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 June 30, 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 August 3, 2006, was 3,961,746.

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 June 30, 2006                                      |     
|                                                                       |     
|Statements of Operations For the Three and Six                         |     
|Month Periods Ended June 30, 2006 and 2005                             |     
|                                                                       |     
|Statements of Cash Flows For the  Six                                  |     
|Months Ended June 30, 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 2.    Unregistered Sales of Equity Securities and Use of Proceeds |     
|                                                                       |     
|Item 6.    Exhibits                                                    |     
|                                                                       |     
|Signatures                                                             |     

2

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PART I  FINANCIAL INFORMATION

A4S Security, Inc. Balance SheetJune 30, 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;   | 
|3,961,746 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 OperationsPeriods Ended June 30, (Unaudited)

|                                              | Three Months Ended |  | Six Months Ended |           
|--------------------------------------------- | ------------------ |  | ---------------- | ----------
|
|Net sales (Note 6)                            |                    |  | $                | 301,948   
|Cost of sales                                 |                    |  |                  | 474,121   
|                                              |                    |  |                  |           
|Gross profit (loss)                           |                    |  |                  | (172,173  
|                                              |                    |  |                  |           
|Operating expenses:                           |                    | 
|Selling, general and administrative (includes |                    | 
|non-cash compensation of $194,147 and         |                    | 
|$293,822 for the three and six-month          |                    | 
|periods ended  June 30, 2006)                 |                    |  |                  | 1,082,050 
|Research and development                      |                    |  |                  | 250,156   
|                                              |                    |  |                  |           
|Total operating expenses                      |                    |  |                  | 1,332,206 
|                                              |                    |  |                  |           
|Operating loss                                |                    |  |                  | (1,504,379
|                                              |                    |  |                  |           
|Other income (expense):                       |                    | 
|Interest expense                              |                    |  |                  | (182      
|Interest income                               |                    |  |                  | 26,238    
|Other income (expense), net                   |                    |  |                  | 531       
|                                              |                    |  |                  |           
|Total other income (expense)                  |                    |  |                  | 26,587    
|                                              |                    |  |                  |           
|Net loss                                      |                    |  | $                | (1,477,792
|                                              |                    |  |                  |           
|Basic and diluted net loss per Share          |                    |  | $                | (0.37     
|                                              |                    |  |                  |           
|Basic and diluted weighted                    |                    | 
|average number of common shares               |                    | 
|Outstanding                                   |                    |  |                  | 3,961,498 
|                                              |                    |  |                  |           

See Accompanying Notes to Unaudited Condensed Financial Statements.

4

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A4S Security, Inc.Statements of Cash FlowsSix Months Ended June 30, (Unaudited)

|                                                        | 2006 |  | 2005 |           
|------------------------------------------------------- | ---- |  | ---- | ----------
|Cash flows from operating activities                    |      |  |      |           
|Net loss                                                |      |  | $    | (2,601,350
|Adjustments to reconcile net loss to                    |      | 
|net cash used by operating activities:                  |      | 
|Non-cash stock based compensation                       |      |  |      | 293,822   
|Depreciation and amortization                           |      |  |      | 42,179    
|Amortization of interest on convertible debt allocation |      |  |      |          
|Recovery of doubtful accounts receivable                |      |  |      |          
|(Increase) decrease in:                                 |      | 
|Accounts receivable                                     |      |  |      | (298,995  
|Inventories                                             |      |  |      | (117,990  
|Prepaid expenses and other current assets               |      |  |      | (6,611    
|Increase (decrease) in:                                 |      | 
|Accounts payable                                        |      |  |      | 23,984    
|Accrued expenses                                        |      |  |      | 38,650    
|                                                        |      |  |      |           
|Net cash used by operating activities                   |      |  |      | (2,626,311
|                                                        |      |  |      |           
|Cash flows from investing activities:                   |      | 
|Purchases of property and equipment                     |      |  |      | (50,765   
|Purchase of intangibles and other assets                |      |  |      | (53,454   
|                                                        |      |  |      |           
|Net cash used by investing activities                   |      |  |      | (104,219  
|                                                        |      |  |      |           
|Cash flows from financing activities:                   |      | 
|Proceeds from issuance of notes payable                 |      |  |      |          
|Payment of deferred financing costs                     |      |  |      |          
|Payment of deferred offering costs                      |      |  |      |          
|Repayment of bridge loans                               |      |  |      |          
|Repayment of installment obligations                    |      |  |      | (2,924    
|Proceeds from issuance of common stock and warrants     |      |  |      |          
|                                                        |      |  |      |           
|Net cash (used by) provided by financing activities     |      |  |      | (2,924    
|                                                        |      |  |      |           
|Net (decrease) increase in cash and cash equivalents    |      |  |      | (2,733,454
|                                                        |      |  |      |           
|Cash and cash equivalents at beginning of period        |      |  |      | 4,665,955 
|                                                        |      |  |      |           
|Cash and cash equivalents at end of period              |      |  | $    | 1,932,501 
|                                                        |      |  |      |           
|Supplemental disclosure of cash flow information        |      | 
|Cash paid during the period for interest                |      |  | $    | 395       
|                                                        |      |  |      |           

