**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**
 
 F**or
                  the transition period from to
                  .**
  **Commission
        File Number: 000-51639**
  **Argyle
        Security, Inc.**
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
              
              **20-3101079**(State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)
  **200
        Concord Plaza Suite 700 San Antonio, TX 78216**
 (Address
        of Principal Executive Offices including Zip Code)
 
 **(210)
        828-1700**
 (Registrant’s
        Telephone Number, Including Area Code)
  Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Exchange Act 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. Yes xNo
o
  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. (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). Yes oNo x
  There
        were 5,961,307 shares of the Registrant’s common stock issued and outstanding as
        of August 14, 2007.
  
 
 
 **Argyle
        Security, Inc. Index to Form 10-Q**
  **Part
                  I.**
              **Financial
                  Information**
              1Item
                  1. Consolidated Financial Statements (unaudited)
              1Consolidated
                  Balance Sheets
              1Consolidated
                  Statements of Operations
              2Consolidated
                  Statement of Stockholders’ Equity
              3Consolidated
                  Statement of Cash Flows
              4Notes
                  to Consolidated Financial Statements
              5Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              11Item
                  3. Quantitative and Qualitative Disclosures About Market Risk
              15Item
                  4. Controls and Procedures
              15Item
                  4T. Controls and Procedures
              15**Part
                  II.**
              **Other
                  Information**
              `6Item
                  1. Legal Proceedings
              16Item
                  1A. Risk Factors
              16Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              16Item
                  3. Defaults Upon Senior Securities
              17Item
                  4. Submission of Matters to a Vote of Security Holders
              17Item
                  5. Other Information
              17Item
                  6. Exhibits
              17SIGNATURES
              18
  
 
 **PART
        I - FINANCIAL INFORMATION**
 
 **ITEM
        1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**
  **Argyle
        Security Acquisition Corporation**
 (a
        development stage company)
  **Consolidated
        Balance Sheet** s
  June
                  30, 2007
                (unaudited)
              
              December
                  31,
                2006**ASSETS****Current
                  assets**:Cash
              
              $
              58,392
              
              $
              694,115Cash
                  and cash equivalents, held in trust
              
              
              30,072,533
              
              
              29,453,449Prepaid
                  expenses
              
              
              51,333
              
              
              7,333**Total
                  current assets**
              
              
              30,182,258
              
              
              30,154,897Property
                  and equipment, net
              
              
              3,815
              
              
              4,901Deferred
                  income taxes
              
              
              13,341
              
              
              27,932Deferred
                  transaction costs
              
              
              790,779
              
              
              493,583Other
                  assets
              
              
              15,970
              
              
              -**Total
                  assets**
              
              $
              31,006,163
              
              $
              30,681,313**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY****Current
                  liabilities:**Accrued
                  expenses
              
              $
              560,967
              
              $
              624,129Deferred
                  underwriting costs
              
              
              1,191,902
              
              
              1,162,183Notes
                  and accrued interest payable to related parties (net of deferred
                  financing
                  costs of $28,075)
              
              
              274,390
              
              
              -Accrued
                  income taxes
              
              
              8,364
              
              
              118,855**Total
                  current liabilities**
              
              
              2,035,623
              
              
              1,905,167Common
                  stock, subject to possible redemption - 764,627 shares at $7.50
                  per
                  share
              
              
              5,738,206
              
              
              5,738,206Deferred
                  interest attributable to common stock subject to possible redemption
                  (net
                  of taxes)
              
              
              276,906
              
              
              175,747**Stockholders’
                  Equity:**Preferred
                  stock — $.0001 par value; 1,000,000 shares authorized; 0 shares issued
                  and
                  outstanding
              
              
              -
              
              
              -Common
                  stock—$.0001 par value; 89,000,000 shares authorized; issued and
                  outstanding: 4,781,307 at June 30, 2007 and December 31, 2006 (including
                  764,627 shares of common stock subject to possible
                  redemption)
              
              
              478
              
              
              478Additional
                  paid-in capital
              
              
              22,688,787
              
              
              22,696,946Retained
                  earnings during the development stage
              
              
              266,163
              
              
              164,769**Total
                  stockholders’ equity**
              
              
              22,955,428
              
              
              22,862,193**Total
                  liabilities and stockholders’ equity**
              
              $
              31,006,163
              
              $
              30,681,313
  See
        notes
        to unaudited consolidated financial statements
 
 1
 
 **Argyle
        Security Acquisition Corporation**
 (a
        development stage company)
  **Unaudited
        Consolidated Statements of Operations**
    **For
                    the period****Three**
                
                **Three**
                
                **Six**
                
                **Six**
                
                **from
                    June 22,****Months**
                
                **Months**
                
                **Months**
                
                **Months**
                
                **2005
                    (inception)****Ended**
                
                **Ended**
                
                **Ended**
                
                **Ended**
                
                **through****June
                    30, 2007**
                
                **June
                    30, 2006**
                
                **June
                    30, 2007**
                
                **June
                    30, 2006**
                
                **June
                      30,** 2007**Operating
                    expenses**
                
                $
                229,616
                
                $
                257,743
                
                $
                520,320
                
                $
                579,449
                
                $
                1,552,552**Other
                    income and expense**Bank
                    interest
                
                $
                60
                
                $
                5,650
                
                $
                3,838
                
                $
                6,236
                
                $
                24,080Interest
                    on cash and cash equivalents held in trust
                
                
                387,127
                
                
                353,155
                
                
                767,938
                
                
                570,059
                
                
                2,100,024Interest
                    expense
                
                
                (82,371
                )
                
                (27,362
                )
                
                (97,108
                )
                
                (27,828
                )
                
                (161,512
                )Total
                    other income and expense
                
                
                304,816
                
                
                331,443
                
                
                674,668
                
                
                548,467
                
                
                1,962,592Income/(loss)
                    before provision for income taxes
                
                
                75,200
                
                
                73,700
                
                
                154,348
                
                
                (30,982
                )
                
                410,040Provision
                    for income taxes
                
                
                25,635
                
                
                -
                
                
                52,954
                
                
                -
                
                
                143,877**Net
                    income/(loss)**
                
                $
                49,565
                
                $
                73,700
                
                $
                101,394
                
                $
                (30,982
                )
                $
                266,163Deferred
                    interest attributable to common stock subject to possible redemption
                    (net
                    of taxes)
                
                
                50,996
                
                
                70,595
                
                
                101,159
                
                
                113,954
                
                
                276,906**Net
                    income/(loss) allocable to holders of non-redeemable common
                    stock**
                
                $
                (1,431
                )
                $
                3,105
                
                $
                235
                
                $
                (144,936
                )
                $
                (10,743
                )**Net
                    income/(loss) per share - basic and diluted**
                
                $
                0.01
                
                $
                0.02
                
                $
                0.02
                
                $
                (0.01
                )
                $
                0.07Weighted
                    average number of shares outstanding - basic and diluted
                
                
                4,781,307
                
                
                4,781,307
                
                
                4,781,307
                
                
                4,169,385
                
                
                3,661,448**Net
                    income/(loss) per share exclusive of shares and related interest
                    subject
                    to possible redemption - basic and diluted**
                
                $
                0.00
                
                $
                0.00
                
                $
                0.00
                
                $
                (0.04
                )
                $
                0.00Weighted
                    average number of shares outstanding exclusive of shares subject
                    to
                    possible redemption -- basic and diluted
                
                
                4,016,680
                
                
                4,016,680
                
                
                4,016,680
                
                
                3,527,267
                
                
                3,119,578
   2
  **Argyle
          Security Acquisition Corporation**
 (a
          development stage company)
  **Unaudited
          Consolidated Statements of Stockholders’ Equity**
 RetainedEarningsAdditional
                
                During
                    the
                
                TotalCommon
                    Stock
                
                Paid-in
                
                Development
                
                Stockholders'Shares
                
                Amount
                
                Capital
                
                Stage
                
                EquityStock
                    issuance on June 23, 2005 at $.027
                
                
                937,500
                
                $
                94
                
                $
                24,906
                
                
                
                
                $
                25,000Net
                    loss
                
                
                
                
                
                
                
                
                
                
                $
                (7,743
                )
                
                (
                    7,743
                )**Balances**,
                    at December 31, 2005
                
                
                937,500
                
                $
                94
                
                $
                24,906
                
                $
                (7,743
                )
                $
                17,257Stock
                    issuance on January 24, 2006 at $8
                
