**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D** . **C** . **20549**









**FORM
      10-K**


**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2007**


**COMMISSION
      FILE NUMBER 000-21295**







**GVI
      Security Solutions, Inc.**


(Exact
      name of registrant as specified in its charter)


**Delaware**
              (State
                or Other Jurisdiction of Incorporation or Organization)
            **77-0436410**
              (I.R.S.
                Employer identification number)





**2801
                Trade Center Drive, Suite 120 Carrollton, Texas**
            **75007**(Address
                of principal executive offices)
            (Zip
                Code)




**Registrant’s
      telephone number, including area code** **** **(972)
      245-7353**





**Securities
      registered pursuant to Section 12(b) of the Act: None**





**Securities
      registered pursuant to Section 12(g) of the Act: Common Stock
      $0** . **001
      par value**





Indicate
      by check mark if the registrant is a well-know seasoned issuer as defined in
      Rule 405 of the Securities Act.


 ̈ Yes   þ No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15 (d) of the Act.


 ̈ Yes   þ No





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


þ Yes  ̈ No




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈




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




Large
                accelerated filer  ̈
            Accelerated
                filer  ̈





Non-accelerated
                filer  ̈
            (Do
                not check if a smaller reporting company)
            Smaller
                reporting company þ




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


 ̈ Yes   þ No




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant as of June 30, 2007 was approximately
      $8,632,050.




The
      number of shares outstanding of the registrant’s Common Stock as of March 24,
      2008 was 28,147,106.







**GVI
      SECURITY SOLUTIONS, INC** .


**2007
      FORM 10-K ANNUAL REPORT**


**TABLE
      OF CONTENTS**




PagePART I
            
            
            2Item
                1.
            Business.
            2Item
                1A.
            Risk
                Factors
            6Item
                1B.
            Unresolved
                Staff Comments
            11Item
                2.
            Properties.
            11Item
                3.
            Legal
                Proceedings.
            11Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            11PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and
                IssuerPurchases of Equity Securities.
            12Item
                7.
            Management's
                Discussion and Analysis of Financial Conditions and Results of
                Operations
            13Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            21Item
                8.
            Financial
                Statements and Supplementary Data.
            21Item
                9.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure.
            21Item 9A.
            Controls
                and Procedures.
            21Item 9B.
            Other
                Information.
            22PART IIIItem
                10
            Directors,
                Executive Officers and Corporate Governance.
            22Item
                11.
            Executive
                Compensation.
            23Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.
            28Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence.
            30Item
                14.
            Principal
                Accountant Fees and Services.
            30PART IVItem
                15.
            Exhibits,
                Financial Statement Schedules.
            31


1


**CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




***This
      annual report on Form 10-K contains forward-looking statements relating to
      future events and our future performance 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, including, without limitation, statements
      regarding our expectations, assumptions, estimates, projections, beliefs,
      intentions or future strategies that are signified by the words “expects”,
“anticipates”, “intends”, “believes” or similar language. Actual results could
      differ materially from those anticipated in such forward-looking statements.
      All
      forward-looking statements included in this document are based on information
      available to us on the date hereof.***




**PART
      I**




**Item
      1. Business.** ****




**Overview**




We
      provide video surveillance products and systems for a variety of applications
      and for use in numerous markets including educational institutions, retail
      stores and warehouses, gaming establishments, theme parks, public works
      projects, bank branches and offices, and many other homeland security
      applications.




Our
      product line includes cameras designed for specific applications, recording
      systems, displays, management software and other necessary ancillary products.
      These products can be configured as a system that is scalable as customer needs
      expand or become more complex in nature.




We
      primarily target the middle market where a typical customer’s need is for a
      system that incorporates from four cameras to sixty-four cameras in any one
      location. We offer a premium brand and a wide product range with an attractive
      product feature set that is backed by a strong service and support platform.
      Our
      customers include distributors and system integrators that specialize in the
      supply and/or installation of video surveillance and other physical security
      products, such as access control and intrusion detection.




We
      represent Samsung Electronics as the primary distributor of their branded
      security and surveillance products in the Americas. We also sell a line of
      complementary products under the GVI brand in those territories. Samsung
      Electronics has been and continues to be our primary supplier of the video
      security products that we distribute. In October 2006, we entered into a new
      agreement with Samsung under which we have been granted the right to distribute
      Samsung’s complete line of professional video surveillance and security products
      in North, Central and South America through December 31, 2010. Samsung has
      agreed to a limited non-compete in these territories.




In
      order
      to serve our customers with timely delivery and after sales service, we operate
      sales and distribution centers in Dallas, Texas, Mexico City, Mexico, Sao Paulo,
      Brazil and Bogotá, Colombia. We also operate a customer call center in Dallas
      Texas.




**Corporate
      History**




We
      were
      incorporated in Delaware in August 1996 as Thinking Tools, Inc. and initially
      engaged in developing and marketing business simulation software. In April
      1999,
      we eliminated substantially all of our operations and terminated substantially
      all of our personnel. In March 2000, we acquired the business of an Internet
      software and service provider. This business did not generate sufficient
      revenues to support our operations and was discontinued in December
      2000.




From
      December 2000 until February 20, 2004, we had no active business. On February
      20, 2004, pursuant to an Agreement and Plan of Merger, GVI Security, Inc.,
      a
      Delaware corporation, merged with our newly-formed wholly-owned subsidiary,
      GVI
      Security Acquisition Corp., becoming our wholly owned subsidiary, and on April
      12, 2004, we changed our name to GVI Security Solutions, Inc.




2





On
      October 6, 2006, we completed a $5 million private placement, consisting of
      100
      Units at a price of $50,000 per unit. Each Unit consisted of 1,250,000 shares
      of
      Common Stock and a 6% Subordinated Secured Convertible Promissory Note in the
      principal amount of $45,000, convertible into 11,250,000 shares of Common Stock
      at a conversion price equal to $.004. On November 27, 2006, we effected a
      50-for-1 reverse stock split of the Common Stock, and all of the Convertible
      Notes (including approximately $40,460 of accrued interest) were converted
      to
      Common Stock. After giving effect to the reverse split and the conversion,
      we
      had outstanding 26,392,834 shares of Common Stock, of which 25,202,314 were
      issued to the purchasers of the Units (2,500,000 on the closing of the October
      2006 private placement and 22,702,314 upon conversion of the Convertible Notes
      in November 2006).





On
      January 22, 2007, the Company completed a private placement of 1,713,334 shares
      of Common Stock at a price of $0.60 per share for aggregate gross consideration
      of $1,028,000. The proceeds from the January private placement were used for
      working capital and general corporate purposes.




**Security
      Systems Markets**




According
      to a recent industry report, the combined market for the world video
      surveillance market totaled approximately $5.5 billion in 2006, and is estimated
      to grow to approximately $8.1 billion by the year 2010. **** The
      Americas market represents approximately 40% of the worldwide
      market. **** According to this report, the global security market is expected to continue
      to
      grow at an average annual rate in excess of 10%, with the primary components
      of
      this growth being electronic integrated security systems. We believe that video
      surveillance products represent the largest components of a typical integrated
      security system. The industry continues to see significant growth throughout
      the
      world fueled by increased fear of terrorism and crime, heightened expectation
      of
      safety in public places and institutions, and higher expectations of
      performance, reliability and architectural appeal.




Video
      surveillance has undergone significant changes over the last few years, from
      the
      introduction of affordable digital cameras to the birth of digital recording.
      Cost effective digital video recorders (DVR) have enabled a shift from human
      surveillance to more sophisticated computer-driven surveillance that utilizes
      archiving, data mining and artificial intelligence with predictive behavior
      algorithms. A DVR is a computer with special interface cards that accepts camera
      input and converts video signals to digital data and stores this data on the
      hard disk drive of the computer. The benefits of the DVR are its capacity to
      store large volumes of data, the clarity of its pictures, the lack of distortion
      of images and its capability to perform rapid searches based upon certain
      pre-defined parameters. We believe that over the next few years we will see
      a
      full shift in the video surveillance segment of the electronic security systems
      industry from analog to digital equipment.




**Strategies**




Our
      objective is to provide our customers and partners with a wide range of security
      products designed to install, operate and service with relative ease while
      meeting the needs of the end user. Our goal is to provide our customers with
      excellent service and superior technology at competitive prices.




We
      believe that by delivering the highest levels of customer service along with
      effective solutions for the markets that we address, we can strengthen our
      reputation as a reliable and cost-effective provider in the electronic security
      systems industry and develop customer loyalty. We strive to anticipate and
      meet
      our customers’ needs by increasing the range of products and services we offer,
      by entering into new business alliances and by pursuing acquisitions of
      complementary businesses enabling us to offer new products and services. Our
      goals include further developing our expertise and products in the security
      video sector, as well as developing other security or ancillary products to
      supplement and complement our existing product line. However, there can be
      no
      assurance that we will consummate any additional acquisitions or that any
      business we acquire will be successful. In addition, the acquisition of a
      business through the issuance of our securities will result in dilution to
      our
      existing stockholders.




**Products
      and Services**




We
      are
      committed to setting new standards in quality, performance and value by
      providing highly functional and competitive integrated security products. We
      offer a range of video surveillance and security systems to our customers,
      including products that can be used on a stand-alone basis or that can be
      integrated into a larger more sophisticated security system. We serve the
      import, support, marketing, inventory, warranty and distribution needs of our
      customers.




3





*Products*




Our
      objective is to provide complete security solutions for our customers by
      providing a suite of fully-integrated products. We sell the following products
      separately and as part of our fully integrated suite of video surveillance
      and
      integrated security solutions:




·
            a
                full line of video surveillance cameras, which include features like
                motion detection, low light day/night compatibility and high resolution,
                all with systems integration
                capabilities




·
            a
                range of vandal proof, water and weather resistant cameras and
                environmental housings




·
            high
                speed PTZ dome cameras




·
            a
                complete range of lenses




·
            a
                full range of LCD, flat screen and CRT
                monitors




·
            VCR’s
                and digital video recorders (DVR’s)




·
            ATM
                and retail POS (point of service) transaction verification
                software




·
            video
                transmission equipment




·
            digital
                processors (quads and multiplexers),
                switchers




·
            video
                management systems and recording
                software




We
      rely
      on original equipment manufacturer relationships for a number of our standard
      products. In some instances, we purchase products that meet our specifications
      from a manufacturer and distribute these products under the GVI TM label.
      When assembly of our products is required, it is done in our Dallas, Texas
      facility.




**Customer
      Support**




We
      believe that our ability to establish and maintain long-term relationships
      with
      our customers and differentiate ourselves from the competition depends
      significantly on the strength of our customer support operations and staff.
      We
      operate customer support centers in Dallas, Texas, Mexico City, Mexico, Sao
      Paulo, Brazil and Bogota, Colombia and also utilize a number of independent
      service providers in the other territories that we service.




**Distribution
      and Marketing**




We
      offer
      our products and services through local, regional and national system
      integrators and distributors who resell our products to professional security
      providers. System integrators utilize our products to develop and install a
      fully integrated security suite for end users. We also utilize regional sales
      executives and independent sales representatives to sell our products to our
      customers.


4





**Competition**




The
      electronic security systems industry is highly competitive and has become more
      so over the last several years as security issues and concerns have become
      a
      primary consideration at both government and private facilities worldwide.
      Competition is intense among a wide range and fragmented group of product and
      service providers, including electronic security equipment manufacturers,
      distributors, providers of integrated security systems, systems integrators,
      and
      others that provide competitive systems or individual elements of a
      system.




We
      believe that the range of our product and service offerings and our distribution
      channels enable us to compete favorably in the market for the security products
      and services that we offer. However, some of our competitors have greater name
      recognition, longer operational histories and greater financial, marketing
      and
      managerial resources than we do.




The
      key
      factors which drive competition in the video surveillance and security industry
      are product availability, quality, product performance, ease of integration
      and
      customer service, price, and support. There are a number of manufacturers and
      distributors of video security products. We believe that we have distinguished
      ourselves in this market by providing our customers with superior levels of
      customer service. Our main competitors are Pelco, Sony, Panasonic and Speco
      Technologies, among many others.





In
      addition, Samsung Techwin, a company distinct from Samsung Electronics but
      related through common ownership, manufactures electronic security products
      that
      are competitive with the Samsung Electronics products we sell. Samsung Techwin
      distributes its products in the United States through Samsung 360, a competitor
      of ours.




**Strategic
      Vendor Relationship**




Historically,
      Samsung Electronics has been our primary supplier for the security products
      that
      we distribute. For the years ended December 31, 2007, 2006 and 2005, 65%, 67%
      and 50%, respectively, of our revenues (excluding revenues from discontinued
      operations), were attributable to products manufactured by Samsung.





Under
      our
      prior agreement with Samsung, we had the exclusive right to sell Samsung
      products in the Professional Channel and the exclusive right to sell its
      products in the Retail Channel to a major national retailer. Our exclusive
      right
      to sell Samsung products to the major national retailer expired on December
      31,
      2005, and Samsung terminated the remaining portion of its previous agreement
      with us in January 2006. Samsung was entitled to terminate that agreement
      because we did not purchase the minimum amounts required to be purchased
      thereunder during the 2005 calendar year. Following the termination of our
      prior
      agreement with Samsung, our Board of Directors approved the discontinuation
      of
      sales to the Retail Channel.




On
      October 2, 2006, we entered into a new Distributorship Agreement with Samsung
      under which we have been granted the right to distribute Samsung’s complete line
      of professional video surveillance and security products in the “Territory”
comprising North, Central and South America through December 31, 2010. Pursuant
      to the Distributorship Agreement, Samsung has agreed to a limited non-compete
      in
      the Territory. The Distributorship Agreement provides for minimum annual
      purchase amounts of $27 million and $32.4 million for the years ending December
      31, 2007 and 2008, respectively. Samsung may terminate the Distributorship
      Agreement at any time if we do not purchase those annual amounts, as well as
      upon a breach of our other obligations thereunder. For the year ended December
      31, 2007, we purchased approximately $28.0 million under the Distributorship
      Agreement with Samsung, meeting our minimum purchase obligations for that
      year.




We
      are
      also a party to distribution arrangements with other high technology
      manufacturers who supply us with other products that complement the Samsung
      offering of video security products.




**Intellectual
      Property**




We
      have
      several registered trademarks for “GVI” in connection with the products we
      sell.




**Employees**





As
      of
      January 31, 2008, we had approximately 53 full-time employees. None of our
      employees are represented by a labor union or are subject to
      collective-bargaining agreements. We believe that we maintain good relationships
      with our employees.


5





**Properties**





We
      currently lease approximately 58,850 square feet of office and warehouse space
      in Carrollton, Texas under a lease agreement which expires in September 2009.
      In
      the opinion of our management, the leased properties are adequately insured.
      Our
      existing properties are in good condition and suitable for the conduct of our
      business.





**Legal
      Proceedings**





We
      are
      not party to any material pending legal proceedings.





**Item
      1A. Risk Factors.** ****




**RISKS
      RELATED TO OUR INDUSTRY AND OUR BUSINESS**





**A
      SUBSTANTIAL PORTION OF OUR BUSINESS IS ATTRIBUTABLE TO A SINGLE
      SUPPLIER.**





Historically,
      Samsung Electronics has been our primary supplier for the security products
      that
      we distribute. For the years ended December 31, 2007, 2006 and 2005, 65%, 67%
      and 50%, respectively, of our revenues (excluding revenues from discontinued
      operations) were attributable to products manufactured by Samsung, whose
      products we sold under an exclusive distribution agreement. Our exclusive
      agreement to distribute Samsung products in the Retail Channel to a major
      national retailer expired on December 31, 2005, and Samsung terminated the
      remaining portion of its agreement with us in January 2006. Samsung was entitled
      to terminate the distribution agreement because we did not purchase the minimum
      amounts required to be purchased thereunder during the 2005 calendar year.
      Following the termination of our agreement with Samsung, our Board of Directors
      approved the discontinuation of sales to the Retail Channel.




On
      October 2, 2006, we entered into a new Distributorship Agreement with Samsung
      under which we have been granted the right to distribute Samsung’s complete line
      of professional video surveillance and security products in the “territory”
comprising North, Central and South America through December 31, 2010. Pursuant
      to the Distributorship Agreement, Samsung has agreed to a limited non-compete
      in
      the territory. Although we consider our relationship with Samsung to be good,
      in
      the event we fail to purchase the minimum amount of products required under
      the
      Distribution Agreement or breach any other provision of the agreement, Samsung
      can again terminate its agreement with us and sell products to our competitors.
      Further, if Samsung fails to perform its obligations under the Distribution
      Agreement or we are unable to renew our agreement with Samsung, our business,
      financial condition and results of operations will be materially adversely
      affected. ****





**A
      SUBSTANTIAL PORTION OF OUR BUSINESS IS ATTRIBUTABLE TO TWO KEY
      CUSTOMERS.**





During
      the year ended December 31, 2007, two customers accounted for 20% and 18%
      respectively of our sales. During the year ended December 31, 2006, these same
      two customers accounted for 16% and 14% respectively of our sales from
      continuing operations. As a result, our revenues and results of operations
      could
      be materially and adversely affected if these clients reduce their purchases
      of
      our products.




**WE
      HAVE EXPERIENCED RECENT OPERATING LOSSES AND MAY INCUR ADDITIONAL OPERATING
      LOSSES IN THE FUTURE.**





We
      incurred a net loss of approximately $16.5 million for the year ended December
      31, 2006, as well as net losses of approximately $13.0 million and $7.2 million
      for the years ended December 31, 2005 and 2004, respectively. These net losses
      primarily resulted from increased administrative, accounting, finance and legal
      costs following our February 2004 merger, write-downs of both retail and
      professional channel inventory, returns of retail products previously sold
      by
      us, and write downs of goodwill and other assets associated with our Rapor
      products. Our 2006 loss included a $4.5 million non-cash charge from a
      beneficial conversion feature from a convertible note. We have taken steps
      to
      reduce our costs and increase sales of our products. As a result, we have been
      profitable in each fiscal quarter during 2007, generating net income of
      approximately $2,637,000 in 2007.


6





**SAMSUNG
      SUBJECTS US TO CREDIT LIMITS, WHICH CAN LIMIT OUR ABILITY TO PURCHASE THEIR
      PRODUCTS AND SELL THOSE PRODUCTS TO OUR CUSTOMERS.**





Samsung
      sets credit limits with respect to amounts owed by us to Samsung for products
      purchased by us from Samsung. To the extent the amount we owe Samsung at a
      given
      time exceeds these limits, Samsung will not ship to us additional products
      unless we pay for those products in cash or provide Samsung with a letter of
      credit. During the third quarter of 2006, Samsung suspended shipment of products
      to us as a result of a reduction in our credit limit, causing us to maintain
      lower levels of inventory during the remainder of the year, negatively impacting
      our sales during the third and fourth quarter of 2006. In conjunction with
      our
      new agreement with Samsung that we entered into on October 2, 2006, and our
      payment of $3 million for past-due amounts, Samsung resumed shipments to us.
      However, in the future, if we exceed Samsung’s credit limits and have
      insufficient cash to purchase products from Samsung, we may be unable to meet
      the demands of our customers and our business and relationships with our
      customers may be materially adversely affected.