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 June 30, 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 June 30, 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) Issue No. 98-5 discusses 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s ability
to continue as a going concern. The Companys interim financial statements for the
six months ended June 30, 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 $2,601,000 and $2,626,000, respectively, for the six months
ended June 30, 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. Through 2006, the Company expects to continue to
incur cash losses from operations, until additional sales can be generated. While
increases in revenues combined with improved margins on installations are anticipated to
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 and generate additional margins from such
sales;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Attempt
to complete the recently announced acquisitions of Vizer Group, Inc. and
               Avurt International, Inc. (Note 7), and integrate their business
operations and                opportunities into the Companys to expand revenue and
market base;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Depending
upon the level of increasing sales, explore revenue opportunities from
               licensing or partnering opportunities on certain of the Companys
               technologies; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Continue
to monitor and implement cost control initiatives to conserve the June                30,
2006, approximate $1.9 million cash balance through the remainder of 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|                                                     | 
|---------------------------------------------------- | 
|As of June 30, 2006, total inventories consisted of: | 
|Finished products for resale                         | 
|Raw materials and components                         | 
|                                                     | 
|Total inventories                                    | 
|                                                     | 

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

|                                                                     | 
|-------------------------------------------------------------------- | 
|Property and equipment at June 30, 2006, consisted of the following: | 
|Computer equipment and software                                      | 
|Office equipment and improvements                                    | 
|Demonstration vehicles                                               | 
|                                                                     | 
|                                                                     | 
|Less accumulated depreciation                                        | 
|                                                                     | 
|Property and equipment, net                                          | 
|                                                                     | 

7

---



|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 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 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 $121,000 having been previously recorded as additional interest
expense during the six months ended June 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | During
November and December 2004, the Company borrowed a total of $105,000 from three
stockholders, one of whom is also an officer and director, 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
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 allocated to the value of the warrants. This amount
was accreted back to the balance of the notes, over their terms as additional interest
expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | During
the six months ended June 30, 2005, $3,283 was allocated to the value of warrants sold as
part of a debt offering during that period. Additionally, $174,600 was allocated to the
value of warrants sold as part of other debt offerings in 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 June 30,
2006 is presented below.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Nonvested Shares             |  | Nonvested
Shares
Under
Option |  | Weighted
Average
Grant Date
Fair Value |  
|---------------------------- |  | ----------------------------- |  | -------------------------------------- | -
|Nonvested at January 1, 2006 |  |                               |  | 404,132                                |  
|Granted                      |  |                               |  | 308,500                                |  
|Vested                       |  |                               |  | (64,068                                | )
|Forfeited                    |  |                               |  | (4,348                                 | )
|                             |  |                               |  |                                       
|                             |  |                              
|Nonvested at June 30, 2006   |  |                               |  | 644,216                                |  
|                             |  |                               |  |                                       
|                             |  |                              

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
Plan 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.