                
                125,000
                
                
                12
                
                
                999,988
                
                
                
                
                
                1,000,000Stock
                    issuance on January 30, 2006 at $8
                
                
                3,625,000
                
                
                362
                
                
                28,999,638
                
                
                
                
                
                29,000,000Stock
                    issuance on January 30, 2006 at $8
                
                
                75,046
                
                
                8
                
                
                600,360
                
                
                
                
                
                600,368Proceeds
                    from issuance of option to underwriters
                
                
                
                
                
                
                
                
                100
                
                
                
                
                
                100Expenses
                    of offerings
                
                
                
                
                
                
                
                
                (2,145,230
                )
                
                
                
                
                (2,145,230
                )Less:
                    Proceeds subject to possible redemption of 764,627 shares and
                    associated
                    deferred interest
                
                
                
                
                
                
                
                
                (5,913,953
                )
                
                
                
                
                (5,913,953
                )Stock
                    based compensation
                
                
                
                
                
                
                
                
                130,632
                
                
                
                
                
                130,632Officer
                    and director option exercise
                
                
                18,761
                
                
                2
                
                
                505
                
                
                
                
                
                507Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                172,512
                
                
                172,512**Balances**,
                    at December 31, 2006
                
                
                4,781,307
                
                $
                478
                
                $
                22,696,946
                
                $
                164,769
                
                $
                22,862,193Increase
                    in deferred interest attributable to common stock subject to
                    possible
                    redemption (net of taxes)
                
                
                
                
                
                
                
                
                (101,159
                )
                
                
                
                
                (101,159
                )Deferred
                    financing costs - warrants
                
                
                
                
                
                
                
                
                93,000
                
                
                
                
                
                93,000Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                101,394
                
                
                101,394Balances,
                    at June 30, 2007
                
                
                4,781,307
                
                $
                478
                
                $
                22,688,787
                
                $
                266,163
                
                $
                22,955,428
  See
          notes
          to unaudited consolidated financial statements
 
 3
 
 **Argyle
          Security Acquisition Corporation**
 (a
          development stage company)
  **Unaudited
          Consolidated Statement of Cash Flows**
  Six
                      Months
                    Ended
                      June
                        30,2007
                  
                  Six
                      Months
                    Ended
                      June
                        30,2006
                  
                  For
                      the period
                    from
                      June 22,
                      2005
                        (inception)
                      through
                      June
                        30,2007**Cash
                      flows from operating activities**Net
                      income/(loss)
                  
                  $
                  101,394
                  
                  $
                  (30,982
                  )
                  $
                  266,163**Adjustment
                      to reconcile net loss to net cash****used
                      in operating activities:**Stock
                      based compensation
                  
                  $
                  -
                  
                  $
                  130,632
                  
                  $
                  130,632Amortization
                      of deferred financing costs
                  
                  
                  64,925
                  
                  
                  -
                  
                  
                  64,925Depreciation
                      expense
                  
                  
                  1,086
                  
                  
                  532
                  
                  
                  2,705Increase
                      in prepaid expenses
                  
                  
                  (44,000
                  )
                  
                  (51,334
                  )
                  
                  (51,333
                  )Increase/(decrease)
                      in accrued expenses
                  
                  
                  (80,462
                  )
                  
                  114,253
                  
                  
                  101,545Interest
                      earned on cash and cash equivalents, held in trust
                  
                  
                  (767,938
                  )
                  
                  (570,059
                  )
                  
                  (2,100,025
                  )Accrued
                      interest on deferred underwriting costs
                  
                  
                  29,718
                  
                  
                  27,362
                  
                  
                  93,656(Increase)/decrease
                      in deferred income tax asset
                  
                  
                  14,591
                  
                  
                  -
                  
                  
                  (13,341
                  )Increase/(decrease)
                      in accrued income taxes
                  
                  
                  (110,491
                  )
                  
                  -
                  
                  
                  8,363Interest
                      income released from the trust
                  
                  
                  -
                  
                  
                  -
                  
                  
                  600,000Tax
                      payment released from the trust
                  
                  
                  148,854
                  
                  
                  -
                  
                  
                  148,854Net
                      cash used in operating activities
                  
                  $
                  (642,323
                  )
                  $
                  (379,596
                  )
                  $
                  (747,856
                  )**Cash
                      flows from investing activities:**Purchases
                      of investments held in trust
                  
                  $
                  (141,256,218
                  )
                  $
                  (178,921,809
                  )
                  $
                  (459,976,426
                  )Maturity
                      of investments held in trust
                  
                  
                  141,256,218
                  
                  
                  150,200,446
                  
                  
                  431,255,063Purchase
                      of property and equipment
                  
                  
                  -
                  
                  
                  (6,520
                  )
                  
                  (6,520
                  )Transaction
                      costs
                  
                  
                  (270,545
                  )
                  
                  -
                  
                  
                  (328,888
                  )Increase
                      in other assets
                  
                  
                  (15,970
                  )
                  
                  -
                  
                  
                  (15,970
                  )Net
                      cash used in investing activities
                  
                  $
                  (286,515
                  )
                  $
                  (28,727,883
                  )
                  $
                  (29,072,741
                  )**Cash
                      flows from financing activities**Gross
                      proceeds from public offering and private placement
                  
                  $
                  -
                  
                  $
                  30,600,368
                  
                  $
                  30,600,368Offering
                      costs
                  
                  
                  (6,885
                  )
                  
                  (873,356
                  )
                  
                  (1,046,986
                  )Proceeds
                      from issuance and exercises of options
                  
                  
                  -
                  
                  
                  607
                  
                  
                  607Repayment
                      of notes payable, stockholders
                  
                  
                  -
                  
                  
                  (155,000
                  )
                  
                  (155,000
                  )Proceeds
                      from notes payable & warrants, stockholders
                  
                  
                  300,000
                  
                  
                  -
                  
                  
                  455,000Proceeds
                      from sale of common stock to founding stockholders
                  
                  
                  -
                  
                  
                  -
                  
                  
                  25,000Net
                      cash provided by/(used in) financing activities
                  
                  $
                  293,115
                  
                  $
                  29,572,619
                  
                  $
                  29,878,989**Net
                      increase/(decrease) in cash**
                  
                  
                  (635,723
                  )
                  
                  465,140
                  
                  
                  58,392**Cash**,
                      beginning of period
                  
                  
                  694,115
                  
                  
                  9,608
                  
                  
                  -**Cash**,
                      end of period
                  
                  $
                  58,392
                  
                  $
                  474,748
                  
                  $
                  58,392Supplemental
                      disclosure of cash flow informationCash
                      paid for interest
                  
                  $
                  -
                  
                  $
                  3,177
                  
                  $
                  3,177Supplemental
                      schedule of non-cash financing activities:Accrual
                      of deferred underwriting costs
                  
                  $
                  -
                  
                  $
                  1,377,017
                  
                  $
                  1,098,245Issuance
                      of warrants associated with notes to related parties
                  
                  $
                  93,000
                  
                  $
                  -
                  
                  $
                  -Supplemental
                      schedule of non-cash investing activities:Accrual
                      of deferred transaction costs
                  
                  $
                  93,186
                  
                  $
                  -
                  
                  $
                  461,890
  See
          notes
          to unaudited consolidated financial statements
   4
  **Argyle
          Security Acquisition Corporation**
 (a
          development stage company)
  **Notes
          to Unaudited Consolidated Financial Statements**
 **June
          30, 2007**
  **Note
          1 - Basis of presentation**
  The
          consolidated financial statements of Argyle Security Acquisition Corporation
          (the “Company” or “Argyle”) as of June 30, 2007, and for the three and six
          months ended June 30, 2007 and 2006, respectively, and for the period from
          June
          22, 2005 (inception) to June 30, 2007 (cumulative), are unaudited. In the
          opinion of management, all normal recurring adjustments considered necessary
          for
          a fair presentation have been included. Operating results for the interim
          periods presented are not necessarily indicative of the results to be expected
          for a full fiscal year. The audited balance sheet as of December 31, 2006
          does
          not include all of the information and footnotes required by U.S. generally
          accepted accounting principles for complete financial statement presentation.
  The
          statements and related notes have been prepared pursuant to the rules and
          regulations of the U.S. Securities and Exchange Commission. Accordingly,
          certain
          information and footnote disclosures normally included in financial statements
          prepared in accordance with generally accepted accounting principles have
          been
          omitted pursuant to such rules and regulations. These financial statements
          should be read in conjunction with the financial statements that were included
          in the Company’s Annual Report on Form 10-K for the year ended December 31,
          2006, as filed with the U.S. Securities and Exchange Commission.
 