**IF
      WE ARE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY
      AND
      CHANGES IN OUR CUSTOMERS' REQUIREMENTS AND PREFERENCES, OUR BUSINESS, FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
      AFFECTED.**





If
      we are
      unable, for technological, legal, financial or other reasons, to adapt in a
      timely manner to changing market conditions or customer requirements, we could
      lose customers and market share. The electronic security systems industry is
      characterized by rapid technological change. Sudden changes in customer
      requirements and preferences, the frequent introduction of new products and
      services embodying new technologies and the emergence of new industry standards
      and practices could render our existing products, services and systems obsolete.
      The emerging nature of products and services in the electronic security systems
      industry and their rapid evolution will require that we continually improve
      the
      performance, features and reliability of our products and services. Our success
      will depend, in part, on our ability:




·
            to
                enhance our existing products and
                services;




·
            to
                anticipate changing customer requirements by designing, developing,
                and
                launching new products and services that address the increasingly
                sophisticated and varied needs of our current and prospective customers;
                and




·
            to
                respond to technological advances and emerging industry standards
                and
                practices on a cost-effective and timely
                basis.




The
      development of additional products and services involves significant
      technological and business risks and requires substantial expenditures and
      lead
      time. If we fail to introduce products with new technologies in a timely manner,
      or adapt our products to these new technologies, our business, financial
      condition and results of operations will be adversely affected. We cannot assure
      you that even if we are able to introduce new products or adapt our products
      to
      new technologies that our products will gain acceptance among our customers.
      In
      addition, from time to time, we or our competitors may announce new products,
      product enhancements or technological innovations that have the potential to
      replace or shorten the life cycles of our products and that may cause customers
      to defer purchasing our existing products, resulting in inventory
      obsolescence.


7





**WE
      MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE OF
      STRONG COMPETITION IN THE ELECTRONIC SECURITY SYSTEMS INDUSTRY, AND WE EXPECT
      THIS COMPETITION TO CONTINUE TO INTENSIFY.**





The
      electronic security systems industry is highly competitive and has become more
      so over the last several years as security issues and concerns have become
      a
      primary consideration at both government and private facilities worldwide.
      Competition is intense among a wide range and fragmented group of product and
      service providers, including electronic security equipment manufacturers,
      distributors, providers of integrated security systems, systems integrators,
      consulting firms and engineering and design firms and others that provide
      competitive systems or individual elements of a system. Some of our competitors
      are larger than us and possess significantly greater name recognition, assets,
      personnel, sales and financial resources. These entities may be able to respond
      more quickly to changing market conditions by developing new products and
      services that meet customer requirements or are otherwise superior to our
      products and services and may be able to more effectively market their products
      than we can because they have significantly greater financial, technical and
      marketing resources than we do. They may also be able to devote greater
      resources to the development, promotion and sale of their products than we
      can.
      Increased competition could require us to reduce our prices, result in our
      receiving fewer customers orders, and result in our loss of market share. We
      cannot assure you that we will be able to distinguish ourselves in a competitive
      market. To the extent that we are unable to successfully compete against
      existing and future competitors, our business, operating results and financial
      condition would be materially adversely affected.





**WE
      DEPEND ON OUR MANUFACTURERS, SOME OF WHICH ARE OUR SOLE SOURCE FOR SPECIFIC
      PRODUCTS. OUR BUSINESS AND REPUTATION WOULD BE SERIOUSLY HARMED IF THESE
      MANUFACTURERS FAIL TO SUPPLY US WITH THE PRODUCTS WE REQUIRE AND ALTERNATIVE
      SOURCES ARE NOT AVAILABLE.**





Samsung’s
      ability to provide security products needed for our market is critical to our
      success. We also have relationships with a number of other manufacturers for
      the
      supply of our GVI branded products. Our success depends in part on whether
      our
      manufacturers are able to fill the orders we place with them and in a timely
      manner. If any of our manufacturers fail to satisfactorily perform their
      contractual obligations or fill purchase orders we place with them, we may
      be
      required to pursue replacement manufacturer relationships. If we are unable
      to
      find replacements on a timely basis, or at all, we may be forced to either
      temporarily or permanently discontinue the sale of certain products and
      associated services, which could expose us to legal liability, loss of
      reputation and risk of loss or reduced profit. Although we continually evaluate
      our relationships with our manufacturers and plan for contingencies if a problem
      should arise with a manufacturer, finding new manufacturers that offer a similar
      type of product would be a complicated and time consuming process and we cannot
      assure you that if we ever need to find a new manufacturer for certain of our
      products we would be able to do so on a completely seamless basis, or at all.
      Our business, results of operation and reputation would be adversely impacted
      if
      we are unable to provide our products to our customers in a timely
      manner. ****





**OUR
      FUTURE SUCCESS DEPENDS IN PART ON ATTRACTING AND RETAINING KEY SENIOR MANAGEMENT
      AND QUALIFIED TECHNICAL AND SALES PERSONNEL. WE ALSO FACE CERTAIN RISKS AS
      A
      RESULT OF THE RECENT CHANGES TO OUR MANAGEMENT TEAM.**





Our
      future success depends in part on the contributions of our management team
      and
      key technical and sales personnel and our ability to attract and retain
      qualified personnel. In particular, our success depends on our senior management
      team, consisting of Steven Walin, our Chief Executive Officer, and Joseph
      Restivo, our Chief Financial Officer and Chief Operating Officer. Mr. Walin
      and
      Mr. Restivo are each a party to an employment agreement with us that expires
      in
      December 2011. There is significant competition in our industry for qualified
      managerial, technical and sales personnel and we cannot assure you that we
      will
      be able to retain our key senior managerial, technical and sales personnel
      or
      that we will be able to attract, integrate and retain other such personnel
      that
      we may require in the future. **** We
      also
      cannot assure you that our employees will not leave and subsequently compete
      against us. If we cannot work together effectively to overcome any operational
      challenges that arise during the integration process, if our new management
      team
      cannot master the details of our business and our market or if we are unable
      to
      attract and retain key personnel in the future, our business, financial
      condition and results of operations could be adversely affected.





**WE
      HAVE SUBSTANTIAL INDEBTEDNESS TO WELLS FARGO SECURED BY SUBSTANTIALLY ALL OF
      OUR
      ASSETS. IF AN EVENT OF DEFAULT OCCURS UNDER OUR CREDIT AGREEMENT WITH WELLS
      FARGO, WELLS FARGO MAY FORECLOSE ON OUR ASSETS.**





On
      November 20, 2007, we entered into a Credit and Security Agreement with Wells
      Fargo Bank, National Association under which we were provided with a $15 million
      revolving credit facility. On November 21, 2007, we borrowed approximately
      $10.3
      million under the credit facility, using approximately $8.6 million of the
      proceeds to repay in full all of our outstanding indebtedness to our prior
      secured lender. The Credit and Security Agreement with Wells Fargo provides
      for
      the following events of default (among others):


8





·
            failure
                to pay interest and principal when
                due;




·
            an
                uncured breach by us of any covenant (including financial covenants),
                term
                or condition in the Credit and Security Agreement or any of the related
                loan documents;




·
            a
                breach by us, in any material respect, of any representation or warranty
                made in the Credit and Security Agreement or any of the related loan
                documents;




·
            any
                money judgment or similar final process is filed against us for more
                than
                $50,000;




·
            the
                occurrence of a “Change in Control” as defined in the Credit and Security
                Agreement;




·
            the
                occurrence of a material adverse change in our business or financial
                condition; and




·
            any
                form of bankruptcy or insolvency proceeding is instituted by or against
                us.




Upon
      the
      occurrence of an event of default under our agreements with Wells Fargo, Wells
      Fargo may enforce its rights as a secured party and we may lose all or a portion
      of our assets, be forced to materially reduce our business activities or cease
      operations.





**WE
      RELY ON INDEPENDENT DEALERS AND DISTRIBUTORS TO SELL OUR PRODUCTS. DISRUPTION
      TO
      THIS DISTRIBUTION CHANNEL WOULD HARM OUR BUSINESS.**





Because
      we sell a significant portion of our products to independent dealers and
      distributors, we are subject to many risks, including risks related to their
      inventory levels and support for our products. In particular, if dealers and
      distributors do not maintain sufficient levels of inventory to meet customer
      demand, our sales could be negatively impacted.




Our
      dealers and distributors also sell products offered by our competitors. If
      our
      competitors offer our dealers and distributors more favorable terms, those
      dealers and distributors may de-emphasize or decline to carry our products.
      In
      the future, we may not be able to retain or attract a sufficient number of
      qualified dealers and distributors. If we are unable to maintain successful
      relationships with dealers and distributors or to expand our distribution
      channels, our business could suffer.





**OUR
      BUSINESS AND REPUTATION AS A DISTRIBUTOR OF HIGH QUALITY VIDEO SURVEILLANCE
      AND
      SECURITY EQUIPMENT MAY BE ADVERSELY AFFECTED BY PRODUCT DEFECTS OR SUBSTANDARD
      PERFORMANCE.**





We
      believe that we offer state-of-the art products that are reliable and
      competitively priced. In the event that our products do not perform to
      specifications, we and/or the manufacturer of such products might be required
      to
      redesign or recall those products or pay substantial damages or warranty claims.
      Such an event could result in significant expenses, disrupt sales and affect
      our
      reputation and that of our products. In addition, product defects could result
      in substantial product liability. Although we currently maintain product
      liability insurance, we cannot assure you that it is adequate or that it will
      remain available on acceptable terms. If we face liability claims that exceed
      our insurance or that are not covered by our insurance, our business, financial
      condition and results of operation would be adversely affected.




**OUR
      GROWTH STRATEGY INCLUDES MAKING ACQUISITIONS IN THE FUTURE, WHICH COULD SUBJECT
      US TO SIGNIFICANT RISKS, ANY OF WHICH COULD HARM OUR
      BUSINESS.**





Our
      growth strategy includes identifying and acquiring or investing in suitable
      candidates on acceptable terms. Over time, we may acquire or make investments
      in
      other providers of product offerings that complement our business and other
      companies in the security industry.


9





Acquisitions
      involve a number of risks and present financial, managerial and operational
      challenges, including:





·
            diversion
                of management's attention from running our existing
                business;




·
            increased
                expenses, including travel, legal, administrative and compensation
                expenses resulting from newly hired
                employees;




·
            increased
                costs to integrate personnel, customer base and business practices
                of the
                acquired company with our own;




·
            adverse
                effects on our reported operating results due to possible write-down
                of
                goodwill associated with
                acquisitions;




·
            potential
                disputes with sellers of acquired businesses, technologies, services
                or
                products; and




·
            dilution
                to stockholders if we issue securities in any acquisition.




Moreover,
      performance problems with an acquired business, technology, product or service
      could also have a material adverse impact on our reputation as a whole. In
      addition, any acquired business, technology, product or service could
      significantly under-perform relative to our expectations, and we may not achieve
      the benefits we expect from our acquisitions. For all these reasons, our pursuit
      of an acquisition and investment strategy or any individual acquisition or
      investment, could have a material adverse effect on our business, financial
      condition and results of operations.




In
      December 2004 we completed the acquisition of Rapor, Inc. During the third
      quarter of 2006, we recorded impairment costs of approximately $977,000 related
      to Rapor. These costs resulted from the write-off of goodwill of approximately
      $544,000, as well as the write-off of the remaining net book values of trademark
      and technology associated with the Rapor products of approximately $433,000.
      Management concluded that the Rapor product line no longer fit our existing
      distribution channels and market strategy and, accordingly wrote-off goodwill,
      trademarks and technology associated with this product line. In 2007, we
      disposed of our remaining Rapor assets for nominal consideration.




**WE
      FACE LABOR, POLITICAL AND CURRENCY RISKS BECAUSE SAMSUNG ELECTRONICS' FACTORIES
      ARE LOCATED IN KOREA AND CHINA, AND WE MAY FACE OTHER RISKS IF WE CONTINUE
      TO
      EXPAND OUR BUSINESS INTERNATIONALLY.**





Since
      our
      primary suppliers are located in Korea, we may face a number of additional
      risks, including those arising from the current political tension between North
      and South Korea. While we have not faced any problems to date, in the future,
      as
      we continue to expand our business internationally, we may face:





·
            regulatory
                limitations imposed by foreign
                governments;




·
            price
                increases due to fluctuations in currency exchange
                rates;




·
            political,
                military and terrorist risks;




·
            disruptions
                or delays in shipments caused by customs brokers or government
                agencies;




·
            unexpected
                changes in regulatory requirements, tariffs, customs, duties and
                other
                trade barriers; and




·
            potentially
                adverse tax consequences resulting from changes in tax
                laws.




We
      cannot
      assure you that one or more of the factors described above will not have a
      material adverse effect on our business, financial condition and results of
      operation.




10





**INVESTMENT
      RISKS**




**OUR
      COMMON STOCK IS THINLY TRADED ON THE**  **OTC
      BULLETIN BOARD, AND WE MAY BE UNABLE TO OBTAIN LISTING OF OUR COMMON STOCK
      ON A
      MORE LIQUID MARKET.**




Our
      Common Stock is quoted on the OTC Bulletin Board, which provides significantly
      less liquidity than a securities exchange (such as the American or New York
      Stock Exchange) or an automated quotation system (such as the NASDAQ National
      Market or NASDAQ Capital Market). There is uncertainty that we will ever be
      accepted for a listing on an automated quotation system or securities
      exchange.





**PENNY
      STOCK REGULATIONS MAY AFFECT YOUR ABILITY TO SELL OUR COMMON
      STOCK.**





To
      the
      extent the price of our Common Stock remains below $5.00 per share, our Common
      Stock will be subject to Rule 15g-9 under the Exchange Act, which imposes
      additional sales practice requirements on broker dealers which sell these
      securities to persons other than established customers and accredited investors.
      Under these rules, broker-dealers who recommend penny stocks to persons other
      than established customers and "accredited investors" must make a special
      written suitability determination for the purchaser and receive the purchaser's
      written agreement to a transaction prior to sale. Unless an exception is
      available, the regulations require the delivery, prior to any transaction
      involving a penny stock, of a disclosure schedule explaining the penny stock
      market and the associated risks. The additional burdens imposed upon
      broker-dealers by these requirements could discourage broker-dealers from
      effecting transactions in our Common Stock and may make it more difficult for
      holders of our Common Stock to sell shares to third parties or to otherwise
      dispose of them.





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




As
      a
      result of our October 2006 private placement and conversion of the Convertible
      Notes issued in that private placement, the investors in the private placement
      as a group were the beneficial owners of approximately 96% of our outstanding
      shares of Common Stock, and currently beneficially own approximately 90% of
      our
      outstanding shares of Common Stock. Accordingly, these stockholders can decide
      the outcome of any corporate transaction or other matter submitted to our
      stockholders for approval, including mergers, consolidations and the sale of
      all
      or substantially all of our assets, and also could prevent or cause a change
      in
      control. The interests of these stockholders may differ from the interests
      of
      our other stockholders. Third parties may be discouraged from making a tender
      offer or bid to acquire us because of this concentration of
      ownership.




**Item
      1** **B.
      Unresolved Staff Comments.**




Not
      Applicable




**Item
      2. Properties.**




We
      currently lease approximately 58,850 square feet of office and warehouse space
      in Carrollton, Texas under a lease agreement which expires in September 2009.
      In
      the opinion of our management, the leased properties are adequately insured.
      Our
      existing properties are in good condition and suitable for the conduct of our
      business.




**Item
      3. Legal Proceedings.**




We
      are
      not party to any material pending legal proceedings.




**Item
      4. Submission of Matters to a Vote of Security Holders.** ****




No
      matter
      was submitted to a vote of security holders during the fourth quarter of 2007.




11




**PART
      II**




**Item 5.**
            **Market
                for Registrant’s Common Equity and Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities.**




Our
      Common Stock trades in the over-the-counter-market under the symbol “GVSS.” From
      April 14, 2004 until November 28, 2006, our Common Stock was quoted under the
      symbol “GVIS.” Prior to April 14, 2004, our Common Stock was quoted under the
      symbol “TSIM.” Trades in our Common Stock were reported by the OTC Bulletin
      Board from January 1, 2002 until June 9, 2002, and by Pink Sheets LLC from
      June
      9, 2002 until December 13, 2004. Since December 13, 2004, trades of our Common
      Stock have been quoted on the OTC Bulletin Board. The following table sets
      forth
      the quarterly high and low bid prices of a share of our Common Stock as reported
      by the OTC Bulletin Board and Pink Sheets LLC, respectively. The quotations
      listed below reflect inter-dealer prices, without retail mark-ups, mark-downs
      or
      commissions and may not necessarily represent actual transactions. The prices
      below have not been adjusted for the one-for-50 reverse split of our Common
      Stock effected on November 27, 2006.




**Price****High**
            
            **Low****2006**First
                quarter
            
            $
            0.37
            
            $
            0.15Second
                quarter
            
            $
            0.36
            
            $
            0.15Third
                quarter
            
            $
            0.17
            
            $
            0.03Fourth
                quarter
            
            $
            1.25
            
            $
            0.02**2007**First
                quarter
            
            $
            1.17
            
            $
            0.90Second
                quarter
            
            $
            1.01
            
            $
            0.80Third
                quarter
            
            $
            0.83
            
            $
            0.66Fourth
                quarter
            
            $
            1.01
            
            $
            0.56





The
      number of holders of record for our Common Stock as of December 31, 2007 was
      approximately 150. This number excludes individual stockholders holding stock
      under nominee security position listings.





**Dividends**





We
      have
      not paid any dividends on our Common Stock since our inception and do not intend
      to pay any cash dividends to our stockholders in the foreseeable future.
      Nonetheless, the holders of our Common Stock are entitled to dividends when
      and
      if declared by our board of directors from legally available funds.





Equity
      Compensation Plan Information




Plan Category
            Number of securities to be issued upon exercise of outstanding options, warrants and rights
            Weighted-average exercise price of outstanding options, warrants and rights
            Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(a)
            (b)
            (c)Equity
                compensation plans approved by security holders
            5,900,000
            $1.07
            -Equity
                compensation plans not approved by security holders
            2,187,218 (1)
            0.28
            -Total
            8,087,218
            0.86
            -




12


(1)
            Consists
                of options to purchase 62,218 shares of common stock issued to employees
                with a weighted average exercise price of $0.80, and warrants to
                purchase
                2,125,000 shares of common stock issued to consultants with a weighted
                average price of $0.26, the details of which are provided in Note
                13 of
                our Financial Statements. Does not include warrants to purchase 134,592
                shares with exercise prices equal to $30.00 or more.




**Item 7.**
            **Management****’****s
                 Discussion and Analysis of Financial Condition and Results of
                Operations****.**




*This
      report contains forward-looking statements relating to future events and our
      future performance 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, including, without limitation, statements regarding our
      expectations, beliefs, intentions or future strategies that are signified by
      the
      words “expects,” “anticipates,” “intends,” “believes” or*  *similar
      language. Actual results could differ materially from those anticipated in
      such
      forward-looking statements. All forward-looking statements included in this
      document are based on information available to us on the date hereof. We caution
      investors that our business and financial performance are subject to substantial
      risks and uncertainties. In evaluating our business, prospective investors
      should carefully consider the information set forth under the caption “Risk
      Factors” in addition to the other information set forth herein and elsewhere in
      our other public filings with the Securities and Exchange
      Commission.*




**Overview**





Through
      our subsidiaries, we provide video surveillance and security solutions products, incorporating
      a complete line of video surveillance and detection systems, to the homeland
      security, professional and business-to-business market segments .
      We provide
      a
      strong combination of closed
      circuit televisions ( CCTVs),
      digital video recorders (DVRs), and
      networking products that
      enhance life safety for both government agencies and the private sector.