During the three and six months ended
June 30, 2006, A4S recorded compensation expense related to stock options that increased
the net loss by $194,147 and $293,822, respectively, and basic and diluted net loss per
share by $0.05 and $0.07, respectively. 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 six months ended June 30, 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                        |                     |  |                                 | 308,500 |                                                     |   | 5.07                      | 
|Exercised                      |                     |  |                                 |        |                                                     |   |                           | 
|Forfeited                      |                     |  |                                 | (8,696  | )                                                   |   | 3.50                      | 
|                               |                     |  |                                 |         |                                                     |   |                           | 
|Outstanding at June 30, 2006   |                     |  |                                 | 950,178 |                                                     | $ | 4.51                      | 
|                               |                     |  |                                 |         |                                                     |   |                           | 
|Exercisable at June 30, 2006   |                     |  |                                 | 305,962 |                                                     | $ | 4.69                      | 
|                               |                     |  |                                 |         |                                                     |   |                           | 

9

---



The total fair value of stock options
granted to employees that vested during the six months ended June 30, 2006 and 2005 was
$147,100 and $64,700 respectively and no stock options were exercised during either
period.

As of June 30, 2006, the Company had
approximately $2,138,000 of unrecognized compensation cost related to stock options that
will be recorded over a weighted average period of approximately four years.

During the six months ended June 30,
2006, options to purchase 308,500 shares of common stock were granted under the
Companys Plan to employees, officers and directors. The options are subject to
vesting provisions, are exercisable at a weighted average of $5.07 per share, and expire
in ten years. During the six months ended June 30, 2006, 8,696 options to acquire shares
of common stock were cancelled due to forfeitures.

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 and six months ended June
30, 2005 as indicated below:

|                                               | Periods Ended June 30, 2005 | 
|---------------------------------------------- | --------------------------- | 
|
|Net loss as reported                           |                             | 
|                                               |                             | 
|Recognized stock-based compensation costs, net |                             | 
|                                               |                             | 
|Fair value method compensation costs, net      |                             | 
|                                               |                             | 
|Pro forma net loss                             |                             | 
|                                               |                             | 
|Loss per share, basic and diluted:             |                             | 
|As reported                                    |                             | 
|Pro forma                                      |                             | 

10

---



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

| | As
of June 30, 2006, two customers comprised 71% and 23% of the outstanding accounts
receivable balance. For the three-month period ended June 30, 2006, two customers
accounted for 67% and 21% of net sales and for the six month period ended June 30, 2006,
four customers accounted for 39%, 21%, 13% and 12%, of net sales. For the three-month
period ended June 30, 2005, one customer accounted for 73% of net sales and for the six
month period ended June 30, 2005, one customer accounted for 85% of net sales.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | Subsequent
Events:
|-- | ------------------

| | Pending Acquisitions:
| | ---------------------

| | During
July 2006, the Company entered into a non-binding letter of intent to acquire privately
held Westminster, Colorado based Vizer Group, Inc. (Vizer) and Avurt
International, Inc. (Avurt), owned and managed by a common group of
individuals.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The acquisition of the commonly controlled companies, calls for a purchase
price, payable in the Companys common stock for the combined companies
totaling $3 million plus a contingent $2 million dollar earn-out based upon
achieving specified future minimum revenue and operating thresholds. The Company
also plans to enter employment contracts with the key Vizer and Avurt management
personnel. Closing of the acquisition is subject to, among other items,
finalization and execution of a definitive purchase agreement, completion of due
diligence and approval by the Companys shareholders. The Company has
agreed to advance funds under a secured note to Vizer and Avurt to fund
completion of the Avurt launcher and expand marketing efforts. To date $250,000
has been advanced under the arrangement and additional funds have been agreed to
be advanced totaling an additional $750,000 and additional amounts possible,
pending possible certain events by the company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Siemens Departure:
| | -------------------

| | During
August 2006 the full-time employment of Michael Siemens (Siemens) with the
Company ended. Siemens who resigned as a director and president in June 2006 will
continue to provide defined consulting services to the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---



