UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 0-21295

GVI Security Solutions, Inc.

(Exact name of registrant as specified in its charter)

Delaware		77-0436410
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(972) 245-7353

(Registrant’s telephone number, including area code)

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

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

x Yes o No

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

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

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

o Yes x No

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

GVI Security Solutions, Inc.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			3

Item 1. Condensed Financial Statements.			3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

Item 3. Quantitative and Qualitative Disclosures About Market Risk			24

Item 4. Controls and Procedures.			24

PART II. OTHER INFORMATION			25

Item 6. Exhibits.			25

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

GVI Security Solutions, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30, 2007 (Unaudited)			December 31, 2006
ASSETS

Current Assets
Cash	$	795		$	225
Accounts receivable, net		7,228			7,881
Inventory, net		9,846			6,416
Prepaid and other current assets		744			1,324
Total Current Assets		18,613			15,846

Property and Equipment, net		201			383
Deferred loan origination fee, net		–			209
Other assets		34			34
Total Assets	$	18,848		$	16,472

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities
Accounts payable	$	7,727		$	7,059
Accrued expenses		1,867			2,022
Capitalized lease obligations, current		65			77
Senior term note		556			1,925
Revolving credit facility		7,733			6,366
Liabilities of discontinued operations		183			400
Total Current Liabilities		18,131			17,849

Capital lease obligations, net of current portion		18			63
Total Liabilities		18,149			17,912

Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock, undesignated, $.001 par value, 3,000,000 shares authorized, none issued or outstanding		–			–
Common stock, $.001 par value, 200,000,000 shares authorized; 28,147,107 shares issued and outstanding at September 30, 2007 and 26,292,830 shares issued and outstanding at December 31, 2006		28			26
Additional paid-in-capital		34,504			33,309
Accumulated deficit		(33,833	)		(34,775	)
Total Stockholders' Equity (Deficit)		699			(1,440	)
Total Liabilities and Stockholders' Equity (Deficit)	$	18,848		$	16,472

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

GVI Security Solutions, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share figures)

	Three Months Ended September 30					Nine Months Ended September 30
	2007		2006			2007		2006

Revenues	$	10,761	$	10,067		$	34,055	$	32,920

Cost of Revenues		7,647		9,445			24,587		28,360

Gross Profit		3,114		622			9,468		4,560

Selling, General and Administrative Expenses		2,431		2,794			7,682		9,865
Impairment of goodwill and other intangible assets				977					977

Operating Income (Loss)		683		(3,149	)		1,786		(6,282	)

Interest Expense		196		399			808		966

Income (loss) from continuing operations before income taxes and loss on discontinued operations		487		(3,548	)		978		(7,248	)

Income Tax Expense		13		22			36		68
Income (loss) from continuing operations before loss from discontinued operations		474		(3,570	)		942		(7,316	)

Loss from discontinued operations, net of taxes		–		576			–		(2,674	)

Net Income (loss)	$	474	$	(2,994	)	$	942	$	(9,990	)

Basic income (loss) per common share:
Continuing operations income (loss) per common share	$	0.02	$	(3.35	)	$	0.03	$	(7.08	)
Discontinued operations loss per common share	$	0.00	$	0.54		$	0.00	$	(2.59	)
Net income (loss) per common share	$	0.02	$	(2.81	)	$	0.03	$	(9.66	)
Weighted average common shares outstanding		28,147		1,065			27,997		1,034

Diluted net income (loss) per common share:
Continuing operations income (loss) per common share	$	0.01	$	(3.35	)	$	0.03	$	(7.08	)
Discontinued operations loss per common share	$	0.00	$	0.54		$	0.00	$	(2.59	)
Net income (loss) per common share	$	0.01	$	(2.81	)	$	0.03	$	(9.66	)
Weighted average common shares outstanding		33,473		1,065			33,592		1,034

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

GVI Security Solutions, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

	Nine Months Ending September 30
	2007			2006
Cash Flows (Used In) Provided by Operating Activities
Net Income (Loss)	$	942		$	(9,990	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Used In Operating Activities
Loss from discontinued operations, net of tax		–			2,674
Loss on retirement of assets		–			50
Impairment of goodwill and intangible assets		–			977
Depreciation and amortization from continuing operations		185			381
Amortization of deferred loan origination fee		209			450
Compensation costs and expenses of vested common stock warrants and options		141			567
Changes in Assets and Liabilities
Accounts receivable		654			1,383
Inventory		(3,430	)		4,036
Refundable income tax receivable		–			643
Prepaid and other current assets		580			280
Accounts payable		668			(716	)
Accrued expenses		(136	)		205
Net cash (used in) provided by operating activities from continuing operations		(187	)		941

Net cash (used in) provided by operating activities of discontinued operations		(218	)		506
Net cash (used in) provided by operating activities		(405	)		1,447

Cash Flows (Used in) Provided by Investing Activities
Purchase of property and equipment		(2	)		(45	)
Proceeds from sale of investment		–			50