**Discontinuance
      of Retail Sales**





**** Historically,
      sales of our products in the Retail Channel have accounted for a substantial
      portion of our revenues. For the year ended December 31, 2005, 56% of
      our
      revenues, including revenues from discontinued operations, were from sales
      in
      the Retail Channel. Among other reasons, the decline in sales of our retail
      products resulted from the replacement of our products by a major national
      retailer that accounted for substantially all of our Retail Channel sales with
      products manufactured by a competitor. In addition, our exclusive agreement
      to
      distribute Samsung products in the Retail Channel to this retailer expired
      on
      December 31, 2005. As a result, in the first quarter of 2006 our board of
      directors approved the discontinuance of our sales to the Retail Channel so
      that
      we can focus our efforts on sales to professionals and wholesale distributors. ****





**** The
      retail business is accounted for as discontinued operations and, accordingly,
      its operations are segregated in the accompanying financial statements. In
      connection with the discontinuance of the Retail Channel business for the year
      ended December 31, 2006, we wrote down assets identified with the retail
      business by approximately $2.4 to net realizable value. The write down to net
      realizable value was based on management’s best estimates of the amounts
      expected to be realized on the disposition of all related assets and liabilities
      held for disposition from the discontinued operations. At December 31, 2006,
      we
      had divested of substantially all retail inventory and other related assets
      The
      results of the discontinued operations do not include any allocation of
      corporate overhead during the periods presented.




**Reverse
      Stock Split**




As
      discussed below, on October 6, 2006, we completed a $5 million private
      placement, and in connection therewith, on November 27, 2006, we effected a
      50-for-1 reverse stock split of the Common Stock. After giving effect to the
      reverse split, we had outstanding 26,392,834 shares of Common Stock, of which
      25,202,314 were issued to the purchasers of the Units. Unless otherwise
      indicated, a ll
      share
      and per share amounts in this Annual Report on Form 10-K, including the
      accompanying financial statements, give retroactive effect to the 1-for-50
      reverse stock split.


13





**CRITICAL
      ACCOUNTING POLICIES**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates. We believe
      the following critical accounting policies have significant effect in the
      preparation of our consolidated financial statements.





**Revenue
      Recognition**





Our
      primary source of revenue is from sales of our products. We recognize revenue
      when the sales process is deemed complete and associated revenue has been
      earned. Our policy is to recognize revenue when risk of loss and title to the
      product transfers to the customer. Net sales is comprised of gross revenue
      less
      expected returns, trade discounts and customer allowances, which include costs
      associated with off-invoice mark downs and other price reductions, as well
      as
      trade promotions. These incentive costs are recognized at the later of the
      date
      on which we recognize the related revenue or the date on which we offer the
      incentive. For those incentives that require the estimate of sales volume or
      redemption rates, such as for volume rebates, we use historical experience
      and
      internal and customer data to estimate the sales incentives at the time revenue
      is recognized.





We
      allow
      customers to return defective products when they meet certain established
      criteria as outlined in our trade terms. We regularly review and revise, when
      deemed necessary, our estimates of sales returns which are primarily based
      on
      actual historical return rates. We record estimated sales returns as reductions
      to sales, cost of sales, and accounts receivable and an increase to inventory.
      Returned products which are recorded as inventory are valued based upon the
      amount we expect to realize upon their subsequent disposition. The physical
      condition and marketability of the returned products are the major factors
      considered by us in estimating realizable value. Actual returns, as well as
      realized values on returned products, may differ significantly, either favorably
      or unfavorably, from our estimates if factors such as customer inventory levels
      or competitive conditions differ from our estimates and expectations and, in
      the
      case of actual returns, if economic conditions differ significantly from our
      estimates and expectations.





**Allowance
      for Doubtful Accounts**





We
      maintain allowances for doubtful accounts for estimated losses from customers'
      inability to make payments. We assess each account that is more than 90 days
      delinquent and other accounts when information known to us indicates amounts
      may
      be uncollectible. In order to estimate the appropriate level of the allowance,
      we consider such factors as historical bad debts, current customer credit
      worthiness, changes in customer payment patterns and any correspondence with
      the
      customer. In 2007 and 2006 we experienced losses, or recorded provisions for
      potential losses, from customers' inability to make payments, totaling
      approximately $163,000 and $817,000, which were equal to 0.4% and 1.8% of
      revenues, respectively. If the financial condition of our customers were to
      deteriorate and impair their ability to make payments, additional allowances
      might be required in future periods.





**Inventory**





Inventory
      is stated at the lower of cost (first-in, first-out method) or market and
      consists of goods held for resale and parts used for repair work. Reserves
      are
      recorded for slow-moving, obsolete, nonsaleable or unusable items based upon
      a
      product-level review, in order to reflect inventory balances at their net
      realizable value. Inventory reserve balances at December 31, 2007 and 2006
      were
      approximately $2,558,000 and $2,541,000, respectively.





**Goodwill
      and Intangible Assets**




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




14





During
      the year ended December 31, 2006, we concluded that the Rapor product line
      no
      longer fit the Company’s existing distribution channels and market strategy and,
      accordingly, recorded impairment costs of approximately $977,000 resulting
      from
      the write-off of goodwill of approximately $544,000, and the write-off of the
      remaining net book value of the trademark and technology associated with Rapor
      products totaling approximately $433,000, as prescribed under SFAS 142. No
      such
      impairment expense was recorded for the year ended December 31,
      2007.





**Income
      Taxes**





Income
      taxes consist of taxes currently payable plus deferred taxes related primarily
      to differences between the basis of property and equipment, inventory, and
      accounts receivable for financial and income tax reporting. Deferred taxes
      represent the future tax return consequences of those differences, which will
      be
      taxable or deductible when the assets and liabilities are recovered or
      settled.




Deferred
      tax liabilities and assets are classified as current or noncurrent based on
      the
      classification of the related asset or liability for financial reporting, or
      according to the expected reversal date of temporary differences not related
      to
      an asset or liability for financial reporting. Also, a valuation allowance
      is
      used, if necessary, to reduce deferred tax assets by the amount of any tax
      benefits that are not expected to be realized in the future based on available
      evidence.





**Stock-Based
      Compensation**




We
      periodically issue stock options and warrants to employees and non-employees
      in
      non-capital raising transactions for services and for financing costs. We
      adopted Statement of Financial Accounting Standards (SFAS) No. 123R effective
      January 1, 2006, and is using the modified prospective method in which
      compensation cost is recognized beginning with the effective date (a) based
      on
      the requirements of SFAS No. 123R for all share-based payments granted after
      the
      effective date and (b) based on the requirements of SFAS No. 123R for all awards
      granted to employees prior to the effective date of SFAS No. 123R that remained
      unvested on the effective date. We account for stock option and warrant grants
      issued and vesting to non-employees in accordance with EITF No. 96-18:
      "Accounting for Equity Instruments that are Issued to Other Than Employees
      for
      Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18
“Accounting Recognition for Certain Transactions involving Equity Instruments
      Granted to Other Than Employees” under which the value of the stock compensation
      is based upon the measurement date as determined at either a) the date at which
      a performance commitment is reached, or b) at the date at which the necessary
      performance to earn the equity instruments is complete.




**RESULTS
      OF OPERATIONS**





***Fiscal
      Year Ended December 31, 2007 Compared To Fiscal Year Ended December 31,
      2006***





**Net
      Revenues From Continuing Operations**





Net
      revenues increased approximately $1.0 million, or 2% to approximately $45.0
      million during the year ended December 31, 2007 from approximately $44.0 million
      during the year ended December 31, 2006. The increase in revenues reflects
      increased sales to distributors, integrators and installers of a variety of
      products manufactured by Samsung Electronics as well as other manufacturers.
      Our
      net revenues for 2007 also reflect a decrease of $1.9 million in total returns
      and allowances. Management believes the reduction in returns and allowances
      primarily resulted from a change in our customer return policies as well as
      improved customer satisfaction with our core products. We continue to introduce
      new products to complement our existing lines, and will continue to focus on
      the
      professional market through various channels.




15


**Cost
      Of Goods Sold From Continuing Operations**




Total **** cost
      of
      goods sold decreased approximately $5.2 million, or 14% to approximately $32.2
      million for the year ended December 31, 2007, from approximately $37.4 million
      during the year ended December 31, 2006. This decrease was due to (i) improved
      product margins, (ii) reduced product returns under warranty, (iii) lower net
      freight costs, and (iv) significant inventory write downs of approximately
      $1.4
      million occurring in 2006.





As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the year ended December 31, 2007 increased to approximately $12.8
      million from approximately $6.6 million for the year ended December 31, 2006,
      and gross profit as a percentage of revenues increased to 28.5% for the year
      ended December 31, 2007 compared with 15% for the year ended December 31,
      2006.





**Selling,
      General and Administrative Expenses**




Selling,
      general, and administrative expenses decreased 24% to approximately $10.3
      million for the year ended December 31, 2007 from approximately $13.5 million
      for the year ended December 31, 2006, as follows:




**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately 16% to approximately $5.4 million
      for
      the year ended December 31, 2007 from approximately $6.4 million for the year
      ended December 31, 2006. The decrease was primarily due to (i) a decrease
      in commissions of approximately $638,000, and (ii) an increase of approximately
      $439,000 in marketing expenses paid for by our suppliers. These decreases were
      partially offset by an increase in promotional expenses of approximately
      $103,000.




**General
      and Administrative.** General
      and administrative expenses decreased 31% to approximately $4.9 million for
      the
      year ended December 31, 2007 from approximately $7.1 for the year ended December
      31, 2006.  Major items resulting in this decrease were (i) $581,000 of bad
      debt expense incurred in 2006 with no similar charge in 2007, (ii) a decrease
      of
      approximately $525,000 in salaries and benefits, (iii) a decrease of
      approximately $302,000 in legal fees, (iv) a decrease in depreciation and
      amortization of approximately $257,000, (v) a decrease of approximately $185,000
      in directors’ fees, and (vi) a decrease in insurance and property taxes of
      approximately $231,000.




**Impairment
      Of Long-Lived Assets**




During
      the year ended December 31, 2006, the Company recorded impairment costs of
      approximately $977,000. These costs resulted from the write-off of goodwill
      of
      approximately $544,000, and the write-off of the remaining net book value of
      the
      trademark and technology associated with the Rapor products of approximately
      $433,000. No similar impairment expenses were recorded in the year ended
      December 31, 2007.




**Interest
      Expense**




Interest
      expense for the year ended December 31, 2007 decreased 83% to approximately
      $1.0
      million, from approximately $5.9 million in the year ended December 31, 2006.
      The decrease was the result of (i) a charge of $4.5 million to record beneficial
      conversion features resulting from the issuance of convertible notes in 2006,
      with no similar charge in 2007, (ii) higher deferred debt amortization, totaling
      $600,000 for 2006 as compared to $212,000 in 2007, and (iii) approximately
      $324,000 of lower interest expense in 2007 as compared with 2006, due to lower
      average outstanding debt balances and a lower average interest rate in 2007.
      These decreases were partially offset by the effect of a favorable adjustment
      during 2006 of $320,000 whereby interest expense that had been accrued in prior
      periods was not required to be paid to our prior lender.




**Income
      Tax Expense (Benefit)**




We
      recorded a provision for federal, state and local income tax of approximately
      $43,000 for the year ended December 31, 2007. In addition, we recorded a benefit
      of approximately $984,000 associated with our tax loss carry-forwards eligible
      for utilization in the year ending December 31, 2008. This produced a net income
      tax benefit of approximately $941,000 for the year ended December 31, 2007,
      as
      compared to an expense of approximately $14,000 for the comparable period ended
      December 31, 2006.




16


**Discontinued
      Operations**




Gain
      from
      discontinued operations, net of tax, was $233,000 for the year ended December
      31, 2007, compared to a loss from discontinued operations of approximately
      $2.7
      million for the year ended December 31, 2006. The gain for the year ended
      December 31, 2007 reflects the remaining reserve we had taken in connection
      with
      our obligations to service our discontinued retail product line, which
      obligations terminated during the year ended December 31, 2007. The loss for
      the
      year ended December 31, 2006 reflects negative revenues and reserves recorded
      in
      connection with returns of retail products sold in prior periods, and write
      downs of returned retail inventories. Operating results from discontinued
      operations do not include any allocation of corporate overhead.




**Net
      Income (Loss)**




As
      a
      result of the items discussed above there was net income of approximately $2.6
      million for the year ended December 31, 2007 compared with a net loss of
      approximately $16.5 million for the year ended December 31, 2006.




***Fiscal
      Year Ended December 31, 2006 Compared To Fiscal Year Ended December 31,
      2005***





**Net
      Revenues From Continuing Operations**





Net
      revenues increased approximately $3.2 million, or 8% to approximately $44.0
      million during the year ended December 31, 2006 from approximately $40.8 million
      during the year ended December 31, 2005. The increase reflects a $5.0 million,
      or 13%, increase in sales of professional products, offset by a decrease of
      approximately $1.8 million, or 93%, in enterprise solutions revenues, which
      have
      been discontinued. The increase in revenues of our professional products
      reflected increased sales to distributors, integrators and installers of a
      variety of products manufactured by Samsung Electronics as well as other
      manufacturers. The reduction in enterprise solutions revenues reflects sales
      of
      the Rapor portal during the year ended December 31, 2005, with no corresponding
      sales during the year ended December 31, 2006. D uring
      the
      third quarter of 2006, management concluded that the Rapor product line no
      longer fit our existing distribution channels and market strategy, and.
      accordingly wrote-off intangibles associated with this product line.




**Cost
      Of Goods Sold From Continuing Operations**




Total **** cost
      of
      goods sold increased approximately $2.6 million, or 7% to approximately $37.4
      million for the year ended December 31, 2006, from approximately $34.8 million
      during the year ended December 31, 2005. This increase was due to the increased
      revenue volume from the sale of professional products, partially offset by
      improved margins on professional products, which resulted in an overall increase
      in cost of sales for professional products of $3.3 million for the year ended
      December 31, 2006 as compared to the period ended December 31, 2005. In
      addition, cost of sales related to enterprise sales decreased $1.3 million
      for
      the period ended December 31, 2006 as compared to the comparable period in
      2005
      as a result of the absence of sales of the Rapor product in 2006. Indirect
      costs
      included in cost of goods sold, related to salaries and expenses associated
      with
      our warehouse, assembly and technical support services departments, increased
      $600,000 during the year ended December 31, 2006 as compared to the year ended
      December 31, 2005. Other charges included in cost of goods sold during the
      year
      ended December 31, 2006 of approximately $1.6 million related to adjustments
      to
      reflect slow-moving inventory to their net realizable value, as compared to
      similar adjustments of approximately $630,000 during the year ended December
      31,
      2005.




As
      a
      result of the changes described above in revenues and cost of goods sold, gross
      profit for the year ended December 31, 2006 increased to approximately $6.6
      million from approximately $6.0 million for the year ended December 31, 2005,
      and gross profit as a percentage of revenues increased to 15.0% for the year
      ended December 31, 2006 compared with 14.6% for the comparable period ended
      December 31, 2005.




17


**Selling,
      General and Administrative Expenses**




Selling,
      general, and administrative expenses decreased 12% to approximately $13.5
      million for the year ended December 31, 2006 from approximately $15.2 million
      for the year ended December 31, 2005, as follows:




**Sales
      and Marketing.** Sales
      and
      marketing expenses decreased approximately 30% to approximately $6.4 million
      for
      the year ended December 31, 2006 from approximately $9.1 million for the year
      ended December 31, 2005. The decrease was primarily due to (i) the
      elimination of approximately $800,000 of expense related to a licensing
      agreement entered into January 1, 2005, which was not renewed for 2006, (ii)
      decreases of approximately $356,000 in sales and marketing staff salaries and
      related benefits, (iii) a decrease of approximately $530,000 in promotional
      expenses, (iv) a decrease in commissions of approximately $591,000, and (v)
      a
      reduction in travel and other various general and administrative expenses of
      $330,000.




**General
      and Administrative.** General
      and administrative expenses increased 17% to approximately $7.1 million for
      the
      year ended December 31, 2006 from approximately $6.1 for the comparable period
      ended December 31, 2005.  Major items resulting in the increased
      general and administrative expense were (i) approximately $710,000 in personnel
      termination costs, (ii) stock based compensation expense of approximately
      $332,000 recorded due to the adoption of SFAS 123R effective January 1, 2006,
      with no comparable expense in 2005, and (iii) an increase in bad debt expenses
      of approximately $746,000. These increases were partially offset by decreases
      in
      (i) professional fees of $240,000, (ii) contract and temporary labor of $272,000
      and (iii) various other general and administrative expenses of approximately
      $250,000.




**Impairment
      Of Long-Lived Assets**




During
      the year ended December 31, 2006, we recorded impairment costs of approximately
      $977,000. These costs resulted from the write-off of goodwill of approximately
      $544,000, and the write-off of the remaining net book value of the trademark
      and
      technology associated with the Rapor products of approximately $433,000. No
      similar impairment expenses were recorded in the year ended December 31, 2005.




**Interest
      Expense**




Interest
      expense for the year ended December 31, 2006 increased 367% to approximately
      $5.9 million, from approximately $1.3 million in the year ended December 31,
      2005. The increase was the result of (i) a charge of $4.5 million to record
      beneficial conversion features resulting from the issuance of convertible notes
      with exercise terms more favorable than prevailing market conditions, (ii)
      a
      charge of approximately $47,000 to reflect the fair value of warrants issued
      in
      conjunction with the October 2006 private placement transaction, and (iii)
      interest associated with convertible notes issued in conjunction with the
      October 2006 private placement transaction of approximately $40,000.




**Income
      Tax Expense (Benefit)**




We
      recorded a provision for federal, state and local income tax of approximately
      $14,000 for the year ended December 31, 2006, as compared to an expense of
      approximately $83,000 for the comparable period ended December 31, 2005. The
      $14,000 expense relates to state franchise taxes due in various states in which
      we are licensed and transact business. At December 31, 2006, we believed that
      any provision for federal and state tax benefits due to our loss for the year
      ended December 31, 2006 would be offset by an equal increase in a valuation
      allowance as a result of our history of recurring operating losses.




**Discontinued
      Operations**




Loss
      from
      discontinued operations, net of tax, was approximately $2.7 million for the
      year
      ended December 31, 2006, compared to a loss from discontinued operations of
      approximately $2.3 million for the year ended December 31, 2005. The loss for
      the period ended December 31, 2006 reflects negative revenues and reserves
      recorded in connection with returns of retail products sold in prior periods,
      and write downs of returned retail inventories. In September 2006 we entered
      into an agreement with our former retail distribution agent whereby the parties
      terminated the alliance agreement and the respective rights and obligations
      of
      the parties thereunder. In addition, we transferred to the distribution agent
      substantially all of our remaining retail inventory in satisfaction of any
      and
      all remaining outstanding and future return obligations. In comparison to our
      negative revenues for the year ended December 31, 2006, we had net revenues
      of
      approximately $13.8 million for the comparable period ended December 31, 2005.
      Operating results from discontinued operations do not include any allocation
      of
      corporate overhead.




18


**Net
      Loss**




As
      a
      result of the items discussed above there was a net loss of approximately $16.5
      million for the year ended December 31, 2006 compared with a net loss of
      approximately $13.0 million for the year ended December 31, 2005.