# 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, ten additional customers including the Greater Cleveland Regional Transit Agency
ordered units. During the six months ended June 30, 2006, four customers collectively
accounted for approximately 85% of our revenues for the period. We currently have
approximately a $636,000 backlog of orders from transit agencies. 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 six months ended June 30, 2006, we were awarded and
had substantially completed 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. Three
additional California based organizations, Capitol Corridor Joint Powers Authority, City
of Elk Grove and City of Vacaville, have ordered ShiftWatch systems 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) are currently up for public comment and will be issued in 2006. We believe that our
ShiftWatch® 3.0 architecture which is in final development, to be implemented in our
TVS 3.0 product, is able to meet or exceed the high resolution digital video
specifications soon to be finalized for law enforcement by the IACP. We believe that we
may have more attractive alternatives for this technology at possibly lower development
costs for quicker alternative product introductions than our permanently installed law
enforcement products. Our primary efforts in this area have been focused on designing an
in-car digital video law enforcement product that would provide 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. We have anticipated that our product, if released,
would lead the industry in interoperable capabilities, while providing the highest
allowable video resolution that will comply with or exceed anticipated industry minimum
specifications. At present we are evaluating the estimated elapsed time and costs to bring
this law enforcement product to market versus other options where we could be in a
position to create products and generate revenues more rapidly. As discussed in Note 7 to
the accompanying financial statements, during August 2006, Michael Siemens left the
Company and therefore his positions on the IACP panels and executive committees are vacant and we are addressing those
vacancies. We expect to continue with our on-going commitment to the participation on the
panels and Executive Committees of the International Association of Chiefs of Police. We
are currently evaluating marketing and distribution options and alternatives to cost
effectively address this market.

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 $8,280,000 million in gross proceeds for us. Under
provisions contained in their terms, approximately $3,510,000 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.

During July 2006, the Company entered
into a non-binding letter of intent to acquire privately held Westminster, Colorado based
Vizer Group, Inc. (Vizer) and Avurt International, Inc. (Avurt)
The acquisition of the commonly controlled companies, calls for a purchase price, payable
in the Companys common stock for the combined companies totaling $3 million plus a
contingent $2 million dollar earn-out based upon achieving specified future minimum
revenue and operating thresholds. The Company will also enter employment contracts with
the key Vizer and Avurt management personnel. Closing of the acquisition is subject to,
among other items, finalization and execution of a definitive purchase agreement,
completion of due diligence and approval by the Companys shareholders. The Company
has agreed to advance funds under a secured note to Vizer and Avurt to fund completion of
the Avurt launcher and expand marketing efforts. To date $250,000 has been advanced under
the arrangement.

12

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Vizer specializes in web-based access
control, video surveillance and intrusion detection, conveniently accessible through the
use of multiple network based devices, including computers, cell phones and PDAs.
With access and monitoring devices connected through the network, installation and
re-location costs are significantly less than traditional hard wired systems. Vizers
unique proprietary e-Link product is built around a web hosted security
services model that provides a business complete control over access, alarms, key cards,
and video surveillance, all remotely. Vizers customers include Remington Arms,
Johnson & Wales University, ConAgra Foods and Ameriquest Mortgage.

Avurt distributes and produces
non-lethal personal protection devices and compliance products currently in use by federal
and state agencies. The devices fire a projectile that breaks on impact dispersing a cloud
of potent pepper spray based powder causing a severe debilitating reaction in the target
area, effective on both humans and animals. Avurt currently sells the
PepperBall® brand projectiles and launchers. The use of PepperBall®
products is preferred by many law enforcement agencies due to its non-lethal impact as
compared to other stun products in use by law enforcement agencies to control
suspects. PepperBall® is a registered trademark of PepperBall Technologies, Inc. A new
proprietary (patent pending) handheld launcher is scheduled to be released by Avurt late
in 2006. In addition to the current customer base, the new launcher is anticipated to be
marketed to: security guards, postal carriers, animal control officers, animal owners,
campers, hikers, bikers, aid workers, military police and consumers that desire additional
personal protection.

