**UNITED
        STATES**
  **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **___________________**
 
 **FORM
        10-QSB**
 
 |X|  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        quarterly period ended June 30, 2005
 or
 
 [
        ]  TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        transition period from __________ to __________
 
 Commission
        file number: 0-21295
 
 GVI
        Security Solutions, Inc.
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              77-0436410(State
                  or other jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer Identification No.)2801
                  Trade Center Drive, Suite 120, Carrollton, Texas
              75007(Address
                  of principal executive offices)
              (Zip
                  code)
 
 (972)
        245-7353
 (Registrant’s
        telephone number, including area code)
 
 
 (Former
        Name or Former Address, if Changed Since Last Report)
 
  Check
        whether the registrant (1) filed all reports required to be filed by Section
        13
        or 15(d) of the Exchange Act during the past 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
  As
        of
        August 9, 2005 there were 50,124,251 shares of the registrant’s common stock
        outstanding.
 
  Transitional
        Small Business Disclosure Format:
  ̈ Yes  þ No
   1
  **GVI
        Security Solutions, Inc.**
  **FORM
        10-QSB**
  **TABLE
        OF CONTENTS**
 **PART
                    I**  **FINANCIAL
                    INFORMATION**
                
                
                **3**Item
                    1. Financial Statements
                
                
                3Item
                    2. Management's Discussion and Analysis or Plan of
                    Operation
                
                
                10Item
                    3. Controls and Procedures
                
                
                14**PART
                    II**  **OTHER
                    INFORMATION**
                
                
                **14**Item
                    4. Unregistered Sales of Equity Securities and Use of
                    Proceeds
                
                
                14Item
                    6. Exhibits
                
                
                15
    2
  **PART
        I. FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements.**
  **GVI
        Security Solutions, Inc.**
 **Condensed
        Consolidated Balance Sheet**
 **(unaudited)**
 (In
                  thousands, except share and per share amounts)**June
                  30, 2005**ASSETSCurrent
                  AssetsCash
              
              
              
              
              $
              5,208Accounts
                  receivable, net
              
              
              
              
              
              10,275Inventory
              
              
              
              
              
              16,332Other
                  receivables
              
              
              
              
              
              988Prepaid
                  expenses and other current assets
              
              
              
              
              
              1,199Refundable
                  income taxes
              
              
              
              
              
              643Total
                  Current Assets
              
              
              
              
              
              34,645Property
                  and Equipment, Net
              
              
              
              
              
              1,473Other
                  AssetsDeferred
                  loan origination fee, net of accumulated amortization
              
              
              
              
              
              1,109Intangibles,
                  net
              
              
              
              
              
              1,146Investment
              
              
              
              
              
              250Other
              
              
              
              
              
              34Total
                  Assets
              
              
              
              
              $
              38,657LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  LiabilitiesAccounts
                  payable
              
              
              
              
              $
              9,365Debt
              
              
              
              
              
              1,968Accrued
                  expenses
              
              
              
              
              
              1,361Total
                  Current Liabilities
              
              
              
              
              
              12,694Debt,
                  Non-current portion
              
              
              
              
              
              11,736Total
                  Liabilities
              
              
              
              
              
              24,430Commitments
                  and ContingenciesStockholders'
                  EquityPreferred
                  stock, Undesignated, $.001 Par Value, 3,000,000
                Shares
                  authorized, None issued or outstanding
              
              
              
              
              
              --Common
                  stock, $.001 par value, 75,000,000 shares authorized; 50,124,251
                  shares
                  issued and outstanding
              
              
              
              
              
              50Additional
                  paid-in capital
              
              
              
              
              
              22,807Accumulated
                  deficit
              
              
              
              
              
              (8,630
              )Total
                  Stockholders' Equity
              
              
              
              
              
              14,227Total
                  Liabilities and Stockholders' Equity
              
              
              
              
              $
              38,657
 
 The
        Notes
        to Consolidated Financial Statements are an integral part of these
        statements
  3
  **GVI
        Security Solutions, Inc.**
 **Condensed
        Consolidated Statements of Operations**
 **(unaudited)**
 Three
                        Months Ended
                      June
                        30,
                    
                    
                    Six
                        Months Ended
                      June
                        30,2005
                    
                    
                    2004
                    
                    
                    2005
                    
                    
                    2004Revenues
                    
                    $
                    10,399
                    
                    $
                    14,936
                    
                    $
                    34,340
                    
                    $
                    30,023Cost
                        of Revenues
                    
                    
                    8,520
                    
                    
                    12,771
                    
                    
                    29,076
                    
                    
                    25,338Gross
                        Profit
                    
                    
                    1,879
                    
                    
                    2,165
                    
                    
                    5,264
                    
                    
                    4,685Selling,
                          General And Administrative Expenses
                    
                    
                    4,428
                    
                    
                    3,947
                    
                    
                    8,208
                    
                    
                    6,754Operating
                        Income (Loss)
                    
                    
                    (2,549
                    )
                    
                    (1,782
                    )
                    
                    (2,944
                    )
                    
                    (2,069
                    )Interest
                        Expense
                    
                    
                    280
                    
                    
                    116
                    
                    
                    393
                    
                    
                    204Income
                        (Loss) Before Taxes
                    
                    
                    (2,829
                    )
                    
                    (1,898
                    )
                    
                    (3,337
                    )
                    
                    (2,273
                    )Income
                        Tax Expense (Benefit)
                    
                    
                    (21
                    )
                    
                    527
                    
                    
                    (23
                    )
                    
                    633Net
                        Income (Loss)
                    
