**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 June 30, 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, Former Address, and Former Fiscal Year, 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 o
      No




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


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




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


oYes   x
      No




As
      of
      August 10, 2007 there were 28,147,107 shares of the registrant’s common stock
      outstanding.







**GVI
      Security Solutions, Inc.**


**FORM
      10-Q**


**TABLE
      OF CONTENTS**


**PART
                      I. FINANCIAL INFORMATION**
                  3Item
                      1. Financial Statements.
                  3Item
                      2. Management’s Discussion and Analysis of Financial Condition and Results
                      of Operations
                  16Item
                      3. Quantitative and Qualitative Disclosures About Market
                      Risk
                  24Item
                      4. Controls and Procedures.
                  24**PART
                      II. OTHER INFORMATION**
                  25Item
                      6. Exhibits.
                  25





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)





June
                30,
              2007
              (Unaudited)
            
            
            December
                31,
              2006**ASSETS**Current
                AssetsCash
            
            $
            522
            
            $
            225Accounts
                receivable, net
            
            
            8,082
            
            
            7,881Inventory
            
            
            7,768
            
            
            6,416Prepaid
                and other current assets
            
            
            1,374
            
            
            1,324Total
                Current Assets
            
            
            17,746
            
            
            15,846Property
                and Equipment, net
            
            
            249
            
            
            383Deferred
                loan origination fee, net
            
            
            -
            
            
            209Other
                assets
            
            
            34
            
            
            34Total
                Assets
            
            $
            18,029
            
            $
            16,472**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                LiabilitiesAccounts
                payable
            
            $
            6,023
            
            $
            7,059Accrued
                expenses
            
            
            2,171
            
            
            2,022Capitalized
                lease obligations, current
            
            
            79
            
            
            77Senior
                term note
            
            
            1,012
            
            
            1,925Revolving
                credit facility
            
            
            8,335
            
            
            6,366Liabilities
                of discontinued operations
            
            
            182
            
            
            400Total
                Current Liabilities
            
            
            17,802
            
            
            17,849Capital
                lease obligations, net of current portion
            
            
            23
            
            
            63Total
                Liabilities
            
            
            17,825
            
            
            17,912Commitments
                and ContingenciesStockholders'
                Equity (Deficit)Preferred
                stock, undesignated, $.001 par value, 3,000,000 shares authorized,
                none
                issued or outstanding
            
            
            -
            
            
            -Common
                stock, $.001 par value, 200,000,000 shares authorized; 28,147,107
                shares
                issued and outstanding at June 30, 2007 and 26,292,830 shares issued
                and
                outstanding at December 31, 2006
            
            
            28
            
            
            26Additional
                paid-in-capital
            
            
            34,482
            
            
            33,309Accumulated
                deficit
            
            
            (34,306
            )
            
            (34,775
            )Total
                Stockholders' Equity (Deficit)
            
            
            204
            
            
            (1,440
            )Total
                Liabilities and Stockholders' Equity (Deficit)
            
            $
            18,029
            
            $
            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 figures)





Three
                Months Ended June 30
            
            Six
                Months Ended June 302007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            12,273
            
            $
            11,155
            
            $
            23,294
            
            $
            22,851Cost
                of Revenues
            
            
            8,881
            
            
            8,713
            
            
            16,940
            
            
            17,928Gross
                Profit
            
            
            3,392
            
            
            2,442
            
            
            6,354
            
            
            4,923Selling,
                General and Administrative Expenses
            
            
            2,804
            
            
            4,448
            
            
            5,251
            
            
            8,057Operating
                Income (Loss)
            
            
            588
            
            
            (2,006
            )
            
            1,103
            
            
            (3,134
            )Interest
                Expense
            
            
            261
            
            
            170
            
            
            611
            
            
            567Income
                (loss) from continuing operations before income taxes and loss on
                discontinued operations
            
            
            327
            
            
            (2,176
            )
            
            492
            
            
            (3,701
            )Income
                Tax Expense
            
            
            19
            
            
            23
            
            
            23
            
            
            46Income
                (loss) from continuing operations before loss from discontinued
                operations
            
            
            308
            
            
            (2,199
            )
            
            469
            
            
            (3,747
            )Loss
                from discontinued operations, net of taxes
            
            
            -
            
            
            (2,288
            )
            
            -
            
            
            (3,250
            )Net
                Income (loss)
            
            $
            308
            
            $
            (4,487
            )
            $
            469
            
            $
            (6,997
            )Basic
                income (loss) per common share:Continuing
                operations income (loss) per common share
            
            $
            0.01
            
            $
            (2.15
            )
            $
            0.02
            
            $
            (3.67
            )Discontinued
                operations loss per common share
            
