**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 March 31, 2007




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  ̈ Accelerated
      filer  ̈ 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).  ̈ Yes x No





As
      of May
      9, 2007 there were 28,126,277 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
            
            20Item
                4.Controls
                and Procedures
            
            21**PART
                II.****OTHER
                INFORMATION**
            
            **21**Item
                2.Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            21Item
                6.Exhibits
            
            22




2


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





**GVI
      Security Solutions, Inc.**


**Condensed
      Consolidated Balance Sheets**




(In
                thousands, except share and per share
                amounts)





March
                31,
              2007
            
            December
                31,
              2006**ASSETS:**
            
            *(Unaudited)*Current
                AssetsCash
                and equivalents
            
            $
            311
            
            $
            225Accounts
                receivable, net of allowances for doubtful
              accounts
                of $532 and $558, respectively
            
            
            7,021
            
            
            7,881Inventory,
                net
            
            
            8,522
            
            
            6,416Prepaid
                and other current assets
            
            
            892
            
            
            1,324Total
                Current Assets
            
            
            16,746
            
            
            15,846Property
                and Equipment, net
            
            
            311
            
            
            383Deferred
                loan origination fee, net
            
            
            59
            
            
            209Other
                assets
            
            
            34
            
            
            34Total
                Assets
            
            $
            17,150
            
            $
            16,472**LIABILITIES
                AND STOCKHOLDERS' DEFICIENCY:**Current
                LiabilitiesAccounts
                payable
            
            $
            8,152
            
            $
            7,059Accrued
                expenses
            
            
            1,967
            
            
            2,022Capitalized
                lease obligations, current
            
            
            78
            
            
            77Senior
                term note, current
            
            
            1,469
            
            
            1,925Revolving
                credit facility
            
            
            5,361
            
            
            6,366Liabilities
                of discontinued operations
            
            
            272
            
            
            400Total
                Current Liabilities
            
            
            17,299
            
            
            17,849Capital
                lease obligations, net of current portion
            
            
            43
            
            
            63Total
                Liabilities
            
            
            17,342
            
            
            17,912Commitments
                and ContingenciesStockholders'
                DeficiencyPreferred
                stock, undesignated, $.001 par value, 3,000,000 shares authorized,
                none
                issued or outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value, 200,000,000 shares authorized, 28,126,277
                shares
              issued
                and outstanding at March 31, 2007 and 26,292,830 issued and outstanding
                at
                December 31, 2006
            
            
            28
            
            
            26Additional
                paid-in capital
            
            
            34,395
            
            
            33,309Accumulated
                deficit
            
            
            (34,615
            )
            
            (34,775
            )Total
                Stockholders' Deficiency
            
            
            (192
            )
            
            (1,440
            )Total
                Liabilities and Stockholders' Deficiency
            
            $
            17,150
            
            $
            16,472





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
              March
                31,2007
            
            2006Revenues
            
            $
            11,021
            
            $
            11,696Cost
                of Revenues
            
            
            8,059
            
            
            9,339Gross
                Profit
            
            
            2,962
            
            
            2,357Selling,
                General and Administrative Expenses
            
            
            2,447
            
            
            3,481Operating
                Income (loss)
            
            
            515
            
            
            (1,124
            )Interest
                Expense
            
            
            351
            
            
            398Income
                (loss) from continuing operations before income taxes and
              loss
                from discontinued operations
            
            
            164
            
            
            (1,522
            )Income
                Tax Expense
            
            
            4
            
            
            23Income
                (loss) from continuing operations before loss from discontinued
                operations
            
            
            160
            
            
            (1,547
            )Loss
                from discontinued operations, net of taxes
            
            
            -
            
            
            (962
            )Net
                Income (loss)
            
            $
            160
            
            $
            (2,509
            )Basic
                income (loss) per comment share:Continuing
                operations income (loss) per common share
            
            $
            0.01
            
            $
            (1.53
            )Discontinued
                operations loss per common share
            
            $
            0.00
            
            $
            (0.95
            )Net
                income (loss) per common share
            
            $
            0.01
            
            $
            (2.48
            )Weighted
                average common shares outstanding
            
            
            27,654
            
            
            1,013Diluted
                net income (loss) per common share:Continuing
                operations income (loss) per common share
            
            $
            0.00
            
            $
            (1.53
            )Discontinued
                operations loss per common share
            
            $
            0.00
            
            $
            (0.95
            )Net
                income (loss) per common share
            
            $
            0.00
            
            $
            (2.48
            )Weighted
                average common shares outstanding
            
            
            33,455
            
            
            1,013




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)**




Three
                Months Ending
              March
                31,2007
            
            2006Cash
                Flows Provided By (Used In) Operating ActivitiesNet
                Income (loss)
            
            $
            160
            
            $
            (2,509
            )Adjustments
                to Reconcile Net Income (loss) to Net Cash Provided By (Used In)
                Operating
                Activities:Loss
                from discontinued operations, net of tax
            
            
            -
            
            
            962Depreciation
                and amortization from continuingoperations
            
            
            73
            
            
            139Amortization
                of deferred loan origination fee
            
            
            150
            
            
            150Compensation
                costs and expenses for stock and options issued
            
            
            36
            
            
            257Changes
                in Assets and LiabilitiesAccounts
                receivable, net
            
            
            861
            
            
            (1,974
            )Inventory
            
            
            (2,107
            )
            
            (1,269
            )Prepaid
                and other current assets
            
            
            432
            
            
            221Accounts
                payable
            
            
            1,093
            
            
            3,051Accrued
                expenses
            
            
            (35
            )
            