 **Note
          2 - Background, formation and summary of significant accounting
          policies**
  The
          Company was incorporated in Delaware in June 2005 as a blank check company
          formed to acquire, through merger, capital stock exchange, asset acquisition
          or
          other similar business combination, a business in the security industry.
          As of
          June 30, 2007, Argyle’s efforts have been limited to organizational activities,
          completion of its initial public offering and the evaluation of possible
          business combinations. Argyle does not currently have any
          operations.
 
 The
          Company completed a private placement (the “Private Placement”) in January 2006
          and received net proceeds of approximately $0.9 million. Also in January
          2006,
          the registration statement for the Company’s initial public offering (“Public
          Offering”) was declared effective, and the net proceeds from the sale of
          Argyle’s units, after deducting certain offering expenses of approximately $2.4
          million, including underwriting discounts of approximately $1.8 million,
          were
          approximately $28.2 million. Approximately $27.3 million of the proceeds
          from
          the initial public offering and the private placement was placed in a trust
          account for Argyle’s benefit. Except for $0.6 million in interest that was
          earned on the funds contained in the trust account and that was released
          to
          Argyle to be used as working capital, and the amounts that may be released
          to
          Argyle for the payment of taxes, Argyle is not be able to access the amounts
          held in the trust until it consummates a business combination.
 
 As
          of
          June 30, 2007, the trust account also contains $1.4
          million of deferred compensation for Argyle’s underwriters related to
          its initial public offering which will be paid to them only in the event
          of a
          business combination. On March 14, 2007, the underwriters from
          Argyle's initial public offering agreed to forfeit any and all rights
          or claims to a pro-rata portion of the deferred underwriting costs and
          associated interest with respect to any shares of common stock which are
          redeemed in connection with our proposed acquisition (see Note 8). The
          amounts
          held outside of the trust account are being used by Argyle to provide for
          business, legal and accounting due diligence on prospective acquisitions
          and
          continuing general and administrative expenses. The net proceeds deposited
          into
          the trust fund remain on deposit in the trust account earning interest.
          In
          connection with the initial public offering and the private placement,
          Argyle’s
          officers and directors placed all the shares owned by them before the private
          placement and the initial public offering into an escrow account. Except
          in
          certain circumstances, the shares held in escrow may not be released prior
          to
          January 24, 2009. See Note 9 for subsequent event update.
 
 5
  In
          December 2006, and as amended in June 2007 and July 2007, Argyle, Argyle’s
          wholly-owned subsidiary ISI Security Group, Inc. (Merger Subsidiary) and
          ISI
          Detention Contracting Group, Inc. (ISI) entered into a merger agreement
          pursuant
          to which the Merger Subsidiary will merge into ISI, and ISI will become
          a
          wholly-owned subsidiary of Argyle. Pursuant to the merger agreement, Argyle
          will
          pay or issue to ISI’s security holders an aggregate merger consideration of
          $46.5 million, consisting of $18.6 million, 1,180,000 shares of Argyle’s common
          stock (valued at approximately $9.2 million based on the closing price
          of the
          common stock on June 25, 2007) and unsecured promissory notes in the aggregate
          amount of $1.9 million, bearing interest at a rate of 5% per
          year, convertible into Argyle’s common stock at a conversion price of $10
          per share, and the assumption of approximately $6.0 million of long-term
          debt,
          approximately $7.6 million outstanding pursuant to a $9.0 million line
          of
          credit, $2.1 million of capitalized leases as of March 31, 2007, approximately
          $1.0 million of transaction costs, and up to $2.0 million ($1.9 million
          as of
          March 31, 2007) which will be paid to a company owned by ISI’s Chief Executive
          Officer and President.
 
 The
          Company will proceed with the combination only if a majority of the shares
          of
          common stock voted by the public stockholders are voted in favor of the
          business
          combination and public stockholders owning less than 20% of the aggregate
          shares
          sold in the Public Offering and the Private Placement exercise their redemption
          rights (as described below). The officers and directors of the Company
          (“Initial
          Stockholders”) have agreed to vote their 956,261 founding shares of common stock
          in accordance with the vote of the majority in interest of all other
          stockholders of the Company with respect to any business combination and
          to vote
          the 125,000 shares of common stock included in the units they purchased
          in the
          Private Placement and any shares they acquired in the aftermarket in favor
          of the business combination. After consummation of the Company’s first business
          combination, these voting agreements will no longer be applicable.
  With
          respect to the first business combination which is approved and consummated,
          any
          holder of shares sold in the Public Offering, other than the Initial
          Stockholders and their nominees (the “Public Stockholders”) who voted against
          the business combination may demand that the Company redeem his or her
          shares.
          The per share redemption price will equal $7.50 per share (see Note 8)
          plus
          interest earned thereon in the trust account, net of taxes payable, $.6
          million
          of interest income which was released from the trust account in September
          2006
          to fund the Company's working capital, and amounts owed to the
          underwriter for the private placement (approximately $.05 million plus
          interest)
          . Public Stockholders holding up to 19.99% of the aggregate number of shares
          sold in the Public Offering and the private placement may seek redemption
          of
          their shares in the event of a business combination. Accordingly, amounts
          classified as common stock subject to possible redemption of approximately
          $5.7
          million, and the associated deferred interest of approximately $0.3 million
          have been reflected in the accompanying balance sheet. See Note 9 for
          subsequent event update.
  *Cash
          and cash equivalents*
  The
          Company considers all highly liquid investments with original maturities
          of
          three months or less to be cash equivalents.
 
 *Income
          taxes*
 
 Deferred
          income taxes are recorded based on enacted statutory rates to reflect the
          tax
          consequences in future years of the differences between the tax bases of
          assets
          and liabilities and their financial reporting amounts. Deferred tax assets
          which
          will generate future tax benefits are recognized to the extent that realization
          of such benefits through future taxable earnings or alternative tax strategies
          in the foreseeable short term future is more likely than not.
 
 *Recently
          issued accounting pronouncements*
  In
          December 2004, the Financial Accounting Standards Board ("FASB") issued
          SFAS No.
          123 (revised 2004), "Share based payment" ("SFAS 123(R)"). SFAS 123(R)
          requires
          all share-based payments to employees, including grants of employee stock
          options, to be recognized in the financial statements based on their fair
          values. The Company adopted SFAS 123(R) on January 1, 2006.
 
 6
  The
          Company adopted the FASB’s Interpretation No. 48, “Accounting for
          Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN
          48”), effective January 1, 2007.  FIN 48 clarifies the accounting for
          uncertainty in income taxes recognized in financial statements and requires
          the
          impact of a tax position to be recognized in the financial statements if
          that position is more likely than not of being sustained by the taxing
          authority. The adoption of FIN 48 did not have an effect on our consolidated
          financial position or results of operations.
 
 *Transaction
          costs*
  The
          Company has capitalized approximately $.8 million related to the ISI
          acquisition. These costs are primarily composed of attorney and accountants’
fees and bankers’ fees regarding the fairness opinion.
 
 *Use
          of estimates*
  The
          preparation of financial statements in conformity with accounting principles
          generally accepted in the United States of America requires management
          to make
          estimates and assumptions that affect the reported amounts of assets and
          liabilities at the date of the financial statements and the reported amounts
          of
          income and expenses during the reporting period. Actual results could differ
          from those estimates.
  *Basis
          of presentation*
  The
          consolidated financial statements include the accounts of the Company and
          our
          wholly-owned subsidiary, ISI Security Group, Inc. All significant inter-company
          transactions are eliminated in the consolidation process.
 
 **Note
          3 - Offerings**
  *Public
          Offering*
  In
          January 2006, the Company sold 3,700,046 units (which includes 75,046 units
          sold
          by the underwriters pursuant to a partial exercise of their over-allotment
          option) to the public at a price of $8.00 per unit. Each unit consists
          of one
          share of the Company’s common stock, $0.0001 par value, and one redeemable
          common stock purchase warrant (“warrant”). Each warrant entitles the holder to
          purchase from the Company one share of common stock at an exercise price
          of
          $5.50 commencing the later of the completion of a business combination
          with a
          target business or January 24, 2007, and expiring January 24, 2011. The
          warrants
          are redeemable by the Company at a price of $.01 per warrant upon 30 days
          notice
          after the warrants become exercisable, only in the event that the last
          sale
          price of the common stock is at least $11.50 per share for any 20 trading
          days
          within a 30 trading day period ending three business days before a notice
          of
          redemption is delivered.
 