            $
            0.00
            
            $
            (2.24
            )
            $
            0.00
            
            $
            (3.18
            )Net
                income (loss) per common share
            
            $
            0.01
            
            $
            (4.39
            )
            $
            0.02
            
            $
            (6.85
            )Weighted
                average common shares outstanding
            
            
            28,126
            
            
            1,022
            
            
            27,900
            
            
            1,021Diluted
                net income (loss) per common share:Continuing
                operations income (loss) per common share
            
            $
            0.01
            
            $
            (2.15
            )
            $
            0.01
            
            $
            (3.67
            )Discontinued
                operations loss per common share
            
            $
            0.00
            
            $
            (2.24
            )
            $
            0.00
            
            $
            (3.18
            )Net
                income (loss) per common share
            
            $
            0.01
            
            $
            (4.39
            )
            $
            0.01
            
            $
            (6.85
            )Weighted
                average common shares outstanding
            
            
            33,736
            
            
            1,022
            
            
            33,564
            
            
            1,021




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)





Six
                Months Ending June 302007
            
            
            2006Cash
                Flows Used In Operating ActivitiesNet
                Income (Loss)
            
            $
            469
            
            $
            (6,997
            )Adjustments
                to Reconcile Net Income (Loss) to Net Cash Used
              In
                Operating ActivitiesLoss
                from discontinued operations, net of tax
            
            
            -
            
            
            3,250Depreciation
                and amortization from continuingoperations
            
            
            135
            
            
            268Amortization
                of deferred loan origination fee
            
            
            209
            
            
            300Compensation
                costs and expenses of common stock warrants and options
                issued
            
            
            119
            
            
            555Changes
                in Assets and LiabilitiesAccounts
                receivable
            
            
            (201
            )
            
            (515
            )Inventory
            
            
            (1,353
            )
            
            (2,865
            )Refundable
                income tax receivable
            
            
            -
            
            
            643Prepaid
                and other current assets
            
            
            (51
            )
            
            425Accounts
                payable
            
            
            (1,036
            )
            
            3,488Accrued
                expenses
            
            
            169
            
            
            459Net
                cash used in operating activities from continuing
                operations
            
            
            (1,540
            )
            
            (989
            )Net
                  cash (used in) provided by operating activities of discontinued
                  operations
            
            
            (218
            )
            
            435Net
                cash used in operating activities
            
            
            (1,758
            )
            
            (554
            )Cash
                Flows Used in Investing ActivitiesPurchase
                of property and equipment
            
            
            -
            
            
            (45
            )Net
                Cash Used in Investing Activities
            
            
            -
            
            
            (45
            )Cash
                Flows Provided By (Used In) Financing ActivitiesNet
                proceeds from revolving credit facility
            
            
            1,969
            
            
            79Issuance
                of common stock
            
            
            1,036
            
            
            -Principal
                payments of term note
            
            
            (912
            )
            
            (850
            )Principal
                repayments of capitalized lease obligations
            
            
            (38
            )
            
            (81
            )Net
                Cash Provided By (Used In) Financing Activities
            
            
            2,055
            
            
            (852
            )Net
                Increase (Decrease) in Cash
            
            
            297
            
            
            (1,451
            )Cash,
                Beginning of Period
            
            
            225
            
            
            3,284Cash,
                End of Period
            
            $
            522
            
            $
            1,833**SUPPLEMENTARY
                CASH FLOW INFORMATION**Cash
                paid for interest
            
            $
            403
            
            $
            504Cash
                paid for income taxes
            
            
            35
            
            
            2**SUPPLEMENTAL
                SCHEDULE OF NONCASH INVESTING AND****FINANCING
                ACTIVITIES**Debt
                principal payment converted to common stock
            
            $
            -
            
            $
            300Accrued
                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**


**Six
      Months Ended June 30, 2007 and 2006 (unaudited)**





**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.





**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 material inter-company 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 will require additional equity or debt financing to repay its term
      and
      revolving credit loans to Laurus Master Fund, which become due December 31,
      2007, and may also require additional capital to finance its operations, working
      capital or other capital expenditures.





**Discontinued
      Operations**





In
      the
      first quarter of 2006, the Company’s board approved a plan to discontinue its
      Retail Channel business. This business is accounted for as discontinued
      operations and, accordingly, its operations are segregated in the accompanying
      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.




6





On
      September 13, 2006, the Company entered into an agreement with its former
      distributor to the retail channel, whereby the Company transferred to this
      distributor substantially all of its remaining retail inventory in exchange
      for
      the termination of the parties’ respective remaining obligations under 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 $182,000 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 in
      accordance with Security and Exchange Commission Staff Accounting Bulletin
      (“SAB”) 104, Revenue Recognition, 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 June 30, 2007 and December
      31,
      2006 were approximately $2,557,000 and $2,541,000, respectively.