            277Net
                cash provided by (used in) operating activities from continuing
                operations
            
            
            663
            
            
            (695
            )Net
                cash provided by (used in) operating activitiesof
                discontinued operations
            
            
            (128
            )
            
            250Net
                cash provided by (used in) operating activities
            
            
            535
            
            
            (445
            )Cash
                Flows Used In Investing ActivitiesPurchase
                of property and equipment
            
            
            -
            
            
            (19
            )Net
                Cash Used In Investing Activities
            
            
            -
            
            
            (19
            )Cash
                Flows Used In Financing ActivitiesIssuance
                of common stock
            
            
            1,032
            
            
            -Net
                proceeds from (repayments of) revolving credit facility
            
            
            (1,006
            )
            
            332Principal
                payments of Senior term note
            
            
            (456
            )
            
            (450
            )Principal
                payments of capitalized lease obligations
            
            
            (19
            )
            
            (45
            )Net
                Cash Used In Financing Activities
            
            
            (449
            )
            
            (163
            )Net
                increase (decrease) in cash and equivalents
            
            
            86
            
            
            (627
            )Cash
                and equivalents, beginning of period
            
            
            225
            
            
            2,981Cash
                and equivalents, end of period
            
            $
            311
            
            $
            2,354**SUPPLEMENTARY
                CASH FLOW INFORMATION**Cash
                paid for interest
            
            $
            201
            
            $
            178Cash
                paid for income taxes
            
            
            -
            
            
            2**SUPPLEMENTAL
                SCHEDULE OF NONCASH INVESTING AND****FINANCING
                ACTIVITIES**Accrued
                obligation converted to common stock
            
            $
            20
            
            $
            -




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





5


**GVI
      Security Solutions, Inc.**


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


**Three
      Months Ended March 31, 2007 and 2006**





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





**Nature
      of Business**





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




The
      Company’s customers include distributors and system integrators that specialize
      in video surveillance and security products and services, government agencies
      and private sector businesses. GVI’s technology and products are available to
      the United States Government through a General Services Administration (GSA)
      contract.





**Basis
      of Presentation**





These
      condensed consolidated financial statements should be read in conjunction with
      the Company's Annual Report on Form 10-K for the fiscal year ended December
      31,
      2006. All
      share
      and per share amounts herein have been given retroactive effect to the 1-for-50
      reverse stock split of the Company’s common stock effected in November 2006
      ( See
      Note
      4).





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





Certain
      reclassifications have been made to the 2006 financial statements for
      consistency purposes, including reclassifications of certain revenue and expense
      amounts relating to the three months ending March 31, 2006. 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 condensed consolidated financial statements include the accounts
      of
      GVI Security Solutions, Inc., and its wholly-owned subsidiaries GVI Security,
      Inc. and Rapor, Inc. All intercompany transactions, balances and profits have
      been eliminated.





**Going
      Concern Considerations**





The
      accompanying financial statements have been presented in accordance with
      generally accepted accounting principles, which assumes the continuity of the
      Company as a going concern. During the years ended December 31, 2006, 2005
      and
      2004, the Company experienced 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. The financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.





The
      Company’s operating results in 2007 will be dependent upon its ability to
      continue to provide quality products and services in sufficient volume at
      attractive prices and maintain customer loyalty. The Company will continue
      to
      implement measures to reduce operating costs, including sales and marketing
      expenses, support and other general and administrative expenses. Depending
      upon
      the Company’s ability to increase its revenues and effectively manage its
      working capital requirements, as well as the timing and rate of revenue growth
      and management’s ability to control costs, the Company may require additional
      equity or debt borrowings to finance its operations, working capital
      requirements or capital expenditure needs.




6





**Discontinued
      Operations**





In
      the
      first quarter of 2006, the Company’s board approved a plan to discontinue its
      Retail Channel business. This business was accounted for as discontinued
      operations and, accordingly, its operations are segregated in the accompanying
      condensed financial statements. In connection with the discontinuance of the
      Retail Channel business for the years ended December 31, 2006 and 2005, the
      Company wrote down assets identified with the retail business by approximately
      $2.3 million and $2.9 million, respectively, to net realizable value. The write
      down to net realizable value was based on management’s best estimates of the
      amounts expected to be realized on the disposition of all related assets and
      liabilities held for disposition from the discontinued operations. The results
      of the discontinued operations do not include any allocation of corporate
      overhead during the periods presented.





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 its
      previous alliance agreement. The Company has written off all remaining net
      assets associated with the Retail Channel business, and has accrued a remaining
      reserve of $272,000 for estimated obligations associated with completing the
      termination of this business channel.





**Revenue
      Recognition**





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





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





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





**Inventory**





Inventory
      is stated at the lower of cost (first-in, first-out method) or market and
      consists of goods held for resale and parts used for repair work. Reserves
      are
      recorded for slow-moving, obsolete, nonsaleable or unusable items based upon
      a
      product-level review, in order to reflect inventory balances at their net
      realizable value. Inventory reserve balances at March 31, 2007 and December
      31,
      2006 were approximately $2,884,000 and $2,541,000, respectively.




7


**Advertising**





Advertising
      costs are expensed as incurred. Certain advertising costs, which included
      various promotional incentives and trade show participation, for the three
      months ended March 31, 2007 and 2006 were reimbursed by Samsung in the form
      of
      marketing incentives and partial reimbursement for trade show participation.
      Advertising costs, net of reimbursements, during the three months ended March
      31, 2007 and 2006 were $34,000 and $85,000, respectively.