**Liquidity
      and Capital Resources**





At
      December 31, 2007, we had cash and equivalents of approximately $313,000,
      working capital of approximately $11.5 million, stockholders’ equity of $1.5
      million, and an outstanding balance of $10.3 million under our revolving credit
      facility with Wells Fargo. In comparison, at December 31, 2006, we had cash
      and
      equivalents of approximately $225,000, a working capital deficit of
      approximately $2.0 million, an outstanding balance of $1.9 million under the
      Laurus term loan, and outstanding balances under the Laurus revolving credit
      facility of approximately $6.4 million. Additionally, we had borrowing
      availability of approximately $1.9 million at December 31, 2007 under our credit
      facility with Wells Fargo, as compared with $2.2 million of availability from
      our prior lender at December 31, 2006.




Cash
      increased from $225,000 at December 31, 2006 to $313,000 at December 31, 2007,
      primarily as a result of (i) net borrowings under our revolving credit
      facilities of approximately $4.0 million, (ii) net income of approximately $1.7
      million, (iii) a decrease in accounts receivables of approximately $1.3 million,
      and (iv) private placement proceeds of approximately $1.0 million. These factors
      were partially offset by (i) an increase in inventory of approximately $6.3
      million, (ii) principal payments of a senior term note of approximately $1.9
      million, and (iii) interest payments of approximately $805,000.




By
      its
      terms, our prior credit facility with Laurus, which has since been repaid in
      full, was to mature on December 31, 2007. Accordingly, at December 31, 2006,
      obligations owed to Laurus were reflected as current liabilities.




Management
      believes that cash generated from operations, together with borrowings available
      under the Credit Agreement with Wells Fargo, will provide us with adequate
      financing to fund operations and meet our cash requirements through the end
      of
      2008.




**$15
      Million Wells Fargo Revolving Credit Facility**




On
      November 20, 2007, through our wholly-owned subsidiary GVI Security, Inc.,
      we
      entered into a Credit and Security Agreement with Wells Fargo Bank, National
      Association under which we were provided with a $15 million revolving credit
      facility. On November 21, 2007, we borrowed approximately $10.3 million under
      the credit facility, using approximately $8.6 million of the proceeds to repay
      in full all of our outstanding indebtedness to Laurus Master Fund. In addition,
      we used $1.7 million of the initial loan proceeds to increase our working
      capital. Borrowings under the credit facility are secured by all of our assets.
      Upon closing, we paid Wells Fargo an origination fee of $37,500. We also pay
      Wells Fargo an annual fee equal to .25% of the average daily unused portion
      of
      the Facility. Outstanding loans under the credit facility will become due on
      November 20, 2010.




Pursuant
      to the Credit Agreement, among other things:




·
            Interest
                accrues on outstanding loans under the credit facility, at our option,
                at
                a per annum rate equal to the prime rate from time to time in effect
                (6.0%
                at March 14, 2008) plus .75% percent, or a LIBOR rate selected by
                us, plus
                3.25%.




19





·
            In
                the event we achieve Net Income (as defined in the Credit Agreement),
                of
                $1,000,000 in the year ending December 31, 2008, the interest rate
                under
                the credit facility will be prospectively reduced by .50% per
                annum.





·
            Aggregate
                loans (plus the face amount of letters of credit) outstanding under
                the
                credit facility at any time may not exceed the lesser of $15 million
                or a
                borrowing base equal to the sum of 85% of “Eligible Accounts” plus the
                lesser of (i) 60% of “Eligible Inventory” (valued at the lower of cost or
                market), (ii) 85% of the “Net Orderly Liquidation Value of Eligible
                Inventory,” and (iii) $8.5 million.





·
            We
                will be required to pay a prepayment fee to Wells Fargo if the credit
                facility is terminated prior to maturity. Such fee ranges from $300,000
                if
                the credit facility is terminated prior to November 20, 2008, to
                $37,500
                if the credit facility is terminated after November 20, 2009 but
                prior to
                the maturity date.





·
            We
                are required to comply with a number of affirmative, negative and
                financial covenants. Among other things, these covenants restrict
                our
                ability to pay dividends, require us to achieve minimum quarterly
                Net
                Income as set forth in the Credit Agreement, and require us to maintain
                a
                minimum Debt Service Coverage Ratio (as defined in the Credit Agreement)
                as of the last day of each quarter of not less than 1.25 to 1.0.
                As of
                December 31, 2007, we were in compliance with all loan
                covenants.







**October
      2006 and January 2007 Private Placements**




On
      October 6, 2006, we completed a $5 million private placement, consisting of
      100
      Units at a price of $50,000 per unit. Each Unit consisted of 25,000 shares
      of
      Common Stock and a 6% Subordinated Secured Convertible Promissory Note
      (“Convertible Notes”) in the principal amount of $45,000 convertible into
      225,000 shares of Common Stock at a conversion price equal to $.20. As a result,
      we issued 2,500,000 shares of common stock for $500,000 and Convertible Notes
      in
      the principal amount of $4,500,000 convertible into 22,500,000 shares of the
      Company’s Common Stock. On November 27, 2006, we effected a 50-for-1 reverse
      stock split of the Common Stock, and all of the Convertible Notes (including
      approximately $40,460 of accrued interest) were converted to Common Stock.
      After
      giving effect to the reverse split and the conversion, we had outstanding
      26,392,834 shares of Common Stock, of which 25,202,314 were issued to the
      purchasers of the Units (2,500,000 on the closing of the October 2006 private
      placement and 22,702,314 upon conversion of the Convertible Notes in November
      2006).




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




On
      January 22, 2007, we completed an additional private placement of 1,713,334
      shares of Common Stock at a price of $0.60 per share for aggregate gross
      consideration of $1,028,000.




**Contractual
      Obligations and Commitments**




A
      summary
      of our contractual obligations as of December 31, 2007 is as follows:





**Payments
                Due by Period (in thousands)****2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**Long-Term
                Debt Obligations
            
            $
            0
            
            $
            0
            
            
            10,344
            
            $
            0
            
            $
            0Capital
                Lease Obligations
            
            
            51
            
            
            12
            
            
            0
            
            
            0
            
            
            0Operating
                Lease Obligations
            
            
            99
            
            
            58
            
            
            46
            
            
            0
            
            
            0Samsung
                Purchase Commitment
            
            
            32,400
            
            
            38,880
            
            
            46,656
            
            
            55,987
            
            
            -Total
            
            $
            32,550
            
            $
            38,950
            
            $
            57,046
            
            $
            55,987
            
            $
            0




20





**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet transactions, arrangements or obligations (including
      contingent obligations) that would have a material effect on our financial
      results.




**Item** **7A.
      Quantitative and Qualitative Disclosures about Market Risk.**




Foreign
      Currency Exchange Risk





Our
      results of operations and cash flows are not subject in any material
      respect **** to
      fluctuations due to changes in foreign currency exchange rates. We do not
      currently have any foreign currency hedging contracts in place, nor did we
      enter
      into any such contracts during the years ended December 31, 2007, and 2006.
      To
      date, exchange rate fluctuations have had little impact on our operating results
      and cash flows.





Interest
      Rate Sensitivity





As
      disclosed above, our loan with Wells Fargo bears interest at a fluctuating
      rate
      of interest related to the prime and LIBOR rates in effect from time to time.
      Accordingly, increases in the prime rate will increase our interest expense
      under our agreements with Wells Fargo. We do not use interest rate hedging
      contracts to manage our exposure to changes in interest rates.





**Item** **8.
      Financial Statements and Supplementary Data.**




The
      Financial Statements and Notes thereto can be found beginning on page F-1,
      "Index to Financial Statements," at the end of this Form 10-K.




**Item** **9.
      Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**




Not
      Applicable.




**Item** **9A.
      Controls and Procedures.**




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




There
      were no significant changes in our internal control over financial reporting
      subsequent to our evaluation of our internal control over financial reporting
      that could materially affect or are reasonably likely to materially affect
      our
      internal control over financial reporting.




Our
      management, including our Chief Executive and Chief Financial Officer, does
      not
      expect that our disclosure controls and procedures or internal control over
      financial reporting will prevent all errors and all fraud. A control system,
      no
      matter how well conceived and operated, can provide only reasonable, not
      absolute, assurance that the objectives of the system are met and cannot detect
      all deviations.  Because of the inherent limitations in all control
      systems, no evaluation of control can provide absolute assurance that all
      control issues and instances of fraud or deviations, if any, within the Company
      have been detected. While we believe that our disclosure controls and procedures
      and our internal control over financial reporting have been effective, in light
      of the foregoing, we intend to continue to examine and refine our disclosure
      controls and procedures and our internal control over financial reporting to
      monitor ongoing developments in this area.




21




In
      2007,
      management conducted tests of our internal controls over financial reporting
      in
      accordance with the standards set forth by the Public Company Accounting
      Oversight Board (“PCAOB”). In accordance with these standards, management
      assessed and tested, on a sample basis, the Company’s internal control over
      financial reporting according to a comprehensive risk analysis using the
      Internal Control — Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (“COSO”). It is management’s opinion
      that the testing methodology of the internal control framework is appropriate
      and provides reasonable assurance as to the integrity and reliability of our
      internal controls over financial reporting.




In
      management’s opinion, based on the assessment completed as at December 31,
      2007, our internal controls over financial reporting is operating
      effectively.




**Item** **9B.
      Other Information.**




Not
      Applicable.




**PART
      III**




**Item** **10.
      Directors, Executive Officers and Corporate Governance of the
      Registrant.**




The
      following table sets forth our directors and executive officers, their ages
      and
      the positions they hold:




**Name**
            
            **Age**
            
            **Position**Steven
                E. Walin
            
            52
            
            Chairman
                of the Board of Directors and Chief Executive OfficerJoseph
                Restivo
            
            54
            
            Chief
                Financial Officer, Chief Operating Officer, and
                DirectorCraig
                Ellins1,2,3
            
            55
            
            DirectorGary
                Freeman1,2,3
            
            40
            
            DirectorMoshe
                Zarmi1,2,3
            
            70
            
            Director


1 Member
      of
      the Audit Committee


2 Member
      of
      the Compensation Committee


3 Member
      of
      the Governance Committee





STEVEN
      WALIN has been our Chief Executive Officer since March 6, 2006, and has served
      as a director of ours since March 28, 2006. Mr. Walin was named Chairman of
      the
      Board on January 8, 2008. Mr. Walin is currently a director of Trestle Holdings,
      Inc. Mr. Walin has over 20 years of experience in the security industry. Most
      recently, from April 2003 until his appointment as our Chief Executive Officer,
      Mr. Walin served as the President of GE Security Enterprise Solutions, a
      division of General Electric Company that provides security solutions, including
      video monitoring, intrusion and access control systems. Prior to his employment
      with GE, from July 2001, Mr. Walin served as the Senior Vice President - North
      America Security for the Security Systems Division of Siemens Building
      Technologies. Prior to that, Mr. Walin had been the President and Chief
      Operating Officer of Securities Technology Group, Inc. until it was acquired
      by
      Siemens in July 2001.




JOSEPH
      RESTIVO has been our Chief Financial Officer since March 2006 and a director
      since October 4, 2006. Mr. Restivo was named Chief Operating officer on October
      22, 2007. Prior to his employment with us, since January 2003, Mr. Restivo
      was
      an independent business consultant providing services in the areas of financial
      and business planning, turnaround assistance and operational management support.
      Prior to that time, from January 2000 until January 2002, Mr. Restivo served
      as
      the Vice President, North American Services and Business Development, for the
      Security Systems Division of Siemens Building Technologies. In addition, from
      1990 until 1999, Mr. Restivo held numerous positions with Casi-Rusco
      (subsequently acquired by General Electric), a developer and manufacturer of
      large-scale access control systems, including Chief Financial Officer and Chief
      Operating Officer.




22


GARY
      FREEMAN has served as one of our directors since October 4, 2006. Mr. Freeman
      is
      currently a Partner in Bandari, Beach, Lim & Cleland’s Audit and Accounting
      services division. In conjunction with various consulting engagements, Mr.
      Freeman has assumed interim senior level management roles at numerous public
      and
      private companies during his career, including Co-President and Chief Financial
      Officer of Trestle Holdings Inc., Chief Financial Officer of Silvergraph
      International and Chief Financial Officer of Galorath Incorporated. Mr.
      Freeman’s previous experience includes ten years with BDO Seidman, LLP,
      including two years as an Audit Partner.




CRAIG
      ELLINS has served as one of our directors since October 4, 2006. Mr. Ellins
      is
      the founder, Chairman and Chief Executive Officer of DigitalFX International,
      Inc. a digital communication company. Mr. Ellins has more than 20 years of
      experience in television direct marketing and Internet communications and has
      provided strategic planning services to companies such as K-tel International,
      Fingerhut Corporation, Guthy-Renker, Simitar Entertainment, and Stamina
      Products.




MOSHE
      ZARMI has served as one of our directors since October 4, 2006, and previously
      served as one of our directors from January 1998 until June 27, 2006. Mr. Zarmi
      was also our President and Chief Executive Officer from January 1998 until
      February 2004. Mr. Zarmi has 30 years experience, primarily in high technology
      industries. From February 1993 to January 1997, Mr. Zarmi was the Chief
      Executive Officer of Geotest, a leading Automated Test Equipment company based
      in Southern California. His extensive business experience includes a tenure
      at
      Israel Aircraft Industries, where he held various positions in finance and
      administration, as well as head of US marketing and sales.




**Audit
      Committee Financial Expert**




The
      Board
      of Directors has determined that Gary Freeman is an “audit committee financial
      expert,” as such term is defined in Item 401(h) of Regulation S-K, and is
      independent as defined in rule 4200(a)(15) of the listing standards of the
      National Association of Securities Dealers.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




The
      members of our Board of Directors, our executive officers and persons who hold
      more than 10% of our outstanding Common Stock are subject to the reporting
      requirements of Section 16(a) of the Exchange Act, which requires them to file
      reports with respect to their ownership of our Common Stock and their
      transactions in such Common Stock. Based solely upon a review of Forms 3 and
      4
      and amendments furnished to the Company by such persons subject to the reporting
      requirements of Section 16(a) of the Exchange Act, we believe that all reporting
      requirements under Section 16(a) for the 2007 fiscal year were met in a timely
      manner by our directors, executive officers and beneficial owners of more than
      10% of our Common Stock.




**Code
      of Conduct**




The
      Company maintains a Code of Business Conduct and Ethics that is applicable
      to
      all of our employees, including our Chief Executive Officer and Chief Financial
      Officer, and our directors. The Code of Conduct, which satisfies the
      requirements of a “code of ethics” under applicable SEC rules, contains written
      standards that are designed to deter wrongdoing and to promote honest and
      ethical conduct, including the ethical handling of actual or apparent conflicts
      of interest; full, fair, accurate, timely and understandable public disclosures
      and communications, including financial reporting; compliance with applicable
      laws, rules and regulations; prompt internal reporting of violations of the
      code; and accountability for adherence to the code.




**Item
                11.**
            **Executive
                Compensation**




*Summary
      Compensation Table*





The
      following table shows for the fiscal years ended December 31, 2007 and 2006,
      compensation awarded to or paid to, or earned by, Steven Walin, our Chief
      Executive Officer; and Joseph Restivo, our Chief Financial Officer and Chief
      Operating Officer (the “Named Executive Officers”).




23


**Summary
      Compensation Table for Fiscal 2007 & 2006**




Name and Principal Position
            
            Year
            
            Salary ($)
            
            Bonus ($)
            
            Option Awards (3) ($)
            
            All Other Compensation ($)
            
            Total ($)Steven
                Walin Chief Executive Officer
            
            
            2007
            
            $
            375,000
            
            $
            187,500
            
            
            --
            
            $
            18,000
                (6
            )
            $
            580,500Steven
                Walin Chief Executive Officer
            
            
            2006
            
            $
            315,859
            
            $
            240,625
                (1
            )
            $
            259,445
                (4
            )
            $
            15,231
                (6
            )
            $
            831,160Joseph
                Restivo Chief Financial Officer
            
            
            2007
            
            $
            212,500
                (2
            )
            $
            106,250
            
            
            --
            
            $
            133,317(6
            )
            $
            452,067Joseph
                Restivo Chief Financial Officer
            
            
            2006
            
            $
            159,351
            
            $
            100,000
            
            $
            50,684
                (5
            )
            $
            9,692
                (6
            )
            $
            319,727




(1)
            Consists
                of a signing bonus of $100,000 and a guaranteed bonus of $140,625
                for the
                first year of employment, both as required by the specific terms
                of Mr.
                Walin’s Employment Agreement.




(2)
            Annual
                base salary was increased from $200,000 to $250,000 effective October
                1,
                2007.




(3)
            The
                value of option awards granted to the Named Executive Officers has
                been
                estimated pursuant to SFAS No. 123(R) based on our expense during
                2006 for
                the options described in the footnotes below, except that for purposes
                of
                this table, we have assumed that none of the options will be forfeited.
                The Named Executive Officers will not realize the estimated value
                of these
                awards in cash until these awards are vested and exercised or sold.
                For
                information regarding our valuation of option awards, see “Stock-Based
                Compensation” in Note 1 of our financial statements for the year ended
                December 31, 2007.




(4)
            Represents
                2006 expense with respect to options to purchase 60,000 shares of
                common
                stock granted March 6, 2006, with exercise prices of $15.00 to $40.00
                per
                share, and options to purchase 1,881,795 shares of common stock granted
                October 4, 2006, with an exercise price of $0.20 per share, after
                giving
                effect to the cancellation of the option granted March 6, 2006, which
                was
                forfeited in connection with the grant in October 4, 2006.




(5)
            Represents
                2006 expense with respect to options to purchase 15,000 shares of
                common
                stock granted March 28, 2006, with exercise prices of $8.00 to $39.00
                per
                share, and options to purchase 1,881,795 shares of common stock granted
                October 4, 2006, with an exercise price of $0.20 per share, after
                giving
                effect to the cancellation of the option granted March 28, 2006,
                which was
                forfeited in connection with the grant in October 4, 2006.




(6)
            Consists
                of a car allowance of $1,500 per month for Mr. Walin and $1,000 per
                month
                for Mr. Restivo. Mr Restivo’s 2007 all other compensation includes Mr.
                Restivo’s costs to relocate from Florida to Carrollton, Texas, where we
                are headquartered, for which we reimbursed Mr.
                Restivo.




*Grants
      of Plan-Based Awards*




We
      did
      not grant any awards under our Amended and Restated 2004 Long Term Incentive
      Plan to our Named Executive Officers in 2007.




*Outstanding
      Equity Awards at Fiscal Year -End*




The
      following table shows for the fiscal year ended December 31, 2007, certain
      information regarding outstanding equity awards at fiscal year-end for the
      Named
      Executive Officers .




24


**Outstanding
      Equity Awards At December 31, 2007**




Option AwardsName
            
            Number of
              Securities Underlying Unexercised Options
              (#)
              Exercisable
            
            Number of Securities Underlying Unexercised Options
              (#)
              Unexercisable
            
            Option Exercise Price
              ($)
            
            Option Expiration DateSteven
                Walin
            
            
            940,898
            
            
            940,898
            
            $
            .20
            
            
            October
                4, 2016Joseph
                Restivo
            
            
            940,898
            
            
            940,898
            
            $
            .20
            
            
            October
                4, 2016




*Option
      Exercises and Stock Vested*




None
      of
      our Named Executive Officers exercised stock options or vested with respect
      to
      stock awards during our fiscal year ended December 31, 2007.




