FORM 10-QSB

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

(X)                    QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF                1934

For the quarterly period ended March 31, 2006

OR

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

Commission file number:
 001-32566

A4S SECURITY, INC.
(Exact name of registrant as specified in its charter)

|                                                                |                                     
|--------------------------------------------------------------- | ------------------------------------
|Colorado                                                        | 20-1978398                          
|(State or other jurisdiction of
 incorporation or organization) | (I.R.S. Employer Identification No.)

489 North Denver Avenue,
Loveland, Colorado 80537
(Address of principal executive offices) (Zip Code)

(970) 461-0071(Registrants
telephone number, including area code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
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.    Yes  [X]  
No  [   ]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
[  ]   No [X]

The number of shares of no par value
common stock outstanding as of May 11, 2006, was 3,961,441.

Transitional Small Business
Disclosure Format (Check one):      Yes    [     ]      No    [X]

---



A4S SECURITY, INC.

|                                                   | Page
|-------------------------------------------------- | ----
|PART 1 Financial Information                      |     
|                                                   |     
|Item 1.   Condensed Unaudited Financial Statements |     
|                                                   |     
|Balance Sheet as of March 31, 2006                 |     
|                                                   |     
|Statements of Operations For the Three             |     
|Month Periods Ended March 31, 2006 and 2005        |     
|                                                   |     
|Statements of Cash Flows For the Three             |     
|Months Ended March 31, 2006 and 2005               |     
|                                                   |     
|Notes to Unaudited Condensed  Financial Statements |     
|                                                   |     
|Item 2.   Management's Discussion and Analysis     |     
|                                                   |     
|Item 3.    Controls and Procedures                 |     
|                                                   |     
|PART II - Other Information                        |     
|                                                   |     
|                                                   |     
|Item 6.    Exhibits                                |     
|                                                   |     
|Signatures                                         |     

2

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PART I  FINANCIAL
INFORMATION

A4S Security, Inc.
                                                   Balance Sheet
                                                  March 31, 2006
                                                    (Unaudited)

|                                                            | 
|----------------------------------------------------------- | 
|ASSETS                                                      | 
|                                                            | 
|Current assets:                                             | 
|Cash and cash equivalents                                   | 
|Accounts receivable (Note 6)                                | 
|Inventories (Note 2)                                        | 
|Prepaid expenses and other current assets                   | 
|                                                            | 
|Total current assets                                        | 
|                                                            | 
|Property and equipment, net (Note 3)                        | 
|                                                            | 
|Intangible and other assets                                 | 
|                                                            | 
|Total assets                                                | 
|                                                            | 
|LIABILITIES AND STOCKHOLDERS' EQUITY                        | 
|                                                            | 
|Current liabilities:                                        | 
|Accounts payable                                            | 
|Accrued expenses                                            | 
|Installment obligations                                     | 
|                                                            | 
|Total current liabilities                                   | 
|                                                            | 
|Installment obligations, net of current portion             | 
|                                                            | 
|Total liabilities                                           | 
|                                                            | 
|Commitments                                                 | 
|                                                            | 
|Stockholders' equity (Notes 1 and 5):                       | 
|Preferred stock, no par value, 5,000,000 shares authorized; | 
|no shares issued or outstanding                             | 
|Common stock, no par value, 30,000,000 shares authorized;   | 
|3,961,441 shares issued and outstanding                     | 
|Accumulated deficit                                         | 
|                                                            | 
|Total stockholders' equity                                  | 
|                                                            | 
|Total liabilities and stockholders' equity                  | 
|                                                            | 

See
Accompanying Notes to Unaudited Condensed Financial Statements.

3

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A4S Security, Inc.
                                             Statements of Operations
                                        Periods Ended March 31 (Unaudited)

|                                                        | Three Months Ended | 
|------------------------------------------------------- | ------------------ | 
|
|Net sales (Note 6)                                      |                    | 
|Cost of sales                                           |                    | 
|                                                        |                    | 
|Gross profit                                            |                    | 
|                                                        |                    | 
|Operating expenses:                                     |                    | 
|Selling, general and administrative  (includes non-cash |                    | 
|compensation of $99,675 in 2006)                        |                    | 
|Research and development                                |                    | 
|                                                        |                    | 
|Total operating expenses                                |                    | 
|                                                        |                    | 
|Operating loss                                          |                    | 
|                                                        |                    | 
|Other income (expense):                                 |                    | 
|Interest expense                                        |                    | 
|Interest income                                         |                    | 
|Other expense, net                                      |                    | 
|                                                        |                    | 
|Total other income (expense)                            |                    | 
|                                                        |                    | 
|                                                        |                    | 
|Net loss                                                |                    | 
|                                                        |                    | 
|                                                        |                    | 
|Basic and diluted net loss per share                    |                    | 
|                                                        |                    | 
|Basic and diluted weighted average number               |                    | 
|of common shares outstanding                            |                    | 
|                                                        |                    | 

See Accompanying
Notes to Unaudited Condensed Financial Statements.