**Income
      Taxes**





Income
      tax expense for the three month periods ending March 31, 2007 and 2006 relate
      to
      state and local franchise taxes that are due to various states and
      municipalities in which the Company is licensed and transacts business. For
      the
      three month period ending March 31, 2007, the Company did not record any federal
      income tax liability with respect to its net income in that period due to the
      existence and availability of operating loss carry-forwards.





**Credit
      Risk Concentration**




During
      the three months ended March 31, 2007, two customers accounted for $2,164,000
      (19%) and $1,847,000 million (17%), respectively, of the Company’s continuing
      sales. During the three months ended March 31, 2006, three customers accounted
      for $1,180,000 (10%), $1,661,000 (14%) and $1,357,000 (12%), respectively,
      of
      the Company’s continuing sales. As of March 31, 2007, the two significant
      customers noted above for the three months then ended comprised $1,098,000
      (12%)
      and $1,843,000 (20%), respectively, of Company’s total outstanding accounts
      receivable balance. As of March 31, 2006, the three significant customers noted
      above for the three months then ended comprised $528,000 (5%), $1,548,000 (15%)
      and $2,250,000 (21%), respectively, of Company’s total outstanding accounts
      receivable balance.




International
      sales accounted for approximately 29%, and 26% of the Company's sales during
      the
      three months ended March 31, 2007 and 2006, respectively. Geographically, Mexico
      has become one of the Company’s major growth areas. During the three months
      ended March 31, 2007 and 2006, Mexico accounted for 7.6% and 8.6%, respectively,
      of the Company’s total sales.





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.




**Earnings
      per Share**





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





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




8





The
      following is a reconciliation of the calculation of basic and diluted earnings
      per share for the three months ended March 31, 2007 and 2006.





**Three
                months ended**
              **March
                31,****2007**
            
            **2006****Numerator**Income
                (loss) from continuing operations
            
            $
            160
            
            $
            (1,547
            )Loss
                from discontinued operations
            
            
            -
            
            
            (962
            )Net
                income, as reported
            
            $
            160
            
            $
            (2,509
            )**Denominator**Weighted
                average common shares outstanding
            
            
            27,654
            
            
            1,013Effect
                of dilutive securities:Warrants
            
            
            1,505
            
            
            -Common
                stock options
            
            
            4,296
            
            
            -Weighted
                average common shares and dilutive securities outstanding
            
            
            33,455
            
            
            1,013***Earnings
                per share - basic***Income
                (loss) from continuing operations
            
            $
            0.00
            
            $
            (1.53
            )Loss
                from discontinued operations
            
            
            -
            
            $
            (0.95
            )Net
                income, as reported
            
            $
            0.00
            
            $
            (2.48
            )***Earnings
                per share - dilutive***Income
                (loss) from continuing operations
            
            $
            0.00
            
            $
            (1.53
            )Loss
                from discontinued operations
            
            
            -
            
            $
            (0.95
            )Net
                income, as reported
            
            $
            0.00
            
            $
            (1.53
            )




Options
      and warrants to purchase approximately 49,000 and 134,000 shares,respectively,
      of common stock at various prices exceeding $15.00 per share were outstanding
      during the three months ended March 31, 2007 but were not included in the
      computation of diluted earnings per share for this period because the respective
      options' and warrant exercise price were greater than the average market price
      of the common shares during this period, and their effect would be
      anti-dilutive. Options and warrants to purchase approximately 155,000 and
      134,000 shares, respectively, of common stock at various prices were outstanding
      during the three months ended March 31, 2006 but were not included in the
      computation of diluted earnings per share for this period because the Company
      incurred a loss for this period, and their effect would be
      anti-dilutive.




**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.




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.




9





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




**Three
                Months Ended**
              **March
                31,****2007**
            
            **2006**Dividend
                yield
            
            
            -
            
            
            -Risk-free
                factors
            
            
            6.5
            %
            
            6.0
            %Volatility
                factors
            
            
            43
            %
            
            47
            %Option
                Lives in Years
            
            
            6.0
            
            
            6.0




**Adoption
      of New Accounting Policies**




June
      2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on
      EITF
      Issue No. 06-3 "How Taxes Collected From Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement (That Is, Gross versus
      Net Presentation)" ( EITF 06-3). The scope of EITF 06-3 includes any tax
      assessed by a governmental authority that is directly imposed on a
      revenue-producing transaction between a seller and a customer, and provides
      that
      a company may adopt a policy of presenting taxes either on a gross basis -
      that
      is, including the taxes within revenue - or on a net basis. For any such taxes
      that are reported on a gross basis, a company should disclose the amounts of
      those taxes for each period for which an income statement is presented if those
      amounts are significant. EITF 06-3 is effective for financial reports for
      interim periods and annual reporting periods beginning after December 15, 2006.
      The Company adopted EITF 06-3 on January 1, 2007. The Company collects various
      taxes that fall under the scope of EITF 06-3 on services provided and is
      accounting for and reporting them on a net basis.


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




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




The
      Company’s policy is to record interest and penalties on uncertain tax provisions
      as income tax expense. As of March 31, 2007, The Company has no accrued
      interest or penalties related to uncertain tax positions.





**Recent
      Accounting Pronouncements**


In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
        Financial Assets and Financial Liabilities-Including an amendment of FASB
        Statement No *. 115* ,
        (“SFAS
        159”). SFAS 159 permits entities to choose to measure many financial instruments
        and certain other assets and liabilities at fair value on an
        instrument-by-instrument basis. SFAS 159 is effective for fiscal years beginning
        after November 15, 2007. We do not believe that the adoption of this
        pronouncement will have a significant impact on our consolidated financial
        statements.