*Pension
      Benefits*




None
      of
      our Named Executive Officers participate in or have account balances in
      qualified or non-qualified defined benefit plans sponsored by us.




*Nonqualified
      Deferred Compensation*




None
      of
      our Named Executive Officers participate in or have account balances in
      non-qualified defined contribution plans or other deferred compensation plans
      maintained by us.





**Employment
      Contracts; Termination of Employment and Change-in-Control
      Arrangements**




***Employment
      Agreement with Chief Executive Officer***




We
      entered into an Employment Agreement, dated as of February 9, 2006, with Steven
      Walin, our Chief Executive Officer. The Employment Agreement was amended on
      January 8, 2008, to extend the term thereof to December 31, 2011. Pursuant
      to the Employment Agreement, Mr. Walin receives an annual base salary of
      $375,000.




Pursuant
      to his Employment Agreement, Mr. Walin is entitled to receive an annual bonus
      of
      up to 50% of his base salary based on the achievement of annual performance
      targets approved of by our board of directors, for subsequent
      years.




In
      addition, pursuant to the Employment Agreement, in the event that Mr. Walin’s
      employment is terminated by us without “Cause” or by Mr. Walin for “Good Reason”
(as such terms are defined in the Employment Agreement), Mr. Walin will be
      entitled to:




·
            payment
                of all accrued but unpaid base salary, his signing bonus (to the
                extent
                then unpaid), and unpaid annual bonus with respect to any completed
                fiscal
                year;




·
            payment
                of his base salary and continued medical benefits for 18 months;
                provided,
                that if such termination occurs after a “Change in Control” Mr. Walin will
                instead be entitled to a payment equal to 200% of his base salary
                and
                continued medical benefits for 24
                months;




·
            pro-rated
                bonus for the year in which the termination occurs, payable following
                such
                fiscal year to the extent he would have otherwise been entitled to
                such
                bonus; and




25


·
            provided
                at least six months has expired since the last vesting of an option
                grant,
                a pro rata vesting of his option shares which are scheduled to vest
                on the
                next vesting date; provided, that if such termination occurs after
                a
                “Change in Control” or after the first anniversary of Mr. Walin’s
                employment with us, all of the unvested options will immediately
                vest.




If
      Mr.
      Walin’s employment is terminated as a result of his death or disability, we will
      pay him his accrued but unpaid base salary, unpaid annual bonus with respect
      to
      any completed fiscal year, and a pro-rated portion of any bonus he would have
      otherwise been entitled for the fiscal year in which the termination
      occurs.




Mr.
      Walin
      is prohibited under the Employment Agreement from using or disclosing any of
      our
      proprietary information, competing with us, hiring any of our employees or
      consultants and soliciting any of our customers or suppliers to reduce or cease
      business with us.




On
      October 4, 2006, we entered into an amendment to our Employment Agreement with
      Mr. Walin under which we issued him an option to purchase 1,881,795 shares
      of
      our Common Stock at an exercise price of $.20 per share (such number of shares
      and exercise price after giving effect to our subsequent reverse stock split)
      vesting over a three-year period. Pursuant to the amendment, Mr. Walin forfeited
      all stock options previously granted to him under his employment agreement
      as
      well as the right to be issued additional stock options upon the closing of
      a
      private placement of our securities.




On
      January 8, 2008, we entered into an amendment to our Employment Agreement with
      Mr. Walin, under which his term of employment has been extended to December
      31,
      2011. The amendment also extends the period following a “Change in Control,”
from 12 months to 18 months, within which Mr. Walin is entitled to increased
      severance in the event he is terminated “Without Cause” or resigns for “Good
      Reason.”




On
      March
      21, 2008, Mr. Walin was paid an annual bonus of $187,500. This bonus equates
      to
      50% of Mr. Walin’s 2007 base salary, and was approved by the Company’s
      compensation committee.




***Employment
      Agreement with Chief Financial Officer and Chief Operating
      Officer***




We
      have
      entered into an Employment Agreement, dated as of March 28, 2006, with Joseph
      Restivo, our Chief Financial Officer and Chief Operating Officer. The Employment
      Agreement was amended on January 8, 2008, to extend the term thereof to December
      31, 2011. The
      Employment Agreement provides Mr. Restivo with an annual base salary of
      $250,000, and an annual bonus of up to 50% of his base salary based on the
      achievement of annual performance targets approved of by our board of
      directors.




In
      addition, pursuant to the Employment Agreement, in the event that Mr. Restivo’s
      employment is terminated by us without “Cause” or by Mr. Restivo for “Good
      Reason” (as such terms are defined in the Employment Agreement), Mr. Restivo
      will be entitled to:




·
            payment
                of all accrued but unpaid base salary and unpaid annual bonus with
                respect
                to any completed fiscal year;




·
            payment
                of his base salary and continued medical benefits for 18 months;
                provided,
                that if such termination occurs after a “Change in Control” Mr. Restivo
                will instead be entitled to a payment equal to 200% of his base salary
                and
                continued medical benefits for 24
                months;




·
            pro-rated
                bonus for the year in which the termination occurs, payable following
                such
                fiscal year to the extent he would have otherwise been entitled to
                such
                bonus; and




·
            provided
                at least six months has expired since the last vesting of his option
                grant, a pro rata vesting of his option shares which are scheduled
                to vest
                on the next vesting date; provided, that if such termination occurs
                after
                a “Change in Control” or after the first anniversary of Mr. Restivo’s
                employment with us, all of the unvested options will immediately
                vest.




26


·
            A
                cash payment of $75,000 on an after-tax basis to cover his relocation
                expenses.




If
      Mr.
      Restivo’s employment is terminated as a result of his death or disability, we
      will pay him his accrued but unpaid base salary and unpaid annual bonus with
      respect to any completed fiscal year, and a pro-rated portion of any bonus
      he
      would have otherwise been entitled for the fiscal year in which the termination
      occurs.




Mr.
      Restivo is prohibited under the Employment Agreement from using or disclosing
      any of our proprietary information, competing with us, hiring any of our
      employees or consultants and soliciting any of our customers or suppliers to
      reduce or cease business with us.




On
      October 4, 2006, we entered into an amendment to our Employment Agreement with
      Mr. Restivo under which we issued him an option to purchase 1,881,795 shares
      of
      our Common Stock at an exercise price of $.20 per share (such number of shares
      and exercise price after giving effect to our subsequent reverse stock split)
      vesting over a three-year period. Pursuant to the amendment, Mr. Restivo
      forfeited all stock options previously granted to him under his employment
      agreement as well as the right to be issued additional stock options upon the
      closing of a private placement of our securities.




On
      January 8, 2008, we entered into an amendment to our Employment Agreement with
      Mr. Restivo, under which his term of employment has been extended to December
      31, 2011. The amendment also extends the period following a “Change in Control,”
from 12 months to 18 months, within which Mr. Restivo is entitled to increased
      severance in the event he is terminated “Without Cause” or resigns for “Good
      Reason.” The amendment additionally entitles Mr. Restivo to a cash payment of
      $75,000 to cover his relocation expenses in the event he is terminated “Without
      Cause” or resigns for “Good Reason” (whether before or after a “Change in
      Control”).




On
      March
      21, 2008, Mr. Restivo was paid an annual bonus of $106,500. This bonus equates
      to 50% of Mr. Restivo’s 2007 base salary, and was approved by the Company’s
      compensation committee.




***Director
      Compensation***




*Non-employee
      Directors*




On
      December 6, 2006, our Board of Directors approved compensation arrangements
      for
      non-employee directors under which each of our non-employee directors are
      entitled to receive a monthly cash payment of $2,500. David Weiner and Craig
      Ellins waived their rights to receive these payments through December 2007.
      Our
      directors are also reimbursed for actual out-of-pocket expenses incurred by
      them
      in connection with their attendance at meetings of the Board of
      Directors.




On
      February 14, 2007 we granted three directors ten-year options to purchase an
      aggregate of 100,000 shares of Common Stock at an exercise price of $.60 per
      share. One quarter of these options vested immediately, with the remaining
      options vesting ratably in 12 quarterly installments over a three year period
      that commenced April 1, 2007.




The
      following table shows for the fiscal year ended December 31, 2007 certain
      information with respect to the compensation of our non-employee
      directors.




27


**Director
      Compensation for Fiscal 2007**




Name
            
            Fees Earned or
              Paid in
              Cash
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($) (1)
            
            All Other
              Compensation
              ($)
            
            Total
              ($)Craig
                Ellins
            
            
            --
            
            
            --
            
            $
            28,400
            
            
            --
            
            $
            28,400Gary
                Freeman
            
            $
            30,000
            
            
            --
            
            $
            28,400
            
            
            --
            
            $
            58,400David
                Weiner (2)
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Moshe
                Zarmi
            
            $
            30,000
            
            
            --
            
            $
            28,400
            
            
            --
            
            $
            58,400




(1)
            The
                value of option awards granted to directors has been estimated pursuant
                to
                SFAS No. 123(R) based on our expense during 2007 for the options
                described
                in the footnotes below, except that for purposes of this table, we
                have
                assumed that none of the options will be forfeited. The directors
                will not
                realize the estimated value of these awards in cash until these awards
                are
                vested and exercised or sold. For information regarding our valuation
                of
                option awards, see “Stock-Based Compensation” in Note 1 of our financial
                statements for the year ended December 31,
                2007.




(2)
            Not
                currently a director of the
                Company.




**Stock
      Option Plan**




In
      March
      2004, our stockholders approved our 2004 Long-Term Incentive Plan, reserving
      118,798 (after giving effect to a subsequent one-for-65 reverse split) shares
      of
      our Common Stock for issuance thereunder. Pursuant to amendments to the Plan
      approved by our stockholders, and after giving effect to our recent one-for-50
      reverse split, we are authorized to issue up to 5,900,000 shares of Common
      Stock
      under the Plan. The Plan provides for the grant of options and other awards
      to
      our employees, officers, directors and consultants. The Plan authorizes the
      Board of Directors to issue incentive stock options (“ISOs”) as defined in
      Section 422(b) of the Internal Revenue Code of 1986, as amended, stock options
      that do not conform to the requirements of that Code section (“Non-ISOs”), stock
      appreciation rights (“SARs”), restricted stock, stock awards and other stock
      based awards. Directors who are not employees of the Company may only be granted
      Non-ISOs.




The
      Plan
      is administered by the Compensation Committee of the Board of Directors. The
      Compensation Committee has the authority to select those employees, officers,
      directors and consultants whose performance it determines significantly promotes
      the Company’s success to receive discretionary awards under the Plan, grant the
      awards, interpret and determine all questions of policy with respect thereto
      and
      adopt rules, regulations, agreements and instruments deemed necessary for its
      proper administration.




**Item
      1** **2.
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.** ****




The
      following table sets forth as of March 24, 2008, certain information known
      to us
      with respect to the beneficial ownership of Common Stock by (i) each person
      who
      is known by us to own of record or beneficially more than 5% of the outstanding
      Common Stock, (ii) each of our directors executive officers, and (iii) all
      of
      our directors and executive officers as a group. Unless otherwise indicated,
      each of the stockholders can be reached at our principal executive offices
      located at 2801 Trade Center Drive, Suite 120, Carrollton, Texas
      75007.




**SHARES BENEFICIALLY OWNED****1****Number**
            
            **Percent (%)***Beneficial
                Owners of more than 5% of Common Stock (other than directors and
                executive
                officers)**Steven*
                Kolow2*PO
                Box 5360 Wayland, MA 01778*
            
            
            5,340,623
            
            
            19.7
            %




28




**SHARES BENEFICIALLY OWNED****1****Number**
            
            **Percent (%)**Europa
                International, Inc.3
            
            
            3,557,303
            
            
            12.4
            %Fred
                Knoll4
            
            
            3,565,445
            
            
            12.4
            %HG
                Investments, LLC*7030
                Hayvenhurst Ave. Van Nuys, CA 91406*
            
            
            2,770,342
            
            
            9.8
            %Richard
                Kall5*9000
                Players Club Drive Las Vegas, NV 89134*
            
            
            2,595,342
            
            
            9.2
            %David
                Weiner6
            
            
            2,861,649
            
            
            9.9
            %*Directors
                and Executive Officers*Craig
                Ellins7
            
            
            139,
                583
            
            
            *Gary
                Freeman7
            
            
            56,250
            
            
            *Moshe
                Zarmi7
            
            
            100,761
            
            
            *Joseph
                Restivo8
            
            
            1,341,342
            
            
            4.6
            %Steven
                Walin8
            
            
            1,358,009
            
            
            4.6
            %*All
                directors and executive officers as a group (five
                persons)*9
            
            
            2,995,945
            
            
            9.7
            %







*
            Less
                than 1%.





1
            Gives
                effect to the shares of Common Stock issuable upon the exercise of
                all
                options exercisable within 60 days of March 24, 2008 and other rights
                beneficially owned by the indicated stockholders on that date. Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission and includes voting and investment power with
                respect
                to shares. Unless otherwise indicated, the persons named in the table
                have
                sole voting and sole investment control with respect to all shares
                beneficially owned. Percentage ownership is calculated based on 28,147,107
                shares of the Common Stock outstanding as of March 24, 2008. All
                information is based upon information furnished by the persons listed,
                contained in filings made by them with the SEC or otherwise available
                to
                the Company.




2
            Includes
                324,938 shares of Common Stock issuable upon exercise of warrants
                and
                600,000 shares of Common Stock held by The Kolow Charitable Foundation,
                as
                to which Mr. Kolow has voting and dispositive powers.




3
            Includes
                650,063 shares of Common Stock issuable upon exercise of warrants.
                Europa’s address is P.O. Box 146, Road Town, Tortola, British Virgin
                Islands. Fred Knoll is the principal of Knoll Capital Management,
                L.P.,
                which manages Europa’s investments.




4
            Includes
                (i) 3,557,303 shares of Common Stock beneficially owned by Europa;
                (ii)
                1,475 shares of Common Stock beneficially owned by Thinking Technologies,
                L.P., and (iii) warrants to purchase 6,667 shares of Common Stock
                held by
                Knoll Capital Fund II. Fred Knoll is the principal of Knoll Capital
                Management, L.P., which is the general partner of Thinking Technologies,
                L.P., and the investment manager of Knoll Capital Fund II and Europa.
                Mr.
                Knoll’s address is c/o Knoll Capital Management, L.P. 666 5thAvenue Suite 3702, New York, New York
                10102.




29


5
            Includes
                75,000 shares of Common Stock issuable upon exercise of a
                warrant.




6
            Includes
                (i) 20,020 shares of Common Stock owned by Woodman Management Corporation,
                of which David Weiner is the sole shareholder, (ii) 518,688 shares
                of
                Common Stock issuable upon exercise of a warrant, and (iii) warrants
                to
                purchase 6,667 shares of Common Stock held by W-Net, Inc., of which
                Mr.
                Weiner is the sole shareholder.





7
            Includes
                56,250 shares of Common Stock issuable upon exercise of
                options.





8
            Includes
                1,215,325 shares of Common Stock issuable upon exercise of options.





9
            Includes
                Messrs. Ellins, Freeman, Zarmi, Walin, and
                Restivo.




**Item
      1** **3.
      Certain Relationships and Related Transactions, and Director
      Independence.**




On
      January 22, 2007, we completed a private placement of 1,713,334 shares of Common
      Stock at a price of $0.60 per share for aggregate gross consideration of
      $1,028,000. The purchasers in the private placement included Craig Ellins,
      a
      director of ours who purchased 83,333 shares of Common Stock, and Steve Walin,
      our Chief Executive Officer, who purchased 16,667 shares of Common Stock.




***Director
      Independence*** **





All
      members of our Board of Directors, other than our Chairman of the Board and
      Chief Executive Officer, Steven Walin, and our Chief Financial Officer and
      Chief
      Operating Officer, Joseph Restivo, are independent under the standards set
      forth
      in Nasdaq Marketplace Rule 4200(a)(15). In addition, each member of our
      Compensation and Governance Committees is independent under Nasdaq Marketplace
      Rule 4200(a)(15) and each member of our Audit Committee is independent under
      the
      standards set forth in Nasdaq Marketplace Rules 4350(d)(2)(A)(i) and (ii).




**Item
      14. Principal Accountant Fees and Services.** ****




The
      following table presents fees for professional audit services rendered by
      Weinberg & Company for the audit of the Company’s annual financial
      statements for the years ended December 31, 2007 and 2006, and fees billed
      for
      other services rendered by Weinberg & Company during those
      years.




**2007**
            
            **2006**Audit
                fees(1)
            
            $
            176,607
            
            $
            194,271Audit
                related fees
            
            
            -
            
            
            -Tax
                fees
            
            $
            22,039
            
            $
            11,930All
                other fees(2)
            
            $
            24,842
            
            $
            28,429Total
                fees
            
            $
            223,488
            
            $
            234,630







(1)
            Includes
                fees paid for professional services rendered in connection with the
                audit
                of annual financial statements and the review of quarterly financial
                statements.




(2)
            Consists
                primarily of fees paid in connection with review of the Company’s
                financial statements in the Company’s Registration Statement on Form S-1,
                Current Reports on Form 8-K, and related due
                diligence.




30


**Pre-Approval
      Policies and Procedures**




The
      Audit
      Committee pre-approves all auditing services and permitted non-audit services
      (including the fees and terms thereof) to be performed for us by our independent
      auditor, subject to the de minimis exceptions for non-audit services described
      in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended.
      The
      Audit Committee approved all such services prior to the auditor’s engagement for
      such services during the year ended December 31, 2007.