 *Private
          Placement*
  In
          January 2006, the Company sold to its officers an aggregate of 125,000
          units
          identical to the units sold in the Public Offering at a price of $8.00
          per unit.
 
 **Note
          4 - Notes payable to stockholders**
  During
          2005, the Company issued several unsecured promissory notes to the officers
          of
          the Company totaling $155,000. The Notes had an interest rate of 4% per
          annum
          and were paid in full with proceeds from the Public Offering, including
          aggregate interest of $3,177.
 
 In
          April
          2007, Argyle’s officers and directors, an affiliate of Argyle’s Chairman and
          Co-Chief Executive Officer, and certain of Argyle’s consultants, pursuant to a
          note and warrant acquisition agreement, loaned Argyle an aggregate of $.3
          million and in exchange received promissory notes in the aggregate principal
          amount of $.3 million and warrants to purchase an aggregate of 37,500 shares
          of
          Argyle’s common stock. The warrants are exercisable at $5.50 per share of common
          stock and expire on January 24, 2011. The warrants also may be exercised
          on a
          net-share basis by the holders of the warrants. The promissory notes bear
          interest at a rate of 4% per year and are repayable 30 days after the
          consummation of a business combination (see Note 5 for further duscussion
          of the
          fair value assigned to the warrant and Note 9 for subsequent
          payment).
  7
 
 **Note
          5 - Stockholders' equity and stock-based compensation**
  In
          July
          2005, the Company granted to its officers, directors and their respective
          affiliates certain options, which were exercisable only in the event the
          underwriters exercised the over allotment option, to purchase that number
          of
          shares enabling them to maintain their 20% ownership interest in the Company
          (without taking into account the units they purchased in the Private Placement).
          The measurement date was deemed to be January 30, 2006, the date the over
          allotment was exercised because the number of options to be issued was
          not known
          until that date.
  In
          January 2006, the underwriters exercised a portion of the over-allotment
          option
          in the amount of 75,046 units. In February 2006 the officers and directors
          exercised their options and purchased 18,761 units for an aggregate cost
          of $507
          (or $0.027 per share). The compensation cost, recorded in operating
          expenses, resulting from these share-based payments was $130,632 at January
          30, 2006, using the Black-Scholes pricing model. This model was developed
          for
          use in estimating the fair value of traded options that have no vesting
          restrictions and are fully transferable. The fair value of the options
          was
          estimated at the measurement date using the following
          assumptions:


·
                Weighted
                    average volatility factor of 0.10;
  ·
                No
                    expected dividend payments;
  ·
                Weighted
                    average risk-free interest rate of
                    5%;
  ·
                A weighted
                    average expected life of 0.13
                    years.
  The
        fair
        value of each option was $6.99 per share. All options vested immediately
        at the
        measurement date and no further options may be exercised. Compensation expense
        was recognized immediately and recorded as an operating expense.
 
 As
        of
        June 30, 2007, no officer or director of the Company holds options to purchase
        the Company’s securities.
  In
        January 2006 the Company sold to its underwriters options to purchase up to
        an aggregate of 187,500 units for $100. The units issuable upon exercise
        of
        these options are identical to those sold in the Public Offering. These
        options will be exercisable at $8.80 per unit commencing on the later
        of the consummation of a business combination or one year from January 24,
        2006,
        and expiring January 24, 2011. The options to purchase the 187,500 units
        and the
        Securities underlying such units have been deemed compensation by the National
        Association of Securities Dealers (“NASD”) and are therefore subject to a
        180-day lock-up pursuant to Rule 2710(g) (1) of the NASD Conduct Rules.
        Additionally, these options may not be sold, transferred, assigned, pledged
        or
        hypothecated for a one-year period (including the foregoing 180-day period)
        following January 24, 2006. However, these options may be transferred to
        any
        underwriter and selected dealer participating in the offering and their bona
        fide officers or partners.
 
 The
        Company accounted for these purchase options as a cost of raising capital
        and
        included the instrument as equity in its financial statements. Accordingly,
        there is no net impact on the Company’s financial position or results of
        operations, except for the recording of the $100 proceeds from the sale.
        The
        Company has estimated, based upon a Black Scholes model, that the fair value
        of
        the purchase options on the date of sale was approximately $3.40 per unit
        (a
        total value of approximately $.6 million), using an expected life of five
        years,
        volatility of 44%, and a risk-free rate of 5% (See Note 9). However, because
        the
        Company’s units do not have a trading history, the volatility assumption was
        based on information currently available to management. The volatility estimate
        was derived using historical data of public companies in the proposed industry.
        The Company believes the volatility estimate calculated from these companies
        was
        a reasonable benchmark to use in estimating the expected volatility of our
        units; however, the use of an index to estimate volatility may not necessarily
        be representative of the volatility of the underlying securities.
 8
 
 The
        Company has engaged Rodman & Renshaw, LLC (the "Representative"), on a
        non-exclusive basis, as its agent for the solicitation of the exercise of
        the
        warrants. To the extent not inconsistent with the guidelines of the NASD
        and the
        rules and regulations of the Securities and Exchange Commission, the Company
        has
        agreed to pay the Representative for bona fide services rendered a commission
        equal to 5% of the exercise price, if the exercise was solicited by the
        Representative. In addition to soliciting, either orally or in writing, the
        exercise of the warrants, the Representative’s services may also include
        disseminating information, either orally or in writing, to warrant holders
        about
        the Company or the market for the Company’s securities, and assisting in the
        processing of the exercise of the warrants. No compensation will be paid
        to the
        Representative upon the exercise of the warrants if:
 ·
                the
                    market price of the underlying shares of common stock is lower
                    than the
                    exercise price;
  ·
                the
                    holder of the warrants has not confirmed in writing that the
                    representative solicited the
                    exercise;
  ·
                the
                    warrants are held in a discretionary
                    account;
  ·
                the
                    warrants are exercised in an unsolicited transaction;
                    or
  ·
                the
                    arrangements to pay the commission are not disclosed to warrant
                    holders at the time of
                    exercise.
  In
          April
          2007, the Company entered into bridge loans totaling $0.3 million with
          certain officers, directors and consultants (see note 4). In connection
          with the
          bridge loans, 37,500 stock warrants were issued providing the holder to
          exercise
          the warrant to purchase an equal share amount in the Company’s common stock.
          Warrants allow holders to exercise the warrants to purchase common stock
          at
          $5.50 per share and were granted demand and piggy-back registration rights
          with
          respect to the shares of common stock underlying the warrants. The warrants
          expire January 24, 2011. The Company has estimated, based upon a Black-Scholes
          model, that the fair value of the warrants on the date of issue was
          approximately $2.48 per warrant, (a total value of approximately $.09 million)
          using an expected life of 2 years, volatility of 2.39%, and a risk-free
          rate of
          5%. However, because the Company’s warrants have a limited trading history, the
          volatility assumption was based on information currently available to
          management.
 
 **Note
        6 - Common stock reserved for issuance**
  As
        of June 30, 2007, 3,862,546 shares of common stock were reserved for
        issuance upon exercise of redeemable warrants and 375,000 shares of common
        stock
        were reserved for issuance pursuant to the underwriters’ unit purchase option
        described above.
 
 **Note
        7 - Preferred stock**
  The
        Company is authorized to issue 1,000,000 shares of preferred stock with such
        designations, voting and other rights and preferences, as may be determined
        from
        time to time by the Board of Directors. No shares of preferred stock are
        currently issued or outstanding.
 
 **Note 8
        - Agreement with underwriters**
 
 In
        March
        2007, the underwriters from the Company's Public Offering agreed to forfeit
        any and all rights or claims to a pro-rata portion of the deferred underwriting
        costs and associated accrued interest with respect to any shares of common
        stock
        that are redeemed in connection with the proposed acquisition. As a result
        of
        the agreement, the redemption price of our common stock, without considering
        interest earned in the trust, taxes payable and the $.6 million of interest
        released to the Company for working capital, increased by $.36 per share
        to
        $7.50 per share, and the amount of common stock subject to possible redemption
        increased by approximately $.3 million to approximately $5.7 million.
        Additionally, the deferred underwriting cost liability was reduced by
        approximately $.3 million.
 