In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
      provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 provides a common definition of fair value and
      establishes a framework to make the measurement of fair value in generally
      accepted accounting principles more consistent and comparable. SFAS No. 157
      also
      requires expanded disclosures to provide information about the extent to which
      fair value is used to measure assets and liabilities, the methods and
      assumptions used to measure fair value, and the effect of fair value measures
      on
      earnings. SFAS No. 157 is effective for financial statements issued in fiscal
      years beginning after November 15, 2007 and to interim periods within those
      fiscal years. The Company does not believe the adoption of SFAS No. 157 will
      have a material on its consolidated results of operations, financial position,
      or cash flows.





**NOTE
      2 ~ LAURUS CREDIT FACILITY**





On
      May
      27, 2004, the Company closed a $15 million convertible debt financing with
      Laurus Master Funds (“Laurus”) under which the Company was originally provided
      with a $5 million term loan and a $10 million revolving line of credit.
      Borrowings under the Laurus credit facility are secured by all assets of the
      Company. At March 31, 2007 and December 31, 2006, $1.5 million and $1.9 million,
      respectively, in principal was outstanding under the Term Loan and $5.4 million
      and $6.4 million, respectively, in principal was outstanding under the revolving
      line of credit. 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
      term
      loan is evidenced by a Secured 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.




Amounts
      outstanding under the Term Note were initially convertible into Common Stock
      at
      Laurus's option at a conversion price initially equal to $135.00 per share.
      As
      the market price of the stock at the date of the modification was significantly
      below the conversion price, there was no financial statement impact of the
      modification of the conversion price. In December 2004 the conversion price
      was
      reduced to $95.50 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. The revolving line of credit 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 $169.00
      per share. In December 2004 the conversion price was reduced to $111.00 under
      the terms of the anti-dilution feature of the facility. As the market price
      of
      the stock at the date of the modification was significantly below the conversion
      price, there was no financial statement impact of the modification of the
      conversion price. 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 at the time
      of
      loan origination to purchase an aggregate of 26,800 shares of the Company’s
      Common Stock was reduced from $175.00 to $30.00. 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 $7.50 from $95.50, and Laurus
      converted such amount of principal into 40,000 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 Company’s private placement transaction,
      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 are due under the Term Note for the months of January
      2007
      through November 2007, with the final payment in December 2007 of $252,000.





Accordingly,
      after giving effect to the amendments above, the remaining amortizing payments
      of principal on the Term Note are $152,083 per month through November 2007
      and a
      final payment of $252,083 due in December 2007.




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





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





Future
      minimum lease payments under noncancelable capital lease obligations at March
      31, 2007 were as follows ($ in thousands):


2007
            
            $
            622008
            
            
            532009
            
            
            12Total
                payments
            
            
            127Less
                amounts relating to interest
            
            
            7Total
                capital lease obligations
            
            
            120Less
                current portion
            
            
            77Capital
                lease obligations, noncurrent
            
            $
            43




**NOTE
      4 ~ STOCKHOLDERS’ EQUITY**





***October
      2006 Private Placement***




On
      October 6, 2006, the Company completed a $5 million private placement (excluding
      closing costs of $100,000), consisting of 100 Units at a price of $50,000 per
      unit. Each Unit consisted of 25,000 shares of Common Stock and a 6% Subordinated
      Secured Convertible Promissory Note (“Convertible Notes”) in the principal
      amount of $45,000, convertible into 225,000 shares of Common Stock at a
      conversion price equal to $.20. As a result, the Company issued 2,500,000 shares
      of common stock for $400,000 (net of closing costs of $100,000) and Convertible
      Notes in the aggregate principle amount of $4,500,000 convertible into
      22,500,000 shares of the Company’s common stock. The Company could repay the
      Convertible Notes at maturity through the issuance of common stock, so long
      as
      the market price of the common stock was no less than 150% of the conversion
      price at maturity. The Convertible Notes could not be converted into common
      stock until the Company could amend its certification of incorporation effecting
      a reverse stock split providing for a sufficient number of authorized shares
      of
      common stock to permit such conversion. On November 27, 2006, the Company
      effected a 50-for-1 reverse stock split of the Common Stock, and all of the
      Convertible Notes (including $40,463 of accrued interest) were converted to
      Common Stock.




The
      conversion price of the Convertible Notes was less than the market price of
      the
      Company’s common stock on the date of the issuance of the Convertible Notes. 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.
      The
      entire debt discount was recognized by the Company on November 27, 2006, the
      date on which the Company’s 50-for-1 reverse split was effected and the Notes
      became ultimately convertible.




As
      part
      of the transaction, the Company agreed to issue warrants to purchase an
      aggregate of 1,875,000 shares of Common Stock at a price of $.20 per share
      to a
      consultant that became a director. As a result of this agreement, the Company
      recorded deferred loan origination fees equal to the fair value of the warrant
      totaling $46,875.




11


***January
      2007 Private Placement Transaction***




On
      January 22, 2007, the Company completed a private placement of 1,713,334 shares
      of Common stock at a price of $.60 per share, totaling $1,028,000. 100,000
      of
      such shares sold were purchased by a director of the Company and its Chief
      Executive Officer.





**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 has recorded an estimate of its liability for sales
      taxes and believes any changes would not have a material effect on its financial
      condition or results of operations.