Net Cash (Used in) Provided by Investing Activities		(2	)		5

Cash Flows Provided By (Used In) Financing Activities
Net proceeds from revolving credit facility		1,367			(2,168	)
Sale of common stock		1,028			–
Proceeds from exercise of stock options		8
Principal payments of term note		(1,369	)		(850	)
Principal repayments of capitalized lease obligations		(57	)		(99	)
Net Cash Provided By (Used In) Financing Activities		977			(3,177	)

Net Increase (Decrease) in Cash		570			(1,668	)

Cash, Beginning of Period		225			3,284
Cash, End of Period	$	795		$	1,618

SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest	$	618		$	691
Cash paid for income taxes		43			2
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Debt principal payment converted to common stock	$	–		$	300
Accrued obligation converted to common stock		20			–

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

GVI Security Solutions, Inc.

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2007 and 2006 (unaudited)

NOTE 1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

GVI Security Solutions (“GVI” or “Company”) provides 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.

The Company’s 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.

Basis of Presentation

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

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

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of GVI Security Solutions, Inc., and its wholly-owned subsidiaries GVI Security, Inc. and Rapor, Inc. All Inter-company transactions, balances and profits have been eliminated.

Going Concern Considerations

The accompanying financial statements have been presented in accordance with generally accepted accounting principles, which assumes the continuity of the Company as a going concern. During the years ended December 31, 2006, 2005 and 2004, the Company experienced negative cash flow and operating losses, which have resulted in a significant reduction in the Company’s cash balances. These factors collectively raise substantial doubt about the Company’s ability to continue as a going concern.

The Company will require additional equity or debt financing to repay its term and revolving credit loans to Laurus Master Fund, which become due December 31, 2007, and may also require additional capital to finance its operations, working capital or other capital expenditures. The Company is currently evaluating financing alternatives and is in discussions with a replacement lender. Although the Company anticipates that it will be able to refinance its indebtedness to Laurus prior to the maturity date of December 31, 2007, there can be no assurance that the Company will be successful in that regard.

Discontinued Operations

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

On September 13, 2006, the Company entered into an agreement with its former distributor to the retail channel, whereby the Company transferred to this distributor substantially all of its remaining retail inventory in exchange for the termination of the parties’ respective remaining obligations under its previous alliance agreement. The Company has written off all remaining net assets associated with the Retail Channel business, and has accrued a remaining reserve of $182,000 [for estimated obligations associated with completing the termination of this business channel.

Revenue Recognition

The Company’s primary source of revenue is from sales of its products. The Company recognizes revenue when the sales process is deemed complete and associated revenue has been earned. The Company’s policy is to recognize revenue in accordance with Security and Exchange Commission Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, when products have been shipped, risk of loss and title to the product transfers to the customer, the selling price is fixed and determinable and collectibility is reasonably assured. Net sales is comprised of gross revenue less expected returns, trade discounts and customer allowances, which include costs associated with off-invoice mark downs and other price reductions, as well as trade promotions. Related incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive.

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

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

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market and consists of goods held for resale and parts used for repair work. Reserves are recorded for slow-moving, obsolete, nonsaleable or unusable items based upon a product-level review, in order to reflect inventory balances at their net realizable value. Inventory reserve balances at September 30, 2007 and December 31, 2006 were approximately $2,205,000 and $2,541,000, respectively.

Advertising

Advertising costs are expensed as incurred. Certain advertising costs, which include various promotional incentives and trade show participation, for the nine months ended September 30, 2007 and 2006 were reimbursed by Samsung in the form of marketing incentives and partial reimbursement for trade show participation. Advertising costs, net of reimbursements, during the three month periods ended September 30, 2007 and 2006 were $159,000 and $258,000, respectively, and during the nine month periods ended September 30, 2007 and 2006 were $450,000 and $712,000, respectively.

Income Taxes

Income tax expense for the three and nine month periods ending September 30, 2007 and 2006 relate to state and local franchise taxes that are due to various states and municipalities in which the Company is licensed and transacts business. For the three and nine month periods ended September 30, 2007, the Company has not recorded any federal income tax liability, due to the existence and availability of operating loss carry-forwards, and has not accrued a deferred tax asset for the operating loss carry-forward as continued taxable income is uncertain.

Credit Risk Concentration

During the three months ended September 30, 2007, two customers accounted for $2,053,000 (19%) and $1,613,000 (15%), respectively, of the Company’s sales. During the three months ended September 30, 2006, two customers accounted for $1,634,000 (16%) and $1,450,000 (14%), respectively, of the Company’s sales. During the nine months ended September 30, 2007, two customers accounted for $6,443,000 (19%) and $6,018,000 (18%), respectively, of the Company’s sales. During the nine months ended September 30, 2006, three customers accounted for $4,745,000 (14%), $4,633,000 (14%) and $3,171,000 (10%), respectively, of the Company’s sales.

