such adjustment reflected in the
      nine
      months ended September 30, 2005. The overall increase in cost of goods sold
      was
      also the result of additional warehouse and assembly costs of approximately
      $350,000 in the nine months ending September 30, 2006 compared with the nine
      months ending September 30, 2005.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the nine months ended September 30, 2006 increased to approximately
      $4.6 million from approximately $4.5 million for the nine months ended September
      30, 2005, and gross profit as a percentage of revenues decreased to 13.9% for
      the nine months ended September 30, 2006 compared with 14.5% for the nine months
      ended September 30, 2005. Had we not reflected the $1 million slow-moving
      inventory adjustment in the three months ending September 30, 2006, our gross
      margins would have been 17% for this nine month period.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses decreased 12% to approximately $9.9 million
      for the nine months ended September 30, 2006 from approximately $11.2 million
      for the nine months ended September 30, 2005, as follows:




**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately 37% to approximately $4.4 million
      in
      the nine months ended September 30, 2006 from approximately $6.9 million in
      the
      nine months ended September 30, 2005. The decrease was primarily due to (i)
      the elimination of approximately $590,000 of expense related to the licensing
      agreement with Cybasec Ltd. entered into January 1, 2005, which was not renewed
      for 2006, (ii) decreases of approximately $570,000 in sales and marketing staff
      salaries and related benefits, (iii) a decrease of approximately $870,000 in
      promotional expenses, and (iv) a reduction in travel and other various general
      and administrative expenses of $500,000.





**General
      and Administrative.** General
      and administrative expenses increased 31% to approximately $5.5 million for
      the
      nine months ended September 30, 2006 from approximately $4.3 million for the
      nine months ended September 30, 2005.  Major items resulting in
      the increased general and administrative expense were (i) approximately
      $710,000 in personnel termination costs during the nine month period, (ii)
      stock
      based compensation expense of approximately $260,000 recorded due to the
      adoption of SFAS 123R effective January 1, 2006, with no comparable
      expense  in
      2005,
      (iii) an increase in bad debt expenses of approximately $550,000. These
      increases were partially offset by decreases in various other general and
      administrative expenses.





**IMPAIRMENT
      OF LONG-LIVED ASSETS**





During
      the nine months ended September 30, 2006, the Company recorded impairment costs
      of approximately $1 million, These costs resulted from the write-off of goodwill
      of approximately $544,000, and the write-off of the remaining net book value
      of
      the trademark and technology associated with the Rapor products of approximately
      $433,000. No similar impairment expenses were recorded in the nine months ended
      September 30, 2005.




**INTEREST
      EXPENSE**





Interest
      expense for the nine months ended September 30, 2006 increased 36% to
      approximately $966,000 from approximately $708,000 in the nine months ended
      September 30, 2005. The increase was due to higher outstanding borrowings and
      a
      higher average interest rate during the nine months ended September 30, 2006
      compared with the nine month period ended September 30, 2005. The higher average
      interest rates resulted from a higher prime interest rate during the period
      as
      well as the interest rate provisions applicable to borrowings under the
      revolving credit facility. As a result of the conversion price under the
      facility exceeding the market price of our Common Stock for the nine months
      ended September 30, 2006, the interest rate for the period was equal to the
      prime rate plus two percent. The combined effect of these factors resulted
      in
      increased interest charges of approximately $258,000 for the nine-month period
      ended September 30, 2006.




18




**INCOME
      TAX EXPENSE (BENEFIT)**





We
      recorded a provision for federal, state and local income tax of approximately
      $68,000 for the nine months ended September 30, 2006, as compared to an expense
      of approximately $55,000 for the nine months ended September 30, 2005. The
      $68,000 expense relates to state franchise taxes due in various states in which
      we are licensed and transact business. We believe that any provision for federal
      and state tax benefits due to our loss for the nine months ended September
      30,
      2006 would be offset by an equal increase in a valuation allowance as a result
      of our history of recurring operating losses.





**DISCONTINUED
      OPERATIONS**





Loss
      from
      discontinued operations, net of tax, was approximately $2.7 million for the
      nine
      months ended September 30, 2006, compared to income from discontinued operations
      of approximately $1.5 million for the nine months ended September 30, 2005.
      The
      loss for the nine months ended September 30, 2006 reflects negative revenues
      and
      reserves recorded in connection with returns of retail products sold in prior
      periods, and write downs of returned retail inventories. In September 2006
      we
      entered into an agreement with our retail distribution agent whereby the parties
      terminated the alliance agreement and the respective rights and obligations
      of
      the parties thereunder. In addition, we transferred substantially all of our
      remaining retail inventory in satisfaction of any and all remaining outstanding
      and future return obligations. In comparison to our negative revenues for the
      nine months ended September 30, 2006, we had net revenues of approximately
      $13.8
      million for the nine months ended September 30, 2005. Operating results from
      discontinued operations do not include any allocation of corporate overhead.