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 period
      ended December 31 are as follows ($ in thousands):




Years
                Ending December 31:
            
            Amount2007
            
            $
            2272008
            
            
            3082009
            
            
            231$
            766




***Vendor
      Agreement***





On
      October 2, 2006, the Company entered into a new Product Distribution Agreement
      (“Agreement”) with Samsung, under which the Company was granted the right to
      distribute Samsung’s complete line of professional video surveillance and
      security products in North, Central and South America (“Territory”) through
      December 31, 2010. Pursuant to the Agreement, Samsung has agreed to a limited
      non-compete in the Territory. The Agreement also provides for minimum annual
      purchase amounts of $21 million 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.
      During the three months ended March 31, 2007 and 2006, the Company purchased
      approximately $5.0 million and $2.0 million, respectively, under the
      Distributorship Agreement with Samsung.





**NOTE
      6 ~ INCOME TAXES**





The
      Company has incurred significant operating losses over the past several fiscal
      years, which have 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.





12





**NOTE
      7 ~ 2004 STOCK INCENTIVE PLAN**





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





In
      March
      2006, the Company granted to the Chief Executive Officer and Chief Financial
      Officer options to purchase a total of 75,000 shares of Common Stock exercisable
      at $8.00 to $40.00 per share. These options were not granted under a plan.
      In
      October 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
      1,881,795 shares of the Company’s Common Stock at an exercise price of $.20 per
      share vesting over a three-year period. Under the terms of the amendment, the
      two officers agreed to forfeit options to purchase an aggregate of 75,000 shares
      of common stock previously issued to them. In addition, options to purchase
      an
      aggregate of 1,640,000 shares of common stock were made available for
      distribution to other key management members at an exercise price of $.20 per
      share vesting over a three-year period. Additionally, options to purchase an
      aggregate of 30,000 shares of common stock were granted to directors. The
      director options provided for an exercise price of $.20 per share over a 10
      year
      life, and vests over a three-year period.





On
      February 14, 2007, the Company granted to three directors options to purchase
      an
      aggregate of 100,000 shares of the Company’s common stock. These options provide
      for an exercise price of $.60 per share over a 10 year life. 25% of each
      director’s options vest immediately, with the remaining 75,000 options vesting
      ratably in 12 installments of 6,250 each on the first day of each fiscal quarter
      of the Corporation commencing April 1, 2007.




A
      summary
      of the status and activity of the Company’s stock options for the three months
      ended March 31, 2007 is presented below:




Three
                Months Ended
              March
                31, 2007Shares
            
            Weighted
                Ave Exercise PriceOutstanding
                at January 1, 2007:
            
            5,498,797
            
            $1.37Granted
            
            
            300,000
            
            
            .60Exercised
            
            
            (20,000
            )
            
            .20Forfeited
            
            
            (16,578
            )
            
            92.84Outstanding
                at March 31, 2007:
            
            
            5,762,218
            
            $
            1.07Options
                Exercisable at March 31, 2007:
            
            
            1,820,625
            
            $
            2.87


The
      aggregate intrinsic values of outstanding and exercisable shares at March 31,
      2007 were approximately $5,155,000 and $1,605,000 respectively.





The
      weighted average fair value of options issued at date of grant using the fair

      value based method during the three months ended March 31, 2007 is estimated
      at
      $0.28. The total intrinsic value of options exercised during the three months
      ended March 31, 2006 was approximately $19,000.




13


The
      following table summarizes information about stock options outstanding as of
      March 31, 2007:




Outstanding
                Options
            
            Exercisable
                OptionsExercise
                Prices
            
            Shares
                Outstanding at
              March
                31, 2007
            
            Weighted-average
                Remaining Contractual Life
            
            Number
                Outstanding at
              March
                31, 2007$
            0.20
            
            
            5,413,590
            
            
            9.6
                years
            
            
            1,691,747.60
            
            
            300,000
            
            
            4.9
                years
            
            
            81,25015.93
            
            
            4,637
            
            
            6.3
                years
            
            
            4,63742.50
            
            
            2,000
            
            
            8.0
                years
            
            
            1,00075.00
            
            
            13,366
            
            
            7.8
                years
            
            
            13,366>
                130.00
            
            
            28,625
            
            
            6.9
                years
            
            
            28,6255,762,218
            
            
            9.6
                years
            
            
            1,820,625




There
      were 20,000 stock options exercised during the year three months ended March
      31,
      2007. The Company recognized compensation expense from the vesting of issued
      stock options of approximately $36,000 for the three months ended March 31,
      2007, and had estimated future compensation expense from these stock options
      of
      approximately $168,000 at March 31, 2007 which will be recognized over the
      remaining estimated weighted useful life of 35 months.





**NOTE
      8 ~ WARRANTS**





A
      summary
      of the Company’s outstanding warrants at March 31, 2007 is as
      follows:





Description
            
            Shares
            
            Approx.
                Remaining Term (Years)
            
            Exercise
                PriceLaurus
                Master Fund
            
            
            26,800
            
            
            4.3
            
            
            $30.00Laurus
                finder’s fee
            
            
            1,880
            
            
            4.2
            
            
            $175.00ESI
            
            
            60,000
            
            
            4.5
            
            
            $75.00Rapor
                shareholders
            
            
            27,079
            
            
            4.7
            
            
            $152.00Oct.
                2004 bridge financing
            
            
            15,333
            
            
            2.6
            
            
            $75.00Consultant
            
            
            3,500
            
            
            2.5
            
            
            $175.00
                - $250.00Consulting
                fee paid to director
            
            
            1,875,000
            
            
            2.5
            
            
            $0.20Other
            
            
            131
            
            
            0.7
            
            
            $390.002,009,723




**NOTE
      9 ~ SUBSEQUENT EVENT**





On
      April
      1, 2007, the Company issued a warrant to purchase 100,000 shares of common
      stock
      at a price of $.60 per share to a consultant. The warrant has a term of 5
      years.