                    $
                    (2,850
                    )
                    $
                    (1,371
                    )
                    $
                    (3,360
                    )
                    $
                    (1,640
                    )Income
                        (Loss) Per ShareBasic
                    
                    $
                    (0.06
                    )
                    $
                    (0.05
                    )
                    $
                    (0.07
                    )
                    $
                    (0.06
                    )Diluted
                    
                    $
                    (0.06
                    )
                    $
                    (0.05
                    )
                    $
                    (0.07
                    )
                    $
                    (0.06
                    )Shares
                        Used In Calculation Of Net Income (Loss) Per ShareBasic
                    
                    
                    50,077
                    
                    
                    29,604
                    
                    
                    50,077
                    
                    
                    29,604Diluted
                    
                    
                    50,077
                    
                    
                    29,604
                    
                    
                    50,077
                    
                    
                    29,604
 The
        Notes to Consolidated Financial Statements are an
        integral part of these statements
  4
  **GVI
        Security Solutions, Inc.**
 **Condensed
        Consolidated Statements of Cash Flows**
 **(unaudited)**
  (In
                  thousands)
              
              Six
                  Months Ended
                June
                  30,2005
              
              2004Cash
                  Flows From (Used) by Operating ActivitiesNet
                  Income (Loss)
              
              $
              (3,360
              )
              $
              (1,640
              )Adjustments
                  to Reconcile Net Income (Loss) to Net Cash Used InOperating
                  ActivitiesDepreciation
              
              
              504
              
              
              130Amortization
                  of deferred loan origination fee
              
              
              300
              
              
              51Amortization
                  of intangibles
              
              
              74
              
              
              --Changes
                  in Assets and LiabilitiesAccounts
                  receivable
              
              
              (1,710
              )
              
              (235
              )Inventory
              
              
              (3,769
              )
              
              (2,159
              )Other
                  receivables
              
              
              414
              
              
              877Prepaids
                  and other current assets
              
              
              (819
              )
              
              (416
              )Accounts
                  payable
              
              
              (1,979
              )
              
              2,072Accrued
                  expenses
              
              
              (727
              )
              
              690Deposits
              
              
              --
              
              
              (89
              )Federal
                  income tax payable
              
              
              --
              
              
              (907
              )Net
                  Cash Used in Operating Activities
              
              
              (11,072
              )
              
              (1,626
              )Cash
                  Flows From (Used) by Investing ActivitiesPurchase
                  of property and equipment
              
              
              (237
              )
              
              (715
              )Purchase
                  of investment
              
              
              0
              
              
              (250
              )Net
                  Cash Used in Investing Activities
              
              
              (237
              )
              
              (965
              )Cash
                  Flows From (Used) by Financing ActivitiesProceeds
                  from Subordinated Notes Payable
              
              
              --
              
              
              159Repayment
                  of Subordinated Notes Payable
              
              
              --
              
              
              (159
              )Proceeds
                  of Loan/Lines of Credit
              
              
              11,644
              
              
              15,000Proceeds/Repayments
                  of Prior Lines of Credit
              
              
              (8,444
              )
              
              (8,650
              )Repayment
                  of Capital Lease
              
              
              (82
              )
              
              (9
              )Loan
                  Origination Fee
              
              
              --
              
              
              (1,609
              )Net
                  Cash Provided by Financing Activities
              
              
              3,118
              
              
              4,732Net
                  (Decrease) Increase in Cash
              
              
              (8,190
              )
              
              2,141Cash,
                  Beginning of Period
              
              
              13,398
              
              
              69Cash,
                  End of Period
              
              $
              5,208
              
              $
              2,210SUPPLEMENTAL
                  SCHEDULE OF NONCASH INVESTING ANDFINANCING
                  ACTIVITIESPreferred
                  Stock Conversion into Common Stock
              
              $
              --
              
              $
              2Liabilities
                  Assumed in Acquisition and Recapitalization
              
              
              --
              
              
              1,819Conversion
                  of Related Party Note and Loan Payable and Accrued Interest into
                  Preferred
                  Series D Stock
              
              
              --
              
              
              1,517Capital
                  Lease Equipment Acquisition
              
              
              --
              
              
              204Loan
                  origination fee compensation cost for warrant issued
              
              
              --
              
              
              175Debt
                  Principal Payment converted to common stock
              
              
              67
              
              
              --
 The
        Notes
        to Consolidated Financial Statements are an integral part of these
        statements
 
  5
   **GVI
        Security Solutions, Inc.**
 **Notes
        to Condensed Consolidated Financial Statements**
 
 NOTE
        1 ~
        BASIS OF PRESENTATION
 
 These
        consolidated financial statements should be read in conjunction with a reading
        of the Company's Annual Report on Form 10-KSB for the fiscal year ended December
        31, 2004.
 
 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-QSB and Item 310
        of
        Regulation S-B 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.
 
 In
        order to present comparative Earnings Per Share information for the three and
        six
        months ended June 30, 2005, the shares used in the calculations of net income
        (loss) per share have been adjusted as if the preferred stock conversions,
        as
        applicable, and for the one-for-65 reverse common stock split occurred as
        of
        January 1, 2004.
 