As of September 30, 2007, the two significant customers noted above comprised $2,076,000 (25%) and $1,227,000 (15%), respectively, of the Company’s total outstanding gross accounts receivable balance. As of December 31, 2006, the three significant customers noted above comprised $1,753,000 (19%), $1,682,000 (18%) and $1,098,000 (11%), respectively, of the Company’s total outstanding accounts receivable balance.

International sales accounted for approximately 30%, and 28% of the Company's sales during the three months ended September 30, 2007 and 2006, respectively. Collectively, Mexico, Brazil, and Columbia accounted for approximately 21%, and 17% of the Company's sales during the three months ended September 30, 2007 and 2006, respectively.

International sales accounted for approximately 29%, and 25% of the Company's sales during the nine months ended September 30, 2007 and 2006, respectively. Collectively, Mexico, Brazil, and Columbia accounted for approximately 18%, and 16% of the Company's sales during the nine months ended September 30, 2007 and 2006, respectively.

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

Use of Estimates

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

Earnings per Share

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

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

The following is a reconciliation of the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2007 and 2006 ($ in thousands except for per share amounts).

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Weighted average common shares outstanding		28,147		1,065		27,997		1,034
Effect of dilutive securities:
Warrants		1,403		–		1,486		–
Common stock options		3,923		–		4,109		–
Weighted average common shares and dilutive securities outstanding		33,473		1,065		33,592		1,034

Warrants to purchase approximately 135,000 shares of common stock at various prices exceeding $0.89 per share were outstanding during the three and nine months ended September 30, 2007 but were not included in the computation of diluted earnings per share for those periods because the respective warrant exercise prices were greater than the average market price of the common shares during those periods, and their effect would be anti-dilutive. Options to purchase approximately 299,000 and 149,000 share of common stock at various prices exceeding $0.76 and $0.89 per share were outstanding during the three months and nine months ended September 30, 2007 but were not included in the computation of diluted earnings per share for this period because the respective option exercise prices were greater than the average market price of the common shares during this period, and their effect would be anti-dilutive.

Options and warrants to purchase approximately 7,468,000 and 6,833,000 shares of common stock at various prices were outstanding during the three and nine months ended September 30, 2006 but were not included in the computation of diluted earnings per share for those periods because the Company incurred a loss for those periods, and their effect would be anti-dilutive.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS 123R”). This statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective method. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption and all previously granted awards not yet vested as of the date of adoption.

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

	Nine Months Ended September 30,
	2007		2006

Dividend yield		–		–
Risk-free factors		4%-6%		4.7%
Volatility factors		43%		47%
Option Lives in Years		6.0		6.0

Adoption of New Accounting Policies

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

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109, Accounting for Income Taxes.” The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2007, the Company does not have a liability for unrecognized tax benefits, and no adjustment was required on the adoption.

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

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of September 30, 2007, the Company has not accrued interest or penalties related to uncertain tax positions.

Recent Accounting Pronouncements

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

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

NOTE 2 ~ LAURUS CREDIT FACILITY

On May 27, 2004, the Company closed a $15 million convertible debt financing with Laurus Master Funds (“Laurus”) under which the Company was originally provided with a $5 million term loan and a $10 million revolving line of credit. Borrowings under the Laurus credit facility are secured by all assets of the Company. At September 30, 2007 and December 31, 2006, $556,000 and $1.9 million, respectively, in principal was outstanding under the Term Loan and $7.7 million and $6.4 million, respectively, in principal was outstanding under the revolving line of credit. The agreements with Laurus prohibit the payment of dividends on the Company’s Common Stock, and contain other customary affirmative and negative covenants.

The term loan is evidenced by a Secured Term Note (“Term Note”) and bears interest at a rate per annum equal to the prime rate (as reported in the Wall Street Journal), plus two percent (9.75% at September 30, 2007 and 10.25% at December 31, 2006, respectively), subject to a floor of six percent. Interest on the term loan is payable monthly.

Amounts outstanding under the Term Note were initially convertible into Common Stock at Laurus's option at a conversion price initially equal to $135.00 per share. In December 2004 the conversion price was reduced to $95.50 under the terms of the anti-dilution feature of the Term Note. As the market price of the stock at the date of the modification was significantly below the conversion price, there was no financial statement impact of the modification of the conversion price. In addition, subject to (i) having an effective registration statement with respect to the shares of Common Stock underlying the Term Note, and (ii) limitations based on trading volume of the Common Stock, originally scheduled principal and interest payments under the Term Note were to be made in shares of Common Stock valued at the conversion price. In addition, prepayments under the Term Note were subject to a premium in the amount of 20% of the principal being prepaid.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to the prime rate plus two percent (9.75% at September 30, 2007 and 10.25% at December 31, 2006, respectively). The revolving line of credit terminates, and borrowings there under become due, on December 31, 2007.

