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Gvi Security Solutions Inc – ‘10-K’ for 12/31/08

On: Monday, 3/16/09, at 2:25pm ET · For: 12/31/08 · Accession #: 1144204-9-14154 · File #: 0-21295

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/16/09  Gvi Security Solutions Inc        10-K       12/31/08    7:1.1M                                   Toppan Vintage/FA

Annual Report — Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    631K 
 2: EX-4.2      Instrument Defining the Rights of Security Holders  HTML     38K 
 3: EX-23       Consent of Experts or Counsel                       HTML      7K 
 4: EX-31.1     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     13K 
 5: EX-31.2     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     13K 
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10-K — Annual Report

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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, 2008

COMMISSION FILE NUMBER 000-21295

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 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, 2008 was approximately $3,160,379.

The number of shares outstanding of the registrant’s Common Stock as of March 12, 2009 was 28,197,106.

GVI SECURITY SOLUTIONS, INC.

2008 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page

PART I		2

	Item 1. Business	2

	Item 1A. Risk Factors	6

	Item 1B. Unresolved Staff Comments	11

	Item 2. Properties	11

	Item 3. Legal Proceedings	11

	Item 4. Submission of Matters to a Vote of Security Holders	11

PART II

	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.	11

	Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations	12

	Item 8. Financial Statements and Supplementary Data.	18

	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	18

	Item 9A(T). Controls and Procedures.	18

	Item 9B. Other Information.	19

PART III

	Item 10 Directors, Executive Officers and Corporate Governance.	19

	Item 11. Executive Compensation.	21

	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	25

	Item 13. Certain Relationships and Related Transactions, and Director Independence.	27

	Item 14. Principal Accountant Fees and Services.	27
PART IV

	Item 15. Exhibits, Financial Statement Schedules.	28

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 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. Under our agreement with Samsung, we have 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, and 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.

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 video surveillance market in the Americas totaled approximately $2.7 billion in 2007, and is estimated to grow to approximately $4.3 billion by the year 2012. According to this report, the Americas’ security market is expected to continue to grow at an average annual rate of approximately 10%. We believe that video surveillance products represent the largest components of a typical integrated security system. The industry continues to see 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 and acquiring 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.

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.

Competition

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 customers with superior levels of customer service. Our main competitors are Pelco, Sony, Panasonic, GE, Bosch, and Speco Technologies, among many others.

In addition, Samsung Techwin, a company separate 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 Americas and is competing with us in the systems integration channel on a limited basis.

Strategic Vendor Relationship

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 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. In November 2008, the Distribution Agreement was amended to lower the minimum amounts we are required to purchase from Samsung. As amended, the Distributorship Agreement provides for minimum annual purchase amounts of $25 million, $32.4 million and $42 million for the years ending December 31, 2008, 2009 and 2010, 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, 2008, we purchased approximately $26.0 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 December 31, 2008, we had approximately 66 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.

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, 2008, 2007 and 2006, 73%, 65% and 67%, 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. Under our Distributorship Agreement with Samsung, we have 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, and Samsung has agreed to a limited non-compete in that 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 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. For the year ended December 31, 2008, we were able to meet the minimum amount purchase requirement only after that amount was reduced by an amendment to the Distribution Agreement.

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

During the year ended December 31, 2008, two customers accounted for 20% and 11% respectively of our sales. During the year ended December 31, 2007, these same two customers accounted for 20% and 18% respectively of our sales. As a result, our revenues and results of operations could be materially and adversely affected if any of these clients reduce their purchases of our products.

CHANGES IN THE GENERAL ECONOMY, INCLUDING THE GLOBAL FINANCIAL CRISIS THAT ACCELERATED IN 2008, MAY NEGATIVELY IMPACT OUR BUSINESS.

We sell our security products to companies and industries that may experience financial difficulty, particularly in light of conditions in the credit markets and the overall economy. If our customers experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers, and demand for our products from these customers could decline. If our suppliers experience financial difficulty, we could have difficulty fulfilling our customers’ orders. Furthermore, continued issues involving liquidity and capital adequacy affecting lenders could affect our ability to fully access our credit facility or obtain additional credit. These conditions could adversely affect our financial position and results of operations.

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 from time to time with respect to amounts owed by us to Samsung for products we purchase from them. 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. 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. At December 31, 2008, we owed Samsung approximately $7.0 million and our credit limit with Samsung was $9 million.

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.

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):

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.

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.

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.

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 Stock 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.

The investors in our October 2006 private placement 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 1B. 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. We expect to enter in an extension of our current lease or relocate our offices and warehouse to another location in the Carrollton, Texas area if we are unable to renew our current lease prior to its expiration. 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 2008.

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” and is 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. The quotations listed below reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.