 NOTE
        2 ~
        STOCK BASED-COMPENSATION
 
 In
        December 2002, the Financial Accounting Standards Board Issued SFAS No. 148,
        "Accounting for Stock-Based Compensation - Transition and Disclosure - an
        amendment of SFAS No. 123." This statement amends SFAS No. 123, "Accounting
        for
        Stock-Based Compensation," to provide alternative methods of transition for
        a
        voluntary change to the fair value based method of accounting for stock-based
        employee compensation. In addition, this statement amends the disclosure
        requirements of SFAS No. 123 to require prominent disclosures in financial
        statements about the method of accounting for stock-based employee compensation
        and the effect of the method used on reported results. The Company accounts
        for
        stock-based compensation using Accounting Principles Board (APB) Option No.
        25,
        "Accounting for Stock Issued to Employees" and has not adopted the recognition
        provisions of SFAS No. 123, as amended by SFAS No. 148. The exercise price
        of
        options granted under the stock option plan is equal to the market price
        of the
        underlying stock on the date of grant. Therefore, no compensation cost was
        recorded under APB No. 25.
 
 If
        the Company had determined compensation cost for the stock-based compensation
        plan in accordance with the fair value method prescribed by SFAS No. 123,
        net
        income (loss) for the six month
        periods ended June 30, 2005 and 2004, would have been on a pro forma basis
        as
        follows (in thousands):
 
 2005
              
              2004Net
                  income (loss), as reported
              
              $
              (3,360
              )
              $
              (1,640
              )Stock-based
                  employee compensation expense, net of related tax effects
              
              
              (129
              )
              
              (963
              )Net
                  Income (loss), pro forma
              
              $
              (3,489
              )
              $
              (2,603
              )
 
 The
        weighted average fair value of options granted during 2005 and 2004 was $1.50
        and $1.62 respectively.
  The
        fair
        value of each option on the date of grant was estimated using the Black Scholes
        option pricing model with the following weighted average
        assumptions:
 
 Risk
                  free rate of return
              
              
              3.5
              %
              
              3.02
              %Option
                  lives in years
              
              
              3.0
              
              
              5.0Annual
                  volatility of stock price
              
              
              74
              %
              
              74
              %Dividend
                  yield
              
              
              --
              %
              
              --
              %
 
  6
  **** NOTE
        3 ~
        CREDIT FACILITIES
 
 Laurus
        Debt/Lines of Credit
  On
        May
        27, 2004, the Company closed a $15 million convertible debt financing with
        Laurus Master Fund, Ltd. under which the Company was provided with a $5 million
        term loan and a $10 million accounts receivable loan facility. At closing,
        the
        Company borrowed $5 million under the term loan and $10 million under the
        receivable facility, and used $10,016,000 of the proceeds to repay in full
        the
        indebtedness outstanding under the prior revolving credit agreement with
        Comerica Bank. Additional proceeds of the financing were used to increase
        working capital, pay closing fees to Laurus in the aggregate amount of $617,500,
        and pay a finder's fee in the amount of $800,000. As part of the transaction,
        Laurus was also issued a seven-year warrant to purchase 940,000 shares of
        Common
        Stock at a price of $3.50 per share. The Company also issued a similar warrant
        to purchase 94,000 shares of Common Stock to the finder. Borrowings under
        the
        Laurus financing are secured by all assets of the Company. At June 30, 2005,
        $4.175 million in principal was outstanding under the Term Loan and $9.187
        million in principal was outstanding under the accounts receivable facility.
        The
        agreements with Laurus prohibit the payment of dividends on the Company’s common
        stock, and contain other customary affirmative and negative
        covenants.
  The
        term
        loan is evidenced by a Secured Convertible Term Note and, subject to monthly
        adjustments as set forth below, bears interest at an initial rate per annum
        equal to the prime rate (as reported in the Wall Street Journal), plus two
        percent, subject to a floor of six percent. Interest on the term loan is
        payable
        monthly. Amortizing payments of principal on the term loan commenced September
        1, 2004, with a final payment due on May 27, 2007 as set forth in the table
        below.
 Period
                
                Principal
                    AmountJune
                    2005 through May 2006
                
                $150,000
                    per monthJune
                    2006 through April 2007
                
                $190,000
                    per monthMay
                    2007
                
                $
                    435,000
  The
        interest rate under the Term Note is subject to downward adjustment at the
        end
        of each month as follows. If at the end of the applicable month the Company
        has
        registered the shares of Common Stock underlying the Term Note with the SEC,
        interest payable on the term loan will be adjusted downward by 200 basis
        points
        (two percent) for each incremental 25 percent increase in the market price
        of
        the Common Stock, at the end of the month, in excess of the conversion price
        under the Term Note.
 
 Amounts
        outstanding under the Term Note were convertible into Common Stock at Laurus's
        option at a conversion price initially equal to $2.70 per share. In December,
        2004 the conversion price was reduced to $1.91 under the terms of the
        anti-dilution feature of the Term Note. In addition, subject to (i) having
        an
        effective registration statement with respect to the shares of Common Stock
        underlying the Term Note, and (ii) limitations based on trading volume of
        the
        Common Stock, scheduled principal and interest payments under the Term Note
        will
        be made in shares of Common Stock valued at the conversion price. Prepayments
        under the Term Note are subject to a premium in the amount of 20% of the
        principal being prepaid.
 