14


**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* *;
      credit limits imposed by 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 2006 Annual Report on Form
      10-K.*




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





**THREE
      MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31,
      2006**




**NET
      REVENUES FROM CONTINUING OPERATIONS**





Net
      revenues decreased approximately $675,000, or 6% to approximately $11.0 million
      in the three months ended March 31, 2007 from approximately $11.7 million in
      the
      three months ended March 31, 2006. The overall decrease in sales was primarily
      attributable to a decrease in sales to customers in markets for which the
      Company no longer focuses, including consumer and aftermarket customers, and
      enterprise customers. Sales to consumer, aftermarket and enterprise customers
      were approximately $580,000 for the three months ended March 31, 2006, as
      compared to sales of $125,000 for the similar three month period ended March
      31,
      2007. The remaining decrease resulted from lower sales from one significant
      distribution customer during the three month period ended March 31, 2007 as
      compared to same period ended March 31, 2006 of approximately $700,000, with
      higher sales of approximately $400,000 to the Company’s remaining customers. The
      decreases in net revenues for the three months ended March 31, 2007 were
      partially offset by a reduction of approximately $100,000 in customer marketing
      and rebate obligations. This reduction was effected following management's
      determination that the actual amounts the Company would likely be required
      to
      credit customers as rebates and shared marketing expenses exceeded the amounts
      it had previous estimated for these obligations.





**COST
      OF GOODS SOLD FROM CONTINUING OPERATIONS**





Total **** cost
      of
      goods sold decreased approximately $1.1 million or 12% to approximately $8.1
      million for the three months ended March 31, 2007, from approximately $9.3
      million in the three months ended March 31, 2005. This decrease was due
      primarily to (i) lower sales of approximately $700,000 during the three month
      period ended March 31, 2007 as compared to the same period ended March 31,
      2006,
      resulting in lower costs of approximately $196,000, (ii) higher margins on
      sales
      during the three months ended March 31, 2007 as compared to the similar period
      ended March 31, 2006, resulting in lower cost of goods sold of approximately
      $800,000, and (iii) recovery of early payment discounts from core product
      vendors, primarily Samsung, totaling approximately $234,000 during the three
      months ended March 31, 2007, with no similar discounts generated during the
      same
      period ended March 31, 2006.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the three months ended March 31, 2007 increased approximately
      $428,000 to approximately $3.0 million from approximately $2.6 million for
      the
      three months ended March 31, 2006, and gross profit as a percentage of revenues
      increased to approximately 26.9% for the three months ended March 31, 2007
      compared with approximately 21.7% for the three months ended March 31,
      2006.




15


**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses decreased approximately $1.0 million,
      or
      30%, to approximately $2.5 million in the three months ended March 31, 2007
      from
      approximately $3.5 million in the three months ended March 31, 2006, as
      follows:





**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately $600,000, or 32%, to approximately
      $1.2 million in the three months ended March 31, 2007 from approximately $1.8
      million in the three months ended March 31, 2006. The decrease was
      primarily due to (i) the restructuring of our compensation arrangements with
      our
      sales force, resulting in a reduction of approximately $380,000, (ii) a decrease
      in marketing and promotional expenses, net of reimbursement from vendors, of
      approximately $90,000, (iii) a reduction in salaries and related expenses of
      approximately $70,000, and (iv) a decrease of approximately $60,000 in travel
      and other sales administration costs.





**General
      and Administrative.** General
      and administrative expenses decreased approximately $400,000, or 27%, to
      approximately $1.3 million for the three months ended March 31, 2007 from
      approximately $1.7 million for the three months ended March 31, 2006.
      The decrease in general and administrative expenses was primarily the
      result of (iii) a decrease in salaries and related expenses of approximately
      $304,000, (ii) a decreased in stock compensation expense associated with SFAS
      123R of approximately $173,000, and (iii) a decrease of approximately $57,000
      in
      depreciation expense. These decreases were offset by an increase in bad debt
      expense of approximately $106,000 for the three months ended March 31, 2007
      as
      compared to the three months ended March 31, 2006.





**INTEREST
      EXPENSE**





Net
      interest expense for the three months ended March 31, 2007 decreased 12% to
      approximately $351,000 from approximately $398,000 in the three months ended
      March 31, 2006. This decrease is a result of a lower senior term loan balance
      and average revolving line of credit balance during the three month period
      ended
      March 31, 2007 as compared to the three month period ended March 31, 2006.
      The
      lower outstanding debt balances more than offset the effect of higher interest
      rates in 2007, resulting 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**





We
      reflected a provision for federal, state and local income tax of approximately
      $3,000 for the three months ended March 31, 2007, as compared to recording
      an
      expense of approximately $23,000 for the three months ended March 31, 2006.
      Provisions for tax recorded in the three months ended March 31, 2007 and 2006
      relates to state franchise taxes that were estimated to be due in various states
      in which we are licensed and transact business.





For
      the
      three month period ending March 31, 2007, we did not record any federal income
      tax liability with respect to our net income in that period due to the
      availability of loss carry-forwards.





**DISCONTINUED
      OPERATIONS**





No
      income
      or loss from discontinued operations was reflected during the three months
      ended
      March 31, 2007 as the Company has completed its termination and exit from the
      retail market in the third quarter of 2006. Losses from discontinued operations,
      net of tax, were approximately $962,000 for the three months ended March 31,
      2006. The loss in 2006 was the result of additional retail product returns
      and
      accruals for future returns. Operating results from discontinued operations
      for
      the three months ended March 31, 2006 do not include any allocation of corporate
      overhead.