**NET
      INCOME**





As
      a
      result of the items discussed above there was a net loss of approximately $10.0
      million for the nine months ended September 30, 2006 compared with a net loss
      of
      approximately $5.9 million for the nine months ended September 30,
      2005.





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      September 30, 2006, we had cash and equivalents of approximately $1.6 million,
      working capital of approximately $1.5 million, outstanding balances of $2.1
      million under the Laurus term loan, and outstanding balances of $6.3 million
      under the Laurus revolving credit facility. In comparison, at December 31,
      2005,
      we had cash and equivalents of approximately $3.3 million, working capital
      of
      approximately $11.7 million, an outstanding balance of $3.3 million under the
      Laurus term loan, and outstanding balances under the Laurus revolving credit
      facility of approximately $8.5 million. Additionally, we had borrowing
      availability of approximately $473,000 at September 30, 2006, with no such
      availability at September 30, 2005.




Cash
      decreased from $3.3 million at December 31, 2005 to $1.6 million at June 30,
      2006 primarily as a result of (i) cash operating losses of approximately $1.0
      million, and (ii) term loan principal and interest payments of $1.3 million.
      These factors were partially offset by cash generated from discontinued
      operations of approximately $506,000, and the receipt of refundable income
      taxes
      of approximately $650,000 from December 31, 2005 to September 30,
      2006.




Subsequent
      to September 30, 2006, as described below, we raised $5 million in gross
      proceeds in a private placement of common stock and convertible notes. The
      Company may need to raise additional capital in the future to finance its
      operations; however, there can be no assurance whether the Company will be
      able
      to do so.





**Secured
      Subordinated Debt Financing**





On
      October 6, 2006, we completed a $5 million private placement, consisting of
      100
      units (“Units”) at a price of $50,000 per unit. Each Unit consists of 1,250,000
      shares of Common Stock and a 6% Subordinated Secured Convertible Promissory
      Note
      (“Convertible Notes”) in the principal amount of $45,000, convertible into
      11,250,000 shares of Common Stock at a conversion price equal to $.004. The
      conversion price is subject to equitable adjustments for stock splits, stock
      dividends, and similar events. The
      Convertible Notes may not be converted into Common Stock until we effect an
      amendment to our certificate of incorporation effecting a reverse stock split
      providing for a sufficient number of authorized shares of Common Stock to permit
      such conversion. Our Board of Directors and stockholders have approved a 50-for-1
      reverse split of the Common Stock, expected to be effected on or about November
      27, 2006, which would permit the conversion of the Convertible Notes. The
      conversion price of the Convertible Notes was less than the market price of
      the
      Company’s common stock on the date of the transaction. In accordance with EITF
      98-5 the Company recognized a debt discount of $4.5 million associated with
      the
      beneficial conversion feature of the Convertible Notes. Subsequent to September
      30, 2006, the investors in the private placement agreed to exercise the
      conversion option immediately upon the effectiveness of the Company’s 50-for-1
      reverse stock split.




19




The
      Convertible Notes bear interest at a rate of 6% per annum, payable quarterly,
      at
      the Company’s option, in cash or additional shares of Common Stock valued at the
      conversion price then in effect. At maturity, the Convertible Notes may be
      repaid with shares of the Company’s Common Stock at the conversion price then in
      effect, at the Company’s option. The Convertible Notes are secured by a general
      lien on all of the Company’s assets, which is subordinate to the liens of the
      Company’s senior lender, Laurus Master Fund, Ltd.





As
      part
      of the transaction, the Company agreed to issue a warrant to purchase 93,750,000
      shares of Common Stock at a price of $.004 per share to a consultant as a
      finder’s fee. The warrant may not be exercised until such time as the Company
      has available for issuance a sufficient number of unissued shares of authorized
      Common Stock so as to permit such exercise, and are subject to prorata
      adjustment upon completion of the Company’s 50-for-1 reverse split. Pursuant
      to EITF 96-18, this warrant has been valued at the fair value of the services
      provided, resulting in a charge to earnings in the quarter ending December
      31,
      2006 of $375,000.





Approximately
      $3 million of the proceeds of the private placement were used to repay past
      due
      amounts owed Samsung for security products previously purchased by the Company,
      as well as approximately $108,000 paid to a consulting group owned and
      controlled by an existing shareholder. The balance of the net proceeds from
      the
      private placement will be used primarily for working capital and to pay expenses
      incurred in connection with the private placement.