 9
 
 **Note 9
        - Subsequent event**
 
 In
        July
        2007, the stockholders of the Company **** approved
        the Company's acquisition of ISI. Approximately 6% of outstanding redeemable
        shares, or 232,565 shares, were redeemed at the special meeting, and
        the Company will pay approximately $1.8 million to redeeming stockholders
        in the
        third quarter of 2007. Stockholders also approved an amendment to the Company's
        Certificate of Incorporation to change its name to "Argyle Security, Inc."
        At
        the meeting, the Company’s stockholders also approved the Company's 2007 Omnibus
        Incentive Compensation Plan and an amendment to the Company’s certificate of
        incorporation to remove certain provisions from the certificate that were
        no
        longer applicable after the business combination was consummated.
 
 In
        July
        2007, following the stockholder approval and pursuant to the terms of the
        merger
        agreement, the Company acquired all of the assets and liabilities of ISI
        through
        the merger of its Merger Subsidiary into ISI. As a result of the merger,
        ISI
        became a wholly owned subsidiary of the Company. ISI is a provider of physical
        security solutions to commercial, governmental and correctional customers.
 
 At
        the
        closing of the merger, the following consideration was paid or issued by
        the
        Company to the stockholders of ISI:
 
 ·
              $18.6
                  million in cash;·
              1,180,000
                  shares of common stock of Argyle (valued at approximately $9.2
                  million);
                  and
 ·
              $1.9
                  million of unsecured promissory notes convertible into shares of
                  common
                  stock of the Company at a conversion price of $10 per
                  share.
 
 In
        addition, the merger consideration paid by the Company also included (i)
        payment
        of $1.9 million to an entity created by two executive officers of ISI in
        connection with the issuance of performance and payment bonds to ISI; and
        (ii)
        approximately $1.0 million in ISI transaction costs. The Company also paid
        $.24
        million in success fees to certain service providers in connection with the
        merger.
 The
          Company also assumed approximately $6.0 million of long-term debt, approximately
          $7.6 million outstanding pursuant to a $9.0 million line of credit, and
          $2.1
          million of capitalized leases as of March 31, 2007.
 The
        acquisition of ISI will be accounted for as a business combination with the
        Company as the acquirer. Under the purchase method of accounting, the assets
        and
        liabilities of ISI that were acquired are recorded as of the acquisition
        date at
        their respective fair values, and added to those of the Company. A preliminary
        allocation of the purchase price of ISI to the estimated fair values of the
        assets acquired and liabilities assumed on July 31, 2007 will be made and
        recorded during the fiscal quarter ended September 30, 2007. The preliminary
        allocation of the purchase price, including the evaluation and allocation
        to
        identifiable intangible assets, recognition of deferred taxes and allocation
        to
        goodwill resulting from the acquisition, will be made by management based
        on
        available information and certain assumptions management considers reasonable.
        The preliminary estimates will be subject to change based on the finalization
        of
        asset and liability valuations of ISI, and will depend in part on prevailing
        market rates and conditions. A final determination of the fair values will
        include assistance provided by an independent valuation consultant, which
        management expects will be completed in 2008. The final valuations will be
        based on the actual net tangible and intangible assets of ISI that existed
        as of
        July 31, 2007. Any adjustments may change the allocations of purchase price,
        which could affect the fair value assigned to the assets acquired and
        liabilities assumed and could result in a material change to the Company’s
        financial statements.
 
 In
        August
        2007, the shareholder notes and accrued interest as described in Note 4 were
        repaid by the Company.
 
 10
 
 **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF
        OPERATIONS**
 
 **Forward
        Looking Statements**
 
 This
        Quarterly Report on Form 10-Q includes forward-looking statements within
        the
        meaning of Section 27A of the Securities Act of 1933, as amended, and Section
        21E of the Securities Exchange Act of 1934, as amended. We have based these
        forward-looking statements on our current expectations and projections about
        future events. These forward-looking statements are subject to known and
        unknown
        risks, uncertainties and assumptions about us that may cause our actual results,
        levels of activity, performance or achievements to be materially different
        from
        any future results, levels of activity, performance or achievements expressed
        or
        implied by such forward-looking statements. In some cases, you can identify
        forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
        the negative of such terms or other similar expressions. Factors that might
        cause or contribute to such a discrepancy include, but are not limited to,
        those
        described in our other Securities and Exchange Commission filings. The following
        discussion should be read in conjunction with our unaudited Financial Statements
        and related Notes thereto included elsewhere in this report.
  **Overview**
 
 Argyle
        Security Acquisition Corporation (the “Company” or “Argyle”) is a Delaware
        corporation incorporated on June 22, 2005 in order to serve as a vehicle
        for the
        acquisition of an operating business through a merger, capital stock exchange,
        asset acquisition or other similar business combination. The Company’s strategy
        has been to leverage the industry experience of its management team by focusing
        efforts on identifying an initial prospective target business in the security
        industry, and management plans to continue such a strategy after the Company’s
        initial acquisition. Management believes that businesses involved in this
        industry represent attractive acquisition targets for a number of reasons,
        including the increase in global demand for integrated security-related products
        and services since September 11, 2001, the development of new technology
        which
        has the potential to expand applications and the trend towards integrated
        networked solutions.
  On
        December 8, 2006, Argyle, Argyle’s wholly-owned subsidiary ISI Security Group,
        Inc. (the "Merger Subsidiary") and ISI Detention Contracting Group, Inc.
        (ISI)
        entered into a merger agreement, as amended on June 29, 2007 and July 11,
        2007,
        pursuant to which the Merger Subsidiary would merge into ISI and ISI will
        become
        a wholly-owned subsidiary of Argyle
 
 On
        July
        30, 2007, the stockholders of the Company **** approved
        the Company's acquisition of ISI. Stockholders also approved (i) an amendment
        to
        the Company's Certificate of Incorporation to change its name to "Argyle
        Security, Inc.", (ii) the Company's 2007 Omnibus Incentive Compensation Plan,
        and (iii) an amendment to the Company’s certificate of incorporation to remove
        certain provisions from the certificate that were no longer applicable after
        the
        business combination was consummated.
 
 On
        July
        31, 2007, pursuant to the terms of the merger agreement, the Company acquired
        all of the assets and liabilities of ISI through the merger of its Merger
        Subsidiary into ISI. As a result of the merger, ISI became a wholly owned
        subsidiary of the Company.
 
 At
        the
        closing of the merger, the following consideration was paid or issued by
        the
        Company to the stockholders of ISI:
 
 ·
              $18.6
                  million in cash;·
              1,180,000
                  shares of common stock of Argyle (valued at approximately $9.2
                  million);
                  and
 ·
              $1.9
                  million of unsecured promissory notes convertible into shares of
                  common
                  stock of the Company at a conversion price of $10 per
                  share.
 
 In
        addition, the merger consideration paid by the Company also included (i)
        payment
        of $1.9 million to an entity created by two executive officers of ISI in
        connection with the issuance of performance and payment bonds to ISI; and
        (ii)
        approximately $1.0 million in ISI transaction costs.
 
 11
  The
        Company also assumed approximately $6.0 million of long-term debt, approximately
        $7.6 million outstanding pursuant to a $9.0 million line of credit, and $2.1
        million of capitalized leases as of March 31, 2007.




ISI
        is a
        provider of security solutions to commercial, governmental, and correctional
        customers. As a security solutions provider, ISI has the ability to interview
        a
        customer that needs security for a project and determine that customer’s needs
        in light of the products and technology available within the customer’s budget.
        ISI, using its expertise in the security industry, then develops security
        systems that answer the customer’s needs using hardware and software that is
        available in the marketplace from third party vendors, as well as its own
        proprietary software. ISI participates in the perimeter security, access
        control
        and video and design consultation segments in the correctional sector through
        its ISI-Detention and MCS-Detention subsidiaries and in the
        commercial/industrial/educational sectors through its MCS-Commercial subsidiary.
        In addition, the MCS-Commercial operation is also engaged in providing its
        sectors with fire detection security system solutions.
 
 **Critical
        Accounting Policies**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities at the date of the financial statements and the reported amounts
        of
        expenses during the reporting period. Actual results could differ from these
        estimates.
 