Amounts outstanding under the revolving credit facility were initially convertible to Common Stock at Laurus's option at a conversion price initially equal to $169.00 per share. In December 2004 the conversion price was reduced to $111.00 under the terms of the anti-dilution feature of the facility. As the market price of the stock at the date of the modification was significantly below the conversion price, there was no financial statement impact of the modification of the conversion price. To the extent the Company repays loans outstanding under the revolving credit facility, the Company may reborrow under the revolving credit facility, provided that aggregate loans outstanding under the revolving credit facility at any time may not exceed the lesser of $10 million or a borrowing base equal to the sum of 83.7% of "eligible accounts" plus 60% of "eligible inventory" (with borrowings based on eligible inventory limited to $3.5 million). Eligible accounts are generally gross accounts receivable less foreign receivables and domestic receivables over 90 days from invoice date. Eligible inventory is substantially all finished goods inventory.

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

On October 4, 2006, in connection with the Company’s private placement transaction, the Company entered into an Omnibus Amendment and Consent with Laurus, pursuant to which Laurus consented to the issuance of convertible notes in the private placement. In addition, Laurus agreed to further amendments to the Company’s revolving credit facility and term loan agreements under which (i) the ability of Laurus to convert the Company’s revolving credit facility and term loan into Common Stock was eliminated; (ii) the maturity date of both the revolving credit facility and Term Note was extended from May 24, 2007 until December 31, 2007; (iii) prepayment penalties with respect to both the revolving credit facility and Term Note were eliminated; and (iv) monthly principal payments of $152,000 are due under the Term Note for the months of January 2007 through November 2007, with a final payment due in December 2007 in the amount of $252,000.

NOTE 3 ~ CAPITALIZED LEASES

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

Future minimum lease payments under noncancelable capital lease obligations at September 30, 2007 were as follows ($ in thousands):

2007	$	21
2008		53
2009		13
Total payments		87
Less amounts relating to interest		4
Total capital lease obligations		83
Less current portion		65
Capital lease obligations, noncurrent	$	18

NOTE 4 ~ STOCKHOLDERS’ EQUITY

October 2006 Private Placement

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

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

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

January 2007 Private Placement Transaction

On January 22, 2007, the Company completed a private placement of 1,713,334 shares of Common stock at a price of $0.60 per share, totaling $1,028,000. 100,000 of such shares were purchased by a director of the Company and its Chief Executive Officer.

During the nine months ended September 30, 2007, the company issued 100,000 share of its common stock to settle accounts payable of $20,000.

NOTE 5 ~ COMMITMENTS & CONTINGENCIES

General

Sales to certain consumers of video surveillance and other security products may be subject to sales tax requirements and possible audits by state taxing authorities. The Company has recorded an estimate of its liability for sales taxes and believes any changes would not have a material effect on its financial condition or results of operations.

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

Vendor Agreement

On October 2, 2006, the Company entered into a new Product Distribution Agreement (“Agreement”) with Samsung, under which the Company was granted the right to distribute Samsung’s complete line of professional video surveillance and security products in North, Central and South America (“Territory”) through December 31, 2010. Pursuant to the Agreement, Samsung agreed to a limited non-compete in the Territory. The Agreement also provides for minimum annual purchase amounts of $21 million and $27 million for the years ending December 31, 2006 and 2007, respectively, and allows Samsung to terminate the Agreement at any time if the Company does not achieve the annual minimum purchase amounts, as well as upon the Company’s breach of any of its other obligations there under. During the nine months ended September 30, 2007, the Company purchased approximately $18.6 million under the Distributorship Agreement with Samsung. The Company anticipates that it will meet the minimum purchase amounts for 2007, although there can be assurance in that regard.

NOTE 6 ~ INCOME TAXES

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

	Three Months Ended September 30:						Nine Months Ended September 30:
	2007			2006			2007			2006

US Statutory tax rate – provision (benefit)		35.0	%		35.0	%		35.0	%		35.0	%
Increases (decreases) resulting from:
State income taxes		0.9			(1.1	)		1.3			(1.2	)
Changes in A/R & inventory reserves		0.8			-			(9.4	)		-
Net operating loss deductions		(36.1	)		(35.0	)		(30.0	)		(35.0	)
Depreciation		(0.1	)		-			(1.4	)		-
Other – net		1.0			-			4.4			-
Effective income tax rate		2.7	%		(1.1	%)		3.8	%		(1.2	%)

The Company incurred significant operating losses over the past several fiscal years, 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, assuming full conversion of convertible promissory notes issued to these investors in conjunction with the transaction.

The Company estimates that net operating losses, generated prior to October 2006, and losses generated subsequently thereafter, available to offset future taxable income generated after December 31, 2006 is approximately $5.2 million, and expire in years beginning 2007 through 2021.

NOTE 7 ~ 2004 STOCK INCENTIVE PLAN

In February 2004, the Company adopted its 2004 Long-Term Stock Plan and reserved up to 118,798 shares of Common Stock for issuance there under. 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 amendments, 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 vest over a three-year period.

On February 14, 2007, the Company granted to three directors options to purchase an aggregate of 300,000 shares of the Company’s common stock. These options provide for an exercise price of $.60 per share over a 10 year life. 25% of each director’s options vest immediately, with the remaining 75,000 options vesting ratably in 12 installments of 6,250 each on the first day of each fiscal quarter of the Company commencing April 1, 2007.