**Laurus
      Credit Facility**




On
      May
      27, 2004, we closed a $15 million convertible debt financing with Laurus Master
      Fund, Ltd. (“Laurus”) under which we were provided with a $5 million term loan
      and a $10 million revolving credit facility. At closing, we borrowed $5 million
      under the term loan and $10 million under the revolving credit facility, and
      used $10,016,000 of the proceeds to repay in full the indebtedness outstanding
      under the prior revolving credit agreement with Comerica Bank. Additional
      proceeds of the financing were used to increase working capital, pay closing
      fees to Laurus in the aggregate amount of $617,500, and pay a finder's fee
      in
      the amount of $800,000. As part of the transaction, Laurus was also issued
      a
      seven-year warrant to purchase 940,000 shares of Common Stock at a price of
      $3.50 per share. We also issued a similar warrant to purchase 94,000 shares
      of
      Common Stock to the finder. Both the shares and exercise price of these warrants
      are subject to prorata adjustment upon completion of the Company’s 50-for-1
      reverse split. Borrowings under the Laurus financing are secured by all assets
      of the Company. At September 30, 2006, $2.1 million in principal was outstanding
      under the Term Loan and $6.3 million in principal was outstanding under the
      revolving credit facility. The agreements with Laurus prohibit the payment
      of
      dividends on the Company’s Common Stock, and contain other customary affirmative
      and negative covenants.




The
      loan
      documents with Laurus required our Common Stock to be quoted on the NASD Over
      the Counter Bulletin Board by July 27, 2004, which date was extended to
      September 27, 2004 and further extended to December 31, 2004. In consideration
      for extending the deadlines, we issued Laurus additional seven-year warrants
      to
      purchase an aggregate of 400,000 shares of Common Stock at a price of $3.50
      per
      share, subject to prorata adjustment upon completion of the Company’s 50-for-1
      reverse split. The fair value of these warrants at date of issue was expensed.
      Our Company’s Common Stock began being quoted on the NASD Over the Counter
      Bulletin Board on December 13, 2004.




The
      term
      loan is evidenced by a Secured Convertible Term Note (“Term Note”) and bears
      interest at a rate per annum equal to the prime rate (as reported in the Wall
      Street Journal), plus two percent, subject to a floor of six percent. Interest
      on the term loan is payable monthly.




Prior
      to
      the October 2006 amendment described below, the interest rate under the Term
      Note was subject to downward adjustment at the end of each month so that if
      at
      the end of the applicable month we had registered the shares of Common Stock
      underlying the Term Note with the SEC, interest payable on the Term Note would
      be adjusted downward by 200 basis points (two percent) for each incremental
      25
      percent increase in the market price of the Common Stock, at the end of the
      month, in excess of the conversion price under the Term Note.




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




20




Borrowings
      under the revolving credit facility bear interest at a rate per annum equal
      to
      the prime rate plus two percent. In addition, prior to the October 2006
      amendment described below, the interest rate under the revolving credit facility
      was previously subject to downward adjustment at the end of each month in the
      same manner as provided for under the Term Note. The revolving credit facility
      terminates, and borrowings thereunder become due, on December 31,
      2007.





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





Pursuant
      to an amendment, dated as of May 26, 2006, between the Company and Laurus,
      (i)
      payments of principal due to Laurus for the months of June 2006 through December
      2006 under the Term Note were reduced from $190,000 per month to $100,000 per
      month, (ii) the final payment of principal due to Laurus under the Term Note
      on
      May 27, 2007 was correspondingly increased from $435,000 to $1,065,000, and
      (iii) the exercise price of warrants previously issued to Laurus to purchase
      an
      aggregate of 1,340,000 shares of the Company’s Common Stock was reduced from
      $3.50 to $0.60. Pursuant to a further Amendment, dated as of June 22, 2006,
      the
      conversion price of $300,000 of principal under the Term Note was reduced to
      $0.15 from $1.91, and Laurus converted such amount of principal into 2,000,000
      shares of the Company’s Common Stock. The principal so converted was applied to
      the payments of principal that would otherwise have been due under the Term
      Note
      for the months of July, August and September 2006. As a result of the reduction
      in the exercise price of the warrants, the Company recorded an interest charge
      of approximately $76,000.





On
      October 4, 2006, in connection with the private placement referred to above,
      the
      Company entered into an Omnibus Amendment and Consent with Laurus, pursuant
      to
      which Laurus consented to the issuance of the Convertible Notes in the private
      placement. In addition, Laurus agreed to further amendments to the Company’s
      revolving credit facility and term loan agreements under which (i) the ability
      of Laurus to convert the Company’s revolving credit facility and term loan into
      Common Stock was eliminated; (ii) the maturity date of both the revolving credit
      facility and Term Note was extended from May 24, 2007 until December 31, 2007;
      (iii) prepayment penalties with respect to both the revolving credit facility
      and Term Note were eliminated; and (iv) monthly principal payments of $152,000
      will be due under the Term Note for the months of January 2007 through December
      2007.