**PART
      IV**




**Item
      1** **5.
      Exhibits, Financial Statement Schedules.**




The
      following documents are filed as part of this report:




**Exhibit****Number**
            
            **Exhibit
                Title**2.1
            
            Agreement
                and Plan of Merger, dated as of February 19, 2004, by and among Thinking
                Tools, Inc., GVI Security, Inc., and GVI Security Acquisition Corp.
                *2.2
            
            Agreement
                and Plan of Merger, dated as of June 30, 2004, by and among GVI Security
                Solutions, Inc., Rapor, Inc., and Rapor Acquisition
                Corp.####3.1
            
            Certificate
                of Incorporation and Amendments of GVI Security Solutions,
                Inc.**3.2
            
            Amended
                and Restated By-Laws of GVI Security Solutions, Inc.
                ****4.1‡
            
            2004
                Long-Term Stock Incentive Plan #4.2
            
            Form
                of Subscription Agreement for Units purchased by investors in October
                2004
                Bridge Financing##4.3
            
            Form
                of Warrant issued to investors in October 2004 Bridge
                Financing##4.4
            
            Form
                of Warrant to purchase Common Stock issued to designees of W-Net,
                Inc.
                dated October 6, 2006 ####4.5
            
            Registration
                Rights Agreement, dated May 27, 2004, by and between GVI Security
                Solutions, Inc. and Laurus Master Fund, Ltd. ##4.6
            
            Form
                of Subscription Agreement to purchase Common Stock in connection
                with the
                January 2007 Private Placement (Incorporated by reference to the
                exhibit
                to Registrant’s Current Report on Form 8-K, as filed with the SEC on June
                23, 2007.)10.1
            
            Distributorship
                Agreement dated as of October 2, 2006 between GVI Security Inc. and
                Samsung Electronics Co., Ltd. ####10.2‡
            
            Executive
                Employment Agreement, dated as of January 24, 2005, by and between
                the
                Registrant and Nazzareno E. Paciotti (Incorporated by reference to
                the
                similarly described exhibit previously filed as an exhibit to Registration
                Statement on Form SB-2 (Registration No. 33-122314))10.3‡
            
            Consulting
                Agreement, dated as of February 17, 2004, by and between the Registrant
                and November Group, Ltd. #




31





10.4
            
            Commercial
                Industrial Lease Agreement, effective as of April 1, 2004, between,
                CSHV
                Texas Industrial, L.P., as Landlord, and GVI Security, Inc., as Tenant
                ***10.5‡
            
            Employment
                Agreement, dated as of January 31, 2006, between GVI Security Solutions,
                Inc. and Steven E. Walin ###10.6‡
            
            Employment
                Agreement, dated as of March 28, 2006, between GVI Security Solutions,
                Inc. and Joseph Restivo. ****10.7‡
            
            Mutual
                Separation Agreement, dated as of March 28, 2006, between GVI Security
                Solutions, Inc. and Nazzareno Paciotti.****10.8
            
            Omnibus
                Amendment and Consent betweenGVI
                Security Solutions, Inc., andLaurus
                Master Fund Ltd.dated October 3, 2006####10.9
            
            Amended
                and Restated Securities Purchase Agreement, by and between GVI Security
                Solutions, Inc. and Laurus Master Fund, Ltd., dated May 27, 2004,
                and
                amended and restated as of October 4, 2006####10.10
            
            Amended
                and Restated Secured Term Note, made by GVI Security Solutions, Inc.
                to
                Laurus Master Fund, Ltd. dated May 27, 2004, and amended and restated
                as
                of October 4, 2006####10.11
            
            Common
                Stock Purchase Warrant, dated May 27, 2004, issued to Laurus Master
                Fund,
                Ltd. ##10.12
            
            Amended
                and Restated Security Agreement, by and between GVI Security Solutions,
                Inc. and Laurus Master Fund, Ltd., dated May 27, 2004, and amended
                and
                restated as of October 4, 2006####10.13
            
            Amended
                and Restated Secured Minimum Borrowing Note, made by GVI Security
                Solutions, Inc. to Laurus Master Fund, Ltd. dated May 27, 2004, and
                amended and restated as of October 4, 2006####10.14
            
            Amended
                and Restated Revolving Note, made by GVI Security Solutions, Inc.
                to
                Laurus Master Fund, Ltd. dated May 27, 2004, and amended and restated
                as
                of October 4, 2006####10.15
            
            Subsidiary
                Guarantee, dated May 27, 2004, by GVI Security, Inc. in favor of
                Laurus
                Master Fund, Ltd. #10.16
            
            Stock
                Pledge Agreement, dated May 27, 2004, by and among GVI Security Solutions,
                Inc. and Laurus Master Fund, Ltd. #10.17‡
            
            Amendment
                to Employment Agreement between GVI Security Solutions, Inc. and
                Steven
                Walin dated as of October 4, 2006####10.18‡
            
            Amendment
                to Employment Agreement between GVI Security Solutions, Inc. and
                Joseph
                Restivo dated as of October 4, 2006####10.19
            
            Amendment,
                dated as of June 22, 2006, between GVI Security Solutions, Inc. and
                Laurus
                Master Fund, Ltd. (Incorporated by reference to the similarly described
                exhibit previously filed as an exhibit to Registrant’s Current Report on
                Form 8-K, as filed with the SEC on June 22, 2006.)10.20
            
            Amendment,
                dated as of May 26, 2006, between GVI Security Solutions, Inc. and
                Laurus
                Master Fund, Ltd. (Incorporated by reference to the similarly described
                exhibit previously filed as an exhibit to Registrant’s Current Report on
                Form 8-K, as filed with the SEC on June 5, 2006.)10.21
            
            Amendment
                to Employment Agreement between GVI Security Solutions, Inc. and
                Steven
                Walin dated as of January 8, 2008 (Incorporated by reference to the
                similarly described exhibit previously filed as an exhibit to Registrant’s
                Current Report on Form 8-K, as filed with the SEC on January 11,
                2008)10.22
            
            Amendment
                to Employment Agreement between GVI Security Solutions, Inc. and
                Joseph
                Restivo dated as of January 8, 2008 (Incorporated by reference to
                the
                similarly described exhibit previously filed as an exhibit to Registrant’s
                Current Report on Form 8-K, as filed with the SEC on January 11,
                2008)21
            
            Subsidiaries
                of the Registrant23
            
            Consent
                of Weinberg & Company, P.A.




32




31.1
            
            Certification
                of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                to
                Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
                193431.2
            
            Certification
                of Steven Walin, Chief Executive Officer of the Registrant, pursuant
                to
                Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
                193432.1
            
            Certification
                of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                to
                Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of
                193432.2
            
            Certification
                of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant
                to
                Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of
                1934*
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Current Report on Form 8-K, as filed with the SEC
                on February 27, 2004.**
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Quarterly Report on Form 10-QSB for the quarter
                ended March 31, 2004, filed with the Securities and Exchange Commission
                on
                May 24, 2004.***
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to our Registration Statement on Form SB-2 (Registration
                No.
                33-11321).****
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Annual Report on Form 10-KSB for the year ended
                December 31, 2005, filed with the Securities and Exchange Commission
                on
                March 31, 2006.#
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Current Report on Form 8-K, as filed with the SEC
                on June 7, 2004.##
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Current Report on Form 8-K, as filed with the SEC
                on December 13, 2004.###
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Current Report on Form 8-K, as filed with the SEC
                on February 21, 2006.####
            
            Incorporated
                by reference to the similarly described exhibit previously filed
                as an
                exhibit to Registrant’s Current Report on Form 8-K, as filed with the SEC
                on October 5, 2006.‡
            
            Indicates
                a management contract or compensatory plan or
                arrangement.


33





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, GVI Security Solutions,
      Inc. has caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized, in the city of Carrolton, State of Texas, on March
      24, 2008.





**GVI
                SECURITY SOLUTIONS, INC.**(Registrant)By:
            /s/
                Steven WalinSteven
                WalinChief
                Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




**Signature**
            
            **Title**
            
            **Date**Chief
                Executive Officer (Principal Executive
            
            March
                24, 2008Steven
                Walin
            
            Officer),
              Chairman of
              the Board, and DirectorChief
                Financial Officer (Principal Accounting
            
            March
                24, 2008Joseph
                Restivo
            
            and Financial
              Officer),
              Chief Operating Officerand DirectorCraig
                Ellins
            
            Director
            
            March
                24, 2008Gary
                Freeman
            
            Director
            
            March
                24, 2008Moshe
                Zarmi
            
            Director
            
            March
                24, 2008




34




GVI
      Security Solutions, Inc.





CONSOLIDATED
      FINANCIAL STATEMENTS




PageReport
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007 and
                2006
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficiency) for the years ended
                December 31, 2007 and 2006
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007 and
                2006
            F-6Notes
                to Consolidated Financial Statements
            F-7




F-1


**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Stockholders


GVI
      Security Solutions, Inc.


Carrollton,
      Texas





We
      have
      audited the consolidated balance sheets of GVI Security Solutions, Inc. and
      Subsidiaries as of December 31, 2007 and 2006, and the related consolidated
      statements of operations, stockholders’ equity (deficiency) and cash flows for
      the years then ended. These consolidated financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these consolidated financial statements based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of GVI Security
      Solutions, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the
      results of their operations and their cash flows for the years then ended,
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.




Weinberg
      & Company, P.A.


Los
      Angeles, California


March
      17,
      2008


F-2





**GVI
      Security Solutions, Inc.**


**Consolidated
      Balance Sheets**


**December
      31, 2007 and 2006**


(In
      thousands, except share and per share amounts)




2007
              
              2006**ASSETS:**Current
                  AssetsCash
                  and equivalents
              
              $
              313
              
              $
              225Accounts
                  receivable, net of allowances for doubtful accounts of $416 and
                  $558,
                  respectively
              
              
              6,625
              
              
              7,881Inventory,
                  net
              
              
              12,723
              
              
              6,416Deferred
                  tax assets, current
              
              
              907
              
              
              -Prepaid
                  and other current assets
              
              
              1,184
              
              
              1,324Total
                  Current Assets
              
              
              21,752
              
              
              15,846Property
                  and Equipment, net
              
              
              156
              
              
              384Deferred
                  tax assets, non-current
              
              
              1,321
              
              
              -Deferred
                  loan origination fee, net
              
              
              93
              
              
              209Other
                  assets
              
              
              34
              
              
              33Total
                  Assets
              
              $
              23,356
              
              $
              16,472**LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIENCY):**Current
                  LiabilitiesAccounts
                  payable to primary supplier
              
              $
              5,710
              
              $
              4,885Other
                  trade accounts payable
              
              
              1,682
              
              
              2,174Accrued
                  expenses
              
              
              1,849
              
              
              2,023Revolving
                  credit facility, current
              
              
              -
              
              
              6,366Capitalized
                  lease obligations, current
              
              
              51
              
              
              77Senior
                  term note, current
              
              
              -
              
              
              1,925Liabilities
                  of discontinued operations
              
              
              -
              
              
              400Total
                  Current Liabilities
              
              
              9,292
              
              
              17,850Capital
                  lease obligations, net of current portion
              
              
              12
              
              
              62Deferred
                  tax liability, non-current
              
              
              1,244
              
              
              -Revolving
                  credit facility
              
              
              10,344
              
              
              -Total
                  Liabilities
              
              
              20,892
              
              
              17,912Commitments
                  and ContingenciesStockholders'
                  Equity (Deficiency)Preferred
                  stock, undesignated, $.001 par value, 3,000,000 shares authorized,
                  none
                  issued or outstanding
              
              
              -
              
              
              -Common
                  stock, $.001 par value, 200,000,000 shares authorized, 28,147,106
                  issued
                  and outstanding at December 31, 2007 and 26,292,830 shares issued
                  and
                  outstanding at December 31, 2006
              
              
              28
              
              
              26Additional
                  paid-in capital
              
              
              34,574
              
              
              33,309Accumulated
                  deficit
              
              
              (32,138
              )
              
              (34,775
              )Total
                  Stockholders' Equity (Deficiency)
              
              
              2,464
              
              
              (1,440
              )Total
                  Liabilities and Stockholders' Equity (Deficiency)
              
              $
              23,356
              
              $
              16,472




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


F-3


**GVI
      Security Solutions, Inc.**


**Consolidated
      Statements of Operations**


**Years
      Ended December 31, 2007 and 2006**


(In
      thousands, except per share amounts)




2007
            
            2006Revenues
            
            $
            45,025
            
            $
            43,973Cost
                of Revenues
            
            
            32,238
            
            
            37,389Gross
                Profit
            
            
            12,787
            
            
            6,584Selling,
                General and Administrative Expenses
            
            
            10,312
            
            
            13,494Impairment
                of goodwill and other intangible assets
            
            
            -
            
            
            977Income
                (loss) from operations
            
            
            2,475
            
            
            (7,887
            )Interest
                Expense
            
            
            1,012
            
            
            5,916Income
                (loss) from continuing operations before income taxes and income
                (loss)
                from discontinued operations
            
            
            1,463
            
            
            (13,803
            )Income
                Tax Benefit (Expense)
            
            
            942
            
            
            (14
            )Income
                (loss) from continuing operations before income (loss) from discontinued
                operations
            
            
            2,405
            
            
            (13,817
            )Income
                (loss) from discontinued operations, net of taxes
            
            
            232
            
            
            (2,674
            )Net
                income (loss)
            
            $
            2,637
            
            $
            (16,491
            )Basic
                income (loss) per shareContinuing
                operations
            
            $
            0.08
            
            $
            (3.74
            )Discontinued
                operations
            
            $
            0.01
            
            $
            (0.72
            )Net
                income (loss)
            
            $
            0.09
            
            $
            (4.46
            )Diluted
                income (loss) per shareContinuing
                operations
            
            $
            0.07
            
            $
            (3.74
            )Discontinued
                operations
            
            $
            0.01
            
            $
            (0.72
            )Net
                income (loss) per share
            
            $
            0.08
            
            $
            (4.46
            )Shares
                Used in Calculation of Net Income (Loss) per share - basic
            
            
            28,044,465
            
            
            3,693,955Shares
                Used in Calculation of Net Income (Loss) per share - diluted
            
            
            33,595,044
            
            
            3,693,955





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


F-4


**GVI
      Security Solutions, Inc.**


**Consolidated
      Statements of Stockholders’ Equity (Deficiency)**


**For
      the Years Ended December 31, 2007 and 2006**





Common
                StockShares
            
            Amount
            
            Additional
              Paid-in-
              Capital
            
            Accumulated
                Deficit
            
            TOTALBalance.
                January 1, 2006
            
            
            1,005,160
            
            $
            1
            
            $
            22,886
            
            $
            (18,284
            )
            $
            4,603Laurus
                Principal Payment Conversion
            
            
            40,000
            
            
            -
            
            
            320
            
            
            
            
            
            320Fair
                value of Restricted Stock Issued to Directors
            
            
            5,470
            
            
            -
            
            
            52
            
            
            
            
            
            52Fair
                value of Shares Issued to Retail Agent under Alliance
                Agreement
            
            
            15,000
            
            
            -
            
            
            158
            
            
            
            
            
            158Beneficial
                Conversion from Laurus Modification of Warrant Exercise Price
            
            
            
            
            
            
            
            
            76
            
            
            
            
            
            76Private
                Placement Proceeds, net
            
            
            2,500,000
            
            
            3
            
            
            397
            
            
            
            
            
            400Beneficial
                Conversion Feature resulting from issuance of convertible notes
            
            
            
            
            
            
            
            
            4,500
            
            
            
            
            
            4,500Subordinated
                Debt Conversion
            
            
            22,500,000
            
            
            22
            
            
            4,478
            
            
            
            
            
            4,500Fair
                value of warrant issued to director
            
            
            
            
            
            
            
            
            47
            
            
            
            
            
            47Issuance
                of common stock for interest on convertible debt
            
            
            202,314
            
            
            -
            
            
            40
            
            
            
            
            
            40Fair
                value of common stock issued for services
            
            
            25,000
            
            
            -
            
            
            23
            
            
            
            
            
            23Fair
                value of vested options
            
            
            
            
            
            
            
            
            332
            
            
            
            
            
            332Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            (16,491
            )
            
            (16,491
            )Balance,
                December 31, 2006
            
            
            26,292,944
            
            
            26
            
            
            33,309
            
            
            (34,775
            )
            
            (1,440
            )Private
                placement proceeds, net
            
            
            1,713,333
            
            
            2
            
            
            1,026
            
            
            
            
            
            1,028Conversion
                of severance obligation to common stock
            
            
            100,000
            
            
            -
            
            
            20
            
            
            
            
            
            20Fair
                value of warrants issued for services
            
            
            -
            
            
            -
            
            
            110
            
            
            
            
            
            110Proceeds
                from exercise of stock options
            
            
            40,829
            
            
            -
            
            
            8
            
            
            
            
            
            8Fair
                value of vested options
            
            
            -
            
            
            -
            
            
            101
            
            
            
            
            
            101Net
                Income
            
            
            -
            
            
            -
            
            
            
            
            
            2,637
            
            
            2,637Balance,
                      December 31, 2007
            
            
            28,147,106
            
            $
            28
            
            $
            34,574
            
            
            ($32,138
            )
            $
            2,464




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


F-5


**GVI
      Security Solutions, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**Years
      Ended December 31, 2007 and 2006**


(In
      thousands, except per share amounts)


2007
              
              2006Cash
                  Flows Used In Operating ActivitiesNet
                  Income (Loss)
              
              $
              2,637
              
              $
              (16,491
              )Adjustments
                  to reconcile Net Income (Loss) to Net Cash Used In
                Operating
                  Activities:Loss
                  (Income) from discontinued operations, net of tax
              
              
              (232
              )
              
              2,674Depreciation
                  and amortization from continuing operations
              
              
              229
              
              
              455Loss
                  on retirement of assets
              
              
              -
              
              
              50Impairment
                  of goodwill and intangible assets
              
              
              -
              
              
              977Beneficial
                  conversion discount on convertible debt
              
              
              -
              
              
              4,500Amortization
                  of deferred loan origination fee
              
              
              209
              
              
              647Fair
                  value of shares issued for interest
              
              
              -
              
              
              40Compensation
                  costs and expenses for stock and options issued
              
              
              211
              
              
              661Changes
                  in Assets and LiabilitiesAccounts
                  receivable, net
              
              
              1,256
              
              
              (193
              )Inventory
              
              
              (6,307
              )
              
              711Refundable
                  income tax receivable
              
              
              -
              
              
              643Prepaids
                  and other current assets
              
              
              140
              
              
              (103
              )Deferred
                  Tax Assets and Liabilities, net
              
              
              (985
              )Accounts
                  payable
              
              
              335
              
              
              23Accrued
                  expenses
              
              
              (154
              )
              
              533Net
                  cash used in operating activities from continuing
                  operations
              
              
              (2,661
              )
              
              (4,873
              )Net
                  cash provided by (used in) operating activities of discontinued
                  operations
              
              
              (168
              )
              
              506Net
                  cash provided by (used in) operating activities
              
              
              (2,829
              )
              
              (4,367
              )Cash
                  Flows Provided By (Used In) Investing ActivitiesPurchase
                  of property and equipment
              
              
              (2
              )
              
              (42
              )Proceeds
                  from sale of investment
              
              
              -
              
              
              50Net
                  cash provided by (used in) Investing activities
              
              
              (2
              )
              
              8Cash
                  Flows Provided By (Used In) Financing ActivitiesIssuance
                  of common stock
              
              
              1,028
              
              
              400Issuance
                  of convertible notes
              
              
              -
              
              
              4,500Net
                  Payments of Laurus revolving credit facility
              
              
              (6,366
              )
              
              (2,129
              )Net
                  proceeds from WFBC revolving credit facility
              
              
              10,344
              
              
              -Principal
                  payments of Senior term note
              
              
              (1,925
              )
              
              (1,050
              )Principal
                  payments of capitalized lease obligations
              
              
              (77
              )
              
              (118
              )Proceeds
                  from exercise of options
              
              
              8
              
              
              -Loan
                  origination costs
              
              
              (93
              )
              
              -Net
                  Cash Provided by Financing Activities
              
              
              2,919
              
              
              1,603Net
                  Increase (Decrease) in Cash
              
              
              88
              
              
              (2,756
              )Cash,
                  Beginning of Period
              
              
              225
              
              
              2,981Cash,
                  End of Period
              
              $
              313
              
              $
              225**SUPPLEMENTARY
                  CASH FLOW INFORMATION**Cash
                  paid for interest
              
              $
              805
              
              $
              878Cash
                  paid for income taxes
              
              
              9
              
              
              14**SUPPLEMENTAL
                  SCHEDULE OF NONCASH INVESTING AND****FINANCING
                  ACTIVITIES**Debt
                  principal payment converted to common stock
              
              $
              -
              
              $
              300Conversion
                  of debt to common stock
              
              
              20
              
              
              4,500Loan
                  origination fee compensation cost for warrant issued
              
              
              -
              
              
              47





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


F-6


**GVI
      Security Solutions, Inc.**


**Notes
      to Consolidated Financial Statements**


**For
      the years ended December 31, 2007 and 2006**





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





**Organization**





GVI
      Security Solutions, Inc. (the “Company” and/or “GVI”) was incorporated in August
      1996 as Thinking Tools, Inc. and was originally engaged in the software
      development business. From December 18, 2000 until February 20, 2004, Thinking
      Tools, Inc. had no active business. On February 20, 2004, pursuant to an
      Agreement and Plan of Merger, Thinking Tools, Inc. acquired all of the stock
      of
      GVI Security, Inc. in a merger, and the business of GVI Security, Inc. became
      the business of Thinking Tools, Inc. For accounting purposes, GVI Security,
      Inc.
      was treated as the acquiror in the merger, which was treated as a
      recapitalization of GVI Security, Inc., and the pre-merger financial statements
      of GVI Security, Inc. became the Company’s historical financial statements. On
      April 12, 2004, Thinking Tools changed its name to GVI Security Solutions,
      Inc.