4

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A4S Security, Inc.
                                             Statements of Cash Flows
                                     Three Months Ended March 31, (Unaudited)

|                                                        | 2006 |  | 2005 |           
|------------------------------------------------------- | ---- |  | ---- | ----------
|Cash flows from operating activities                    |      |  |      |           
|Net loss                                                |      |  | $    | (1,123,558
|Adjustments to reconcile net loss to                    |      | 
|net cash used by operating activities:                  |      | 
|Non-cash stock based compensation                       |      |  |      | 99,675    
|Depreciation and amortization                           |      |  |      | 20,325    
|Amortization of interest on convertible debt allocation |      |  |      |          
|(Increase) decrease in:                                 |      | 
|Accounts receivable                                     |      |  |      | (66,717   
|Inventories                                             |      |  |      | (328,502  
|Prepaid expenses and other current assets               |      |  |      | 2,782     
|Increase (decrease) in:                                 |      | 
|Accounts payable                                        |      |  |      | (112,701  
|Accrued expenses                                        |      |  |      | (38,842   
|                                                        |      |  |      |           
|Net cash used by operating activities                   |      |  |      | (1,547,538
|                                                        |      |  |      |           
|Cash flows from investing activities:                   |      | 
|Purchases of property and equipment                     |      |  |      | (23,732   
|Purchase of intangibles and other assets                |      |  |      | (43,498   
|                                                        |      |  |      |           
|Net cash used by investing activities                   |      |  |      | (67,230   
|                                                        |      |  |      |           
|Cash flows from financing activities:                   |      | 
|Proceeds from issuance of notes payable                 |      |  |      |          
|Payment of debt issue costs                             |      |  |      |          
|Repayment of bridge loans                               |      |  |      |          
|Repayment of installment obligations                    |      |  |      | (1,446    
|Proceeds from issuance of common stock and warrants     |      |  |      |          
|                                                        |      |  |      |           
|Net cash (used by) provided by financing activities     |      |  |      | (1,446    
|                                                        |      |  |      |           
|Net change in cash and cash equivalents                 |      |  |      | (1,616,214
|                                                        |      |  |      |           
|Cash and cash equivalents at beginning of period        |      |  |      | 4,665,955 
|                                                        |      |  |      |           
|Cash and cash equivalents at end of period              |      |  | $    | 3,049,741 
|                                                        |      |  |      |           
|Supplemental disclosure of cash flow information        |      | 
|Cash paid during the period for interest                |      |  | $    | 214       
|                                                        |      |  |      |           

See
Accompanying Notes to Unaudited Condensed Financial Statements.

5

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A4S Security, Inc.
                                      Notes to Condensed Financial Statements
                                                    (Unaudited)

# INTERIM
FINANCIAL STATEMENTS

The accompanying financial statements
of A4S Security, Inc. (the Company or A4S) have been prepared in
accordance with the instructions to quarterly reports on Form 10-QSB. In the opinion of
management, all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in financial
position at March 31, 2006, and for all periods presented have been made. Certain
information and footnote data necessary for a fair presentation of financial position and
results of operations in conformity with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is therefore suggested that
these financial statements be read in conjunction with the summary of significant
accounting policies and notes to financial statements included in the Companys Form
10-KSB filed with the SEC for the year ended December 31, 2005. The results of operations
for the period ended March 31, 2006 are not necessarily an indication of operating results
for the full year.  Certain amounts in the 2005 interim financial statements have been reclassified to conform to the presentation on
2006.

|1. | Initial
public offering and managements plans:
|-- | -----------------------------------------------