**NET
      INCOME**





As
      a
      result of the items discussed above the Company reflected net income of
      approximately $143,000 for the three months ended March 31, 2007 compared with
      a
      net loss of approximately $2.5 million for the three months ended March 31,
      2006.





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      March
      31, 2007, we had cash and equivalents of approximately $311,000, a working
      capital deficit of approximately $569,000, an outstanding balance of $1.5
      million under the Laurus term loan, and an outstanding balance of $5.4 million
      under the Laurus revolving credit facility. In comparison, at December 31,
      2006,
      we had cash and equivalents of approximately $225,000, a working capital deficit
      of approximately $2.0 million, an outstanding balance of $1.9 million under
      the
      Laurus term loan, and an outstanding balance under the Laurus revolving credit
      facility of approximately $6.4 million. Additionally, we had borrowing
      availability of approximately $2.3 million at March 31, 2007, as compared with
      borrowing availability of $2.2 million at December 31, 2006.




16




Cash
      increased from $225,000 million at December 31, 2006 to $311,000 at March 31,
      2007 primarily as a result of (i) cash generated from operations of
      approximately $700,000, and (ii) proceeds from the sale of common stock of
      $1.0
      million. These factors were partially offset by principal payments on senior
      term and revolving line of credit obligations totaling $1.6 million during
      the
      three months ended March 31, 2007.




Our
      credit facility with Laurus matures December 31, 2007, Accordingly, at both
      December 31, 2006 and March 31, 2007, we have reflected the remaining senior
      term note balance and working capital revolver as current liabilities. We are
      currently in discussions with Laurus, as well as other potential lenders, with
      regard to the extension and/or replacement of this credit facility. We believe
      that we will be able to obtain additional financing on acceptable or similar
      terms; however, there can be no assurance whether we will be able to do
      so.




In
      October 2006 and January 2007, we raised $6,028,000 in aggregate gross proceeds
      from the private placement of common stock and convertible notes. We may need
      to
      raise additional capital in the future to finance our operations; however,
      there
      can be no assurance whether we will be able to do so.




**January
      2007 Private Placement Transaction**





On
      January 22, 2007 we completed a private placement of 1,713,334 shares of common
      stock at a price of $.60 per share for an aggregate gross consideration of
      $1,028,000. The purchasers of the private placement consisted of a group of
      twelve “accredited investors”, including a director of ours who purchased 83,333
      shares of Common Stock, and our Chief Executive Officer, who purchased 16,667
      shares of Common Stock. The proceeds from the private placement were used for
      working capital and general corporate purposes. Because the shares were sold
      directly by us to the purchasers in the placement, we did not pay any placement
      agent fees or commissions in connection with the private placement.




The
      securities issued in the private placement were sold to persons reasonably
      believed to be accredited investors, without public solicitation or advertising,
      and the certificates evidencing the Common Stock issued in the private placement
      will be endorsed with appropriate restrictive legends. Accordingly, the sale
      of
      the securities in the private placement was exempt from registration under
      Section 4(2) of the Securities Act of 1933, as amended and/or Rule 506 of
      Regulation D promulgated thereunder.




**Laurus
      Credit Facility**




On
      May
      27, 2004, we closed a $15 million convertible debt financing with Laurus Master
      Fund, Ltd. under which we were originally provided with a $5 million term loan
      and a $10 million revolving line of credit. Borrowings under the Laurus credit
      facility are secured by all of our assets. At March 31, 2007 and December 31,
      2006, $1.5 million and $1.9 million, respectively, in principal was outstanding
      under the Term Loan and $5.3 million and $6.3 million, respectively, in
      principal was outstanding under the revolving line of credit. 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 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.




Amounts
      outstanding under the Term Note were initially convertible into Common Stock
      at
      Laurus's option at a conversion price initially equal to $135.00 per share.
      As
      the market price of the stock at the date of the modification was significantly
      below the conversion price, there was no financial statement impact of the
      modification of the conversion price. In December 2004 the conversion price
      was
      reduced to $95.50 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. The revolving line of credit terminates, and
      borrowings thereunder become due, on December 31, 2007.




17





Amounts
      outstanding under the revolving credit facility were initially convertible
      to
      Common Stock at Laurus's option at a conversion price initially equal to $169.00
      per share. In December 2004 the conversion price was reduced to $111.00 under
      the terms of the anti-dilution feature of the facility. As the market price
      of
      the stock at the date of the modification was significantly below the conversion
      price, there was no financial statement impact of the modification of the
      conversion price. 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 at the time
      of
      loan origination to purchase an aggregate of 26,800 shares of the Company’s
      Common Stock was reduced from $175.00 to $30.00. 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 $7.50 from $95.50, and Laurus
      converted such amount of principal into 40,000 shares of the our 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, we recorded an interest charge of approximately $76,000 in the second
      quarter of 2006. In addition, we 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 Company’s private placement transaction,
      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 are due under the Term Note for the months of January
      2007
      through November 2007, with a final payment of $252,000 due in December 2007.





We
      will
      not be able to repay our obligations to Laurus at maturity unless we receive
      replacement financing or extend our current financing. There can be no assurance
      that we will be able to obtain such financing.