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

On July 13, 2007, the Company granted two separate employee’s options to purchase an aggregate of 150,000 shares of the Company’s common stock. These options provide for an exercise price of $.80 per share over a 10 year life, commencing January 1, 2008. 20% of the employee’s options vest January 1, 2008, with the remaining 120,000 options vesting monthly over the following 3 year period beginning thereafter.

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

	Nine Months Ended September 30, 2007
	Shares			Weighted Ave Exercise Price

Outstanding at January 1, 2007:		5,498,797		$	1.37
Granted		550,000			.72
Exercised		(40,830	)		.20
Forfeited		(45,749	)		33.77
Outstanding at September 30, 2007:		5,962,218		$	1.07

Options Exercisable at September 30, 2007:		2,513,448		$	2.15

The aggregate intrinsic values of outstanding and exercisable options at September 30, 2007 were approximately $3,394,000 and $1,481,000 respectively.

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

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

Outstanding Options						Exercisable Options
Exercise Prices		Shares Outstanding at September 30, 2007		Weighted-average Remaining Contractual Life		Number Outstanding at September 30, 2007
$	0.20		5,363,590		9.1 years		2,346,571
	.60		300,000		4.4 years		118,749
	.95		100,000		10.3 years		-
	.80		150,000		10.3 years		-
	15.93		4,637		5.8 years		4,637
	42.50		2,000		7.5 years		1,500
	75.00		13,366		7.3 years		13,366
	130.00		28,625		6.4 years		28,625
			5,962,218		8.9 years		2,513,448

There were 40,830 stock options exercised during the nine months ended September 30, 2007 resulting in proceeds to the company of approximately $8,166.

The Company recognized compensation expense from the vesting of issued stock options of approximately $77,384 for the nine months ended September 30, 2007, and had estimated future compensation expense from these stock options of approximately $221,206 at September 30, 2007 which will be recognized over the remaining estimated weighted useful life of 31 months.

NOTE 8 ~ WARRANTS

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

Description	Shares		Approx. Remaining Term (Years)		Exercise Price

Laurus Master Fund		26,800		3.8		$30.00
Laurus finder’s fee		1,880		3.7		$175.00
ESI		60,000		4.1		$75.00
Rapor shareholders		27,079		4.2		$152.00
Oct. 2004 bridge financing		15,333		2.1		$75.00
Consultants		3,500		2.1		$175.00 - $250.00
Professional consultants		100,000		4.5		$0.60
Consulting fee paid to director		1,875,000		2.0		$0.20
Other		131		0.2		$390.00
		2,109,723

In April 2007 the Company issued a warrant to purchase 100,000 shares of common stock at a price of $.60 per share to a consultant. The warrant has a term of 5 years commencing from the date of grant. In conjunction with the issuance of the grant, the Company recorded a charge to expense of approximately $63,000 to reflect the fair value of the warrants issued.

Item 2. Management’s Discussion and Analysis or Plan of Operation.

Statements contained in this Quarterly Report on Form 10-Q, other than the historical financial information, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements involve known and unknown risks, uncertainties or other factors which may cause actual results, performance or achievement of the Company to be materially different from any future results, performance or achievement expressed or implied by such forward-looking statements. Primary risk factors include, but are not limited to: ability to continue as a going concern; uncertainty of future profitability; reliance on primary supplier; credit limits imposed on primary supplier; outstanding indebtedness; effective integration of recently acquired operations and personnel; expansion risks; effective internal processes and systems; the ability to attract and retain high quality employees; changes in the overall economy; rapid change in technology; the number and size of competitors in its markets; law and regulatory policy; the mix of products and services offered in the Company's target markets; and other risks described herein and in the Company’s 2006 Annual Report on Form 10-K.

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

Summary of Our Business

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.

Our Products

Our suite of video surveillance and integrated security solutions includes a full line of cameras, which include motion detection, low-light and Infrared illuminated, day/night and high resolution, waterproof and weather-resistant cameras, vandal resistant domes; high-speed, remote-controlled dome cameras and casings; as well as a complete range of lenses; all of which can be fully integrated into existing security systems. Our full product line includes a range of displays; real-time and time-lapse DVR’s, video transmission equipment; digital video processors, switchers and video management systems; digital video recording software; and hardware and software that enable intelligent video surveillance.

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.

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 who often support sales across all of our product offerings. We use a combination of our internal sales force and independent representatives to sell our products to our customers.

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006

NET REVENUES FROM CONTINUING OPERATIONS

Net revenues increased approximately $700,000, or 6.9% to approximately $10.8 million in the three months ended September 30, 2007 from approximately $10.1 million in the three months ended September 30, 2006. The increase in net revenues reflects increased gross sales of approximately $500,000 and a reduction of approximately $200,000 in net returns and allowances. Management believes the reduction in returns and allowances primarily resulted from a change in the Company’s customer return policies as well as improved customer satisfaction with the Company’s core products.