| | Initial
public offering:
| | ------------------------

| | In
July 2005 the Company completed an initial public offering (IPO) of
securities. The offering, including the over-allotment option exercised by the
underwriter, resulted in the sale of a total of 1,380,000 units at $6.00 each for total
gross proceeds of $8,280,000. Each unit consisted of one share of common stock and one
warrant to purchase one share of common stock at $9.00 per share, expiring in 2010. The
offering generated net proceeds to the Company of approximately $6,967,000, after
underwriting discounts and non-accountable expense allowance to the underwriters and
offering expenses payable by the Company. Concurrent with the IPO, the Companys
convertible notes payable and related accrued interest were converted into shares of
common stock (Note 4).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board
(FASB) has issued EITF 98-5 discussing among other topics, accounting for
Convertible Securities with Beneficial Conversion Features (BCF). The EITF
requires that convertible instruments issued with a conversion option that is
in-the-money at the date of such offering generally be accounted for with a portion of
the offering proceeds allocated to equity for the BCF and such amount be accreted back to
the face amount of the debt as additional interest expense. Such difference between the
prior conversion amount and the IPO value is a contingent BCF and is therefore not
recognized until the IPO is completed. In July 2005, the Company recorded a contingent
BCF as non-cash interest expense upon the completion of the IPO.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the impact of the IPO combined with the conversion of the convertible notes
payable and related accrued interest, the Companys outstanding common shares
increased from 147,389 outstanding prior to these transactions to a total of 3,961,441
outstanding afterwards. This increased number of additional shares outstanding has a
significant impact on the computation of earnings (loss) per share.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Managements plans:
| | -------------------

| | In
the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31,
2005, the Report of the Independent Registered Public Accounting Firm includes an
explanatory paragraph that describes substantial doubt about the Company ability to
continue as a going concern. The Companys interim financial statements for the
three months ended March 31, 2006 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. The Company incurred a net loss and utilized net cash
in operating activities of $1,124,000 and $1,548,000, respectively, for the three months
ended March 31, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
conditions raise substantial doubt about the Companys ability to continue as a
going concern. Managements plans with regard to these matters are discussed below.
The accompanying financial statements do not include any adjustments that might result
from the outcome of this uncertainty. Into 2006, the Company expects to continue to
incur cash losses from operations, until additional sales can be generated. While
increases in revenues will provide additional cash flow from such sales margins,
additional expenses from recent hiring of sales, marketing and engineering personnel and
expenses for expanded marketing activities will also continue to increase. The Companys
plans to bridge such cash shortfalls in 2006 include the following:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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| | 1. | Aggressively
pursuing additional fund raising activities in 2006 in addition to the approximate $7.0
million that was               received in 2005 from the Company's debt and securities
offerings;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Continue
to focus sales and marketing efforts on securing additional purchase orders to
increase revenues to               generate additional margins from such sales;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Depending
upon the level of increasing sales, explore revenue opportunities from licensing or
partnering               opportunities on certain of the Company's technologies; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Continue
to monitor and implement cost control initiatives to conserve the March 31, 2006,
approximate $3.0 million               cash balance through the remainder of 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Inventories:
|-- | ------------

|                                                      | 
|----------------------------------------------------- | 
|
|As of March 31, 2006, total inventories consisted of: | 
|Finished products for resale                          | 
|Raw materials and components                          | 
|                                                      | 
|Total inventories                                     | 
|                                                      | 

|3. | Property
and Equipment:
|-- | -----------------------

|                                                                      | 
|--------------------------------------------------------------------- | 
|
|Property and equipment at March 31, 2006, consisted of the following: | 
|Computer equipment and software                                       | 
|Office equipment and improvements                                     | 
|Demonstration vehicles                                                | 
|                                                                      | 
|                                                                      | 
|Less accumulated depreciation                                         | 
|                                                                      | 
|Property and equipment, net                                           | 
|                                                                      | 

7

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|4. | Convertible
notes payable and bridge loans:
|-- | -------------------------------------------

| | Notes
payable:
| | --------------

| | The
Company completed a series of convertible debt offerings, under which a total of
$3,512,233 plus accrued interest of $241,588 was outstanding as of July 18, 2005, just
prior to the completion of the IPO. The unsecured notes bore interest at 6% to 8%, and
all convertible notes payable were due December 31, 2006. Substantially all of the 6%
notes, totaling approximately $1.8 million were sold to related parties consisting of
directors, officers and stockholders. Upon the successful completion of the IPO in July
2005, these notes and related accrued interest, by their terms, were automatically
converted into a total of approximately 2,434,000 common shares. These debt agreements
contained restrictive covenants, including restrictions on the Companys ability to
declare dividends.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
proceeds of the note offerings were allocated between the estimated value of the notes
and any warrants based upon their relative estimated fair values and allocated to
beneficial conversion features, based upon their relative estimated intrinsic values.
Approximately $506,000 of the convertible notes had been allocated to the warrants and
beneficial conversion features. The amounts so allocated were being recorded as
additional interest expense over the terms of the loans, giving rise to an effective
interest rate on the loans of approximately 15%. Such amounts were expensed upon the
conversion of the notes with approximately $52,500 having been previously recorded as additional interest
expense during the three months ended March 31, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bridge
loans:
| | -------------