 Subject
        to monthly adjustments as set forth below, borrowings under the receivable
        facility bear interest at an initial rate per annum equal to the prime rate
        minus two percent. The interest rate under the receivable facility is subject
        to
        downward adjustment at the end of each month in the same manner as provided
        for
        under the Term Note. In addition, if the market price of the Common Stock
        is
        below the fixed conversion price at the end of a month, the interest rate
        under
        the receivable facility will be reset to equal the prime rate plus two percent.
        The receivable facility terminates, and borrowings thereunder become due,
        on May
        27, 2007.
  7
  Amounts
        outstanding under the receivable facility were convertible to Common Stock
        at
        Laurus's option at a conversion price initially equal to $3.38 per share.
        In
        December, 2004 the conversion price was reduced to $2.22 under the terms
        of the
        anti-dilution feature of the facility. To the extent the Company repays loans
        outstanding under the receivable facility and/or Laurus converts loans under
        the
        receivable facility into Common Stock, the Company may reborrow or make
        additional borrowings under the receivable facility, provided that aggregate
        loans outstanding under the receivable facility at any time may not exceed
        the
        lesser of $10 million or a borrowing base equal to the sum of 90% of "eligible
        accounts" plus 60% of "eligible inventory" (with borrowings based on eligible
        inventory limited to $3.5 million). Prior to an amendment to the receivable
        facility entered into in June 2005, borrowings based on eligible inventory
        had
        been limited to $2.0 million.
 
 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. The Company’s Common Stock began being quoted on
        the NASD Over the Counter Bulletin Board on December 13, 2004. Compensation
        expense of approximately $16,000 was recorded for the issuance of these
        warrants.
  Loan
        Origination Fees
 
 The
        loan
        origination and finders fees of $1.8 million for the Laurus loans and line
        of
        credit were capitalized and will be amortized to interest expense over three
        years. Included in loan origination fees is compensation of $112,000 relating
        to
        the issuance of warrants to purchase 1,034,000 shares of the company's common
        stock.
 
 Capitalized
        Leases
 
 There
        are
        four capital leases for a trade show booth, warehouse racking, and two office
        furniture leases that have a total value of $519,000. These leases will be
        paid
        over terms ranging from 24 to 60 months and payments will be allocated to
        debt
        and interest expense over the term of the leases.
 
 Amortization
        Table: ($ in thousands)
  2005
              
              2006
              
              2007
              
              2008
              
              2009Capital
                  Leases
              
              $
              87
              
              $
              118
              
              $
              77
              
              $
              51
              
              $
              12
 
 NOTE
        4 ~
        COMMITMENTS & CONTINGENCIES
 
 Sales
        to
        certain consumers of video surveillance and other security products may be
        subject to sales tax requirements and possible audits by state taxing
        authorities. The Company estimates that any liability that it may have for
        sales
        taxes would not have a material effect on its financial condition or results
        of
        operations.
 
 The
        Company is also a party to other disputes in the normal course of business.
        Management believes the ultimate resolution of such disputes will not have
        a
        material effect on the financial statements.
 
 Licensing
        Agreement
 
 The
        company entered into a licensing agreement that commenced on January 1, 2005
        with Cybasec LTD. Under the agreement, which has an initial term of three
        years,
        but can be cancelled after the first year, Cybasec grants the company the
        exclusive license to use, sell, market, distribute, service and customize
        the
        Cybasec Enterprise Security Platform hardware and software applications in
        exchange for the Company committing to purchase required amounts of products
        and
        paying related agreed upon fees. Minimum required payments under this licensing
        agreement are $1,047,000 for the year ending December 31, 2005.
 
 Settlement
        Agreement with William Teitelbaum and Stock Repurchase
 
 Pursuant
        to a Settlement Agreement entered into in October 2004, on January 4, 2005
        the
        Company completed the purchase of 6,666,667 shares from William A. Teitelbaum
        for $10 million. The December 31, 2004 balance sheet included restricted
        cash
        and a liability, each in the amount of $10,000,000, and a reduction of
        stockholders’ equity, for the purchase of these shares.
 
 8
 ESI
        Alliance Agreement
 
 Pursuant
        to a Memorandum of Understanding (the “MOU”) entered into November 5, 2004, the
        Company has entered into an Alliance Agreement with E&S International
        Enterprises, Inc. (“ESI”) and its subsidiary, SSC, Inc. (“SSC”). Consistent with
        the MOU, and pursuant to the Alliance Agreement, ESI (through SSC) acts as
        the
        Company’s exclusive distributor to retailers of consumer security products
        purchased by the Company from manufactures. ESI purchases these products
        from
        the Company at an initial price equal to 108% of the base cost to the Company,
        subject to downward adjustment if ESI’s gross margins fall below certain
        specified levels. The Company is responsible for all warranty obligations
        with
        respect to the products, including servicing and supporting such products.
        The
        Alliance Agreement is for an initial term of three years and will automatically
        renew for one-year periods unless ESI provides notice to the Company at least
        90
        days prior to the then end of the term of the Agreement of its intention
        not to
        renew the Agreement, subject to early termination rights of ESI as set forth
        in
        the Alliance Agreement.
 
 Pursuant
        to the MOU, the Company issued ESI a warrant to purchase 3,000,000 share
        of the
        Company’s common stock at a price of $1.50 per share. Inc addition, ESI and its
        affiliates may be issued up to an additional 3,000,000 shares of common stock
        upon attaining certain sales goals provided for in the Subscription Agreement
        entered into between the Company and ESI.
 
 Directors
        Compensation
 
 On
        July
        21, 2005, the Board of Directors of the Company approved compensation
        arrangements for non-employee directors of the Company. Pursuant to these
        arrangements, commencing August 2005, each non-employee director of the Company
        will be entitled to receive a monthly payment of $2,000 in cash and an award
        of
        shares of common stock of the Company with an aggregate fair market value
        of
        $1,000. It is anticipated that the plan under which such shares of common
        stock
        will be issued will be formulated, and approved of by the Company’s board of
        directors, in August 2005. For purposes of the plan, Howard Safir, the Company’s
        Chairman, has been deemed not to be a non-employee director of the Company.
 