All
      share
      and per share amounts herein have been given retroactive effect to the 1-for-50
      reverse stock split effected November 2006. See
      Note
      8 for 2006 Private Placement transaction.





**Nature
      of Business**





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





**Principles
      of Consolidation**





The
      accompanying consolidated financial statements include the accounts of GVI
      Security Solutions, Inc., and its wholly-owned subsidiaries GVI Security, Inc.
      and Rapor, Inc. (which was legally dissolved in December 2007). All material
      intercompany transactions, balances and profits have been
      eliminated.





**Discontinued
      Operations**





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





On
      September 13, 2006, the Company entered into an agreement with its former
      distributor to the retail channel, whereby the Company transferred to this
      distributor substantially all of its remaining retail inventory in exchange
      for
      the termination of the parties’ respective remaining obligations under its
      previous alliance agreement. The Company wrote off all remaining net assets
      associated with the Retail Channel business, and accrued a reserve of $400,000
      for estimated remaining obligations existing at December 31, 2006.





In
      2007,
      the Company paid approximately $168,000 to satisfy all remaining obligations
      associated with the Retail Channel business, and recognized the difference
      of
      $232,000 as income from discontinued operations during the year ended December
      31, 2007.


F-7





**Revenue
      Recognition**





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





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





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




**Accounts
      Receivable**




Trade
      receivables are presented on the balance sheet as outstanding amounts adjusted
      for any allowance for bad debts. The Company maintains an allowance for doubtful
      receivables based primarily on historical loss experience. Additional amounts
      are provided through charges to income, as management feels necessary, after
      evaluation of receivables and current economic conditions. Amounts which are
      considered to be uncollectible are charged off and recoveries of amounts
      previously charged off are credited to the allowance upon recovery.




**Inventory**





Inventory
      is stated at the lower of cost (first-in, first-out method) or market and
      consists of goods held for resale and parts used for repair work. Reserves
      are
      recorded for slow-moving, obsolete, nonsaleable or unusable items based upon
      a
      product-level review, in order to reflect inventory balances at their net
      realizable value. Inventory reserve balances at December 31, 2007 and 2006
      were
      approximately $2,346,000 and $2,541,000, respectively.





**Long-Lived
      Assets**




The
      Company adopted the provisions of FASB Statement No. 144, “Accounting for the
      Impairment or Disposal of Long Lived Assets,” effective January 1, 2005. 
The Company reviews for impairment annually. When impairment indicators are
      present, the Company reviews the carrying value of its assets in determining
      the
      ultimate recoverability of their unamortized values using analyses of future
      undiscounted cash flows expected to be generated by the assets.  If such
      assets are considered impaired, the impairment recognized is measured by the
      amount by which the carrying amount of the asset exceeded its fair value. 
Assets to be disposed of are reported at the lower of the carrying amount or
      fair value, less cost to sell. Based upon its annual review, management
      determined that there were no indicators of impairment for its long-lived assets
      as of December 31, 2007.




**Goodwill
      and Intangible Assets**




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


F-8





During
      the year ended December 31, 2006, management concluded that the Rapor product
      line no longer fit the Company’s existing distribution channels and market
      strategy and, accordingly, recorded impairment costs of approximately $977,000
      resulting from the write-off of goodwill of approximately $544,000, and the
      write-off of the remaining net book value of the trademark and technology
      associated with Rapor products totaling approximately $433,000, as prescribed
      under SFAS 142. No such impairment expense was recorded for the year ending
      December 31, 2007. The company reviews its goodwill and intangibles annually
      for
      impairment or sooner if indications of impairment are noted.





**Property
      and Equipment**





Property
      and equipment is stated at cost net of depreciation and amortization.
      Depreciation and amortization are provided for on the straight-line method
      over
      the estimated useful lives of the respective assets. Maintenance and repairs
      are
      charged to expense as incurred; major renewals and betterments are capitalized.
      When assets are fully depreciated, or otherwise disposed of, the related cost
      and accumulated depreciation are removed from the accounts and any gain or
      loss
      on disposition is credited or charged to income.





**Shipping
      and Handling Costs**





Shipping
      and handling costs related to product sales and fulfillment are expensed as
      incurred and included in cost of goods sold. Shipping and handling costs related
      to purchases are included in the cost of inventory, and charged to cost of
      goods
      sold when sold to customers.





**Advertising**





Advertising
      costs are expensed as incurred. Certain advertising costs, which included
      various promotional incentives and trade show participation, for the years
      ended
      December 31, 2007 and 2006 were reimbursed by Samsung in the form of marketing
      incentives and partial reimbursement for trade show participation. Advertising
      costs during the years ended December 31, 2007 and 2006 were $477,000 and
      $815,000, respectively.





**Income
      Taxes**





Income
      taxes consist of taxes currently payable plus deferred taxes related primarily
      to differences between the basis of property and equipment, inventory, and
      accounts receivable for financial and income tax reporting. Deferred taxes
      represent the future tax return consequences of those differences, which will
      be
      taxable or deductible when the assets and liabilities are recovered or
      settled.





Deferred
      tax liabilities and assets are classified as current or noncurrent based on
      the
      classification of the related asset or liability for financial reporting, or
      according to the expected reversal date of temporary differences not related
      to
      an asset or liability for financial reporting. Also, a valuation allowance
      is
      used, if necessary, to reduce deferred tax assets by the amount of any tax
      benefits that are not expected to be realized in the future based on available
      evidence.





**Stock-Based
      Compensation**




The
      Company periodically issues stock options and warrants to employees and
      non-employees in non-capital raising transactions for services and for financing
      costs. The Company adopted Statement of Financial Accounting Standards (SFAS)
      No. 123R, “Share-Based Payment,” effective January 1, 2006, and is using the
      modified prospective method in which compensation cost is recognized beginning
      with the effective date (a) based on the requirements of SFAS No. 123R for
      all
      share-based payments granted after the effective date and (b) based on the
      requirements of SFAS No. 123R for all awards granted to employees prior to
      the
      effective date of SFAS No. 123R that remained unvested on the effective date.
      The Company accounts for stock option and warrant grants issued and vesting
      to
      non-employees in accordance with EITF No. 96-18: "Accounting for Equity
      Instruments that are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services” and EITF 00-18 “Accounting
      Recognition for Certain Transactions involving Equity Instruments Granted to
      Other Than Employees” under which the value of the stock compensation is based
      upon the measurement date as determined at either a) the date at which a
      performance commitment is reached, or b) at the date at which the necessary
      performance to earn the equity instruments is complete.


F-9


The
      fair
      value of each option on the date of grant was estimated using the Black-Scholes
      option pricing model with the following weighted average
      assumptions:




2007
            
            2006Risk
                free rate of return
            
            
            4.5
            %
            
            6.0
            %Option
                lives in years
            
            
            6.0
            
            
            6.0Annual
                volatility of stock price
            
            
            72
            %
            
            43
            %Dividend
                yield
            
            
            —
            %
            
            —
            %





**Net
      Income (Loss) Per Share**




Statement
      of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" requires
      presentation of basic earnings per share (“Basic EPS”) and diluted earnings per
      share (“Diluted EPS”). Basic earnings (loss) per share is computed by dividing
      income (loss) available to common stockholders by the weighted average number
      of
      common shares outstanding during the period. Diluted earnings per share gives
      effect to all dilutive potential common shares outstanding during the period.
      These potentially dilutive securities were not included in the calculation
      of
      loss per share for the year ended December 31, 2006 because the Company incurred
      a loss during such period and thus their effect would have been anti-dilutive.
      Accordingly, basic and diluted loss per share is the same for year ended
      December 31, 2006. At December 31, 2006, potentially dilutive securities
      consisted of outstanding warrants and stock options to acquire an aggregate
      of
      7,508,519 shares of Common Stock **.** The
      income generated by the Company during the year ended December 31, 2007 led
      to
      the Company including an additional 5,550,579 shares as dilutive for Diluted
      EPS
      calculations. These dilutive shares consisted of outstanding warrants and stock
      options that were issued at a price below the average market price of the stock
      for the year ended December 31, 2007. The potentially dilutive securities
      consisted of outstanding warrants and stock options to acquire an aggregate
      of
      8,221,810 shares.





**Credit
      Risk Concentration**




At
      December 31, 2007, two customers accounted for 19% and 16% respectively of
      the
      Company’s receivables balances. At December 31, 2006, three customers accounted
      for 20%, 18%, and 12% respectively of the Company’s receivables balances. During
      the year ended December 31, 2007, two customers accounted for 20% and 18%
      respectively of the Company’s sales. During the year ended December 31, 2006,
      three customers accounted for 16%, 14% and 10% respectively of the Company’s
      continuing sales.





International
      sales accounted for approximately 29% and 30% of the Company's sales during
      the
      years ended December 31, 2007 and 2006 respectively. All international sales
      took place in Latin America.





The
      Company performs ongoing credit evaluations of its customers and generally
      requires no collateral from them. ****





**Fair
      Value of Financial Instruments**





The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instruments for which it is practicable to estimate that
      value:





·
            Cash,
                accounts receivable, accounts payable and accrued expenses - The
                carrying
                amount approximates fair value because of the short maturity of those
                instruments.





·
            Notes
                payable and capitalized lease obligations - Based on the borrowing
                rates
                currently available to the Corporation for bank loans with similar
                terms
                and average maturities, the fair value of long-term debt approximates
                the
                carrying value shown on our balance sheet.


F-10





**Use
      of Estimates**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosures of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates. Significant estimates include
      those that relate to the valuation of inventory, accounts receivable, certain
      accruals and liabilities and the useful lives of property and
      equipment.





**Recent
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
      provides enhanced guidance for using fair value to measure assets and
      liabilities. SFAS No. 157 provides a common definition of fair value and
      establishes a framework to make the measurement of fair value in generally
      accepted accounting principles more consistent and comparable. SFAS No. 157
      also
      requires expanded disclosures to provide information about the extent to which
      fair value is used to measure assets and liabilities, the methods and
      assumptions used to measure fair value, and the effect of fair value measures
      on
      earnings. SFAS No. 157 is effective for financial statements issued in fiscal
      years beginning after November 15, 2007 and to interim periods within those
      fiscal years.





In
      February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      Statement No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities - Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS
      159, which becomes effective for the Company on January 1, 2008, permits
      companies to choose to measure many financial instruments and certain other
      items at fair value and report unrealized gains and losses in earnings. Such
      accounting is optional and is generally to be applied instrument by instrument.





In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141 (R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





The
      Company does not believe that the adoption of the above recent pronouncements
      will have a material effect on the Company’s consolidated results of operations,
      financial position, or cash flows.


F-11





**NOTE
      2 ~ ACCOUNTS RECEIVABLE**





Accounts
      receivable, net, at December 31, 2007 and 2006 consists of trade receivables
      from customers, less allowances for doubtful accounts, estimated future returns
      and customer rebates and credits.





The
      Company maintains an allowance for doubtful accounts receivables based primarily
      on historical loss experience. Additional amounts are provided through charges
      to income, as management feels necessary, after evaluation of receivables and
      current economic conditions. Amounts which are considered to be uncollectible
      are charged off and recoveries of amounts previously charged off are credited
      to
      the allowance upon recovery.





Allowance
      for doubtful accounts activity during the years ended December 31, 2007 and
      2006
      was as follows:




2007
            
            2006Beginning
                balance
            
            $
            558
            
            $
            317Bad
                debt provisions
            
            
            171
            
            
            817Account
                write-offs
            
            
            (329
            )
            
            (636
            )Recoveries
            
            
            16
            
            
            59Ending
                Balance
            
            $
            416
            
            $
            558





**NOTE
      3 ~ PROPERTY AND EQUIPMENT**





Property
      and equipment at December 31, 2007 and 2006 consists of the
      following:





Useful Lives
              in Years
            
            2007
            
            2006Furniture
                and fixtures
            
            
            5-7
            
            $
            483
            
            $
            483Office
                and warehouse equipment
            
            
            2-7
            
            
            201
            
            
            201Leasehold
                improvements
            
            
            2-7
            
            
            168
            
            
            168Computer
                equipment and software
            
            
            3-5
            
            
            676
            
            
            676Demo
                and sample equipment
            
            
            1-2
            
            
            2
            
            
            -1,530
            
            
            1,528Accumulated
                Depreciation
            
            
            
            
            
            (1,374
            )
            
            (1,144
            )$
            156
            
            $
            384





**NOTE
      4 ~ CREDIT FACILITY**





The
      Company had borrowings under the following credit facilities as of December
      31,
      2007 and 2006, respectively:




2007
            
            2006(A)Wells
                Fargo
            
            $
            10,344
            
            $
            -(B)Laurus
            
            
            -
            
            
            6,366Total
            
            $
            10,344
            
            $
            6,366





(A)  On
      November 20, 2007, the Company entered into a Credit and Security Agreement
      with
      Wells Fargo Bank, National Association under which the Company was provided
      with
      a $15 million revolving credit facility. On November 21, 2007, the Company
      borrowed approximately $10.3 million under the credit facility, using
      approximately $8.6 million of the proceeds to repay in full all outstanding
      indebtedness owed to Laurus Master Fund. Aggregate amounts outstanding under
      the
      line of credit at December 31, 2007 were approximately $10.3 million. In
      addition the Company used $1.7 million of the initial loan proceeds to increase
      its working capital. Borrowings under the credit facility are secured by all
      of
      the Company’s assets. Upon closing, the Company paid Wells Fargo an origination
      fee of $37,500. The Company also pays Wells Fargo an annual fee equal to .25%
      of
      the average daily unused portion of the Facility. Outstanding loans under the
      credit facility will become due on November 20, 2010.


F-12





Pursuant
      to the Credit and Security Agreement, among other things:




·
            Interest
                accrues on outstanding loans under the credit facility, at our option,
                at
                a per annum rate equal to the prime rate from time to time in effect
                (6.5%
                at December 31, 2007) plus .75% percent, or a LIBOR rate selected
                by us,
                plus 3.25%. In comparison, Laurus borrowings bore interest at a rate
                per
                annum equal to the prime rate plus two
                percent.





·
            In
                the event the Company achieves Net Income (as defined in the Credit
                Agreement), of $1,000,000 in the year ending December 31, 2008, the
                interest rate under the credit facility will be prospectively reduced
                by
                .50% per annum.





·
            Aggregate
                loans (plus the face amount of letters of credit) outstanding under
                the
                credit facility at any time may not exceed the lesser of $15 million
                or a
                borrowing base equal to the sum of 85% of “Eligible Accounts” plus the
                lesser of (i) 60% of “Eligible Inventory” (valued at the lower of cost or
                market), (ii) 85% of the “Net Orderly Liquidation Value of Eligible
                Inventory,” and (iii) $8.5 million. In comparison, our Laurus borrowings
                could not exceed $10 million, with inventory based borrowings limited
                to
                $3.5 million. As of December 31, 2007, the Company’s borrowing base
                supported approximately $13.9 million of borrowings, under the line
                of
                credit agreement, of which approximately $10.3 million was outstanding.





·
            The
                Company will be required to pay a prepayment fee to Wells Fargo if
                the
                credit facility is terminated prior to maturity. Such fee ranges
                from
                $300,000 if the credit facility is terminated prior to November 20,
                2008,
                to $37,500 if the credit facility is terminated after November 20,
                2009
                but prior to the maturity date.





·
            The
                Company is required to comply with a number of affirmative, negative
                and
                financial covenants. Among other things, these covenants restrict
                the
                Company’s ability to pay dividends, requires the Company to achieve
                minimum quarterly Net Income as set forth in the Credit Agreement,
                and
                requires the Company to maintain a minimum Debt Service Coverage
                Ratio (as
                defined in the Credit Agreement) as of the last day of each quarter
                of not
                less than 1.25 to 1.0. As of December 31, 2007, the Company was in
                compliance with all such covenants.




**(B)** On
      May
      27, 2004, the Company closed a $15 million convertible debt financing with
      Laurus under which the Company was provided with a $5 million term loan and
      a
      $10 million revolving credit facility. As part of the transaction, Laurus was
      also issued a seven-year warrant to purchase 18,800 shares of Common Stock
      at a
      price of $175 per share The Company also issued a similar warrant to purchase
      1,880 shares of Common Stock to the finder. These warrants were valued at
      $112,000 using a Black-Scholes pricing model. The assumptions used in the model
      were (i) risk free interest rate of 6%, (ii) expected life of 7 years, (iii)
      expected volatility of 70% and (iv) no anticipated dividends. Borrowings under
      the Laurus financing are secured by all assets of the Company.




The
      loan
      documents with Laurus required the Company’s Common Stock to be quoted on the
      NASD Over the Counter Bulletin Board by July 27, 2004, which date was extended
      to September 27, 2004 and further extended to December 31, 2004. In
      consideration for extending the deadlines, the Company issued Laurus additional
      seven-year warrants to purchase an aggregate of 8,000 shares of Common Stock
      at
      a price of $175 per share. The fair value of these warrants at date of issue
      was
      determined to be approximately $20,000 using a Black-Scholes pricing model,
      and
      were charged to expense during the year ended December 31, 2004. The assumptions
      used in the model were (i) risk free interest rate of 6%, (ii) expected life
      of
      7 years, (iii) expected volatility of 70% and (iv) no anticipated dividends.
      The
      Company’s Common Stock began being quoted on the NASD Over the Counter Bulletin
      Board on December 13, 2004.




The
      term
      loan was evidenced by a Secured Convertible Term Note (“Term Note”) and bore
      interest at a rate per annum equal to the prime rate (as reported in the Wall
      Street Journal), plus two percent, subject to a floor of six percent. Borrowings
      under the revolving credit facility bore interest at a rate per annum equal
      to
      the prime rate plus two percent. Borrowings outstanding under the line of credit
      were approximately $6.4 million as of December 31, 2006. The line of credit
      was
      paid off on November 21, 2007 with proceeds from the Wells Fargo Facility.


F-13





Pursuant
      to an amendment, dated as of May 26, 2006, between the Company and Laurus,
      (i)
      payments of principal due to Laurus for the months of June 2006 through December
      2006 under the Term Note were reduced from $190,000 per month to $100,000 per
      month, (ii) the final payment of principal due to Laurus under the Term Note
      on
      May 27, 2007 was correspondingly increased from $435,000 to $1,065,000, and
      (iii) the exercise price of warrants previously issued to Laurus to purchase
      an
      aggregate of 26,800 shares of the Company’s Common Stock was reduced from
      $175.00 to $30.00. Pursuant to a further Amendment, dated as of June 22, 2006,
      the conversion price of $300,000 of principal under the Term Note was reduced
      to
      $7.50 from $95.50, and Laurus converted such amount of principal into 40,000
      shares of the Company’s Common Stock. The principal so converted was applied to
      the payments of principal that would otherwise have been due under the Term
      Note
      for the months of July, August and September 2006. As a result of the reduction
      in the exercise price of the warrants, the Company recorded an interest charge
      of approximately $76,000 in the second quarter of 2006. In addition, the Company
      also recorded a charge of approximately $20,000 from the reduction of the
      conversion price of $300,000 of convertible term debt principal in June 2006.