		Price
		High		Low

2007
	First quarter	$	1.17	$	0.90
	Second quarter	$	1.01	$	0.80
	Third quarter	$	0.83	$	0.66
	Fourth quarter	$	1.01	$	0.56

2008
	First quarter	$	1.00	$	0.77
	Second quarter	$	0.82	$	0.51
	Third quarter	$	0.64	$	0.38
	Fourth quarter	$	0.47	$	0.22

The number of holders of record for our Common Stock as of December 31, 2008 was approximately 138. 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		$	1.06		0
Equity compensation plans not approved by security holders		2,717,218	(1)		0.41		857,782	(2)
Total		8,617,218			0.86		857,782

(1)

Consists of warrants to purchase 2,575,000 shares of common stock issued to consultants with a weighted average price of $0.41, the details of which are provided in Note 13 of our Financial Statements, and options to purchase 142,218 shares of common stock issued outside of our 2004 Long-Term Stock Plan. Does not include warrants to purchase 134,592 shares with exercise prices equal to $30.00 or more.

(2)	Consists of shares authorized for issuance under our 2008 Long-Term Stock Plan.

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.

Summary of Our Business

We primarily target the middle market where a typical customer’s need is for a system that incorporates from four cameras to ninety-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.

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

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.

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 on prior sales. 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 2008 and 2007 we experienced losses, or recorded provisions for potential losses, from customers' inability to make payments, totaling approximately $25,000 and $163,000, which were equal to 0.05% and 0.4% 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, 2008 and 2007 were approximately $2,251,000 and $2,558,000, 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

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.

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

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.

RESULTS OF OPERATIONS

Fiscal Year Ended December 31, 2008 Compared To Fiscal Year Ended December 31, 2007

Net Revenues From Continuing Operations

Net revenues increased approximately $2.3 million, or 5% to approximately $47.3 million during the year ended December 31, 2008 from approximately $45.0 million during the year ended December 31, 2007. 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, as we continued to introduce new products to complement our existing lines.

Cost Of Goods Sold

Total cost of goods sold increased approximately $900,000, or 3% to approximately $33.1 million for the year ended December 31, 2008, from approximately $32.2 million during the year ended December 31, 2007. This increase was due to higher sales partially offset by improved product margins and lower net freight costs.

As a result of the changes described above in revenues and cost of goods sold, gross profit for the year ended December 31, 2008 increased to approximately $14.2 million from approximately $12.8 million for the year ended December 31, 2007, and gross profit as a percentage of revenues increased to 30.0% for the year ended December 31, 2008 compared with 28.4% for the year ended December 31, 2007.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased 12% to approximately $11.5 million for the year ended December 31, 2008 from approximately $10.3 million for the year ended December 31, 2007, as follows:

Sales and Marketing. Sales and marketing expenses increased approximately 22% to approximately $6.6 million for the year ended December 31, 2008 from approximately $5.4 million for the year ended December 31, 2007. The increase was primarily due to (i) an increase in personnel expense of approximately $504,000, (ii) an increase of approximately $204,000 in commission expense resulting from increased sales, and an (iii) increase of approximately $299,000 in international office expenses associated with increased personnel expenses.

General and Administrative. General and administrative expenses held flat at approximately $4.9 million for both the years ended December 31, 2008 and December 31, 2007.

Interest Expense

Interest expense for the year ended December 31, 2008 decreased 32% to approximately $686,000, from approximately $1.0 million in the year ended December 31, 2007. This decrease is primarily a result of a reduction in amortized loan fees during the year ended December 31, 2008 of approximately $180,000, compared with the year ended December 31, 2007. The remaining decrease was attributable to the lower interest rate on the Wells Fargo credit facility in effect for the year ended December 31, 2008 compared with the interest rate on the Laurus facility in effect for the majority of the year ended December 31, 2007. The decrease was partially offset by higher average loan balances outstanding during the year ended December 31, 2008 compared with the year ended December 31, 2007.

Income Tax Expense (Benefit)

We recorded a current expense for federal, state and local income tax of approximately $28,000 for the year ended December 31, 2008. In addition, we recorded a deferred tax expense of approximately $678,000 related to the utilization of prior year net operating losses during the year ending December 31, 2008. This produced a net income tax expense of approximately $706,000 for the year ended December 31, 2008, as compared to a benefit of approximately $941,000 for the comparable period ended December 31, 2007, which resulted from the recognition of prior operating loss carryovers.

Discontinued Operations

We recorded no gain or loss from discontinued operations in the year ended December 31, 2008 compared to a gain from discontinued operations, net of tax, of $233,000 for the year ended December 31, 2007. The gain for the year ended December 31, 2007 reflects the offset of a reserve we had taken in connection with our obligations to service our retail product line, which we discontinued in 2006. The obligations related to the discontinued operations terminated during the year ended December 31, 2007.

Net Income (Loss)

As a result of the items discussed above there was net income of approximately $1.3 million for the year ended December 31, 2008 compared with net income of approximately $2.6 million for the year ended December 31, 2007.

Liquidity and Capital Resources

At December 31, 2008, we had cash and equivalents of approximately $46,000, working capital of approximately $14.2 million, stockholders’ equity of $4.0 million, and an outstanding balance of $9.9 million under our revolving credit facility with Wells Fargo. In comparison, at December 31, 2007, we had cash and equivalents of approximately $313,000, working capital of approximately $11.5 million, and an outstanding balance of $10.3 million under our revolving credit facility with Wells Fargo. Additionally, we had borrowing availability of approximately $4.7 million at December 31, 2008 under our credit facility with Wells Fargo, as compared with $1.9 million of borrowing availability at December 31, 2007.