 NOTE
        5 ~
        2004 STOCK INCENTIVE PLAN
 
 In
        February 2004, the Company adopted the 2004 Long-Term Stock Incentive Plan
        and
        reserved 5,939,913 shares of its common stock. In addition, in February 2004,
        the Company granted options under the Plan to purchase 2,675,000 shares of
        common stock at $2.60 per share and 2,821,452 shares of common stock at $0.3185
        per share. In January 2005, the Company granted options under the Plan to
        purchase 837,500 shares of common stock at $1.50 per share. No stock based
        compensation cost is reflected in expense as all options granted under the
        plan
        had an exercise price equal to the fair value of the underlying stock on
        the
        date of grant.
 
 Note
        6 ~
        NON-QUALIFIED STOCK OPTIONS
 
 In
        July
        2005, the Company granted non-qualified stock options to purchase 575,000
        shares
        of common stock at $.85
 per
        share. No stock based compensation cost will be reflected in expense as all
        options granted had an exercise price equal to the fair value of the underlying
        stock on the date of grant.
 
 Note
        7 ~
        OPERATING LOSSES
 
 For
        the
        six months ended June 30, 2005, the Company reported a net loss of approximately
        ($3.36 0)
        million, and for the year ended December 31, 2004, the Company reported a
        net
        loss of approximately ($7.178) million. Additionally, the Company had an
        accumulated deficit of approximately $8.630 million at June 30, 2005. The
        Company’s financial statements have been presented on the basis that it is a
        going concern, which contemplates the realization of assets and satisfaction
        of
        liabilities in the normal course of business. The Company believes that its
        continuing focus on cost reductions, and the more efficient management of
        its
        inventory and accounts receivable balances, will result in an improved financial
        condition in future periods. However, there can be no assurance that the
        Company
        will be profitable in future periods.
  9
  **Item
        2. Management’s Discussion and Analysis or Plan of
        Operation.**
  *Statements
        contained in this Quarterly Report on Form 10-QSB, other than the historical
        financial information, constitute “forward-looking statements” within the
        meaning of the Private Securities Litigation Reform Act of 1995. All such
        forward-looking statements involve known and unknown risks, uncertainties
        or
        other factors which may cause actual results, performance or achievement
        of the
        Company to be materially different from any future results, performance or
        achievement expressed or implied by such forward-looking statements. Primary
        risk factors include, but are not limited to: reliance on primary supplier;
        uncertainty of future profitability, outstanding indebtedness; reliance on
        a
        primary retailer for sales through the retail channel; 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 2004 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 **JUNE
        30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30,
        2004****
  **REVENUES**
  Revenues
        decreased $4.5 million or 30.2% to approximately $10.4 million in the three
        months ended June
        30 ,
        2005
        from approximately $14.9 million in the three months ended June
        30 ,
        2004.
        The decrease was primarily a result of a decrease of $5.4 million, or 95.6%
        in
        sales of our retail products during the period, offset by increases of $500,000,
        or 5.8%, in sales of our professional products, and $400,000, or 259% in
        sales
        by our Enterprise Solutions Group as compared to the three months ended June
        30,
        2004. The decrease in sales of our retail products resulted from a combination
        of excess on hand quantities of our products previously purchased by our
        exclusive distributor, as well as reduced demand for our products by retailers
        that sell those products. Management expects sales of our retail products
        to
        improve over the remaining six-months of the current year as compared to
        sales
        of those products during the three months ended June 30, 2005. The increase
        in
        sales 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. Increased sales by our Enterprise
        Solutions Group reflects sales of our Rapid Access Security Door to the Drug
        Enforcement Administration.
 
 **COST
        OF REVENUES**
  Cost
        of
        revenues decreased 33.0% to approximately $8.5 million for the three months
        ended June
        30 ,
        2005
        from approximately $12.8 million for the three months ended June
        30 ,
        2004.
        This decrease was due to the decrease in sales of our retail products offset
        by
        increases in tech support costs, warranty costs and other manufacturing costs.
 
 As
        a
        result of the changes described above in revenues and cost of revenues, gross
        profit in the three months ended June
        30 ,
        2005
        decreased to approximately $1.9 million from approximately $2.1 million in
        the
        three months ended June
        30 ,
        2004.
        Gross profit as a percentage of revenues increased to 18.1% for the three
        months
        ended June
        30 ,
        2005
        compared with 14.4% for the three months ended June
        30 ,
        2004.
        This increase was a result of the increase in sales our professional products
        and sales by our Enterprise Solutions Group, which generate higher gross
        margins
        relative to sales of our retail products, together with a decrease in sales
        of
        our lower margin retail products.
 
 **SELLING,
        GENERAL AND ADMINISTRATIVE EXPENSES**
  Selling,
        general and administrative expenses increased 13.5% to approximately $4.4
        million in the three months ended June
        30 ,
        2005
        from approximately $3.9 million in the three months ended June
        30 ,
        2004.
 
 **Sales
        and Marketing** .
        Sales
        and marketing expenses increased 68.7% to approximately $2.7 million in the
        three months ended June
        30 ,
        2005
        from approximately $1.6 million in the three months ended June
        30 ,
        2004.
        The increase was primarily due to (i) increased salaries and selling expenses
        amounting to $153,000 directly related to staffing our Enterprise Solutions
        Group, (ii) a decrease of $132,000 in reimbursements for marketing expenses
        from
        our principal supplier as a result of decreased purchases of their products,
        (iii) additional sample and demo expense of $68,000, and (iv) costs of
        approximately $250,000 related to a licensing agreement with Cybasec, Ltd.
        for a
        new Network Video System which was entered into January 1, 2005.
 