Accordingly,
      after giving effect to the amendments above, amortizing payments of principal
      on
      the Term Note, which commenced September 1, 2004, are provided below as
      follows:


**Period**
              
              **Principal
                  Amount**October
                  2006 through December 2006
              
              $
              100,000
                  per monthJanuary
                  2007 through December 2007
              
              $
              152,083
                  per month





**Samsung
      Electronics Distribution Agreement**




On
      October 2, 2006, the Company entered into a new Product Distribution Agreement
      with Samsung, under which we were 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
      and
      $27 million for the years ending December 31, 2006 and 2007, respectively,
      and
      allows Samsung to terminate the Agreement at any time if we do not achieve
      the
      annual minimum purchase amounts, as well as upon our breach of any of our other
      obligations thereunder.




21




**Going
      Concern Considerations**





The
      accompanying unaudited condensed and pro forma consolidated financial statements
      have been presented in accordance with U.S. GAAP, which assumes our continuity
      as a going concern. However, during the nine months ended September 30, 2006
      and
      in the prior fiscal years, we experienced, and we continue to experience,
      negative cash flow and operating losses, as well as losses from discontinued
      operations, which have
      resulted in a significant reduction in our cash balances. These factors raise
      substantial doubt about our ability to continue as a going concern. In addition,
      we may need to raise additional capital in the future to finance our operations
      and business model, and there can be assurance in that regard.




**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 nine months ended September 30, 2006. To
      date, exchange rate fluctuations have had little impact on our operating results
      and cash flows.





Interest
      Rate Sensitivity




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




**Item
      4. Controls and Procedures.**




Our
      Chief
      Executive and Chief Financial Officers have concluded, based on their evaluation
      as of September 30, 2006, that our disclosure controls and procedures are
      effective to reasonably ensure that information required to be disclosed in
      the
      reports filed or submitted under the Securities Exchange Act of 1934, as
      amended, is recorded, processed, summarized and reported within the time periods
      specified in the SEC’s rules and forms.




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




**PART
      II. OTHER INFORMATION**




**Item
      1A. Risk Factors**





In
      addition to the risk factor set forth below and the disclosures in this report
      under “Going Concern Considerations,” care should be considered in evaluating
      the “Risk Factors” discussed in Part I, Item 1 of our Annual Report on Form
      10-KSB for the year ended December 31, 2005, which could materially affect
      our
      business, financial condition and future results. The risks described in this
      report and in the Annual Report on Form 10-KSB 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.





**SUBSTANTIALLY
      ALL OF OUR SHARES OF COMMON STOCK ARE OWNED BY THE INVESTORS IN OUR OCTOBER
      2006
      PRIVATE PLACEMENT, WHICH LIMITS THE ABILITY OF OUR OTHER STOCKHOLDERS TO
      INFLUENCE CORPORATE MATTERS.**




Following
      the closing of the private placement, assuming the full conversion of the
      Convertible Notes, the investors in the private placement as a group were the
      beneficial owners of approximately 96% of our outstanding shares of Common
      Stock, and GVI Investment Company, LLC, the largest investor in the private
      placement, was the beneficial owner of approximately 48% of our outstanding
      shares of Common Stock. Accordingly, these stockholders can decide the outcome
      of any corporate transaction or other matter submitted to our stockholders
      for
      approval, including mergers, consolidations and the sale of all or substantially
      all of our assets, and also could prevent or cause a change in control. The
      interests of these stockholders may differ from the interests of our other
      stockholders. Third parties may be discouraged from making a tender offer or
      bid
      to acquire us because of this concentration of ownership.




22





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




Pursuant
      to our Nonemployee Directors Stock Plan adopted by our board of Directors in
      October 2005, we issued shares of our Common Stock to our nonemployee directors
      during the period of July 1 to September 30, 2006 as set forth in the table
      below. These issuances were exempt from registration under Section 4(2) of
      the
      Securities Act of 1933, as amended.




Date
                of Issuance
            
            Number
                of Shares Issued to eachNon-Employee
                Director
            
            Total
                Number of Shares
              Issued
                to Non-Employee DirectorsJuly
                18, 2006
            
            
            6,667
            
            
            40,002August
                15, 2006
            
            
            12,540
            
            
            75,240





**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


23


**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
              16, 2006
            By:
            /s/ Joseph
              RestivoName:
                Joseph Restivo
              Title:
                Chief Financial Officer




24


**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




25