COST OF GOODS SOLD FROM CONTINUING OPERATIONS

Total cost of goods sold decreased approximately $1.8 million or 19% to approximately $7.6 million for the three months ended September 30, 2007, from approximately $9.4 million in the three months ended September 30, 2006. This decrease was due to (i) improved product margins, (ii) reduced product returns under warranty claims, (iii) lower net freight costs, and (iv) significant inventory write downs of approximately $1.0 million in 2006.

As a result of the changes described above in revenues and cost of goods sold, gross profit for the three months ended September 30, 2007 increased to approximately $3.1 million from approximately $0.6 million for the three months ended September 30, 2006, and gross profit as a percentage of revenues increased to 28.9% for the three months ended September 30, 2007 compared with 6.2% for the three months ended September 30, 2006.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses decreased 14% to approximately $2.4 million in the three months ended September 30, 2007 from approximately $2.8 million in the three months ended September 30, 2006, as follows:

Sales and Marketing. Sales and marketing expenses increased approximately 8% to approximately $1.4 million in the three months ended September 30, 2007 from approximately $1.3 million in the three months ended September 30, 2006. The increase was a result of increases in various indirect sales and marketing costs.

General and Administrative. General and administrative expenses decreased 38% to approximately $1.0 million for the three months ended September 30, 2007, from approximately $1.6 million for the three months ended September 30, 2006. Major items resulting in the decrease in general and administrative expenses included (i) a decrease in bad debt expense of approximately $187,000 in the three months ended September 30, 2007 as compared to the three months ended September 30, 2006, and (ii) a decrease in accounting and legal fees of approximately $297,000, to approximately $74,000 for the three months ended September 30, 2007 from approximately $371,000 incurred in the comparable period ended September 30, 2006.

INTEREST EXPENSE

Net interest expense for the three months ended September 30, 2007 decreased 51% to approximately $196,000 from approximately $399,000 in the three months ended September 30, 2006. This decrease is primarily related to deferred debt amortization totaling $150,000 recorded in the three months ended September 30, 2006 relating to our Laurus credit facility, with no such amortization recorded in the comparable period ended September 30, 2007 due to the depletion of remaining unamortized debt costs in May 2007. The remainder of the reduction is attributable to a lower balance outstanding on our term loan with Laurus during the period.

INCOME TAX EXPENSE

We recorded a provision for federal, state and local income tax of approximately $13,000 for the three months ended September 30, 2007, which was 27% lower than the tax expense of approximately $22,000 reflected for the three months ended September 30, 2006. Provisions for tax recorded in the three months ended September 30, 2007 and 2006 relate to state franchise taxes that were estimated to be due in various states in which we are licensed and transact business.

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

DISCONTINUED OPERATIONS

No income or loss from discontinued operations was reflected during the three months ended September 30, 2007 as the Company completed its termination and exit from the retail market in the third quarter of 2006. Losses from discontinued operations, net of tax, were approximately $600,000 for the three months ended September 30, 2006. The loss in 2006 was the result of additional retail product returns and accruals for future returns. Operating results from discontinued operations for the three months ended September 30, 2006 do not include any allocation of corporate overhead.

NET INCOME

As a result of the items discussed above we earned net income of approximately $474,000 for the three months ended September 30, 2007 compared with a net loss of approximately $3.0 million for the three months ended September 30, 2006.

NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

NET REVENUES FROM CONTINUING OPERATIONS

Net revenues increased approximately $1.1 million, or 3% to approximately $34.1 million in the nine months ended September 30, 2007 from approximately $32.9 million in the nine months ended September 30, 2006. The increase in net revenues was primarily the result of a significant decrease in professional sales returns in the nine months ended September 30, 2007 as compared with the same period in 2006. The decrease in professional sales returns totaled approximately $1.9 million, to approximately $1.8 million during the nine months ended September 30, 2007 from $3.7 million for the same period ended September 30, 2006. Management believes the reduction in returns and allowances primarily resulted from a change in the Company’s customer return policies as well as improved customer satisfaction with the Company’s core products.

COST OF GOODS SOLD FROM CONTINUING OPERATIONS

Total cost of goods sold decreased approximately $3.8 million, or 13% to approximately $24.6 million for the nine months ended September 30, 2007, from approximately $28.4 million in the nine months ended September 30, 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 $1.0 million occurring in 2006. As a result of the changes described above in revenues and cost of goods sold, gross profit for the nine months ended September 30, 2007 increased to approximately $9.5 million from approximately $5.6 million for the nine months ended September 30, 2006, and gross profit as a percentage of revenues increased to 27.8% for the nine months ended September 30, 2007 compared with 16.9% for the nine months ended September 30, 2006.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses decreased 22% to approximately $7.7 million for the nine months ended September 30, 2007 from approximately $9.9 million for the nine months ended September 30, 2006, as follows:

Sales and Marketing. Sales and marketing expenses decreased approximately 9% to approximately $4.0 million in the nine months ended September 30, 2007 from approximately $4.4 million in the nine months ended September 30, 2006. The decrease was primarily due to (i) the restructuring of our compensation arrangements with our sales force, resulting in a reduction in commissions of approximately $436,000, and (ii) decreases of approximately $282,000 in sales and marketing staff salaries and related benefits. These decreases were partially offset by increases in various other sales related and marketing expenses.