**Advertising**





Advertising
      costs are expensed as incurred. Certain advertising costs, which include various
      promotional incentives and trade show participation, for the six months ended
      June 30, 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 month period ended June 30,
      2007
      and 2006 were $258,000 and $369,000, and during the six month period ended
      June
      30, 2007 and 2006 were $290,000 and $454,000.





7


**Income
      Taxes**





Income
      tax expense for the three and six month periods ending June 30, 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 and six month periods ended June 30, 2007, the Company has not recorded
      any federal income tax liability or asset, due to the existence and availability
      of operating loss carry-forwards and has not accrued a deferred tax asset for
      the operating loss carryforward as future taxable income is currently uncertain.





**Credit
      Risk Concentration**




During
      the six months ended June 30, 2007, two customers accounted for $4,261,000
      (18%)
      and $4,434,000 (19%), respectively, of the Company’s sales. During the six
      months ended June 30, 2006, three customers accounted for $3,581,000 (16%),
      $2,877,000 (13%) and $2,438,000 (11%), respectively, of the Company’s sales. As
      of June 30, 2007, the two significant customers noted above comprised $2,130,000
      (23%) and $1,475,000 (16%), respectively, of Company’s total outstanding gross
      accounts receivable balance. As of June 30, 2006, the three significant
      customers noted above comprised $1,602,000 (16%), $779,000 (8%) and $2,668,000
      (27%), respectively, of Company’s total outstanding accounts receivable balance.





International
      sales accounted for approximately 26%, and 24% of the Company's sales during
      the
      six months ended June 30, 2007 and 2006, respectively. Geographically, Mexico
      and the South American Andean region have become significant markets for the
      Company. During the six months ended June 30, 2007 and 2006, the Mexico and
      Andean regions accounted for 18% and 17%, 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 and six months ended June 30, 2007 and
      2006.




**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Numerator**Income
                (loss) from continuing operations
            
            $
            308
            
            $
            (2,199
            )
            $
            469
            
            $
            (3,747
            )Loss
                from discontinued operations
            
            
            -
            
            $
            (2,288
            )
            
            -
            
            $
            (3,250
            )Net
                income (loss), as reported
            
            $
            308
            
            $
            (4,487
            )
            $
            469
            
            $
            (6,997
            )**Denominator**Weighted
                average common shares outstanding
            
            
            28,126
            
            
            1,022
            
            
            27,900
            
            
            1,022Effect
                of dilutive securities:Warrants
            
            
            1,487
            
            
            -
            
            
            1,490
            
            
            -Common
                stock options
            
            
            4,123
            
            
            -
            
            
            4,174
            
            
            -Weighted
                average common shares and dilutive securities outstanding
            
            
            33,736
            
            
            1,022
            
            
            33,564
            
            
            1,022***Earnings
                per share - basic***Income
                (loss) from continuing operations
            
            $
            0.01
            
            $
            (2.15
            )
            $
            0.02
            
            $
            (3.67
            )Loss
                from discontinued operations
            
            
            -
            
            
            (2.24
            )
            
            -
            
            
            (3.18
            )Net
                income (loss), as reported
            
            $
            0.01
            
            $
            (4.39
            )
            $
            0.02
            
            $
            (6.85
            )***Earnings
                per share - dilutive***Income
                (loss) from continuing operations
            
            $
            0.01
            
            $
            (2.15
            )
            $
            0.01
            
            $
            (3.67
            )Loss
                from discontinued operations
            
            
            -
            
            
            (2.24
            )
            
            -
            
            
            (3.18
            )Net
                income (loss), as reported
            
            $
            0.01
            
            $
            (4.39
            )
            $
            0.01
            
            $
            (6.85
            )




Options
      and warrants to purchase approximately 149,000 and 135,000 shares of common
      stock at various prices exceeding $0.80 per share were outstanding during the
      three and six months ended June 30, 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 7,468,000 and
      6,833,000 shares of common stock at various prices were outstanding during
      the
      three and six months ended June 30, 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.





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





9




**Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006**Dividend
                yield
            
            
            -
            
            
            -Risk-free
                factors
            
            
            6.5
            %
            
            4.7
            %Volatility
                factors
            
            
            43
            %
            
            47
            %Option
                Lives in Years
            
            
            6.0
            
            
            6.0








**Adoption
      of New Accounting Policies**




In
      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 June 30, 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 and 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 June 30, 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 impact on its consolidated results of operations, financial
      position, or cash flows.