Cash decreased from $313,000 at December 31, 2007 to $46,000 at December 31, 2008, primarily as a result of (i) an increase in inventory of approximately $2.5 million, (ii) an increase in accounts receivable of approximately $434,000, (iii) an investment in equipment of approximately $145,000, and (iv) net repayments on the Wells Fargo credit facility of approximately $482,000. These factors were partially offset by (i) net income of $1.3 million, (ii) an increase in accounts payable of approximately $694,000, and (iii) an decrease in deferred tax assets of approximately $677,000.

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 2009.

$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:

Subject to downward adjustment as provided below, 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 (3.25% at January 19, 2009) plus .75% percent, or a LIBOR rate selected by us, plus 3.25%.

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 $150,000 if the credit facility is terminated prior to November 20, 2009, or $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, 2008, we were in compliance with the loan covenants.

In addition, as a result of our achievement of Net Income (as defined in the Credit Agreement), in excess of $1 million for the year ending December 31, 2008, interest rate under the credit facility will be reduced by .50% per annum commencing within 30 days of Wells Fargo’s receipt of our financial statements for the year ended December 31, 2008.

Contractual Obligations and Commitments

A summary of our contractual obligations as of December 31, 2008 is as follows:

	Payments Due by Period (in thousands)
	2009		2010		2011		2012		Thereafter
Long-Term Debt Obligations	$	0	$	0	$	9,862	$	0	$	0
Capital Lease Obligations		12		0		0		0		0
Operating Lease Obligations		308		46		0		0		0
Samsung Purchase Commitment		32,400		42,000		0		0		-

Total	$	32,720	$	42,046	$	9,862	$	0	$	0

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 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(T). 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.

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.

In 2008, 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, 2008, our internal control over financial reporting is operating effectively.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual 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.

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	53	Chairman of the Board of Directors and Chief Executive Officer
Joseph Restivo	55	Chief Financial Officer, Chief Operating Officer, and Director
Craig Ellins 1,2,3	56	Director
Gary Freeman 1,2,3	41	Director
Moshe Zarmi 1,2,3	71	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 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. Mr. Walin is currently a director of Trestle Holdings, Inc.

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.

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 2008 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, 2008 and 2007, 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”).

Summary Compensation Table

Name and Principal Position	Year	Salary ($)			Bonus ($)		Option Awards ($)		All Other Compensation ($)			Total ($)
Steven Walin	2008	$	375,000		$	159,375		—	$	18,000	(2)	$	580,500
Chief Executive Officer	2007	$	375,000		$	187,500		—	$	18,000	(2)	$	580,500
Joseph Restivo,	2008	$	250,000		$	125,000		—	$	12,000	(2)	$	387,000
Chief Operating Officer and Chief Financial Officer	2007	$	212,500	(1)	$	106,250		—	$	133,317	(2)	$	452,067

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

(2)	Includes 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 also 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 any of our incentive plans to our Named Executive Officers in 2007 or 2008.

Outstanding Equity Awards at Fiscal Year –End

The following table shows for the fiscal year ended December 31, 2008, certain information regarding outstanding equity awards at fiscal year-end for the Named Executive Officers.

Outstanding Equity Awards At December 31, 2008

Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Option Awards Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)	Option Expiration Date
Steven Walin	1,411,346	470,449	$	.20	October 4, 2016
Joseph Restivo	1,411,346	470,449	$	.20	October 4, 2016

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

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 12, 2009, the Company’s compensation committee approved an annual bonus payment of $159,375 for Mr. Walin. This bonus equates to 43% of Mr. Walin’s 2008 base salary

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.

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 12, 2009, the Company’s compensation committee approved an annual bonus payment of $125,000 for Mr. Restivo. This bonus equates to 50% of Mr. Restivo’s 2008 base salary

Director Compensation

Non-employee Directors

Our non non-employee directors are entitled to receive a monthly cash payment of $2,500. Craig Ellins waived his right to receive these payments through February of 2008. In addition, the chairman of our audit and compensation committees is entitled to receive $5,000 annually for each of those committees chaired by him. Mr. Freeman chaired both the audit and compensation committee during the year ended December 31, 2008. 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 July 3, 2008 we granted each of our non-employee directors a ten-year option to purchase 30,000 shares of Common Stock at an exercise price of $.46 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 September 1, 2008. In addition, we granted the chairman of our audit and compensation committees an option to purchase an additional 20,000 shares in the aggregate for his service as chairman of those committees with similar vesting provisions.

The following table shows for the fiscal year ended December 31, 2008 certain information with respect to the compensation of our non-employee directors.

Director Compensation for Fiscal 2008

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)		Option Awards ($) (1)		All Other Compensation ($)		Total ($)
Craig Ellins	$	25,000		—	$	7,890		—	$	32,890
Gary Freeman	$	35,000		—	$	13,150		—	$	53,150
Moshe Zarmi	$	30,000		—	$	7,890		—	$	37,890

(1)

The value of option awards granted to directors has been estimated pursuant to SFAS No. 123(R) based on our expense for the options described in the footnotes to our financial statements, 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, 2008.