| | During
November and December 2004, the Company borrowed a total of $105,000 from three
stockholders under unsecured demand notes, bearing interest at 8%. The bridge loans,
including interest, were repaid in January 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2005, the Company borrowed $825,000 under short-term notes with interest at 8% per
annum, which were repaid in July 2005 upon the completion of the IPO. The notes included
warrant rights, which based upon the IPO, gave rise to a total of 137,500 warrants being
issued, exercisable at $6.00 per share and expiring in July 2010. The proceeds of the
notes were allocated between the notes and the warrants based upon their estimated
relative fair values, with $53,600 being allocated to the value of the warrants. This
amount was being accreted back to the balance of the notes, over their terms as
additional interest expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Stockholders equity:
|-- | ---------------------

| | Common
stock transactions:
| | --------------------------

| | During
the three months ended March 31, 2005, $3,133 was allocated to the value of warrants sold
as part of the debt offerings during that period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Companys non vested options to acquire common shares
granted to employees, officers and directors  and changes during the period
ended March 31, 2006 is presented below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Nonvested Shares             |  | Nonvested
Shares
Under
Option |  | Weighted
Average
Grant Date
Fair Value |  
|---------------------------- |  | ----------------------------- |  | -------------------------------------- | -
|Nonvested at January 1, 2006 |  |                               |  | 404,132                                |  
|Granted                      |  |                               |  | 142,500                                |  
|Vested                       |  |                               |  | (46,647                                | )
|Forfeited                    |  |                               |  |                                       |  
|                             |  |                               |  |                                       
|                             |  |                              
|Nonvested at March 31, 2006  |  |                               |  | 499,985                                |  
|                             |  |                               |  |                                       
|                             |  |                              

8

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Stock-based compensation:

A4S currently provides stock-based
compensation under the Companys 2004 Stock Incentive Plan (Plan) that
has been approved by the  Companys shareholders. Stock options granted under this plan generally
vest over three to four years from the date of grant as specified in the plans or by the
compensation committee of the Companys board of directors and are exercisable for a period of up to
ten years from the date of grant.

Effective January 1, 2006, A4S
adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004), Share-Based Payment (SFAS 123R), using the modified
prospective method. SFAS 123R requires the recognition of the cost of employee services
received in exchange for an award of equity instruments in the financial statements and is
measured based on the grant date fair value of the award. SFAS 123R also requires the
stock option compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (the vesting period).
Prior to A4S adopting SFAS 123R, the Company accounted for stock-based compensation plans
under Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees (APB 25). Under APB 25, generally no
compensation expense is recorded when the terms of the award are fixed and the exercise
price of the employee stock option equals or exceeds the fair value of the underlying
stock on the date of grant. The Company had previously adopted the disclosure-only
provision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123). Through December 31, 2005, the Company had applied APB Opinion No. 25
 and related Interpretations in accounting for
its stock-based employee compensation plans. Accordingly, no compensation expense had been
recognized for options granted to employees at fair market value. The Company estimated
the fair value of each stock option at the grant date by using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in 2005 and
2006:

|                        | 
|----------------------- | 
|
|Expected life           | 
|Volatility              | 
|Risk-free interest rate | 
|Dividend yield          | 
|Forfeitures             | 

The expected life of stock options
represents the period of time that the stock options granted are expected to be
outstanding based on historical exercise trends. The expected volatility is based on the
historical price volatility of A4Ss common stock. The risk-free interest rate
represents the U.S. Treasury bill rate for the expected life of the related stock options.
The dividend yield represents A4Ss anticipated cash dividend over the expected life
of the stock options. Forfeitures represent the weighted average estimate of future
options to be cancelled primarily due to employee terminations.

In the first quarter of fiscal 2006,
A4S recorded compensation expense related to stock options that increased the net loss by
$99,675 and basic and diluted net loss per share by $0.03. The stock option compensation
expense was included in operating expenses in the accompanying statement of
operations.

A summary of stock option activity of
options to employees and directors, for the three months ended March 31, 2006 is presented
below:

|                               | Shares
Under
Option |  | Weighted
Average
Exercise
Price |         | Weighted
Average
Remaining
Contractual
Life (Years) |   | Aggregate
Intrinsic
Value | 
|------------------------------ | ------------------- |  | ------------------------------- | ------- | --------------------------------------------------- | - | ------------------------- | 
|Outstanding at January 1, 2006 |                     |  |                                 | 650,374 |                                                     | $ | 4.18                      | 
|Granted                        |                     |  |                                 | 142,500 |                                                     |   | 5.24                      | 
|Exercised                      |                     |  |                                 |        |                                                     |   |                           | 
|Forfeited                      |                     |  |                                 |        |                                                     |   |                           | 
|                               |                     |  |                                 |         |                                                     |   |                           | 
|Outstanding at March 31, 2006  |                     |  |                                 | 792,874 |                                                     | $ | 4.37                      | 
|                               |                     |  |                                 |         |                                                     |   |                           | 
|Exercisable at March 31, 2006  |                     |  |                                 | 292,889 |                                                     | $ | 4.38                      | 
|                               |                     |  |                                 |         |                                                     |   |                           | 

9

---



The total fair value of stock options
granted to employees that vested during the three months ended March 31, 2006 and 2005 was
$106,700 and $64,700 respectively and no stock options were exercised during either
period.