 10
 **General
        and Administrative** .
        General
        and administrative expenses decreased 26.1% to approximately $1.7 million
        in the
        three months ended June
        30 ,
        2005
        from approximately $2.3 million in the three months ended June
        30 ,
        2004.
        The decreased general and administrative expense was due to a decrease of
        approximately $150,000 in administrative staff salaries, and a decrease of
        approximately $340,000 in provisions for doubtful accounts
        receivable.
 
 **INTEREST
        EXPENSE**
  Interest
        expense in the three months ended June
        30 ,
        2005
        increased 141.4% to approximately $280,000 from approximately $116,000 in
        the
        three months ended June
        30 ,
        2004.
        The increase was primarily related to higher outstanding borrowings during
        the
        three months ended June
        30 ,
        2005,
        and the amortization of $150,000 of loan origination fees during the three
        months ended June
        30 ,
        2005
        compared to amortization of $24,000 of loan fees related to a prior line
        of
        credit during the three months ended June
        30 ,
        2004.
        The amount of interest expense for the three months ended June 30, 2005 reflects
        an offset of $37,000 of interest income earned on bank balances during the
        period. No interest income was earned during the three months ended June
        30,
        2004.
 
 **INCOME
        TAX EXPENSE (BENEFIT)**
  The
        provision for federal, state and local income tax is an expense of $21,000
        for
        the three months ended June 30, 2005 compared to a benefit of $527,000 for
        the
        three months ended June
        30 ,
        2004.
        The $21,000 expense relates to state franchise taxes that are not determined
        based on net income. Any provision for federal and state tax benefits due
        to our
        loss for the three months ended June 30, 2005 would be offset by an equal
        increase in a valuation allowance. **** We
        established this allowance because, in light of our history, including our
        losses following our merger in February 2004, there is uncertainty under
        generally accepted accounting principles as to whether we will have future
        income against which we can offset our losses to reduce our tax expense in
        future periods.
 
 **NET
        LOSS**
  As
        a
        result of the items discussed above there was a net loss of approximately
        $2.9
        million in the three months ended June
        30 ,
        2005
        compared with a net loss of approximately $1.4 million in the three months
        ended June
        30 ,
        2004.
  **SIX
        MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004**
  **REVENUES**
 
 Revenues
        increased $4.3 million or 14.3% to approximately $34.3 million in the six
        months
        ended June
        30 ,
        2005
        from approximately $30.0 million in the six months ended June
        30 ,
        2004.
        The increase was primarily a result of increases of $3.4 million, or 20.8%,
        in
        sales of our professional products, $600,000, or 474% in sales by our Enterprise
        Solutions Group, and $300,000, or 2.5% in sales of our retail products. The
        increase in sales of our professional products reflects increased sales to
        distributors, integrators and installers of a variety of products manufactured
        by Samsung Electronics as well as other manufacturers. Increased sales by
        our
        Enterprise Solutions Group reflects sales of our Rapid Access Security Door
        to
        the Drug Enforcement Administration.
 
 **COST
        OF REVENUES**
 
 Cost
        of
        revenues increased 14.8% to approximately $29.1 million for the six months
        ended June
        30 ,
        2005
        from approximately $25.3 million for the six months ended June
        30 ,
        2004.
        This increase was due to the increases in sales of our products, as well
        as
        increased tech support costs, warranty costs and other manufacturing costs.
 
 As
        a
        result of the changes described above in revenues and cost of revenues, gross
        profit in the six months ended June
        30 ,
        2005
        increased to approximately $5.3 million from approximately $4.7 million in
        the
        six months ended June
        30 ,
        2004.
        Gross profit as a percentage of revenues was approximately the same at 15.3%
        for
        the six months ended June
        30 ,
        2005
        compared with 15.6% for the six months ended June
        30 ,
        2004.
 
 11
 **SELLING,
        GENERAL AND ADMINISTRATIVE EXPENSES**
 
 Selling,
        general and administrative expenses increased 22.4% to approximately $8.2
        million in the six months ended June
        30 ,
        2005
        from approximately $6.8 million in the six months ended June
        30 ,
        2004.
 
 **Sales
        and Marketing:** Sales
        and
        marketing expenses increased 67.9% to approximately $4.7 million in the six
        months ended June
        30 ,
        2005
        from approximately $2.8 million in the six months ended June
        30 ,
        2004.
        The increase was primarily due to (i) increased salaries and selling expenses
        amounting to $352,000 directly related to staffing our Enterprise Solutions
        Group, (ii) a decrease of $217,000 in reimbursements for marketing expenses
        from
        our principal supplier as a result of decreased purchases of their products,
        (iii) additional sample and demo expense of $225,000, and (iv) costs of
        approximately $435,000 related to a licensing agreement for a new Network
        Video
        System which was entered into January 1, 2005.
 
 **General
        and Administrative:** General
        and administrative expenses decreased 12.5% to approximately $3.5 million
        in the
        six months ended June
        30 ,
        2005
        from approximately $4.0 million in the six months ended June
        30 ,
        2004.
        The decreased general and administrative expense was due to a decrease of
        approximately $300,000 in administrative staff salaries, and a decrease of
        approximately $340,000 in provisions for doubtful accounts
        receivable.
  **INTEREST
        EXPENSE**
 
 Interest
        expense in the six months ended June
        30 ,
        2005
        increased 92.6% to approximately $393,000 from approximately $204,000 in
        the six
        months ended June
        30 ,
        2004.
        The increase was primarily related to higher outstanding borrowings during
        the
        three months ended June
        30 ,
        2005,
        and the amortization of $300,000 of loan origination fees during the six
        months
        ended June
        30 ,
        2005
        compared to amortization of $50,000 of loan fees related to a prior line
        of
        credit during the six months ended June
        30 ,
        2004.
        The amount of interest expense for the six months ended June 30, 2005 reflects
        an offset of $97,000 of interest income earned on bank balances during the
        period compared to $0 earned during the six months ended June 30,
        2004.
 