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 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth as of March 5, 2009, 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 OWNED1
	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		5,345,623		18.7	%

Europa International, Inc. 3		3,557,303		12.3	%

Fred Knoll 4		3,565,445		12.4	%

HG Investments, LLC 7030 Hayvenhurst Ave. Van Nuys, CA 91406		2,770,342		9.8	%

Richard Kall 5 9000 Players Club Drive Las Vegas, NV 89134		2,595,342		9.2	%

David Weiner 6 3490 Laurel Canyon Boulevard, Suite 327 Studio City, California 91604		2,818,131		9.8	%

Strategic Turnaround Equity Partners, LP (Cayman) GCM Administrative Services LLC Gary Herman7		1,547,184		5.5	%

Bruce Galloway 8 720 Fifth Avenue, 10th Floor New York, NY 10019		1,589,916		5.6	%

Directors and Executive Officers

Craig Ellins 9		186,458		*

	SHARES BENEFICIALLY OWNED1
	Number		Percent (%)
Moshe Zarmi 9		147,636		*

Gary Freeman 10		111,875		*

Joseph Restivo 11		1,821,790		6.1	%

Steven Walin 11		1,839,998		6.2	%

All directors and executive officers as a group (five persons) 12		4,107,757		12.9	%

* Less than 1%.

Gives effect to the shares of Common Stock issuable upon the exercise of all options exercisable within 60 days of March 5, 2009 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 28,197,107 shares of the Common Stock outstanding as of March 5, 2009. 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. Based on a Schedule 13G filed by Mr. Kolow on January 17, 2008.

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.

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 5th Avenue Suite 3702, New York, New York 10102.

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

Includes (i) 21,000 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. Based on a Schedule 13G filed by Mr. Weiner on January 26, 2009.

These shares are held directly by Strategic Turnaround Equity Partners, LP (Cayman) (“STEP”), with a principal address of c/o Stuarts Corporate Services, Ltd; P.O. Box 2510 GT, 4th floor, One Cayman Financial Centre, 36A Dr. Roy’s Drive, Georgetown, Grand Cayman, Cayman Island. GCM Administrative Services LLC, Gary Herman and Bruce Galloway, which all have a principal address of 720 Fifth Avenue, 10th Floor, New York, NY 10019, share the power to vote and dispose of these shares. Based on a Schedule 13G filed on February 13, 2009.

Includes 1,547,184 shares of Common Stock held by STEP, 15,078 shares of Common Stock held by Mr. Galloway’s Individual Retirement Account, 3,700 shares held in the account of his child which Mr. Galloway has sole power to vote and dispose, 20,000 shares held by Rexon Galloway Capital, LLC, which Mr. Galloway has sole power to vote and dispose, and 954 shares held by Jacombs Investment, Inc. for which Mr. Galloway has sole power to vote and dispose. Mr. Galloway is a managing member of Galloway Capital Management, LLC, the general partner of STEP. Based on a Schedule 13G filed on February 13, 2009.

9	Includes 103,125 shares of Common Stock issuable upon exercise of options.

10	These shares of Common Stock are all issuable upon exercise of options.

11	Includes 1,685,773 shares of Common Stock issuable upon exercise of options.

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

Item 13. Certain Relationships and Related Transactions, and 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, 2008 and 2007, and fees billed for other services rendered by Weinberg & Company during those years.

	2008		2007

Audit fees (1)	$	153,062	$	176,607
Audit related fees		-		-
Tax fees		-	$	22,039
All other fees(2)		-	$	24,842

Total fees	$	153,062	$	223,488

_____________________________

(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)	Consisted 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.

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. No non-audit services were provided to us by our independent auditor during the year ended December 31, 2008.

PART IV

Item 15. 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. *

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 (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, 2004, filed with the SEC on April 14, 2004)

4.2‡		2008 Long-Term Stock Incentive Plan

10.1		Distributorship Agreement dated as of October 2, 2006 between GVI Security Inc. and Samsung Electronics Co., Ltd. ##

10.2		Amendment to Samsung Electronics and GVI Security Inc. Distribution Agreement of October 2, 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 November 26, 2008)

10.3		Commercial Industrial Lease Agreement, effective as of April 1, 2004, between, CSHV Texas Industrial, L.P., as Landlord, and GVI Security, Inc., as Tenant (Incorporated by reference to the similarly described exhibit previously filed as an exhibit to Registration Statement on Form SB-2 (Registration No. 33-11321)).

10.4‡		Employment Agreement, dated as of January 31, 2006, between GVI Security Solutions, Inc. and Steven E. Walin (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.)

10.5‡		Employment Agreement, dated as of March 28, 2006, between GVI Security Solutions, Inc. and Joseph Restivo. ***

10.6‡		Amendment to Employment Agreement between GVI Security Solutions, Inc. and Steven Walin dated as of October 4, 2006#

10.7‡		Amendment to Employment Agreement between GVI Security Solutions, Inc. and Joseph Restivo dated as of October 4, 2006#

10.8‡		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)

10.9‡		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 Registrant (Incorporated by reference to the similarly described exhibit previously filed as an exhibit to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 25, 2008)

23		Consent of Weinberg & Company, P.A.

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 1934

31.2		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

32.1		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 1934

32.2		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 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 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 October 5, 2006.