As of March 31, 2006, the Company had
approximately $850,000 of unrecognized compensation cost related to stock options that
will be recorded over a weighted average period of approximately 4 years.

During the three months ended March
31, 2006, options to purchase 142,500 shares of common stock were granted under the
Companys 2004 Stock Incentive Plan to employees, officers and directors. The options
are subject to vesting provisions, are exercisable at a weighted average of $5.24 per
share, and expire in ten years. During the three months ended March 31, 2006, no options
to acquire shares of common stock were cancelled due to forfeitures.

Subsequent to March 31, 2006, options
to purchase 166,000 shares of common stock were granted under the Companys 2004
Stock Incentive Plan to employees, officers and directors. The options are subject to
vesting provisions, are exercisable at $4.93 per share, and expire in ten years.

Had compensation expense for stock
option grants been determined based on the fair value at the grant dates consistent with
the method prescribed by SFAS 123, the Companys net loss and net loss per share
would have been adjusted to the pro forma amounts for the three months ended March 31,
2005 as indicated below:

|                                               | 2005 | 
|---------------------------------------------- | ---- | 
|
|Net loss:                                      |      | 
|As reported                                    |      | 
|Recognized stock-based compensation costs, net |      | 
|Fair value method compensation costs, net      |      | 
|                                               |      | 
|Pro forma                                      |      | 
|                                               |      | 
|Net loss per share, basic and diluted:         |      | 
|As reported                                    |      | 
|Pro forma                                      |      | 

|6. | Customer
Concentration:
|-- | -----------------------

As of March 31, 2006, one customer
accounted for substantially all of the outstanding  accounts receivable balance. For
the three-month periods ended March 31, 2006 and 2005, one customer accounted for 51% and
93%, respectively, of net sales.

10

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ITEM 2.

# MANAGEMENTS
DISCUSSION AND ANALYSIS

# Overview

We market high resolution mobile
digital video recording systems for security and surveillance. Our products were designed
originally for use in the law enforcement market. In early 2004, as a result of
significant lead times being encountered in the buying decisions of law enforcement
customers we began marketing products to mass transit customers. Through 2005, Kansas City
Area Transit Authority, or KCATA, was our principal customer. During 2006, in addition to
KCATA, the Greater Cleveland Regional Transit Agency ordered units. A total of four
customers generated our revenue during the three months ended March 31, 2006, including
KCATA, which accounted for approximately 51% of our revenues for the period. We currently
have approximately a $366,000 backlog of orders from transit agencies, including re-orders
from Greater Cleveland Regional Transit Agency, Akron Metro RTA, and City of Vacaville,
CA. Our primary near term focus is the mass transit market, and we are currently engaged
in active discussions with over 100 metropolitan transportation authorities. Our marketing
strategy is to present in-person our products to these potential customers to demonstrate
the advantages we believe our products have. During the three months ended March 31, 2006,
we were awarded a contract by the San Joaquin Regional Rail Commission (SJRRC) to install
31 ShiftWatch® Transportation Video Systems in SJRRCs Altamont Commuter Express
rail system. The SJRRC contract includes options, as specified, for additional units to be
acquired by SJRRC or its assignees, with our approval. We have recently been notified that
another California based organization is evaluating an order under the option provisions
granted to SJRRC, and we believe that other agencies will purchase from us, under this
option which provides such organizations with an efficient and less time consuming
procurement option.

We continue to believe that the law
enforcement market represents a significant opportunity that until recently has been
reluctant and slow to make buying decisions. It appears that the long-awaited minimum
product specifications to be issued by the International Association of Chiefs of Police
(IACP) will be issued in 2006. Our development resources and activities supporting this
sector have been increasing as we anticipated the issuance of the IACP minimum
specifications getting closer, enabling us to conclude our initial product design. Our
primary efforts have been focused on creating an in-car digital video law enforcement
product that provides unequaled remote access through state of the art wireless
capability for near real time review and download to a fully scalable back end server
model. This is anticipated to be released later this year. We anticipate that our
product, if successfully released, will lead the industry in interoperable capabilities,
while providing the highest allowable video resolution that will comply with anticipated
industry minimum specifications. We continue with our on-going commitment to the
participation on the panels and Executive Committees of the International Association of
Chiefs of Police.