10





**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 June 30, 2007 and December 31, 2006, $1.0 million and $1.9 million,
      respectively, in principal was outstanding under the Term Loan and $8.3 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.




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 (10.25% at June 30, 2007 and December 31, 2006, respectively),
      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.
      In
      December 2004 the conversion price was reduced to $95.50 under the terms of
      the
      anti-dilution feature of the Term Note. 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
      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 to be 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 (10.25% at June 30, 2007 and December 31, 2006,
      respectively). 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 due in December 2007 of $252,000.





11


**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 June
      30,
      2007 were as follows ($ in thousands):




2007
            
            $
            432008
            
            
            532009
            
            
            12Total
                payments
            
            
            108Less
                amounts relating to interest
            
            
            6Total
                capital lease obligations
            
            
            102Less
                current portion
            
            
            79Capital
                lease obligations, noncurrent
            
            $
            23





**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 principal 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 amendment of the Company’s 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.




12


***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 $0.60 per share, totaling $1,028,000. 100,000
      of
      such shares 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.





***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 six months ended June 30, 2007, the Company purchased approximately
      $11.9 million 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. The Company is currently performing an analysis to determine the
      utilizable net operating loss carryforwards, and believes that such
      carryforwards will be sufficient to eliminate any potential federal taxable
      income for the year ended December 31, 2007.




13




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


Three
                Months Ended
              June
                30:
            
            Six
                Months Ended
              June
                30:2007
            
            
            2006
            
            
            2007
            
            
            2006US
                Statutory tax rate - provision (benefit)
            
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %Increases
                (decreases) resulting from:State
                income taxes
            
            
            6.2
            
            
            (1.1
            )
            
            4.9
            
            
            (1.2
            )Changes
                in A/R & inventory reserves
            
            
            (42.3
            )
            
            -
            
            
            (18.1
            )
            
            -Net
                operating loss deductions
            
            
            (2.1
            )
            
            (35.0
            )
            
            (20.5
            )
            
            (35.0
            )Depreciation
            
            
            (2.6
            )
            
            -
            
            
            2.7
            
            
            -Other
                –
                net
            
            
            12.0
            
            
            -
            
            
            0.9
            
            
            -Effective
                income tax rate
            
            
            6.2
            %
            
            (1.1
            %)
            
            4.9
            %
            
            (1.2
            %)





**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 300,000 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 Company commencing April 1, 2007.




On
      May
      29, 2007, the Company granted to an employee options to purchase an aggregate
      of
      100,000 shares of the Company’s common stock. These options provide for an
      exercise price of $.95 per share over a 10 year life, commencing January 1,
      2008. 20% of the employee’s options vest January 1, 2008, with the remaining
      80,000 options vesting monthly over the following 3 year period beginning
      thereafter.




Subsequently,
      on July 2, 2007, the Company granted to an employee options to purchase an
      aggregate of 100,000 shares of the Company’s common stock. These options provide
      for an exercise price of $.80 per share over a 10 year life, commencing January
      1, 2008. 20% of the employee’s options vest January 1, 2008, with the remaining
      80,000 options vesting monthly over the following 3 year period beginning
      thereafter.





14




A
      summary
      of the status and activity of the Company’s stock options for the six months
      ended June 30, 2007 is presented below:


Six
                Months Ended
              June
                30, 2007Shares
            
            
            Weighted
              Ave
              Exercise
              PriceOutstanding
                at January 1, 2007:
            
            
            5,498,797
            
            $
            1.37Granted
            
            
            400,000
            
            
            .69Exercised
            
            
            (40,830
            )
            
            .20Forfeited
            
            
            (45,749
            )
            
            33.77Outstanding
                at June 30, 2007:
            
            
            5,812,218
            
            $
            1.07Options
                Exercisable at June 30, 2007:
            
            
            2,159,473
            
            $
            2.47








The
      aggregate intrinsic values of outstanding and exercisable options at June 30,
      2007 were approximately $3,278,000 and $1,227,000 respectively.





The
      weighted average fair value of options issued at date of grant using the fair
      value based method during the six months ended June 30, 2007 is estimated at
      $0.34. The total intrinsic value of options exercised during the six months
      ended June 30, 2007 was approximately $30,000.