‡

Indicates a management contract or compensatory plan or arrangement.

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 13, 2009.

GVI SECURITY SOLUTIONS, INC.
(Registrant)
By:	/s/ Steven Walin
	Steven Walin
	Chief 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
Steven Walin	Officer), Chairman of the Board, and Director	March 13, 2009

	Chief Financial Officer (Principal Accounting
Joseph Restivo	and Financial Officer), Chief Operating Officer	March 13, 2009
	and Director

	Director	March 13, 2009
Craig Ellins

	Director	March 13, 2009
Gary Freeman

	Director	March 13, 2009
Moshe Zarmi

GVI Security Solutions, Inc.

CONSOLIDATED FINANCIAL STATEMENTS

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007	F-3

Consolidated Statements of Operations for the years
ended December 31, 2008 and 2007	F-4

Consolidated Statements of Stockholders’ Equity for the years
ended December 31, 2008 and 2007	F-5

Consolidated Statements of Cash Flows for the years
ended December 31, 2008 and 2007	F-6

Notes 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, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity 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, 2008 and 2007 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

February 24, 2009

F-2

GVI Security Solutions, Inc.

Consolidated Balance Sheets

December 31, 2008 and 2007

(In thousands, except share and per share amounts)

	2008			2007
ASSETS:
Current Assets
Cash and equivalents	$	46		$	313
Accounts receivable, net of allowances for doubtful accounts of $426 and $416, respectively		7,129			6,625
Inventory, net		15,249			12,723
Deferred tax assets, current		869			907
Prepaid and other current assets		920			1,184
Total Current Assets		24,213			21,752

Property and Equipment, net		158			156
Deferred tax assets, non-current		178			1,321
Deferred loan origination fee, net		61			93
Other assets		51			34
Total Assets	$	24,661		$	23,356

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities
Accounts payable to primary supplier	$	7,132		$	5,710
Other trade accounts payable		1,105			1,682
Accrued expenses		1,799			1,849
Capitalized lease obligations, current		12			51
Total Current Liabilities		10,048			9,292

Capital lease obligations, net of current portion		-			12
Deferred tax liability, non-current		739			1,244
Revolving credit facility		9,862			10,344
Total Liabilities		20,649			20,892

Commitments and Contingencies

Stockholders' Equity
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, 28,197,106 issued and outstanding at December 31, 2008 and 28,147,106 shares issued and outstanding at December 31, 2007		28			28
Additional paid-in capital		34,826			34,574
Accumulated deficit		(30,842	)		(32,138	)
Total Stockholders' Equity		4,012			2,464
Total Liabilities and Stockholders' Equity	$	24,661		$	23,356

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, 2008 and 2007

(In thousands, except per share amounts)

	2008			2007

Revenues	$	47,333		$	45,025

Cost of Revenues		33,152			32,238

Gross Profit		14,181			12,787

Selling, General and Administrative Expenses		11,554			10,312

Income from operations		2,627			2,475

Other Income		60			-
Interest Expense		(686	)		(1,012	)

Income from continuing operations before income taxes and income from discontinued operations		2,001			1,463

Income Tax (Expense) Benefit		(705	)		942

Income from continuing operations before income from discontinued operations		1,296			2,405

Income from discontinued operations, net of taxes		-			232

Net income	$	1,296		$	2,637

Basic income per share
Continuing operations	$	0.05		$	0.08
Discontinued operations	$	0.00		$	0.01
Net income	$	0.05		$	0.09
Diluted income per share
Continuing operations	$	0.04		$	0.07
Discontinued operations	$	0.00		$	0.01
Net income per share	$	0.04		$	0.08

Shares Used in Calculation of Net Income per share - basic		28,182,079			28,044,465
Shares Used in Calculation of Net Income per share - diluted		31,453,401			33,595,044

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

F-4

GVI Security Solutions, Inc.

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2008 and 2007

	Common Stock
	Shares		Amount		Additional Paid-in-Capital		Accumulated Deficit			TOTAL

Balance, January 1, 2007		26,292,944	$	26	$	33,309	$	(34,775	)	$	(1,440	)

Private placement proceeds, net		1,713,333		2		1,026					1,028
Conversion of severance obligation to common stock		100,000		-		20					20
Fair value of warrants issued for services		-		-		110					110
Proceeds from exercise of stock options		40,829		-		8					8
Fair value of vested options		-		-		101					101
Net Income		-		-				2,637			2,637
Balance, December 31, 2007		28,147,106		28		34,574		(32,138	)		2,464

Fair value of warrants issued for services		-		-		149					149
Proceeds from warrant exercise		50,000		-		10					10
Fair value of vested options		-		-		94					94
Net Income		-		-		-		1,296			1,295
Balance, December 31, 2008		28,197,106	$	28	$	34,826	$	(30,842	)	$	4,012

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, 2008 and 2007

(In thousands, except per share amounts)