 Deferred
        income taxes are provided for temporary differences between the carrying
        amount
        of assets and liabilities for financial reporting purposes and the amounts
        for
        tax purposes. Valuation allowances are provided against the deferred tax
        asset
        amounts when the realization is uncertain.
  Argyle
        purchases U.S. Treasury Bills and money market investments and holds these
        investments to maturity. The investments are recorded at market value which
        approximates their carrying amount and includes accrued interest.
 
 **Results
        of Operations for the six-month period ended June 30, 2007**
 
 Argyle’s
        trust account earned interest of $767,938 for the six months ended June 30,
        2007
        as compared to $570,059 for the six month period ended June 30, 2006. The
        increase in interest income was due to the trust not being funded until the
        closing of our initial public offering at the end of January 2006
        and increased investment returns.
 
 Overall,
        for the six months ended June 30, 2007, Argyle incurred $277,510 of
        consulting and professional fees, $70,006 of franchise tax, $44,000 of
        insurance expense, $32,792 of rent expense, $44,873 of investor relations
        expense and other operating costs of $51,138. For the six months ended June
        30, 2006, Argyle incurred $249,831 of consulting and professional fees, $130,632
        of stock compensation expense, $73,991 of franchise taxes, $36,667 of insurance
        expense, $27,430 of rent expense and other operating costs of
        $60,898.
 
 The
        11%
        increase in consulting and professional fees was primarily the result of
        higher
        audit fees in the first six months of 2007 and, to a lesser extent, higher
        accounting and legal fees.
  Insurance
        expense increased 20% in the first six months of 2007 as compared to the
        same
        period in 2006 as the Company’s directors’ and officers’ insurance policy was
        only effective for five months of the six month period in 2006. Rent expense
        compared within reason for the first six months of 2007 to the same period
        of
        2006.
 
 On
        February 1, 2006, Argyle’s officers and directors exercised options and
        purchased 18,761 shares of common stock for an aggregate cost of $507. The
        compensation cost associated with these options of $130,632 was recorded
        in the
        first quarter of 2006 and was computed using the Black-Scholes pricing model.
 
 The
        provision for taxes in the first six months of 2007 is a result of the net
        income earned during the six month period.
 
 12
 
 **Results
        of Operations for the three-month period ended June 30,
        2007**
 
 Argyle’s
        trust account earned interest of $387,127 for the quarter ended June 30,
        2007 as
        compared to $353,155 for the quarter ended June 30, 2006. The increase in
        interest income was due to increased investment returns.
 
 Overall,
        for the three months ended June 30, 2007, Argyle incurred $113,026 of
        consulting and professional fees, $35,003 of franchise tax, $22,000 of
        insurance expense, $16,239 of rent expense, $20,852 of investor relations
        expense and other operating costs of $22,496. For the three months ended
        June 30, 2006, Argyle incurred $138,159 of consulting and professional fees,
        $46,042 of franchise taxes, $22,000 of insurance expense, $16,622 of rent
        expense and other operating costs of $34,920.
 
 The
        18%
        decrease in consulting and professional fees was primarily the result of
        the
        timing of audit, project consulting and tax preparation fees in the second
        quarter of 2007 compared to the same period in 2006. The provision for taxes
        in
        the second quarter of 2007 is a result of the net income earned during the
        three
        month period.
  **Liquidity
        and Capital Resources**
  On
        January 24, 2006, Argyle completed a private placement of 125,000 units to
        its
        executive officers and their affiliates and received net proceeds of
        approximately $0.9 million. On January 30, 2006, Argyle consummated its initial
        public offering of 3,700,046 units (which included 75,046 units sold as part
        of
        the underwriter’s over-allotment option). Each unit in both the private
        placement and the public offering consisted of one share of common stock
        and one
        redeemable common stock purchase warrant. Each warrant entitles the holder
        to
        purchase from Argyle one share of Argyle’s common stock at an exercise price of
        $5.50 per share commencing on the later of the completion of a business
        combination or January 24, 2007 and expiring January 24, 2011. Argyle’s common
        stock and warrants started trading separately as of March 2, 2006.
  The
        net
        proceeds from the sale of Argyle’s units, after deducting certain offering
        expenses of approximately $2.4 million, including underwriting discounts
        of
        approximately $1.8 million, were approximately $28.2 million. Approximately
        $27.3 million of the proceeds from the initial public offering and the private
        placement was placed in a trust account for Argyle’s benefit. Except for
        reimbursement of taxes payable and $.6 million in interest from the trust
        account that was released to Argyle in September 2006 for working capital,
        Argyle could not access the amounts held in the trust until it consummated
        a
        business combination. The approximate $30.1 million held in trust as of June
        30,
        2007 includes up to approximately $1.4 million of underwriters' and placement
        agent’s compensation and related interest from Argyle’s private placement and
        initial public offering that will be paid to the underwriters and placement
        agent only in the event of a business combination. On March 14, 2007, the
        underwriters from Argyle's initial public offering agreed to forfeit any
        and all
        rights or claims to a pro-rata portion of the deferred underwriting costs
        and
        associated interest with respect to any shares of common stock which are
        redeemed in connection with our proposed acquisition. As a result, the deferred
        underwriting and offering costs were reduced by approximately $0.3 million,
        and
        common stock subject to possible redemption has been increased by $0.3 million.
        The trust account earned interest income of approximately $0.8 million during
        the six months ended June 30, 2007. The amounts held outside of the trust
        account are available to be used by Argyle to provide for business, legal
        and
        accounting due diligence on prospective acquisitions and continuing general
        and
        administrative expenses. As of June 30, 2007, Argyle had approximately $0.06
        million outside the trust account to fund its working capital
        requirements.
  Upon
        going public in late January 2006, Argyle has focused its attention on the
        search for a target business in the security industry. The expenses related
        to
        this effort are primarily comprised of certain monthly consulting fees paid
        to
        parties identified below for the research and investigation of potential
        target
        companies, and professional fees and travel expenses associated with
        targets that are no longer being pursued. Argyle has recorded these
        expenses as either part of the disclosed consulting and professional fees,
        or as
        travel expenses which are classified as other operating costs. The costs
        directly associated with the ISI acquisition, excluding the recurring monthly
        consulting fees which are expensed, have been capitalized as transaction
        costs.
        Two of Argyle’s consultants work exclusively on the research, investigation and
        targeting of security companies for potential future acquisitions, while
        one of the other consultants spends approximately one-half of his time on acquisitions.
        Argyle believes that the amounts recorded as expenses associated with such
        research during 2006 and the first six months of 2007 were approximately
        $0.26
        million. Additionally, transaction costs associated with the ISI acquisition
        of
        approximately $0.8 million have been capitalized as of June 30,
        2007.
  13
 
 On
        April
        16, 2007, Argyle’s officers and directors, an affiliate of Bob Marbut, Argyle’s
        Chairman and Co-Chief Executive Officer, and certain of Argyle’s consultants,
        pursuant to a note and warrant acquisition agreement, loaned Argyle an aggregate
        of $.3 million and in exchange received promissory notes in the aggregate
        principal amount of $.3 million and warrants to purchase an aggregate of
        37,500
        shares of Argyle’s common stock. Pursuant to the agreement, the holders of the
        warrants could not exercise or transfer the warrants until Argyle consummated
        a
        business combination and were granted demand and piggy-back registration
        rights
        with respect to the shares of common stock underlying the warrants. The warrants
        are exercisable at $5.50 per share of common stock and expire on January
        24,
        2011. The warrants also may be exercised on a net-share basis by the holders
        of
        the warrants. The promissory notes bear interest at a rate of 4% per year
        and
        were repayable 30 days after Argyle consummated a business combination. The
        promissory notes were repaid in full plus accrued interest in August
        2007.
 
 Argyle
        has used an estimated $20.5 million (excluding Argyle and ISI transaction
        costs)
        of the net proceeds of the initial public offering to acquire ISI. Additionally,
        Argyle estimates that it has incurred total transaction costs of approximately
        $1.7 million, including legal costs paid to Loeb and Loeb of $0.5 million,
        $0.7
        million related to certain Macquarie Securities (USA) Inc.’s (formerly Giuliani
        Capital Advisors) advisory fees and fairness opinion, $0.3 million paid in
        M&A fees to WFG Investments and additional costs of $0.2 million related to
        accountants, consultants, printer fees and other miscellaneous expenses.
        Such
        costs do not include transaction costs of approximately $1.0 million to be
        incurred by ISI (related primarily to attorney, brokerage and accounting
        fees).
        Redeeming shareholders representing 232,565 shares (approximately 6% of the
        outstanding redeemable shares) will be paid $1.8 million.
 