# 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s ability to continue as a going concern. The
Companys interim financial statements for the six months ended June 30, 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 $2,601,000
and $2,626,000, respectively, for the six months ended June 30, 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. Through 2006, the Company expects to continue to incur cash losses from
operations, until additional sales can be generated. While increases in revenues combined with improved margins on installations are
anticipated to 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 and cash requirements
to support the Vizer and Avurt pending acquisitions sales and marketing activities, will
also continue to increase. The Companys plans to bridge such cash shortfalls in 2006
include the following:

|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 and generate additional margins from such
sales;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Attempt
to complete the recently announced acquisitions of Vizer Group, Inc. and
                    Avurt International, Inc., and integrate their business operations
and                     opportunities into the Companys to expand revenue and
market base;
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Depending
upon the level of increasing sales, explore revenue opportunities from
                    licensing or partnering opportunities on certain of the Companys
                    technologies; and
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Continue
to monitor and implement cost control initiatives to conserve the June
                    30, 2006, approximate $1.9 million cash balance through the remainder
of 2006.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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# Comparison of the
six-month periods ended June 30, 2006 to 2005

Net sales for the six months ended June
30, 2006 totaled $514,800, a $394,200 or 327% 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 six months ended June 30, 2006, four
customers represented approximately 85% 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 six months
ended June 30, 2006 totaled $681,100, a $593,800 or 680% 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 six months ended June 30, 2006 totaled $2,019,500, which is a $1,049,000
or 108% increase as compared to the 2005 period. The increase is primarily attributable to
an increase of approximately $518,400 in payroll and contract labor 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 $293,800 for the six months ended June 30, 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 six months ended June 30, 2006 totaled $478,600, which is a $340,800 or 247% 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 six months
ended June 30, 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 six months ended June 30, 2005 totaled $339,700 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 six months ended June
30, 2006, interest income of approximately $64,400 was recognized from earnings of excess
cash in short term investments.

No income tax benefit was recorded on
the loss for the six months ended June 30, 2006, as our management was unable to determine
that it was more likely than not that such benefit would be realized.

# Comparison of the
three-month periods ended June 30, 2006 to 2005

Net sales for the three months ended
June 30, 2006 totaled $301,900, a $255,100 or 544% 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 June 30, 2006, two
customers represented approximately 88% 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 June 30, 2006 totaled $474,100, a $439,600 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. Cost of sales for the
three months ended June 30, 2006 exceeded net sales primarily due to 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. Additionally, first time learning installation costs
especially on retro-fitting of trains, light-rail vehicles and certain bus models was a
significant cost factor in the three month period. Extra time and resources was also
devoted to ensure customer satisfaction was high especially for the new customer
installation relationships.

Selling, general and administrative
expenses in the three months ended June 30, 2006 totaled $1,082,100, which is a $496,000
or 85% increase as compared to the 2005 period. The increase is primarily attributable to
an increase of approximately $265,600 in payroll and contract labor 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 $194,100 for the three months ended June 30, 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 June 30, 2006 totaled $250,200, which is an $184,500 or 281%
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 June 30, 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 June 30, 2005 totaled $217,200 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
June 30, 2006, interest income of approximately $26,200 was recognized from earnings of
excess cash in short term investments.

14

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# Liquidity and Capital
Resources

We had a net loss of $2,601,400,
including $336,000 in non cash expenses relating to depreciation and amortization and stock based compensation,
 for the six months ended June 30, 2006. We expect
our expenses in the upcoming months, prior to any costs associated with the pending
acquisitions, to be at or somewhat below the level incurred for the three months ended
June 30, 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 remainder of 2006, depending upon possible additional revenues to be achieved.
During the six months ended June 30, 2006, we were awarded and substantially completed 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 June 30, 2006, we had working
capital of $2,434,500, of which $1,932,500 was cash and cash equivalents.