The
      following table summarizes information about stock options outstanding as of
      June 30, 2007:




Outstanding
                    Options
                
                Exercisable
                    OptionsExercise
                  Prices
                
                Shares
                  Outstanding
                  at
                    June 30,
                  2007
                
                Weighted-average
                  Remaining
                  Contractual
                    Life
                
                Number
                  Outstandingat
                  June
                    30, 2007$  0.20
                
                
                5,363,590
                
                
                9.3
                    years
                
                
                2,011,346.60
                
                
                300,000
                
                
                4.7
                    years
                
                
                99,999.95
                
                
                100,000
                
                
                9.9
                    years
                
                
                -15.93
                
                
                4,637
                
                
                6.1
                    years
                
                
                4,63742.50
                
                
                2,000
                
                
                7.8
                    years
                
                
                1,50075.00
                
                
                13,366
                
                
                7.5
                    years
                
                
                13,366130.00
                
                
                28,625
                
                
                6.6
                    years
                
                
                28,6255,812,218
                
                
                9.1
                    years
                
                
                2,159,473




There
      were 40,830 stock options exercised during the six months ended June 30, 2007.
      The Company recognized compensation expense from the vesting of issued stock
      options of approximately $56,000 for the six months ended June 30, 2007, and
      had
      estimated future compensation expense from these stock options of approximately
      $192,000 at June 30, 2007 which will be recognized over the remaining estimated
      weighted useful life of 41 months.




15


**NOTE
      8 ~ WARRANTS**





A
      summary
      of the Company’s outstanding warrants at June 30, 2007 is as
      follows:





Description
            
            Shares
            
            Approx.
              Remaining
              Term
              (Years)
            
            Exercise
                PriceLaurus
                Master Fund
            
            
            26,800
            
            
            4.0
            
            $
            30.00Laurus
                finder’s fee
            
            
            1,880
            
            
            3.9
            
            $
            175.00ESI
            
            
            60,000
            
            
            4.4
            
            $
            75.00Rapor
                shareholders
            
            
            27,079
            
            
            4.4
            
            $
            152.00Oct.
                2004 bridge financing
            
            
            15,333
            
            
            2.3
            
            $
            75.00Consultants
            
            
            3,500
            
            
            2.3
            
            $
            175.00
                - $250.00Professional
                consultants
            
            
            100,000
            
            
            4.8
            
            $
            0.60Consulting
                fee paid to director
            
            
            1,875,000
            
            
            2.3
            
            $
            0.20Other
            
            
            131
            
            
            0.4
            
            $
            390.002,109,723





In
      April
      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
      commencing from the date of grant. In conjunction with the issuance of the
      grant, the Company recorded a charge to expense of approximately $63,000 to
      reflect the fair value of the warrants issued.




**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 on primary supplier; outstanding indebtedness; effective
      integration of recently acquired operations and personnel; expansion risks;
      effective internal processes and systems; the ability to attract and retain
      high
      quality employees; changes in the overall economy; rapid change in technology;
      the number and size of competitors in its markets; law and regulatory policy;
      the mix of products and services offered in the Company's target markets; and
      other risks described herein and in the Company’s 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 JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006**




**NET
      REVENUES FROM CONTINUING OPERATIONS**


Net
      revenues increased approximately $1.1 million, or 9.8% to approximately $12.3
      million in the three months ended June 30, 2007 from approximately $11.2 million
      in the three months ended June 30, 2006. The increase in net revenues was
      primarily the result of a significant decrease in professional sales returns
      in
      the second quarter of 2007 as compared with the same period in 2006, as returns
      are a component of net revenue. The decrease in professional sales returns
      of
      $1.1 million, to approximately $600,000 during the second quarter of 2007 from
      $1.7 million for the same quarter ended June 30, 2006, reflected the change
      in
      certain customer return policies as well as improved customer satisfaction
      of
      the Company’s core products.




16





**COST
      OF GOODS SOLD FROM CONTINUING OPERATIONS**


Total **** cost
      of
      goods sold increased approximately $167,000 or 2.0% to approximately $8.9
      million for the three months ended June 30, 2007, from approximately $8.7
      million in the three months ended June 30, 2006. This increase was due to higher
      sales, offset partially by (i) improved product margins, (ii) reduced product
      returns under warranty, (iii) lower net freight costs and (4) reduced inventory
      exposure from improved inventory management practices.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the three months ended June 30, 2007 increased to approximately
      $3.4
      million from approximately $2.4 for the three months ended June 30, 2006, and
      gross profit as a percentage of revenues increased to 27.6% for the three months
      ended June 30, 2007 compared with 21.9% for the three months ended June 30,
      2006.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses decreased 36.4% to approximately $2.8
      million in the three months ended June 30, 2007 from approximately $4.4 million
      in the three months ended June 30, 2006, as follows:





**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately 22% to approximately $1.4 million
      in
      the three months ended June 30, 2007 from approximately $1.8 million in the
      three months ended June 30, 2006. The decrease was primarily due to (i)
      restructuring of our compensation arrangements with our sales force, resulting
      in a reduction in commissions of $259,000, (ii) decreases of approximately
      $149,000 in sales and marketing staff salaries and related benefits, including
      the elimination of our Enterprise Sales Group in May 2006, and (iii) reduction
      in trade show expenses of approximately $182,000. These decreases were partially
      offset by increases in advertising costs, as well as various other sales and
      marketing expenses.