The United States Patent and
Trademark Office, has notified us through our legal counsel, that they are currently
examining our patent application we filed in November of 2001, that holds numerous claims
relative to the method and manner of handling the digital video streams and recording of
same and use of MPEG video in a mobile law enforcement environment.

During July 2005, we completed our
initial public offering, resulting in the sale of 1,380,000 units, each consisting of one
common share and one warrant to purchase one common share, exercisable at $9.00 per
share. The public offering raised approximately $8.3 million in gross proceeds for us.
Under provisions contained in their terms, approximately $3.5 million in convertible
notes and accrued interest were automatically converted into approximately 2,434,000
shares of common stock upon the completion of the public offering.

# Results of Operations

In the Companys Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2005, the Report of the Independent
Registered Public Accounting Firm includes an explanatory paragraph that describes
substantial doubt about the Company ability to continue as a going concern. The Companys
interim financial statements for the three months ended March 31, 2006 have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company incurred a
net loss and utilized net cash in operating activities of $1,124,000 and $1,548,000,
respectively, for the three months ended March 31, 2006.

These conditions raise substantial
doubt about the Companys ability to continue as a going concern. Managements
plans with regard to these matters are discussed below. The accompanying financial
statements do not include any adjustments that might result from the outcome of this
uncertainty. Into 2006, the Company expects to continue to incur cash losses from
operations, until additional sales can be generated. While increases in revenues will
provide additional cash flow from such sales margins, additional expenses from recent
hiring of sales, marketing and engineering personnel and expenses for expanded marketing
activities will also continue to increase. The Companys plans to bridge such cash
shortfalls in 2006 include the following:

11

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|1. | Aggressively
pursuing additional fund raising activities in 2006 in addition to the approximate $7.0
million that was               received in 2005 from the Company's debt and securities
offerings;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Continue
to focus sales and marketing efforts on securing additional purchase orders to
increase revenues to               generate additional margins from such sales;
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Depending
upon the level of increasing sales, explore revenue opportunities from licensing or
partnering               opportunities on certain of the Company's technologies; and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Continue
to monitor and implement cost control initiatives to conserve the March 31, 2006,
approximate $3.0 million               cash balance through  the remainder of 2006.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Comparison of the
three-month periods ended March 31, 2006 to 2005

Net sales for the three months ended
March 31, 2006 totaled $212,800, a $139,100 or 189% increase over the comparable 2005
period. Net sales for the 2006 and 2005 periods were comprised almost entirely of products
sold into the mass transit market and in 2005 related primarily of sales to KCATA, which
was obtained as a customer during mid-2004. In the three months ended March 31, 2006,
KCATA represented approximately 51% of sales. Sales for 2006 have been fulfilled utilizing
the latest generation re-designed product platform with a much smaller foot-print, with
enhanced features and benefits that one news reporter referred to as a black
box.

Cost of sales for the three months
ended March 31, 2006 totaled $207,000, a $154,200 or 292% increase over the comparable
2005 period. Cost of sales includes additional costs in 2006 associated with increased
fixed overhead costs that have been added to support anticipated sales increases.
Additionally, product installation costs have increased in 2006 over 2005 due to more
installations being conducted by Company personnel and contractors, as compared to higher
percentage of prior installations being done by bus manufacturers as well as the learning
curve associated with retro-fitting trains, light-rail vehicles and certain bus models.

Selling, general and administrative
expenses in the three months ended March 31, 2006 totaled $937,500, which is a $552,900 or
144% increase as compared to the 2005 period. The increase is primarily attributable to an
increase of approximately $370,000 in payroll costs from additions to sales, engineering
and management personnel and the balance represents costs associated primarily with
additional sales and marketing costs. Additionally, employee non-cash equity compensation
totaled $99,675 for the three months ended March 31, 2006 as compared to none in the 2005
period. Such amount relates to the estimated value of options granted to employees and
directors under the Companys option plan, calculated based upon the Black-Scholes
method. Effective January 1, 2006, we began applying the fair value recognition provisions
of FASB Statement No. 123 to our stock-based employee plans

Research and development expenses in
the three months ended March 31, 2006 totaled $228,400, which is a $156,300 or 217%
increase as compared to the 2005 period. The increase is due to a number of factors,
primarily additional development personnel and outsourced research and development
activities being incurred. Such amounts can vary quarter to quarter.

Interest expense for the three
months ended March 31, 2006 was virtually zero due to the repayment or conversion of
substantially all of the interest bearing debt upon the completion of the public offering
in July 2005. Interest expense for the three months ended March 31, 2005 totaled $118,600
due to the average outstanding interest bearing obligation and the amortization of the
additional interest expense associated with the amount allocated to the warrants and the
beneficial conversion features from the convertible debt offerings. During the three
months ended March 31, 2006, interest income of approximately $38,200 was recognized from
earnings of excess cash in short term investments.