Capital expenditures, primarily for
development, testing and office equipment for the balance of the calendar year ending
December 31, 2006 are anticipated to total approximately $30,000 to $60,000.

We anticipate that spending for
research and development, prior to any costs associated with the pending acquisitions, for
the balance of the calendar year ending December 31, 2006 will continue at approximately the
same level as those incurred for the three months ended June 30, 2006. The primary
expenditures will be focused on product refinement and enhancements to respond to customer
requests. Additional development costs may also be incurred for the law enforcement
product configuration. Additionally, new applications will also require additional
development expenses.

During July 2006, the Company entered
into a non-binding letter of intent to acquire privately held Westminster, Colorado based
Vizer Group, Inc. (Vizer) and Avurt International, Inc. (Avurt)
The acquisition of the commonly controlled companies, calls for a purchase price, payable
in the Companys common stock for the combined companies totaling $3 million plus a
contingent $2 million dollar earn-out based upon achieving specified future minimum
revenue and operating thresholds. The Company will also enter employment contracts with
the key Vizer and Avurt management personnel. Closing of the acquisition is subject to,
among other items, finalization and execution of a definitive purchase agreement,
completion of due diligence and approval by the Companys shareholders. The Company
has agreed to advance funds under a secured note to Vizer and Avurt to fund completion of
the Avurt launcher and expand marketing efforts. To date $250,000 has been advanced under
the arrangement and additional funds have been agreed to be advanced totaling an
additional $750,000 and additional amounts possible, pending possible certain events by the
company.

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 six months ended June 30, 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 $2,626,00 during the six months ended June 30, 2006. Cash was consumed by
the loss of $2,601,400, less non-cash expenses of $336,000 for depreciation, amortization
and non-cash equity compensation. Increases in accounts receivable and inventories totaled
$417,000 during the period as a result of increases and anticipated increases in sales
levels. Accounts payable and accrued expenses increased by $62,600 during the period
providing cash.

Net cash consumed by operating
activities was $1,078,500 during the six months ended June 30, 2005. Cash was consumed by
the loss of $1,408,100, less non-cash expenses of $232,900 for depreciation, amortization
and interest. Increases in inventories and prepaid expenses totaled $91,200 during the
period following the increased level of funding with the 2005 fund raising activities.

A net increase of $185,000 in
accounts payable and accruals during the period provided cash.

15

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# Investing Activities

Net cash outflows from investing
activities consumed $104,200 during the six months ended June 30, 2006. The outflow was
primarily attributable to purchases of equipment totaling $50,800 and additions to patents
and deposits totaling $53,500.

Net cash outflows from investing
activities consumed $51,900 during the six months ended June 30, 2005. The outflow was
primarily attributable to purchases of equipment.

# Financing Activities

Net cash outflows from financing
activities consumed $2,900 during the six months ended June 30, 2006 from repayments on
installment obligations.

Net cash inflows from financing
activities generated $1,212,000 during the six months ended June 30, 2005. Notes payable
were increased by $1,585,900 and we paid costs associated with debt issuances of $206,000
during the 2005 period. During this period $105,000 in bridge loans were repaid and we
incurred $237,100 in deferred offering costs associated with our initial public offering
that was completed in July 2005. We also received net proceeds from the sale of common
stock purchase warrants totaling $178,100 during the 2005 period.

# Recently issued
accounting pronouncements:

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.

16

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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.

17

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# PART II  
OTHER INFORMATION

# Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds

During the six months ended June 30, 2006,
we issued 305 common shares to a former employee as part of a severance agreement. No
proceeds were received upon this issuance and no fees were paid.

# 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.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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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: August 14, 2006 | A4S Security, Inc.
(Registrant)
By: /s/ Jeffrey G. McGonegal
Jeffrey G. McGonegal,
Chief Financial Officer | 

19

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