**NOTE
      5** **~** **LOAN
      ORIGINATION FEES**





Loan
      origination fees consist of the following as of December 31, 2007 and 2006
      respectively:





2007
            
            2006Fees
            
            $
            2,192
            
            $
            2,096Amortization
            
            
            (2,099
            )
            
            (1,887
            )Net
            
            $
            93
            
            $
            209





The
      Company incurred and capitalized origination fees associated with the Wells
      Fargo credit facility of approximately $97,000. These fees are amortized into
      interest expense using the effective interest method over the initial term
      of
      the loan of three years.





The
      Company incurred and capitalized origination and finders fees associated with
      the Laurus credit facility of approximately $1.8 million. These fees were
      amortized into interest expense using the effective interest method over the
      initial term of the loan of three years. Included in the capitalized origination
      fees is compensation of approximately $112,000 relating to the issuance of
      warrants to purchase 20,680 shares of the Company’s Common Stock. These fees
      were fully amortized in May 2007.





As
      noted
      in Note 8, in conjunction with its private placement transaction in October
      2006
      the Company recorded loan origination fees of approximately $47,000 to reflect
      the fair value of a warrant to purchase 1,875,000 shares of Common Stock issued
      to a shareholder for services in connection with the private placement
      transaction. These non-cash expenses were initially amortized into interest
      expense using the effective interest method over the term of the underlying
      subordinated convertible notes of three years. In November 2006, the private
      placement investors exercised the conversion feature of the subordinated
      convertible notes, at which time the remaining unamortized balance of the
      related loan origination fees were immediately charged to income.





**NOTE
      6** **~** **CAPITALIZED
      LEASES**





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





Future
      minimum lease payments under noncancelable capital lease obligations at December
      31, 2007 were as follows:




2008
            
            $
            532009
            
            
            13Total
                payments
            
            
            66Less
                amounts relating to interest
            
            
            3Total
                capital lease obligations
            
            
            63Less
                current portion
            
            
            51Capital
                lease obligations, noncurrent
            
            $
            12


F-14





**NOTE
      7 ~ INCOME TAXES**


The
      Company’s provision for income tax expense (benefit) consists of the
      following:





2007
            
            2006CurrentFederal
            
            $
            22
            
            $
            -State
            
            
            20
            
            
            14Total
                Current
            
            
            42
            
            
            14DeferredFederal
            
            
            (832
            )
            
            -State
            
            
            (152
            )
            
            -Total
                Deferred
            
            
            (984
            )Total
            
            $
            (942
            )
            $
            14





Deferred
      taxes are provided for the differences in the tax and accounting basis of assets
      and liabilities as follows ($ in thousands):





2007
            
            2006Deferred
                tax assetsAccounts
                receivable allowances
            
            $
            435
            
            $
            546Inventory
                reserve
            
            
            1,152
            
            
            864Uniform
                capitalization of inventory costs
            
            
            132
            
            
            74Other
            
            
            63
            
            
            0Property
                and Equipment
            
            
            1,211Non
                Cash compensation
            
            
            138
            
            
            46Net
                operating loss and credit carry-forward
            
            
            1,508
            
            
            7,9434,639
            
            
            9,473Less:
                Deferred tax valuation allowance
            
            
            (2,411
            )
            
            (9,352
            )Deferred
                Tax Asset, net of valuation
            
            
            2,228
            
            
            121Deferred
                tax liabilitiesProperty
                and equipment
            
            
            (1,244
            )
            
            (121
            )Net
            
            $
            984
            
            $
            -





The
      Company's effective tax rate differs from the expected federal income tax rate
      as follows ($ in thousands):





2007
            
            2006Income
                tax at statutory rates (34%)
            
            $
            577
            
            $
            (5,612
            )Permanent
                differences
            
            
            18State
                income tax expense – net of federal benefit
            
            
            (187
            )
            
            14Change
                in deferred tax valuation
            
            
            (6,941
            )Reduction
                in NOL carry-forward due to change in ownership
            
            
            5,591
            
            
            5,612Income
                tax (benefit) provision
            
            
            (942
            )
            $
            14


F-15


The
      Company records income taxes using the asset and liability approach, whereby
      deferred tax assets, net of valuation allowances, and liabilities are recorded
      for the future tax consequences of temporary differences between financial
      statement and tax bases of assets and liabilities and for the benefit of net
      operating loss carry forwards.





The
      Company incurred significant operating losses during the three years prior
      to
      2007, which generated net operating loss carry-forwards which may be available
      for future utilization. Internal Revenue Code Section 382 places a limitation
      on
      the utilization of Federal net operating loss and other credit carry-forwards
      when an ownership change, as defined by the tax law, occurs. Generally, this
      occurs when a greater than 50 percentage point change in ownership occurs.
      In
      October 2006, as a result of the completion of the Company’s private placement
      transaction, the investors in the private placement as a group became the
      beneficial owners of approximately 96% of the Company’s outstanding shares,
      after consideration of the conversion of convertible promissory notes issued
      to
      those investors in conjunction with the transaction. Accordingly, the actual
      utilization of net operating loss carry-forwards and other deferred tax assets
      for tax purposes will be limited annually under Code Section 382 to a percentage
      of the fair market value of the Company at the date of this ownership change,
      and this effect has reduced the amount of these loss carry-forwards which the
      Company will be able to utilize to offset against future taxable income. As
      a
      result, at December 31, 2007, the Company has a federal net operating loss
      carry-forward of approximately $4.0 million expiring 2026. Approximately $2.4
      million of the federal net operating loss carry-forward is available for
      utilization in 2008. The remaining $1.6 million can be utilized at a rate of
      approximately $89,000 annually over the following 18 years ending 2026. In
      addition, the company has State net operating loss carry-forwards of
      approximately $1.7 million which expire 2025. A valuation allowance has been
      provided against the net deferred tax assets available after the year ending
      December 31, 2008, due to the uncertainty of the Company’s ability to generate
      long-term taxable income. The company expects to reduce its valuation allowance
      if and when it believes that it is more likely than not that it will be
      realized.





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




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




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





**NOTE
      8 ~ STOCKHOLDERS’ EQUITY**





***January
      2007 Private Placement***




On
      January 22, 2007, the Company completed a private placement of 1,713,334 shares
      of Common Stock at a price of $0.60 per share for aggregate gross consideration
      of $1,028,000. The proceeds from the January private placement were used for
      working capital and general corporate purposes.


F-16


***October
      2006 Private Placement***




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




The
      conversion price of the Convertible Notes was less than the market price of
      the
      Company’s common stock on the date of the issuance of the Convertible Notes. In
      accordance with EITF 98-5 the Company recognized a debt discount of $4.5 million
      associated with the beneficial conversion feature of the Convertible Notes.
      The
      entire debt discount was recognized by the Company on November 27, 2006, the
      date on which the Company’s 50-for-1 reverse split was effected and the Notes
      became ultimately convertible.




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




***Other
      Equity Transactions***




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




During
      the year ended December 31, 2006, the Company issued 40,000 shares of common
      stock to directors valued at $52,000. The shares were valued at the market
      price
      at the date of issuance.




During
      the year ended December 31, 2006, the Company issued 15,000 shares of common
      stock to its former distributor to the retail channel upon achievement of a
      contractual sales milestone. The shares were valued at $157,500, the market
      price at the date of issuance.





During
      the year ended December 31, 2006, the Company issued 25,000 shares of common
      stock for services valued at $23,250. The shares were valued at the market
      price
      at the date of issuance.





**NOTE
      9** **~** **SIGNIFICANT
      VENDOR AGREEMENT**




On
      October 2, 2006, the Company entered into a new Product Distribution Agreement
      (“Agreement”) with Samsung, under which the Company was granted the right to
      distribute Samsung’s complete line of professional video surveillance and
      security products in North, Central and South America (“Territory”) through
      December 31, 2010. Pursuant to the Agreement, Samsung has agreed to a limited
      non-compete in the Territory. The Agreement also provides for minimum annual
      purchase amounts of $21 million, $27 million, $32.4 million, $38.9 million,
      and
      $46.7 million for the years ending December 31, 2006, 2007, 2008, 2009, and
      2010, respectively, and allows Samsung to terminate the Agreement at any time
      if
      the Company does not achieve the annual minimum purchase amounts, as well as
      upon the Company’s breach of any of its other obligations thereunder. For the
      years ended December 31, 2006 and December 31, 2007, the Company exceeded its
      minimum purchasing commitment under the agreement. For the years ended December
      31, 2006 and December 31, 2007, the Company purchased approximately $21.3
      million and $28 million, respectively under the Distributorship Agreement with
      Samsung.


F-17


Samsung
      has established a credit limit under which the Company purchases products.
      During the year ended 2007, the limit was approximately $6.5 million. In January
      2008, the limit was increased to approximately $10 million. The Company must
      pay
      in advance of shipment when the credit limit has been met or exceeded. As of
      December 31, 2007 and 2006, $5.7 million and $4.9 million, respectively, was
      due
      to Samsung under this agreement.




**NOTE
      10 ~ 401(K) PLAN**





The
      Company has a 401(k) profit-sharing plan covering all of its eligible employees.
      The Plan provides for annual discretionary employer and employee contributions.
      For the years ended December 31, 2007 and 2006, no annual discretionary employer
      contributions were approved and funded.





**NOTE
      11 ~ COMMITMENTS & CONTINGENCIES**





***General***





Sales
      to
      certain consumers of video surveillance and other security products may be
      subject to sales tax requirements and possible audits by state taxing
      authorities. The Company records its estimated sales tax liability and includes
      that amount as an accrued obligation until paid.





The
      Company is also party to other disputes in the normal course of business.
      Management believes the ultimate resolution of such disputes will not have
      a
      material effect on the financial statements.





***Lease
      and Rents***





The
      Company leases warehouse and office space under an operating lease agreement
      which expires on September 30, 2009. Under the terms of the lease, the Company
      paid no rent for six months, and then pays monthly rent of $25,704 for the
      remainder of the sixty-six month lease. The Company records rent on a
      straight-line basis over the life of the lease and records the difference
      between amounts paid and expense recorded as a deferred lease liability.





The
      minimum annual rentals under the non-cancelable lease for the periods subsequent
      to December 31, 2007 are as follows ($ in thousands):





Years
                Ending December 31:
            
            Amount2008
            
            
            3332009
            
            
            250$
            583





Rent
      expense under operating leases was approximately $382,000 and $475,000 during
      the years ended December 31, 2007 and 2006 respectively.





***Employment
      Agreements***





We
      entered into an Employment Agreement, dated as of February 9, 2006, with Steven
      Walin, our Chief Executive Officer. The Employment Agreement was amended on
      January 8, 2008 to extend the term thereof to December 31, 2011. Pursuant
      to the Employment Agreement, Mr. Walin receives an annual base salary of
      $375,000.




Pursuant
      to his Employment Agreement, Mr. Walin is entitled to receive an annual bonus
      of
      up to 50% of his base salary based on the achievement of annual performance
      targets approved of by our board of directors, for subsequent
      years.




If
      Mr.
      Walin’s employment is terminated as a result of his death or disability, the
      Company will pay him his accrued but unpaid base salary, unpaid signing bonus,
      and unpaid annual bonus with respect to any completed fiscal year, and a
      pro-rated portion of any bonus he would have otherwise been entitled for the
      fiscal year in which the termination occurs.


F-18


Mr.
      Walin
      is prohibited under the Employment Agreement from using or disclosing any of
      the
      Company’s proprietary information, competing with the Company, hiring any of the
      Company’s employees or consultants and soliciting any of the Company’s customers
      or suppliers to reduce or cease business with the Company.




In
      addition, we entered into an Employment Agreement, dated as of March 28, 2006,
      with Joseph Restivo, our Chief Financial Officer and Chief Operating Officer.
      The Employment Agreement was amended on January 8, 2008 to extend the term
      thereof to December 31, 2011. The
      Employment Agreement provides Mr. Restivo with an annual base salary of
      $250,000, and an annual bonus of up to 50% of his base salary based on the
      achievement of annual performance targets approved of by our board of
      directors.




If
      Mr.
      Restivo’s employment is terminated as a result of his death or disability, the
      Company will pay him his accrued but unpaid base salary and unpaid annual bonus
      with respect to any completed fiscal year, and a pro-rated portion of any bonus
      he would have otherwise been entitled for the fiscal year in which the
      termination occurs.




Mr.
      Restivo is prohibited under the Employment Agreement from using or disclosing
      any of the Company’s proprietary information, competing with the Company, hiring
      any of the Company’s employees or consultants and soliciting any of our
      customers or suppliers to reduce or cease business with the Company.




On
      October 4, 2006, in connection with the private placement noted earlier, the
      Company entered into amendments to the employment agreements of both the Chief
      Executive Officer and Chief Financial Officer, by which the Company agreed
      to
      issue to each of the two officers an option to purchase 1,881,795 shares of
      the
      Company’s Common Stock at an exercise price of $.020 per share vesting over a
      three-year period, and have amended the definition of “Cause” for termination
      purposes under each of the employment agreements to include the Company’s
      incurrence of a net loss, as defined in the amendments, in the quarter ending
      June 30, 2007. The new options may not be exercised until such time as the
      Company has available for issuance a sufficient number of unissued shares of
      authorized Common Stock so as to permit such exercise. Pursuant to the
      amendments, the two officers agreed to forfeit all stock options previously
      granted to them under their employment agreements as well as the right to be
      issued additional stock options upon the closing of a private placement of
      the
      Company’s securities.





The
      January 2008 amendments also extend the period following a “Change in Control,”
from 12 months to 18 months, within which Messrs. Walin and Restivo are entitled
      to increased severance, in the event they are terminated “Without Cause” or
      resign for “Good Reason.” Mr. Restivo’s amendment additionally provides that he
      will receive a cash payment of $75,000 to cover his relocation expenses in
      the
      event he is terminated “Without Cause” or resigns for “Good Reason” (whether
      before or after a “Change in Control”).





**NOTE
      12 ~ 2004 STOCK INCENTIVE PLAN**





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





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


F-19


A
      summary
      of the status and activity of the Company’s stock options is presented below:




Years
                Ended December 31:2007
            
            2006Shares
            
            Weighted
              Ave
              Exercise
              Price
            
            Shares
            
            Weighted
              Ave
              Exercise
              PriceOutstanding
                at January 1:
            
            
            5,498,797
            
            $
            1.37
            
            
            84,435
            
            $
            89.89Granted
            
            
            550,000
            
            $
            0.72
            
            
            5,508,591
            
            $
            0.56Exercised
            
            
            (40,830
            )
            $
            0.20
            
            
            -
            
            
            -Forfeited
            
            
            (45,749
            )
            $
            33.77
            
            
            (94,229
            )
            $
            33.42Outstanding
                at December 31:
            
            
            5,962,218
            
            $
            1.04
            
            
            5,498,797
            
            $
            1.37Options
                Exercisable at December 31:
            
            
            2,867,122
            
            $
            1.88
            
            
            1,411,795
            
            $
            3.80





The
      aggregate intrinsic values of outstanding and exercisable shares at December
      31,
      2007 were $397,349 and $140,763, respectively.





The
      weighted average fair value of options issued at date of grant using the fair
      value based method during 2007 is estimated at $0.34. The total intrinsic value
      of options exercised during 2007 was less than $1,000.




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





Outstanding Options
            
            Exercisable OptionsExercise
              Prices
            
            Shares
              Outstanding
              at December
              31, 2007
            
            Weighted-average
              Remaining
              Contractual Life
            
            Number
              Outstanding at
              December 31,
              2007$ 0.20
            
            
            5,363,590
            
            
            8.8
                years
            
            
            2,681,7950.60
            
            
            300,000
            
            
            4.2
                years
            
            
            137,4990.80
            
            
            150,000
            
            
            10.0
                years
            
            
            00.95
            
            
            100,
                000
            
            
            10.0
                years
            
            
            015.93
            
            
            4,637
            
            
            5.6
                years
            
            
            4,63742.50
            
            
            2,000
            
            
            7.3
                years
            
            
            1,50075.00
            
            
            13,366
            
            
            7.0
                years
            
            
            13,066130.00
            
            
            28,625
            
            
            6.1
                years
            
            
            28,6255,962,218
            
            
            8.9
                years
            
            
            2,867,122





The
      Company recognized compensation expense from the vesting of issued stock options
      of approximately $98,000 and $332,000 for the years ended December 31, 2007
      and
      2006 respectively. The Company’s future compensation expense from these stock
      options was approximately $205,000 on December 31, 2007, which vests monthly
      over the next 36 months.





**NOTE
      13 ~ WARRANTS**





A
      summary
      of the status and activity of the Company’s outstanding warrants is presented
      below:


F-20





Years
                Ended December 31:2007
            
            2006Shares
            
            Weighted
              Ave
              Exercise
              Price
            
            Shares
            
            Weighted
              Ave
              Exercise
              PriceOutstanding
                at January 1:
            
            
            2,009,723
            
            $
            5.98
            
            
            134,867
            
            $
            88.07Issued
            
            
            250,000
            
            $
            0.73
            
            
            1,875,000
            
            $
            0.20Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            (131
            )
            $
            390.00
            
            
            (144
            )
            $
            1,625.00Outstanding
                at December 31:
            
            
            2,259,592
            
            $
            5.38
            
            
            2,009,723
            
            $
            5.98





Summary
      of the Company’s outstanding warrants at December 31, 2007and 2006 are as
      follows:




December 31, 2007
            
            December
              31, 2006Description
            
            Shares
            
            Approx.
              Remaining
              Term
              (Years)
            
            Exercise Price
            
            SharesLaurus
                Master Fund
            
            
            26,800
            
            
            3.5
            
            $
            30.00
            
            
            26,800Laurus
                finder’s fee
            
            
            1,880
            
            
            3.4
            
            $
            175.00
            
            
            1,880ESI
            
            
            60,000
            
            
            3.8
            
            $
            75.00
            
            
            60,000Rapor
                shareholders
            
            
            27,079
            
            
            3.9
            
            $
            152.00
            
            
            27,079Oct.
                2004 bridge financing
            
            
            15,333
            
            
            1.8
            
            $
            75.00
            
            
            15,333Consultant
            
            
            3,500
            
            
            1.8
            
            $
            175.00
                - $ 250.00
            
            
            3,500Consulting
                fee paid to director
            
            
            1,875,000
            
            
            1.8
            
            $
            0.20
            
            
            1,875,000Consultant
            
            
            100,000
            
            
            4.2
            
            $
            0.60
            
            
            -Consultant
            
            
            150,000
            
            
            4.8
            
            $
            0.82
            
            
            -Other
            
            
            0
            
            
            0.9
            
            $
            390.00
            
            
            1312,259,592
            
            
            
            
            
            
            
            
            2,009,723





**NOTE
      14 ~ SUBSEQUENT EVENTS**





On
      January 1, 2008, the Company issued a consulting company warrants to purchase
      300,000 shares of GVI common stock. The warrants vest immediately and have
      a
      strike price of $1.15. The warrants are exercisable for a term of three years
      from the date of delivery.





F-21