**Going
      Concern Considerations**





As
      a
      result of our losses from operations and limited capital resources, our
      independent auditors have included an explanatory paragraph in their report
      on
      our financial statements for the years ended
      December 31, 2006, 2005 and 2004, indicating
      there is substantial doubt about our ability to continue as a going concern.
      The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty. During
      the years ended December 31, 2006, 2005 and 2004, we experienced 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. Although
      we
      generated net income and positive cash flow in our first quarter ended March
      31,
      2007, there can be no assurance that we will continue to do so. If we are not
      able to sustain our profitability in the near term we may need to raise
      additional capital in the near term to finance our operations and sustain our
      business model. We may not be able to obtain additional financing on acceptable
      terms, or at all. In addition, any financing we obtain in the future may result
      in dilution to our existing stockholders.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




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




18





**Revenue
      Recognition**





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





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





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





**Inventory**





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





**Advertising**





Advertising
      costs are expensed as incurred. Certain advertising costs, which includes
      various promotional incentives and trade show participation, are reimbursed
      by
      Samsung in the form of marketing incentives and partial reimbursement for trade
      show participation.





**Long-Lived
      Assets**




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




19




**Income
      Taxes**




We
      estimate and record a quarterly income tax provision in accordance with the
      expected effective annual tax rate. As the year progresses, we continually
      refine our estimate based upon actual events and earnings during the year.
      This
      process may result in a change to our expected effective tax rate for the year.
      When this occurs, we adjust income tax expense during the quarter in which
      the
      change in estimate occurs so that the year-to-date provision equals the expected
      effective annual tax rate.




For
      the
      three month periods ended March 31, 2007 and 2006, income tax expense relates
      primarily to state and local franchise taxes that are due to various states
      and
      municipalities in which the Company is licensed and transacts business. During
      the three month period ending March 31, 2007, we did not record any federal
      income tax liability with respect to our earnings in that period due to the
      existence and availability of operating loss carry-forwards




**Stock-Based
      Compensation**




In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards 123R, “Share-Based Payment”. This statement
      requires that the cost resulting from all share-based payment transactions
      be
      recognized in the financial statements. This statement establishes fair value
      as
      the measurement objective in accounting for share-based payment arrangements
      and
      requires all entities to apply a fair-value based measurement method in
      accounting for share-based payment transactions with employees except for equity
      instruments held by employee share ownership plans. Effective January 1,
      2006, we adopted the fair value recognition provisions of SFAS 123R, using
      the
      modified prospective method. Under this method, the provisions of SFAS 123R
      apply to all awards granted or modified after the date of adoption and all
      previously granted awards not yet vested as of the date of adoption.




Determining
      the appropriate fair value model and calculating the fair value of stock-based
      payment awards require the input of highly subjective assumptions, including
      the
      expected life of the stock-based payment awards and stock price volatility.
      We
      use the Black-Scholes option-pricing model to value compensation expense. The
      assumptions used in calculating the fair value of stock-based payment awards
      represent management’s best estimates, but the estimates involve inherent
      uncertainties and the application of management judgment. As a result, if
      factors change and we use different assumptions, our stock-based compensation
      expense could be materially different in the future (see Notes 1 and 7 to the
      Condensed Consolidated Financial Statements for a further discussion on
      stock-based compensation).




**New
      Accounting Pronouncements**




June
        2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on
        EITF
        Issue No. 06-3 "How Taxes Collected From Customers and Remitted to Governmental
        Authorities Should Be Presented in the Income Statement (That Is, Gross versus
        Net Presentation)" ( EITF 06-3). The scope of EITF 06-3 includes any tax
        assessed by a governmental authority that is directly imposed on a
        revenue-producing transaction between a seller and a customer, and provides
        that
        a company may adopt a policy of presenting taxes either on a gross basis
        - that
        is, including the taxes within revenue - or on a net basis. For any such
        taxes
        that are reported on a gross basis, a company should disclose the amounts
        of
        those taxes for each period for which an income statement is presented if
        those
        amounts are significant. EITF 06-3 is effective for financial reports for
        interim periods and annual reporting periods beginning after December 15,
        2006.
        The Company adopted EITF 06-3 on January 1, 2007. The Company collects various
        taxes that fall under the scope of EITF 06-3 on services provided and is
        accounting for and reporting them on a net basis.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      amendment of FASB Statement No. 115* ,
      (“SFAS
      159”). SFAS 159 permits entities to choose to measure many financial instruments
      and certain other assets and liabilities at fair value on an
      instrument-by-instrument basis. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007. We do not believe that the adoption of this
      pronouncement will have a significant impact on our consolidated financial
      statements.




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, *Fair
      Value Measurements* ,
      (“SFAS
      157”) which defines fair value, establishes a framework for measuring fair value
      in accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. SFAS 157 is effective for fiscal
      years beginning after November 15, 2007. We are currently evaluating the
      impact of adopting SFAS 157 on our consolidated financial statements.




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




Foreign
      Currency Exchange Risk





Our
      results of operations and cash flows are not subject in any material
      respect **** to
      fluctuations due to changes in foreign currency exchange rates. We do not
      currently have any foreign currency hedging contracts in place, nor did we
      enter
      into any such contracts during the three months ended March 31, 2007. To date,
      exchange rate fluctuations have had little impact on our operating results
      and
      cash flows.




20





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




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




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




**PART
      II. OTHER INFORMATION**





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




On
      February 5, 2007, in a transaction exempt from registration under Section 4(2)
      of the Securities Act, we issued 100,000 shares of Common Stock to a former
      employee in satisfaction of $20,000 of remaining severance obligations owed
      by
      us to that former employee.




On
      March
      1, 2007, in a transaction exempt from registration under Section 4(2) of the
      Securities Act, we issued 20,000 shares of Common Stock for $4,000 to a former
      employee upon her exercise of a stock option previously issued to
      her.




21


**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




22


**SIGNATURES**




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


**GVI
                SECURITY SOLUTIONS, INC.**Date:
                May 11, 2007
            By:
            /s/
              Joseph RestivoName:
                Joseph Restivo
              Title:
                Chief Financial Officer





23


**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





24