 After
        paying off any expenses relating to the identification and evaluation of
        prospective acquisition candidates, the structuring, negotiation and
        consummation of the business combination and paying for the redemption of
        the
        stock of any of Argyle’s stockholders who choose to exercise their redemption
        rights, residual proceeds from Argyle’s initial public offering will be used by
        Argyle as working capital. Management believes that cash on hand, after
        payments to redeeming stockholders, in addition to cash provided by the
        operations of ISI, will be sufficient to meet Argyle's working capital
        requirements for the next twelve months.
  From
        January 1, 2006 to June 30, 2007, Argyle has incurred total operating expenses
        of approximately $1.5 million and transaction costs which have been capitalized
        of approximately $0.8 million. This total of approximately $2.3 million is
        greater than the total of $1.4 million disclosed as being available to the
        Company after its initial public offering in its Registration Statement on
        Form
        S-1 relating to the initial public offering. This approximate $.9 million
        difference is primarily attributable to the following: approximately $0.2
        million of franchise taxes, $0.1 million of non-cash stock compensation expense,
        a fairness opinion fee of $0.2 million and various expenses, primarily legal
        and
        accounting, which were greater than those estimated in the Form S-1. Recurring
        monthly operating expenses of approximately $.09 million per month will continue
        to accrue after June 30, 2007.
  Argyle’s
        accrued expenses, as of June 30, 2007, which includes accruals of approximately
        $.5 million for deferred acquisition costs, totaled $.6 million. Accrued
        expenses as of December 31, 2006 amounted to $.6 million and consisted of
        approximately $.4 million in deferred acquisition costs.
  Upon
        the
        merger with ISI, Argyle assumed approximately $6.0 million in long-term debt,
        in
        addition to the $9.0 million ISI line of credit which had an outstanding
        balance
        of approximately $7.6 million as of July 31, 2007. The $6.0 million in long-term
        debt is due eighteen months after completion of the acquisition and there
        are no
        prepayment penalties. The line of credit matures in October 2008 with interest
        payable quarterly and is secured by certain tangible and intangible assets.
        The
        line of credit agreement contains certain financial covenants as well as
        restrictive and affirmative covenants. Additionally, Argyle assumed the capital
        lease obligation related to ISI’s offices in San Antonio, Texas, which had a
        balance of approximately $2.0 million as of July 31, 2007. At closing, Argyle
        paid certain ISI obligations totaling approximately $1.9 million as of July
        31,
        2007, relating to ISI*MCS (an entity created by two of ISI's executive officers
        in connection with the issuance of performance and payments bonds to
        ISI) and notes payable to ISI shareholders. Argyle will also assume the
        current liabilities relating to accounts payable, accrued liabilities and
        billings in excess of costs and estimated earnings on incomplete
        contracts.
 
 14
 
 As
        of
        February 1, 2006, Argyle entered into a lease for Argyle’s office space in San
        Antonio, Texas and began to pay a base rental of approximately $.006 million
        per
        month. The lease term expired in July 2007 and the Company is currently month
        to
        month. In connection with its operations, in March 2006, Argyle paid an
        outstanding obligation to a consultant for approximately $.05 million and
        is
        currently paying approximately $.02 million per month in consulting fees
        for
        services assisting Argyle in the identification of a target business, securities
        compliance and administration. The consulting agreements entered into thus
        far
        may be terminated by either party for any reason upon 15 days
        notice.
 
 Presently,
        Argyle is utilizing four consultants on a monthly basis. Alan Wachtel and
        Graham
        Wallis perform research and investigation of target companies in the security
        industry and assist in the performance of due diligence on potential acquisition
        candidates for potential future acquisitions. Cindy Kittrell is the office
        manager and performs associated administrative functions. Don Neville is
        a
        financial consultant who assists Argyle in its SEC reporting responsibilities,
        accounting matters and also assists in the investigation and due diligence
        of
        potential acquisition candidates.
  **Off
        Balance Sheet Arrangements**
  Argyle
        does not have any off-balance sheet arrangements.
  **Contractual
        Obligations**
  We
        do not
        have any long term debt, capital lease obligations, purchase obligations
        or
        other long term liabilities.
  **ITEM
        3.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
  Market
        risk is the sensitivity of income to changes in interest rates, foreign
        exchanges, commodity prices, equity prices, and other market-driven rates
        or
        prices. As of June 30, 2007, we had not consummated a business combination
        or
        engaged in any substantive commercial business. Accordingly, we were not
        exposed to risks associated with foreign exchange rates, commodity prices,
        equity prices or other market-driven rates or prices. Post the merger with
        ISI,
        the Company will evaluate these risks on an ongoing basis. As of July 2007,
        management is not aware of any such risks that would materially impact the
        Company’s financial condition.
 
 The
        net
        proceeds of our initial public offering held in the trust account are to
        be
        invested only in money market funds meeting certain conditions under Rule
        2a-7
        promulgated under the Investment Company Act of 1940 or United States treasury
        bills. Given our limited risk in our exposure to money market funds and treasury
        bills, we do not view the interest rate risk to be significant.
  **ITEM
        4. CONTROLS AND PROCEDURES**
  An
        evaluation of the effectiveness of our disclosure controls and procedures
        as of
        June 30, 2007 was made under the supervision and with the participation of
        our
        management, including our Co-Chief Executive Officers (one of whom serves
        as our
        principal financial officer). Based on that evaluation, our Co-Chief Executive
        Officers concluded that our disclosure controls and procedures are effective
        as
        of the end of the period covered
        by this report to ensure that information required to be disclosed by us
        in
        reports that we file or submit under the Securities Exchange Act of 1934
        is
        recorded, processed, summarized and reported within the time periods specified
        in Securities and Exchange Commission rules and forms and to ensure that
        the
        information required to be disclosed is accumulated and communicated to
        management, including our Co-Chief Executive Offcers, to allow timely decisions
        regarding required disclosures. During the most recently completed fiscal
        quarter, there has been no significant change in our internal control over
        financial reporting that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over financial reporting.
 
 **ITEM
        4T. CONTROLS AND PROCEDURES**
 
 Not
        Applicable.
  15
  **PART
        II - OTHER INFORMATION**
  **ITEM
        1. LEGAL PROCEEDINGS**
  None.
  **ITEM
        1A. RISK FACTORS**
 
 In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
        Report on Form 10-K for the year ended December 31, 2006, which could materially
        affect our business, financial condition or future results. The risks described
        in our Annual Report on Form 10-K are not the only risks facing our Company.
        Additional risks and uncertainties not currently known to us or that we
        currently deem to be immaterial also may materially adversely affect our
        business, financial condition and/or operating results.
  **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
 
 On
        January 24, 2006, we consummated a private placement of 125,000 units. On
        January 30, 2006, we consummated our initial public offering of 3,700,046
        units
        (which includes 75,046 units sold pursuant to the exercise of a portion of
        the
        underwriter’s over-allotment option). Each unit consists of one share of common
        stock and one redeemable common stock purchase warrant. Each warrant entitles
        the holder to purchase from us one share of our common stock at an exercise
        price of $5.50. The units were sold at an offering price of $8.00 per unit,
        generating total gross proceeds of $30,600,368. Rodman & Renshaw, LLC acted
        as lead underwriter. The securities sold in our initial public offering were
        registered under the Securities Act of 1933 on a registration statement on
        Form
        S-1 (No. 333-126569). The Securities and Exchange Commission declared the
        registration statement effective on January 24, 2006.
 
 At
        the
        time of our offering, we incurred a total $1,836,022 in underwriting
        discounts and commissions and placement agent fees, $1,377,017 of which was
        placed in the trust account and will only be paid to the underwriters in
        the
        event that we consummate a business combination. The total expenses in
        connection with the sale of our units in the private placement and the initial
        public offering were $2,424,001. No expenses of the offering were paid to
        any of
        our directors or officers or any of their respective affiliates. We did,
        however, repay Argyle New Ventures, an affiliate of Bob Marbut, and Ron
        Chaimovski for loans they made to us prior to the consummation of the private
        placement and the initial public offering. The aggregate amount of principal
        and
        interest on such loans that we repaid was $158,177. All the funds held in
        the
        trust account have been invested in either Treasury Bills or Money Market
        Accounts.
 