**General
      and Administrative.** General
      and administrative expenses decreased 46% to approximately $1.4 million for
      the
      three months ended June 30, 2007, from approximately $2.6 million for the three
      months ended June 30, 2006.  Major items resulting in the decrease in
      general and administrative expenses included (i) a reduction of approximately
      $397,000 in personnel and related costs, to approximately $773,000 in the three
      months ended June 30, 2007 from approximately $1.2 million during the quarter
      ended June 30, 2006, (ii) a decrease in bad debt expense of approximately
      $410,000, from $416,000 in the three months ended June 30, 2006 to approximately
      $6,000 in the quarter ended June 30, 2007, (iii) a decrease in professional
      fees
      of approximately $254,000, to approximately $111,000 for the three months ended
      June 30, 2007 from approximately $365,000 incurred in the comparable period
      ended June 30, 2006, and (iv) a reduction in non-cash stock compensation expense
      of approximately $214,000, from approximately $297,000 during the three months
      ended June 30, 2006 to approximately $83,000 for the three months ended June
      30,
      2007. These decreases were partially offset by increases in various other
      general and administrative expenses.





**INTEREST
      EXPENSE**





Net
      interest expense for the three months ended June 30, 2007 increased 53% to
      approximately $260,000 from approximately $170,000 in the three months ended
      June 30, 2006. The increase in the three months ended June 30, 2007 primarily
      reflects an adjustment, during the three months ended June 30, 2006, of $320,000
      of interest expense that had been accrued in prior periods as due to Laurus.
      We
      had accrued this amount following the adjustment of the interest rate under
      the
      provision of our agreements with Laurus. However, because Laurus waived our
      payment of the increased interest amount through April 30, 2006, we adjusted
      the
      amount of interest we had accrued that we were not required to pay to Laurus.
      The effects of this interest adjustment were partially offset by (i) a charge
      to
      interest expense of approximately $76,000 resulting from the reduction in the
      exercise price of warrants issued to Laurus during the three months ended June
      30, 2006, and (ii) higher deferred debt amortization, totaling $150,000 in
      the
      three months ended June 30, 2006, as compared with the comparable period ended
      June 30, 2007, where we incurred only $59,000 due to the depletion of
      unamortized debt costs at May 2007.





**INCOME
      TAX EXPENSE**





We
      recorded a provision for federal, state and local income tax of approximately
      $19,000 for the three months ended June 30, 2007, which was 17% lower than
      the
      tax expense of approximately $23,000 reflected for the three months ended June
      30, 2006. Provisions for tax recorded in the three months ended June 30, 2007
      and 2006 relate to state franchise taxes that were estimated to be due in
      various states in which we are licensed and transact business.




17





In
      October 2006, as a result of the completion of our private placement
      transaction, the investors in the private placement as a group became the
      beneficial owners of approximately 96% of the Company’s outstanding capital
      stock, triggering a change of control event. Accordingly, the actual utilization
      of net operating loss carry-forwards and other deferred tax assets for tax
      purposes may be limited annually under Section 382 of the Internal Revenue
      Code
      to a percentage of the fair market value of the Company at the date of this
      ownership change. We are currently performing an analysis to determine the
      utilizable net operating loss carryforwards; however, we believe that such
      carryforwards will be sufficient to eliminate any potential federal taxable
      income for the year ended December 31, 2007. Accordingly, for the three month
      period ending June 30, 2007, we did not record any federal income tax liability
      with respect to our net income in that period due to the availability of loss
      carry-forwards.





**DISCONTINUED
      OPERATIONS**





No
      income
      or loss from discontinued operations was reflected during the three months
      ended
      June 30, 2007 as the Company completed its termination and exit from the retail
      market in the third quarter of 2006. Losses from discontinued operations, net
      of
      tax, were approximately $2.3 million for the three months ended June 30, 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 June 30, 2006 do not include any allocation of corporate
      overhead.





**NET
      INCOME**





As
      a
      result of the items discussed above we earned net income of approximately
      $308,000 for the three months ended June 30, 2007 compared with a net loss
      of
      approximately $4.5 million for the three months ended June 30,
      2006.