No income tax benefit was recorded
on the loss for the three months ended March 31, 2006, as our management was unable to
determine that it was more likely than not that such benefit would be realized.

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# Liquidity and Capital
Resources

We had a net loss of $1,123,600,
including $120,000 in non cash expenses, for the three months ended March 31, 2006. We
expect our expenses in the upcoming months to be at or somewhat above the level incurred
for the three months ended March 31, 2006. We are currently engaged in active sales
communications with over 100 metropolitan transit authorities. It is likely that a loss
will be incurred for at least the initial portion of 2006, depending upon possible
additional revenues to be achieved. During the three months ended March 31, 2006, we were
awarded a contract by the San Joaquin Regional Rail Commission (SJRRC) to install 31
ShiftWatch® Transportation Video Systems in SJRRCs Altamont Commuter Express
rail system. The SJRRC contract includes options, as specified, for additional units to be
acquired by SJRRC or its assignees, with our approval. We have recently been notified that
another California based organization is evaluating an order under the option provisions
granted to SJRRC, and we believe that other agencies will purchase from us, under this
option which provides such organizations with an efficient and less time consuming
procurement option.

At March 31, 2006, we had working
capital of $3.7 million, of which $3.0 million was cash and cash equivalents.

Capital expenditures, primarily for
development, testing, office equipment and for facility improvement costs for the fiscal
year ending December 31, 2006 are anticipated to total approximately $50,000 to $100,000.

We anticipate that spending for
research and development for the fiscal year ending December 31, 2006 will increase
appreciably from those incurred for the year ended December 31, 2005 and for the interim
period ended March 31, 2006. The primary expenditures will be focused on product
refinement and enhancements to respond to customer requests. Additional development costs
will also be required to achieve the product standards, once they are finalized, for the
law enforcement industry. Additionally, new applications will also require additional
development expenses.

We have a line of credit arrangement
for up to $395,000 with First Interstate Bank of Kalispell, Montana pursuant to which we
have been able to draw against 100% of eligible purchase orders we receive from customers.
The line of credit relationship is based upon a verbal understanding with the bank, and
advances are made and subject to, individual note agreements executed as purchase orders
that are submitted for funding. Advances under such note agreements, when made, are
collateralized by our inventories, receivables, equipment and intangibles. The interest
rate on advances is established at the time of advance and the notes generally have a
maturity date of 90 days following the advance. During the three months ended March 31
2006 and 2005, no amounts were advanced under the arrangement. As the line of credit
arrangement is not subject to a written agreement, the bank may withdraw it at any time;
however, the bank has not given any indication to us that they will not continue to
provide the facility.

In April 2005, we borrowed $825,000
under short-term notes with interest at 8% per annum, which was repaid in July 2005 upon
the completion of our initial public offering. The notes included warrant rights, which
based upon the initial public offering, gave rise to a total of 137,500 warrants
exercisable at $6.00 per share and expire in July 2010.

# Operating Activities

Net cash consumed by operating
activities was $1,547,500 during the three months ended March 31, 2006. Cash was consumed
by the loss of $1,123,600, less non-cash expenses of $120,000 for depreciation,
amortization and non-cash equity compensation. Increases in accounts receivable and
inventories totaled $395,200 during the period as a result of increases and anticipated
increases in sales levels. Accounts payable and accrued expenses were reduced by $151,500
during the period also using cash.

Net cash consumed by operating
activities was $590,600 during the three months ended March 31, 2005. Cash was consumed
by the loss of $554,500, less non-cash expenses of $63,900 for depreciation, amortization
and interest. Increases in accounts receivable, inventories and prepaid expenses totaled
$128,900 during the period which was reflective of the increased level of operations. A
net increase of $28,900 in accounts payable and accruals during the period provided cash.

13

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# Investing Activities

Net cash outflows from investing
activities consumed $67,200 during the three months ended March 31, 2006. The outflow was
primarily attributable to purchases of equipment totaling $23,700 and additions to
patents and deposits totaling $43,500.

Net cash outflows from investing
activities consumed $42,300 during the three months ended March 31, 2005. The outflow was
primarily attributable to purchases of equipment and payments for other assets.

# Financing Activities

Net cash outflows from financing
activities consumed $1,400 during the three months ended March 31, 2006 from repayments
on installment obligations.

Net cash inflows from financing
activities generated $689,200 during the three months ended March 31, 2005. Convertible
notes payable were increased by $893,000 and we paid costs associated with debt issuances
of $99,900 during the 2005 period. During this period $105,000 in bridge loans were
repaid. We also received net proceeds from the sale of common stock purchase warrants
totaling $3,100 during the 2005 period.