General and Administrative. General and administrative expenses decreased 33% to approximately $3.7 million for the nine months ended September 30, 2007 from approximately $5.5 million for the nine months ended September 30, 2006. Major items resulting in the decrease of general and administrative expense were (i) approximately $694,000 in personnel termination costs during the nine month period ended September 30, 2006, for which only approximately $8,000 was incurred in the same period of 2007, (ii) a decrease in bad debt expenses of approximately $491,000, to approximately $135,000 in the nine months ended September 30, 2007 as compared to approximately $626,000 for the nine months ended September 30, 2006, and (iii) a decrease in professional fees, including accounting, legal and other professional expenses, by $567,000, for the nine months ended September 30, 2007 as compared to the same period in 2006.

INTEREST EXPENSE

Interest expense for the nine months ended September 30, 2007 decreased 16% to approximately $808,000 from approximately $966,000 in the nine months ended September 30, 2006. The decrease was due primarily to the effect of (i) a charge of approximately $76,000 for interest expense resulting from the reduction in the exercise price of warrants issued to Laurus during the nine months ended September 30, 2006, (ii) higher deferred debt amortization, totaling $450,000 for the nine months ended September 30, 2006, as compared with the same period ended September 30, 2007 in which we recorded only $209,000 of such costs due to the depletion of remaining unamortized debt costs in May 2007, and (iii) approximately $160,000 of lower interest expense in the nine months ended September 30, 2007 as compared with the same period ended September 30, 2006, due to lower average outstanding debt balances in 2007. These decreases were partially offset by the effect of a favorable adjustment during the nine months ended September 30, 2006 of $320,000, whereby interest expense that had been accrued in prior periods as due to our lender following the adjustment of the interest rate under provisions of our agreements was not required to be paid to Laurus.

INCOME TAX EXPENSE

We recorded a provision for federal, state and local income tax of approximately $36,000 for the nine months ended September 30, 2007, which was 47% lower than the tax expense of approximately $68,000 reflected for the nine months ended September 30, 2006. Provisions for tax recorded in the nine months ended September 30, 2007 and 2006 relate to state franchise taxes that were estimated to be due in various states in which we are licensed and transact business.

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

DISCONTINUED OPERATIONS

No income or loss from discontinued operations was reflected during the nine months ended September 30, 2007 as the Company completed its termination and exit from the retail market in the third quarter of 2006. Losses from discontinued operations, net of tax, were approximately $7.3 million for the nine months ended September 30, 2006. The loss in 2006 was the result of additional retail product returns and accruals for future returns. Operating results from discontinued operations for the nine months ended September 30, 2006 do not include any allocation of corporate overhead.

NET INCOME

As a result of the items discussed above there was a net income of approximately $942,000 for the nine months ended September 30, 2007 compared with a net loss of approximately $9.9 million for the nine months ended September 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2007, we had cash and equivalents of approximately $795,000, working capital of approximately $482,000, an outstanding balance of $600,000 under the Laurus term loan, and an outstanding balance of $7.7 million under the Laurus revolving credit facility. In comparison, at December 31, 2006, we had cash and equivalents of approximately $225,000, a working capital deficit of approximately $2.0 million, an outstanding balance of $1.9 million under the Laurus term loan, and an outstanding balance under the Laurus revolving credit facility of approximately $6.4 million. Additionally, we had borrowing availability under the Laurus credit facility of approximately $1.4 million at September 30, 2007, as compared with borrowing availability of $2.2 million at December 31, 2006.

Cash increased from $225,000 at December 31, 2006 to $795,000 at September 30, 2007 primarily as a result of (i) net income of $942,000, (ii) non-cash charges to net income of approximately $535,000, (iii) proceeds from the sale of common stock of $1.0 million, and (iv) net proceeds of approximately $1.4 million from net borrowings under our revolving credit facility. These factors were partially offset by (i) principal payments of our term loan to Laurus totaling $1.4 million, (ii) increases in working capital accounts, including accounts receivable, inventory and accounts payable, of approximately $1.7 million, and (iii) payments for retail discontinued obligations of approximately $200,000 during the nine months ended September 30, 2007.

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

In October 2006 and January 2007, we raised $6,028,000 in aggregate gross proceeds from the private placement of common stock and convertible notes. We will require additional equity or debt financing to repay our term and revolving credit loans to Laurus Master Fund, which become due December 31, 2007, and may also require additional capital to finance our operations, working capital or other capital expenditures. If we are unable to secure such financing, we may be required to cease operations. Management is currently evaluating financing alternatives and is in discussions with a replacement lender. Although the Company anticipates that it will be able to refinance its indebtedness to Laurus prior to the maturity date of December 31, 2007, there can be no assurance that the Company will be successful in that regard.