**SIX
      MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30,
      200** **6**




**NET
      REVENUES FROM CONTINUING OPERATIONS**





Net
      revenues increased approximately $443,000, or 2% to approximately $23.3 million
      in the six months ended June 30, 2007 from approximately $22.9 million in the
      six months ended June 30, 2006. The increase in net revenues was primarily
      the
      result of a significant decrease in professional sales returns in the six months
      ended June 30, 2007 as compared with the same period in 2006. The decrease
      in
      professional sales returns of $1.6 million, to approximately $1.2 million during
      the six months ended June 30, 2007 from $2.8 million for the same period ended
      June 30, 2006, reflected the change in certain customer return policies as
      well
      as improved customer satisfaction of the Company’s core products.





**COST
      OF GOODS SOLD FROM CONTINUING OPERATIONS**





Total **** cost
      of
      goods sold decreased approximately $937,000, or 5% to approximately $16.9
      million for the six months ended June 30, 2007, from approximately $17.9 million
      in the six months ended June 30, 2006. This decrease was due primarily to the
      significant improvement in margins on the sale of our core products in 2007
      as
      compared to 2006. Direct margins achieved on core products during the six months
      ended June 30, 2007 improved 15%, as a result of improved gross margins
      generated from the sale of new camera and digital video recorder
      products.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the six months ended June 30, 2007 increased to approximately $6.4
      million from approximately $5.0 million for the six months ended June 30, 2006,
      and gross profit as a percentage of revenues increased to 27.3% for the six
      months ended June 30, 2007 compared with 21.8% for the six months ended June
      30,
      2006.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**





Selling,
      general, and administrative expenses decreased 34% to approximately $5.3 million
      for the six months ended June 30, 2007 from approximately $8.0 million for
      the
      six months ended June 30, 2006, as follows:




18





**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately 24% to approximately $2.6 million
      in
      the six months ended June 30, 2007 from approximately $3.4 million in the six
      months ended June 30, 2006. The decrease was primarily due to (i) the
      restructuring of our compensation arrangements with our sales force, resulting
      in a reduction in commissions of approximately $436,000, (ii) decreases of
      approximately $282,000 in sales and marketing staff salaries and related
      benefits, and (iii) a decrease of approximately $164,000 in direct advertising
      and tradeshow costs. These decreases were partially offset by increases in
      various other sales related and marketing expenses.





**General
      and Administrative.** General
      and administrative expenses decreased 42% to approximately $2.7 million for
      the
      six months ended June 30, 2007 from approximately $4.6 million for the six
      months ended June 30, 2006.  Major items resulting in the decrease of
      general and administrative expense were (i) approximately $694,000 in personnel
      termination costs during the six-month period ended June 30, 2006, for which
      only approximately $8,000 was incurred in the same period of 2007 (ii) stock
      based compensation expense of approximately $555,000 recorded due to the
      adoption of SFAS 123R effective January 1, 2006, as compared to approximately
      $55,000 reflected during the six months ended June 30, 2007, (iii) a decrease
      in
      bad debt expenses of approximately $304,000, to approximately $143,000 in the
      six months ended June 30, 2007 as compared to approximately $447,000 for the
      six
      months ended June 30, 2006, and (iv) a decrease in professional fees, including
      accounting, legal and other professional expenses, of $348,000, for the six
      months ended June 30, 2007 as compared to the same period in 2006.





**INTEREST
      EXPENSE**





Interest
      expense for the six months ended June 30, 2007 increased 8% to approximately
      $611,000 from approximately $567,000 in the six months ended June 30, 2006.
      The
      increase was due primarily to the effect of a favorable adjustment during the
      three months ended June 30, 2006 of $320,000, whereby interest expense that
      had
      been accrued in prior periods as due to our lender following the adjustment
      of
      the interest rate under provisions of our agreements was not required to be
      paid
      to Laurus. The effect of this favorable adjustment reflected in 2006 was offset
      by (i) a charge of approximately $76,000 for interest expense resulting from
      the
      reduction in the exercise price of warrants issued to Laurus during the three
      months ended June 30, 2006, (ii) higher deferred debt amortization, totaling
      $300,000 for the six months ended June 30, 2006, as compared with the same
      period ended June 30, 2007 where we recorded only $209,000 due to the depletion
      of remaining unamortized debt costs in May 2007, and (iii) lower interest
      expense in the six months ended June 30, 2007 as compared with the same period
      ended June 30, 2006 of approximately $150,000, due to lower average outstanding
      debt balances in 2007.





**INCOME
      TAX EXPENSE**





We
      recorded a provision for federal, state and local income tax of approximately
      $23,000 for the six months ended June 30, 2007, which was 50% lower than the
      tax
      expense of approximately $46,000 reflected for the six months ended June 30,
      2007. Provisions for tax recorded in the six months ended June 30, 2007 and
      2006
      relate to state franchise taxes that were estimated to be due in various states
      in which we are licensed and transact business.