 **INCOME
        TAX EXPENSE (BENEFIT)**
 
 The
        provision for federal, state and local income tax is an expense of $23,000
        for
        the six months ended June 30, 2005 compared to a benefit of $633,000 for
        the six
        months ended June
        30 ,
        2004.
        The $23,000 expense relates to state franchise taxes that are not determined
        based on net income. Any provision for federal and state tax benefits due
        to our
        loss for the six months ended June 30, 2005 would be offset by an equal increase
        in a valuation allowance. **** We
        established this allowance because, in light of our history, including our
        losses following our merger in February 2004, there is uncertainty under
        generally accepted accounting principles as to whether we will have future
        income against which we can offset our losses to reduce our tax expense in
        future periods.
 
 **NET
        LOSS**
 
 As
        a
        result of the items discussed above there was a net loss of approximately
        $3.4
        million in the six months ended June
        30 ,
        2005
        compared with a net loss of approximately $1.6 million in the six months
        ended June
        30 ,
        2004.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 Historically,
        we have funded our operations primarily through cash generated from operations
        as well as borrowings under secured revolving credit facilities. On May 27,
        2004, we closed a $15 million convertible debt financing with Laurus Master
        Fund, Ltd. under which we were provided with a $5 million term loan and a
        $10
        million accounts receivable loan facility. At closing, we borrowed $5 million
        under the term loan and $10 million under the receivable facility, and used
        $10,016,000 of the proceeds to repay in full the indebtedness outstanding
        under
        our revolving credit agreement with Comerica Bank. Additional proceeds of
        the
        financing were used to increase working capital, pay closing fees to Laurus
        in
        the aggregate amount of $617,500, and pay a finder's fee in the amount of
        $800,000. As part of the transaction, Laurus was also issued a seven-year
        warrant to purchase 940,000 shares of our Common Stock at a price of $3.50
        per
        share. We issued a similar warrant to purchase 94,000 shares of Common Stock
        to
        the finder at a price of $3.50 per share. Borrowings under the Laurus financing
        are secured by all of our assets.
  12
 The
        term
        loan is evidenced by a Secured Convertible Term Note and, subject to monthly
        adjustments as set forth below, bears interest at an initial rate per annum
        equal to the prime rate (as reported in the Wall Street Journal), plus two
        percent, subject to a floor of six percent. Interest on the term loan is
        payable
        monthly. Amortizing payments of principal on the term loan commenced September
        1, 2004. Remaining monthly payments are set forth in the table
        below.
 Period
                
                Principal
                    AmountJune
                    2005 through May 2006
                
                $150,000
                    per monthJune
                    2006 through April 2007
                