 After
        deducting the underwriting discounts and commissions, placement agent fees
        and
        the offering expenses, the total net proceeds to us from the private placement
        and the initial public offering were $28,176,367, of which $27,344,346 was
        deposited into the trust account for our benefit (exclusive of the amounts
        for
        the benefit of the undewriters discussed above). The remaining proceeds
        were available to be used to provide for business, legal and accounting due
        diligence on prospective business combinations and continuing general and
        administrative expenses. The amounts held in the trust account could only
        be used by us upon the consummation of a business combination, with the
        exception of amounts due for income taxes and $600,000 of the interest earned
        on
        the trust account, which was released to us in September 2006 to fund our
        working capital.
 
 On
        December 8, 2006, Argyle, Argyle’s wholly-owned subsidiary ISI Security Group,
        Inc. (the "Merger Subsidiary") and ISI Detention Contracting Group, Inc.
        (ISI)
        entered into a merger agreement, as amended on June 29, 2007 and July 11,
        2007,
        pursuant to which the Merger Subsidiary would merge into ISI and ISI will
        become
        a wholly-owned subsidiary of Argyle.
 
 16
 
 On
        July
        31, 2007, pursuant to the terms of the merger agreement, the Company acquired
        all of the assets and liabilities of ISI through the merger of its Merger
        Subsidiary into ISI. As a result of the merger, ISI became a wholly owned
        subsidiary of the Company.
 
 At
        the
        closing of the merger, the following consideration was paid by the Company
        to
        the stockholders of ISI:
 
 ·
              $18.6
                  million in cash from the Trust Account;·
              1,180,000
                  shares of common stock of Argyle (valued at approximately $9.2
                  million);
                  and
 ·
              $1.9
                  million of unsecured promissory notes convertible into shares of
                  common
                  stock of the Company at a conversion price of $10 per
                  share.
 
 In
        addition, the merger consideration paid by the Company also included (i)
        payment
        of up to $2.0 million to an entity created by two executive officers of ISI
        in
        connection with the issuance of performance and payment bonds to ISI; and
        (ii)
        approximately $1.0 million in ISI transaction costs. Argyle incurred
        transactions costs of approximately $1.7 million in connection with the merger.
        The Company will pay approximately $1.8 million to redeeming stockholders
        and
        the remainder will be retained by the Company for working capital
        purposes.
  The
          Company also assumed approximately $6.0 million of long-term debt, approximately
          $7.6 million outstanding pursuant to a $9.0 million line of credit, and
          $2.1
          million of capitalized leases as of March 31, 2007.
  **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
  None.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  None.
  **ITEM
        5. OTHER INFORMATION**
  None.
  **ITEM
        6. EXHIBITS**
 Exhibit
                    No.
                Description4.1(1)
                Warrant
                    to Purchase Common Stock between the Company and Wesley
                    Clark4.2(1)
                Warrant
                    to Purchase Common Stock between the Company and John J.
                    Smith4.3(1)
                Warrant
                    to Purchase Common Stock between the Company and Bob
                    Marbut4.4(1)
                Warrant
                    to Purchase Common Stock between the Company and Ron
                    Chaimovski4.5(1)
                Warrant
                    to Purchase Common Stock between the Company and Graham
                    Wallis4.6(1)
                Warrant
                    to Purchase Common Stock between the Company and Alan
                    Wachtel4.7(1)
                Warrant
                    to Purchase Common Stock between the Company and Argyle Global
                    Opportunities, L.P.10.1(1)
                Note
                    and Warrant Acquisition Agreement between the Company and Wesley
                    Clark10.2(1)
                Note
                    and Warrant Acquisition Agreement between the Company and John
                    J.
                    Smith10.3(1)
                Note
                    and Warrant Acquisition Agreement between the Company and Bob
                    Marbut10.4(1)
                Note
                    and Warrant Acquisition Agreement between the Company and Ron
                    Chaimovski10.5(1)
                Note
                    and Warrant Acquisition Agreement between the Company and Graham
                    Wallis10.6(1)
                Note
                    and Warrant Acquisition Agreement between the Company and Alan
                    Wachtel10.7(1)
                Note
                    and Warrant Acquisition Agreement between the Company and Argyle
                    Global
                    Opportunities, L.P.10.8(1)
                Note
                    made by the Company in favor of Wesley Clark10.9(1)
                Note
                    made by the Company in favor of John J. Smith10.10(1)
                Note
                    made by the Company in favor of Bob Marbut10.11(1)
                Note
                    made by the Company in favor of Ron Chaimovski10.12(1)
                Note
                    made by the Company in favor of Graham Wallis10.13(1)
                Note
                    made by the Company in favor of Alan Wachtel10.14(1)
                Note
                    made by the Company in favor of Argyle Global Opportunities,
                    L.P.31.1
                Certification
                    of the Co-Chief Executive Officer (Principal Financial Officer)
                    pursuant
                    to Rule 13a-14(a) of the Securities Exchange Act, as
                    amended31.2
                Certification
                    of the Co-Chief Executive Officer and (Principal Executive Officer)
                    pursuant to Rule 13a-14(a) of the Securities Exchange Act, as
                    amended32.1
                Certification
                    of the Co-Chief Executive Officers pursuant to 18 U.S.C. 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                    .
  (1)
                Incorporated
                    by reference to the Company’s Current Report on Form 8-K dated April 16,
                    2007(2)
                Incorporated
                    by reference to the Company’s Current Report on Form 8-K dated March 14,
                    2007
  17
 
 **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly authorized.
  ARGYLE
                  SECURITY ACQUISITION CORPORATIONAugust
                  14, 2007
              By:
              /s/ Bob
                  MarbutBob
                  MarbutCo-Chief
                  Executive Officer
                (Principal
                  Accounting and Financial Officer)
 
 
 
 August
                  14, 2007
              By:
              /s/ Ron
                  ChaimovskiRon
                  ChaimovskiCo-Chief
                  Executive Officer
                (Principal
                  Executive Officer)
 
 18
 
 **Exhibit
        Index**
  Exhibit
                      No.
                  Description4.1(1)
                  Warrant
                      to Purchase Common Stock between the Company and Wesley
                      Clark4.2(1)
                  Warrant
                      to Purchase Common Stock between the Company and John J.
                      Smith4.3(1)
                  Warrant
                      to Purchase Common Stock between the Company and Bob
                      Marbut4.4(1)
                  Warrant
                      to Purchase Common Stock between the Company and Ron
                      Chaimovski4.5(1)
                  Warrant
                      to Purchase Common Stock between the Company and Graham
                      Wallis4.6(1)
                  Warrant
                      to Purchase Common Stock between the Company and Alan
                      Wachtel4.7(1)
                  Warrant
                      to Purchase Common Stock between the Company and Argyle Global
                      Opportunities, L.P.10.1(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and Wesley
                      Clark10.2(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and John
                      J.
                      Smith10.3(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and Bob
                      Marbut10.4(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and Ron
                      Chaimovski10.5(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and Graham
                      Wallis10.6(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and Alan
                      Wachtel10.7(1)
                  Note
                      and Warrant Acquisition Agreement between the Company and Argyle
                      Global
                      Opportunities, L.P.10.8(1)
                  Note
                      made by the Company in favor of Wesley Clark10.9(1)
                  Note
                      made by the Company in favor of John J. Smith10.10(1)
                  Note
                      made by the Company in favor of Bob Marbut10.11(1)
                  Note
                      made by the Company in favor of Ron Chaimovski10.12(1)
                  Note
                      made by the Company in favor of Graham Wallis10.13(1)
                  Note
                      made by the Company in favor of Alan Wachtel10.14(1)
                  Note
                      made by the Company in favor of Argyle Global Opportunities,
                      L.P.31.1
                  Certification
                      of the Co-Chief Executive Officer (Principal Financial Officer)
                      pursuant
                      to Rule 13a-14(a) of the Securities Exchange Act, as
                      amended31.2
                  Certification
                      of the Co-Chief Executive Officer and (Principal Executive
                      Officer)
                      pursuant to Rule 13a-14(a) of the Securities Exchange Act, as
                      amended32.1
                  Certification
                      of the Co-Chief Executive Officers pursuant to 18 U.S.C. 1350,
                      as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                      .
  (1)
                  Incorporated
                      by reference to the Company’s Current Report on Form 8-K dated April 16,
                      2007(2)
                  Incorporated
                      by reference to the Company’s Current Report on Form 8-K dated March 14,
                      2007
 
 19