Laurus Financing

On May 27, 2004, we closed a $15 million convertible debt financing with Laurus Master Fund, Ltd. under which we were originally provided with a $5 million term loan and a $10 million revolving line of credit. Borrowings under the Laurus credit facility are secured by all of our assets. At September 30, 2007 and December 31, 2006, $1.0 million and $1.9 million, respectively, in principal was outstanding under the Term Loan and $8.3 million and $6.4 million, respectively, in principal was outstanding under the revolving line of credit. The agreements with Laurus prohibit the payment of dividends on the Company’s Common Stock, and contain other customary affirmative and negative covenants.

The term loan is evidenced by a Secured Term Note and bears interest at a rate per annum equal to the prime rate (as reported in the Wall Street Journal), plus two percent, subject to a floor of six percent. Interest on the term loan is payable monthly.

Amounts outstanding under the Term Note were initially convertible into Common Stock at Laurus's option at a conversion price initially equal to $135.00 per share. In December 2004, the conversion price was reduced to $95.50 under the terms of the anti-dilution feature of the Term Note. As the market price of the stock at the date of the modification was significantly below the conversion price, there was no financial statement impact of the modification of the conversion price. In addition, subject to (i) having an effective registration statement with respect to the shares of Common Stock underlying the Term Note, and (ii) limitations based on trading volume of the Common Stock, originally scheduled principal and interest payments under the Term Note were made in shares of Common Stock valued at the conversion price. In addition, prepayments under the Term Note were subject to a premium in the amount of 20% of the principal being prepaid.

Borrowings under the revolving credit facility bear interest at a rate per annum equal to the prime rate plus two percent. The revolving line of credit terminates, and borrowings thereunder become due, on December 31, 2007.

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

On October 4, 2006, in connection with the Company’s private placement transaction, the Company entered into an Omnibus Amendment and Consent with Laurus, pursuant to which Laurus consented to the issuance of the Convertible Notes in the private placement. In addition, Laurus agreed to further amendments to the Company’s revolving credit facility and term loan agreements under which (i) the ability of Laurus to convert the Company’s revolving credit facility and term loan into Common Stock was eliminated; (ii) the maturity date of both the revolving credit facility and Term Note was extended from May 24, 2007 until December 31, 2007; (iii) prepayment penalties with respect to both the revolving credit facility and Term Note were eliminated; and (iv) monthly principal payments of $152,000 are due under the Term Note for the months of January 2007 through November 2007, with a final payment of $252,000 due in December 2007.

Going Concern Considerations

As a result of our losses from operations and limited capital resources, our independent auditors have included an explanatory paragraph in their report on our financial statements for the years ended December 31, 2006, 2005 and 2004, indicating there is substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. During the years ended December 31, 2006, 2005 and 2004, we experienced negative cash flow and operating losses, as well as losses from discontinued operations, which have resulted in a significant reduction in our cash balances. These factors raise substantial doubt about our ability to continue as a going concern.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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.

Inventory

Advertising

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

Long-Lived Assets

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

Income Taxes

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

For the nine month periods ended September 30, 2007 and 2006, income tax expense relates primarily to state and local franchise taxes that are due to various states and municipalities in which the Company is licensed and transacts business. During the nine month period ended September 30, 2007, we did not record any federal income tax liability with respect to our earnings in that period due to the existence and availability of operating loss carry-forwards

Stock-Based Compensation

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

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

Adoption of New Accounting Policies

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

Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109, Accounting for Income Taxes.” The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of September 30, 2007, the Company does not have a liability for unrecognized tax benefits, and no adjustment was required on the adoption.

Recent Accounting Pronouncements

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our results of operations and cash flows are not subject in any material respect to fluctuations due to changes in foreign currency exchange rates. We do not currently have any foreign currency hedging contracts in place, nor did we enter into any such contracts during the nine months ended September 30, 2007. To date, exchange rate fluctuations have had little impact on our operating results and cash flows.

Interest Rate Sensitivity

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

Item 4. Controls and Procedures.

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

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

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

PART II. OTHER INFORMATION

Item 6. Exhibits.

Number		Description

31.1		Certification of Steven Walin, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934

31.2		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

32.1		Certification of Steven Walin, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934

32.2		Certification of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934

SIGNATURES

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

	GVI SECURITY SOLUTIONS, INC.

Date: November 8, 2007	By:	/s/ Joseph Restivo
		Name: Joseph Restivo
		Title: Chief Financial Officer

EXHIBIT INDEX

Number		Description

31.1		Certification of Steven Walin, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the Securities Exchange Act of 1934

31.2		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

32.1		Certification of Steven Walin, Chief Executive Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934

32.2		Certification of Joseph Restivo, Chief Financial Officer of the Registrant, pursuant to Rules 13a-14(B) and 15(d)-14(b) of the Securities Exchange Act of 1934

Date: November 8, 2007	By:	/s/ Steven Walin
	Steven Walin
	Chief Executive Officer

Date: November 8, 2007	By:	/s/ Joseph Restivo
	Joseph Restivo
	Chief Financial Officer