In
      October 2006, as a result of the completion of our private placement
      transaction, the investors in the private placement as a group became the
      beneficial owners of approximately 96% of the Company’s outstanding capital
      stock, triggering a change of control event. Accordingly, the actual utilization
      of net operating loss carry-forwards and other deferred tax assets for tax
      purposes may be limited annually under Section 382 of the Internal Revenue
      Code
      to determine to a percentage of the fair market value of the Company at the
      date
      of this ownership change. We are currently performing an analysis to determine
      the utilizable net operating loss carryforwards; however, we believe that such
      carryforwards will be sufficient to eliminate any potential federal taxable
      income for the year ended December 31, 2007. Accordingly, for the six month
      period ending June 30, 2007, we did not record any federal income tax liability
      with respect to our net income in that period due to the availability of loss
      carry-forwards.





**DISCONTINUED
      OPERATIONS**





No
      income
      or loss from discontinued operations was reflected during the six months ended
      June 30, 2007 as the Company completed its termination and exit from the retail
      market in the third quarter of 2006. Losses from discontinued operations, net
      of
      tax, were approximately $3.3 million for the six months ended June 30, 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
      six
      months ended June 30, 2006 do not include any allocation of corporate overhead.




19




**NET
      INCOME**





As
      a
      result of the items discussed above there was a net income of approximately
      $469,000 for the six months ended June 30, 2007 compared with a net loss of
      approximately $7.0 million for the six months ended June 30, 2006.





**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      June
      30, 2007, we had cash and equivalents of approximately $522,000, a working
      capital deficit of approximately $55,000, an outstanding balance of $1.0 million
      under the Laurus term loan, and an outstanding balance of $8.3 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 $765,000 at June 30, 2007, as compared with
      borrowing availability of $2.2 million at December 31, 2006.




Cash
      increased from $225,000 at December 31, 2006 to $522,000 at June 30, 2007
      primarily as a result of (i) cash generated from operations of approximately
      $900,000, (ii) proceeds from the sale of common stock of $1.0 million, and
      (iii)
      proceeds of approximately $2.0 million from net borrowings under our revolving
      credit facility. These factors were partially offset by (i) principal payments
      on senior term note obligations totaling approximately $912,000, (ii) increases
      in other working capital accounts, including accounts receivable, inventory
      and
      accounts payable, of approximately $2.5 million, and (iii) payments for retail
      discontinued obligations of approximately $218,000, during the six months ended
      June 30, 2007.




Our
      credit facility with Laurus matures December 31, 2007. Accordingly, at both
      December 31, 2006 and June 30, 2007, we have reflected the remaining senior
      term
      note balance and working capital revolver as current liabilities.





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 will
      require additional equity or debt financing to repay our term and revolving
      credit loans to Laurus Master Fund, which become due December 31, 2007, and
      may
      also require additional capital to finance our operations, working capital
      or
      other capital expenditures. If we are unable to secure such financing, we may
      be
      required to cease operations.





**Laurus
      Financing**




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 June 30, 2007 and December 31,
      2006, $1.0 million and $1.9 million, respectively, in principal was outstanding
      under the Term Loan and $8.3 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.




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.
      In
      December 2004, the conversion price was reduced to $95.50 under the terms of
      the
      anti-dilution feature of the Term Note. 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
      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.




20




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 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.




**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 two quarters of our
      fiscal year ended December 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.




21


**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.





**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.




22




For
      the
      six month periods ended June 30, 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 six month period ended June 30, 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.




**Adoption
      of New Accounting Policies**




In
      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.
      We adopted EITF 06-3 on January 1, 2007, and accordingly collect various taxes
      that fall under the scope of EITF 06-3 on services provided, and accounting
      for
      and report them on a net basis.





Effective
      January 1, 2007, we 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 June 30, 2007, the Company does not have
      a
      liability for unrecognized tax benefits, and no adjustment was required on
      the
      adoption.




**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.




23




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 six months ended June 30, 2007. To date,
      exchange rate fluctuations have had little impact on our operating results
      and
      cash flows.





Interest
      Rate Sensitivity




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




**Item
      4. Controls and Procedures.**




Our
      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
      have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.




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**PART
      II. OTHER INFORMATION**







**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




25




**SIGNATURES**




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




**GVI
                SECURITY SOLUTIONS, INC.**Date:
                August 13, 2007
            By:
            /s/
                Joseph RestivoName:
            Joseph
                RestivoTitle:
            Chief
                Financial Officer





26


**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





27