Recently issued accounting
pronouncement:

In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), which is a revision of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS 123R supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95,
Statement of Cash Flows. SFAS 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including grants of
employee stock options, to be recognized as additional compensation expense in the
financial statements based on the calculated fair value of the awards. SFAS 123R also
requires the benefits of tax deductions in excess of recognized compensation costs to be
reported as a financing cash flow. This requirement will reduce net operating cash flows
and increase net financing cash flows in periods after adoption. We adopted this statement
effective for our fiscal year beginning January 1, 2006.  We have described the
impact of adopting SFAS 123R in our condensed financial statements in Note 5,
Stock-Based Compensation.

In October 2005, the FASB issued FASB
Staff Position (FSP) 123R-2, Practical Accommodation to the Application
of Grant Date as Defined in FASB Statement No. 123(R) (FSP 123R-2)". FSP
123R-2 provides companies with a practical accommodation when determining the
grant date of an award that is subject to the accounting provisions in SFAS 123R.
Specifically, assuming a company meets all of the other criteria in the definition of
grant date in SFAS 123R, a mutual understanding (between the company and the recipient) of
the key terms and conditions of an award is presumed to exist at the date the award is
approved (in accordance with the companys normal corporate governance policy) if (1)
the award is unilateral grant meaning that the recipient does not have the ability to
negotiate the key terms and conditions of the award, and (2) the key terms and conditions
of the award are expected to be communicated to the recipient within a relatively short
period of time (as defined in the FSP 123R-2) after the grant was approved. This FSP was
effective upon initial adoption of SFAS 123-R on December 1, 2005.

In November 2005, the FASB issued FSP
123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards (FSP 123R-3). FSP 123R-3 provides a practical exception
when a company transitions to the accounting requirements in SFAS 123R. SFAS 123R requires
a company to calculate the pool of excess tax benefits available to absorb tax
deficiencies recognized subsequent to adopting SFAS 123R (APIC Pool), assuming
the company had been following the recognition provisions prescribed by SFAS 123. The FASB
learned that several companies do not have the necessary historical information to
calculate the APIC pool as envisioned by SFAS 123R and accordingly, the FASB decided to
allow a practical exception as documented in FSP 123R-3. This FSP was effective on its
issuance date.

14

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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements in
Managements Discussion and Analysis and other portions of this report are
forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbor created thereby. These
statements relate to future events or our future financial performance and involve known
and unknown risks, uncertainties and other factors that may cause our actual results,
levels of activity, performance or achievements or our industry to be materially different
from those expressed or implied by any forward-looking statements. In some cases,
forward-looking statements can be identified by terminology such as may,
will, could, would, should,
expect, plan, anticipate, intend,
believe, estimate, predict, potential or
other comparable terminology. Please see the Cautionary Note Regarding
Forward-Looking Statements in our Form 10-KSB for the year ended December 31, 2005
for a discussion of certain important factors that relate to forward-looking statements
contained in this report. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that such expectations
will prove to be correct. Unless otherwise required by applicable securities laws, we
disclaim any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

# Item 3.  
Controls and Procedures

(a)  Evaluation
of Disclosure Controls and Procedures

Our management, including our Chief
Executive Officer and the Chief Financial Officer, has conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the last day of the period of
the accompanying financial statements (the Evaluation Date). Based on that
review and evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, our disclosure controls and procedures were
adequate and effective to ensure that material information relating us would be made known
to them by others within those entities in a timely manner, particularly during the period
in which this quarterly report on Form 10-QSB was being prepared, and that no changes are
required at this time.

15

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# PART II  
OTHER INFORMATION

# Item 6.  
Exhibits

(a)
  Exhibits

|EXHIBIT | DESCRIPTION
|------- | -----------

|31.1 | Rule
13a-14(a)/15d-14(a) - Certification of Chief Executive Officer. Filed herewith.
|---- | ------------------------------------------------------------------------------------

|31.2 | Rule
13a-14(a)/15d-14(a) - Certification of Chief Financial Officer. Filed herewith.
|---- | ------------------------------------------------------------------------------------

|32 | Section
1350 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the SARBANES-OXLEY            ACT of 2002. Filed herewith.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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SIGNATURES

In accordance with the requirements
of the Securities Exchange Act of 1934, the registrant caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

|                    |                                                                                                            | 
|------------------- | ---------------------------------------------------------------------------------------------------------- | 
|Dated: May 15, 2006 | A4S Security, Inc.
(Registrant)
By: /s/ Jeffrey G. McGonegal
Jeffrey G. McGonegal,
Chief Financial Officer | 

17

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