                $190,000
                    per monthMay
                    2007
                
                $
                    435,000
  The
        interest rate under the Term Note is subject to downward adjustment at the
        end
        of each month as follows. If at the end of the applicable month we have
        registered the shares of Common Stock underlying the Term Note with the SEC,
        interest payable on the term loan will be adjusted downward by 200 basis
        points
        (two percent) for each incremental 25 percent increase in the market price
        of
        our Common Stock, at the end of the month, in excess of the conversion price
        under the Term Note.
  Amounts
        outstanding under the Term Note are convertible into Common Stock at Laurus's
        option at a conversion price initially equal to $2.70 per share, and currently
        equal to $1.91 per share. In addition, subject to (i) having an effective
        registration statement with respect to the shares of Common Stock underlying
        the
        Term Note, and (ii) limitations based on trading volume of the Common Stock,
        scheduled principal and interest payments under the Term Note will be made
        in
        shares of Common Stock valued at the conversion price. Prepayments under
        the
        Term Note are subject to a premium in the amount of 20% of the principal
        being
        prepaid.
  Subject
        to monthly adjustments as set forth below, borrowings under the receivable
        facility bear interest at an initial rate per annum equal to the prime rate
        minus two percent. The interest rate under the receivable facility is subject
        to
        downward adjustment at the end of each month in the same manner as provided
        for
        under the Term Note. If the market price of Common Stock is below the conversion
        price at the end of a month, the interest rate under the receivable facility
        will be reset to equal the prime rate plus two percent. The receivable facility
        terminates, and borrowings thereunder become due, on May 27, 2007.
  Amounts
        outstanding under the receivable facility are convertible to Common Stock
        at
        Laurus's option at a conversion price initially equal to $3.38 per share,
        and
        currently equal to $2.22 per share. To the extent we repay loans outstanding
        under the receivable facility and/or Laurus converts loans under the receivable
        facility into Common Stock, we may reborrow or make additional borrowings
        under
        the receivable facility, provided that aggregate loans outstanding under
        the
        receivable facility at any time may not exceed the lesser of $10 million
        or a
        borrowing base equal to the sum of 90% of "eligible accounts" plus 60% of
        "eligible inventory" (with borrowings based on eligible inventory limited
        to
        $3.5 million). Prior to an amendment to the receivable facility entered into
        in
        June 2005, borrowings based on eligible inventory had been limited to $2.0
        million.
  The
        conversion prices under the Term Note and the receivable facility are subject
        to
        equitable adjustment for stock splits, stock dividends and similar events,
        and
        "weighted average" adjustment for future stock issuances (other than stock
        issuances in specifically excepted transactions) in accordance with a formula
        specified under our agreements with Laurus.
  From
        time
        to time we deposit cash collateral with financial institutions to secure
        letters
        of credit issued to vendors to purchase products. At June 30, 2005, we had
        no
        letters of credit outstanding.
  On
        December 27, 2004, we completed a private placement of approximately 22,620,000
        shares of Common Stock at a price of $1.50 per share, for aggregate gross
        consideration of $33.9 million. Net
        cash
        proceeds were approximately $31.5 million after compensation to a financial
        advisor and other costs of the placement. Approximately $4.7 million of the
        proceeds were used to repay borrowings from Laurus, and $1.15 million of
        the
        proceeds were used to repay notes issued in an October 2004 bridge financing.
        Pursuant to a Settlement Agreement between us and Mr. Teitelbaum entered
        into in
        October 2004, in January 2005 we used an additional $10 million of the net
        proceeds of the private placement to repurchase 6,666,667 shares of Common
        Stock
        from William A. Teitelbaum, a stockholder of the Company.
  13
 At
        June
        30, 2005, we had cash and cash equivalents of approximately $5.2 million,
        working capital of approximately $22.1 million, an outstanding balance of
        $4.2
        million under the Laurus Term Loan, and outstanding accounts receivable loans
        from Laurus of approximately $9.2 million, with additional borrowing
        availability under such facility of approximately $800,000. In comparison,
        at
        December 31, 2004, we had cash and cash equivalents of approximately $13.4
        million, working capital of approximately $21.7 million, an outstanding balance
        of $4.7 million under the Laurus Term Loan, and outstanding accounts receivable
        loans from Laurus of approximately $5.5 million, with additional borrowing
        availability under such facility of approximately $3.9 million.
  Cash
        decreased from $13.4 million at December 31, 2004 to $5.2 million at June
        30,
        2005 primarily as a result of (i) an increase in inventory, from $12.6 million
        at December 31, 2004 to $16.3 million at June 30, 2005 resulting from increased
        purchases we made of high volume selling products in connection with the
        relocation and closing of the production facilities of our principal
        manufacturer, (ii) a decrease in accounts payable from $11.3 million at December
        31, 2004 to $9.4 million at June 30, 2005, primarily as a result of cash
        payments we made to reduce our obligations to Samsung in accordance with
        the
        terms of our distribution agreement, and (iii) an increase in accounts
        receivable from $8.3 million at December 31, 2004 to $10.3 million at June
        30,
        2005.
  Management
        believes that the net proceeds from the private placement we completed in
        December 2004 together with cash generated from operations and borrowings
        available under our agreements with Laurus, will be sufficient to meet our
        cash
        requirements for calendar 2005. The Company is taking steps both to reduce
        inventory and to more actively pursue the collection of outstanding accounts
        receivable. Further, the Company intends to continue to monitor its cost
        levels,
        and where appropriate, make further reductions in general and administrative
        expenses. These steps may result in an improved financial condition in future
        periods, including increased cash balances available to fund the Company’s
        operations. However, there can be no assurance that the Company will be
        profitable in any future period or successful in its cash management plans.
  **Item
        3. Controls and Procedures.**
  Nazzareno
        Paciotti, our Chief Executive and Chief Financial Officer has concluded,
        based
        on his evaluation as of June 30, 2005, that our disclosure controls and
        procedures are effective to reasonably ensure that information required to
        be
        disclosed by us in the reports we file or submit under the Securities Exchange
        Act of 1934, as amended, is recorded, processed, summarized and reported
        within
        the time periods specified in the SEC’s rules and forms.
  There
        were no significant changes in our internal controls over financial reporting
        that occurred during our first fiscal quarter that has materially affected,
        or
        is reasonably likely to materially affect, our internal control over financial
        reporting.
  **PART
        II. OTHER INFORMATION**
  **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
  In
        April,
        2005 the Company issued 1,077,844 shares of Common Stock to Thomas Wade,
        a
        former officer of the Company in connection with his exercise of an option
        to
        purchase 1,975,020 shares of Common Stock at a price of $.3185 per share.
        The
        exercise price was paid in shares of Common Stock. The transaction was exempt
        from registration under Section 4(2) of the Securities Act.
  14
 **Item
        6. Exhibits.**
  Number
              Description31
              Certification
                  of Nazzareno Paciotti, Chief Executive Officer and Chief Financial
                  Officer
                  of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a)
                  of the
                  Securities Exchange Act of 1934, as amended.32
              Certification
                  of Nazzareno Paciotti, Chief Executive Officer and Chief Financial
                  Officer
                  of the Registrant, pursuant to 18 U.S.C. §1350.
 
  15
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  **GVI
                  SECURITY SOLUTIONS, INC.**Date:
                  August 15, 2005
              By:/s/
                  Nazzareno E. PaciottiName:
                  Nazzareno E. Paciotti
                Title:
                  Chief Financial Officer
 
  16
  **EXHIBIT
        INDEX**
  Number
              Description31
              Certification
                  of Nazzareno Paciotti, Chief Executive Officer and Chief Financial
                  Officer
                  of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a)
                  of the
                  Securities Exchange Act of 1934, as amended.32
              Certification
                  of Nazzareno Paciotti, Chief Executive Officer and Chief Financial
                  Officer
                  of the Registrant, pursuant to 18 U.S.C. §1350.
 
  17