	2008			2007
Cash Flows Provided by Operating Activities
Net Income	$	1,296		$	2,637
Adjustments to reconcile Net Income to net cash provided by (used In) Operating Activities:
(Income) from discontinued operations, net of tax		-			(232	)
Depreciation and amortization from continuing operations		151			229
Amortization of deferred loan origination fee		32			209
Compensation costs and expenses for stock and options issued		242			211
Changes in Assets and Liabilities
Accounts receivable, net		(504	)		1,256
Inventory		(2,526	)		(6,307	)
Prepaids and other current assets		368			140
Other Assets		(17	)		-
Deferred Tax Assets and Liabilities, net		676			(985	)
Accounts payable		741			335
Accrued expenses		(50	)		(154	)
Net cash provided by (used in) operating activities from continuing operations		409			(2,661	)

Net cash used in operating activities of discontinued operations		-			(168	)
Net cash provided by (used in) operating activities		409			(2,829	)

Cash Flows Used In Investing Activities
Purchase of property and equipment		(153	)		(2	)
Net cash used in investing activities		(153	)		(2	)

Cash Flows Provided By (Used In) Financing Activities
Issuance of common stock		-			1,028
Proceeds from warrant conversion to common stock		10			-
Payments of Laurus revolving credit facility		-			(6,366	)
Net proceeds from revolving credit facility		(482	)		10,344
Principal payments of Senior term note		-			(1,925	)
Principal payments of capitalized lease obligations		(51	)		(77	)
Proceeds from exercise of options		-			8
Loan origination costs		-			(93	)
Net Cash (Used In) Provided by Financing Activities		(523	)		2,919

Net (Decrease) Increase in Cash		(267	)		88
Cash, Beginning of Period		313			225
Cash, End of Period	$	46		$	313

SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid for interest	$	715		$	805
Cash paid for income taxes		47			9

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ANDFINANCING ACTIVITIES
Conversion of debt to common stock		-			20

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, 2008 and 2007

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.

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 subsidiary GVI Security, Inc. 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 the year ended December 31, 2007, the Company paid approximately $168,000 to satisfy all remaining obligations associated with the Retail Channel business, and recognized $232,000 as income from discontinued operations, representing the balance of a $400,000 reserve established in 2006 in connection with Company’s estimated obligations for this business.

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.

F-7

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

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, 2008.

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. 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.

F-8

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, 2008 and 2007 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, 2008 and 2007 were $630,000 and $477,000, respectively.

Income Taxes

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.

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:

	2008			2007

Risk free rate of return		4.0	%		4.5	%
Option lives in years		6.0			6.0
Annual volatility of stock price		63	%		72	%
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. The income generated by the Company during the year ended December 31, 2008 led to the Company including an additional 3,271,322 shares of Common Stock 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, 2008. The potentially dilutive securities consisted of outstanding warrants and stock options to acquire an aggregate of 8,831,810 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 of Common Stock 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 of Common Stock.

F-9

Credit Risk Concentration

At December 31, 2008, two customers accounted for 26% and 13% respectively of the Company’s receivables balances. During the year ended December 31, 2008, these same two customers accounted for 20% and 11% respectively of the Company’s sales. At December 31, 2007, two customers accounted for 19% and 16% respectively of the Company’s receivables balances. During the year ended December 31, 2007, these same two customers accounted for 20% and 18% respectively of the Company’s sales.

International sales accounted for approximately 35% and 30% of the Company's sales during the years ended December 31, 2008 and 2007 respectively. International sales took place in Latin America and Canada. During the year ended December 31, 2008 approximately 13% of the Company’s sales took place in Mexico.

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

Fair Value Measurements

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This Statement defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance applies to other accounting pronouncements that require or permit fair value measurements. On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.157-2, Effective Date of FASB Statement No. 157. This Staff Position delays the effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 had no effect on the Company’s consolidated financial position or results of operations.

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

F-10

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.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

NOTE 2 ~ ACCOUNTS RECEIVABLE

Accounts receivable, net, at December 31, 2008 and 2007 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, 2008 and 2007 was as follows:

	2008			2007

Beginning balance	$	416		$	558
Bad debt provisions		26			171
Account write-offs		(19	)		(329	)
Recoveries		3			16
Ending Balance	$	426		$	416

NOTE 3 ~ PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2008 and 2007 consists of the following:

F-11

	Useful Lives in Years		2008			2007

Furniture and fixtures		5-7	$	483		$	483
Office and warehouse equipment		2-7		206			201
Leasehold improvements		2-7		168			168
Computer equipment and software		3-5		818			676
Demo and sample equipment		1-2		2			2
				1,677			1,530
Accumulated Depreciation				(1,519	)		(1,374	)
			$	158		$	156

NOTE 4 ~ CREDIT FACILITY

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. Borrowings under the credit facility are secured by all of the Company’s assets. 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. The Company’s borrowings under its credit facility as of December 31, 2008 and 2007, were approximately $9.9 million and $10.3 million, respectively. The Company has classified the note as a long-term liability based upon management’s current projections of available borrowing base and utilization.

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

Subject to downward adjustment as provided below, 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 (3.25% at December 31, 2008) 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.

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, 2008, the Company’s borrowing base supported approximately $14.6 million of borrowings, under the line of credit agreement, of which approximately $9.9 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 $150,000 if the credit facility is terminated prior to November 20, 2009, or $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, 2008, the Company was in compliance with all such covenants.

In addition, as a result of the Company generating Net Income (as defined in the Credit Agreement), in excess of $1 million for the year ending December 31, 2008, interest rate under the credit facility will be reduced by .50% per annum commencing within 30 days of Wells Fargo’s receipt of the Company’s financial statements for the year ended December 31, 2008.

F-12

NOTE 5 ~ LOAN ORIGINATION FEES

Loan origination fees consist of the following as of December 31, 2008 and 2007 respectively:

	2008			2007
Fees		97		$	2,192
Amortization		(37	)		(2,099	)
Net	$	60		$	93

The Company incurred and capitalized origination fees associated with the Wells Fargo credit facility of approximately $97,000 in the year ended December 31, 2007. These fees are amortized into interest expense using the effective interest method over the initial term of the loan of three years.

In prior 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.

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, 2008 were as follows:

2009	$	12
Less amounts relating to interest		-
Total capital lease obligations		12
Less current portion		12
Capital lease obligations, noncurrent	$	-

NOTE 7 ~ INCOME TAXES

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

	2008			2007
Federal
Current
Federal	$	35		$	22
State		(7	)		20
Total Current		28			42

Deferred
Federal		686			(832	)
State		(9	)		(152	)
Total Deferred		677			(984	)
Total	$	705		$	(942	)

F-13

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

	2008			2007
Deferred tax assets
Accounts receivable allowances	$	318		$	435
Inventory reserve		1,134			1,152
Uniform capitalization of inventory costs		151			132
Other		35			63
Property and Equipment		716			1,211
Non Cash compensation		232			138
Net operating loss and credit carry-forward		868			1,508
		3,454			4,639
Less: Deferred tax valuation allowance		(2,407	)		(2,411	)
Deferred Tax Asset, net of valuation		1,047			2,228
Deferred tax liabilities
Property and equipment		(739	)		(1,244	)

Net	$	308		$	984

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

	2008			2007

Income tax at statutory rates (34%)	$	660		$	577
Permanent differences		59			18
State income tax expense – net of federal benefit		(10	)		(187	)
Change in deferred tax valuation		(4	)		(6,941	)
Reduction in NOL carry-forward due to change in ownership		-			5,591

Income tax (benefit) provision		705			(942	)

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, 2008, the Company has a federal net operating loss carry-forward of approximately $2.1 million expiring 2026. Approximately $0.6 million of the federal net operating loss carry-forward is available for utilization in 2009. The remaining $1.5 million can be utilized at a rate of approximately $89,000 annually over the following 17 years ending 2026. A partial valuation allowance has been provided against the net deferred tax assets, due to the uncertainty of the Company’s ability to generate long-term taxable income, particularly as it relates to the current economic environment. 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.

F-14

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, 2008, 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, 2008, the Company has no accrued interest or penalties related to uncertain tax positions.

NOTE 8 ~ STOCKHOLDERS’ EQUITY

January 2007 Private Placement

NOTE 9 ~ SIGNIFICANT VENDOR AGREEMENT

On October 2, 2006, the Company entered into a 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. In November 2008, the Distribution Agreement was amended to lower the minimum amounts the Company is required to purchase from Samsung. As amended, the Agreement provides for minimum annual purchase amounts of $27 million, $25 million, $32.4 million, and $42 million for the years ending December 31, 2007, 2008, 2009, and 2010, respectively. Samsung may 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, 2007, and December 31, 2008, the Company exceeded its minimum purchasing commitment under the agreement. For the years ended December 31, 2007 and December 31, 2008, the Company purchased approximately $28 million and $26 million respectively under the Distributorship Agreement with Samsung.

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, 2008 and 2007, $7.1 million and $5.7 million, respectively, was due to Samsung under this agreement.

F-15

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, 2008 and 2007, 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, 2008 are as follows ($ in thousands):

Years Ending December 31:	Amount

2009		250
	$	250

Rent expense under operating leases was approximately $372,000 and $382,000 during the years ended December 31, 2008 and 2007 respectively.

NOTE 12 ~ STOCK INCENTIVE PLANS

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, in October 2006 the shares available were increased under this Plan to 5,900,000. In July 2008 the Company adopted its 2008 Long-Term Stock Plan and reserved 1,000,000 shares of Common Stock for issuance thereunder.

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

	Years Ended December 31:
	2008					2007
	Shares			Weighted Ave Exercise Price		Shares			Weighted Ave Exercise Price

Outstanding at January 1:		5,962,218		$	1.04		5,498,797		$	1.37
Granted		160,000		$	0.50		550,000		$	0.72
Exercised		-			-		(40,830	)	$	0.20
Forfeited		(80,000	)	$	0.20		(45,749	)	$	33.77
Outstanding at December 31:		6,042,218		$	1.06		5,962,218		$	1.04

Options Exercisable at December 31:		4,417,431		$	1.34		2,867,122		$	1.88

F-16

The aggregate intrinsic values of outstanding and exercisable shares at December 31, 2008 were $1,003,882 and $764,312, respectively.

The weighted average fair value of options issued at date of grant using the fair value based method during 2008 is estimated at $0.33.

The following table summarizes information about stock options outstanding as of December 31, 2008:

Outstanding Options				Exercisable Options
Exercise Prices	Shares Outstanding at December 31, 2008		Weighted-average Remaining Contractual Life	Number Outstanding at December 31, 2008
$ 0.20		5,283,590	7.8 years		4,022,693
0.46		110,000	4.5 years		18,333
0.60		350,000	4.1 years		212,499
0.80		150,000	9.0 years		69,167
0.95		100, 000	9.0 years		46,111
15.93		4,637	4.6 years		4,637
42.50		2,000	6.3 years		2,000
75.00		13,366	6.0 years		13,366
130.00		28,625	5.1 years		28,625
		6,042,218	7.5 years		4,417,431

The Company recognized compensation expense from the vesting of issued stock options of approximately $94,000 and $98,000 for the years ended December 31, 2008 and 2007 respectively. The Company’s future compensation expense from these stock options was approximately $158,000 on December 31, 2008, which vests monthly over the next 38 months.

NOTE 13 ~ WARRANTS

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

	Years Ended December 31:
	2008					2007
	Shares			Weighted Ave Exercise Price		Shares			Weighted Ave Exercise Price

Outstanding at January 1:		2,259,592		$	5.38		2,009,723		$	5.98
Issued		500,000		$	1.01		250,000		$	0.73
Exercised		(50,000	)	$	0.20		-			-
Expired		-			-		(131	)	$	390.00
Outstanding at December 31:		2,709,592		$	4.67		2,259,592		$	5.38

F-17

Summary of the Company’s outstanding warrants at December 31, 2008 and 2007 are as follows:

	December 31, 2008						December 31, 2007
Description	Shares		Approx. Remaining Term (Years)		Exercise Price		Shares

Laurus Master Fund		26,800		2.5	$	30.00		26,800
Laurus finder’s fee		1,880		2.4	$	175.00		1,880
ESI		60,000		2.8	$	75.00		60,000
Rapor shareholders		27,079		2.9	$	152.00		27,079
Oct. 2004 bridge financing		15,333		0.8	$	75.00		15,333
Consultant		3,500		0.8	$	175.00 – $ 250.00		3,500
Consulting fee paid to director		1,825,000		0.8	$	0.20		1,875,000
Consultant		100,000		3.2	$	0.60		100,000
Consultant		150,000		3.8	$	0.82		150,000
Consultant		300,000		2.0	$	1.15		-
Consultant		50,000		4.6	$	0.60		-
Consultant		150,000		4.7	$	0.85		-
		2,709,592						2,259,592

F-18

Dates Referenced Herein and Documents Incorporated by Reference

This ‘10-K’ Filing	Date	Other Filings

	10/4/16
	12/31/11
	12/31/10
	11/20/10
	12/31/09
	11/20/09
	9/30/09	10-Q
Filed on:	3/16/09
	3/13/09
	3/12/09	8-K
	3/5/09
	2/24/09
	2/13/09	SC 13G/A
	1/26/09	SC 13G/A
	1/19/09
For Period End:	12/31/08
	12/15/08
	11/26/08	8-K
	11/15/08
	9/1/08
	7/3/08	4
	6/30/08	10-Q
	3/25/08	10-K
	2/12/08
	1/17/08	SC 13G
	1/11/08	8-K
	1/8/08	8-K
	1/1/08
	12/31/07	10-K
	11/21/07
	11/20/07	8-K
	10/22/07	8-K
	10/1/07
	1/22/07	4, 8-K
	1/1/07
	12/31/06	10-K
	11/27/06	4, 4/A
	10/6/06
	10/5/06	3, 4, 8-K
	10/4/06	3, 4, 4/A
	10/2/06	8-K
	6/27/06	DEF 14A
	3/31/06	10-Q, 10KSB
	3/28/06	3, 4
	3/6/06	3, 4
	2/21/06	424B3, 8-K
	2/9/06	SC 13G/A
	1/31/06
	1/1/06
	12/31/05	10KSB, 10KSB/A
	1/1/05
	12/31/04	10KSB, 10KSB/A, NT 10-K
	5/24/04	10QSB
	4/14/04	10KSB, 4, 8-K
	4/12/04	4
	4/1/04
	3/31/04	10QSB, NT 10-Q
	2/27/04	8-K
	2/20/04	3, 4, 8-K, 8-K/A
	2/19/04	3, 4
	12/18/00
		List all Filings

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Filing Submission 0001144204-09-014154 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Gvi Security Solutions Inc – ‘10-K’ for 12/31/08

On: Monday, 3/16/09, at 2:25pm ET · For: 12/31/08 · Accession #: 1144204-9-14154 · File #: 0-21295

Previous ‘10-K’: ‘10-K’ on 3/25/08 for 12/31/07 · Latest ‘10-K’: This Filing

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Dates Referenced Herein and Documents Incorporated by Reference

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