# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
                                                        Washington, D.C. 20549

# FORM 10-Q

(Mark One)

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

For the quarterly
period ended June 30, 2008

OR

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

For the transition
period from _____________ to ________________.

Commission file number:
001-32566

|SECURITY WITH ADVANCED TECHNOLOGY, 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.)

|1722 Boxelder Street, Suite 101, Louisville, Colorado 80027
|-----------------------------------------------------------
|(Address of principal executive offices) (Zip Code)        

|(303) 439-0372                                      
|----------------------------------------------------
|(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 [_]  
No [X]

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company.  See definitions of large accelerated
filer, accelerated filer and smaller reporting company in
Rule 126-2 of the Exchange Act.  (Check one):

Large accelerated filer
|_|   Accelerated filer |_|   Non-accelerated filer |_|   Smaller
Reporting Company |X|

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 the
registrants no par value common stock outstanding as of August 11, 2008, was
7,213,403.

---



# SECURITY WITH ADVANCED
TECHNOLOGY, INC.

|                                                                                                | Page
|----------------------------------------------------------------------------------------------- | ----
|PART 1 Financial Information                                                                   |     
|                                                                                                |     
|Item 1.   Condensed  Consolidated Financial Statements                                          |     
|                                                                                                |     
|Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007               |     
|                                                                                                |     
|Consolidated Statements of Operations For the Three and Six                                     |     
|Months Periods Ended June 30, 2008 and 2007 (unaudited)                                         |     
|                                                                                                |     
|Consolidated Statements of Cash Flows For the Six                                               |     
|Months Ended June 30, 2008 and 2007 (unaudited)                                                 |     
|                                                                                                |     
|Notes to  Condensed Consolidated Unaudited  Financial Statements (unaudited)                    |     
|                                                                                                |     
|Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations |     
|                                                                                                |     
|Item 3.    Quantitative and Qualitative Disclosures About Market Risk                           |     
|                                                                                                |     
|Item 4T.    Controls and Procedures                                                             |     
|                                                                                                |     
|PART II - Other Information                                                                     |     
|                                                                                                |     
|Item 1.    Legal Proceedings                                                                    |     
|                                                                                                |     
|Item 1A.    Risk Factors                                                                        |     
|                                                                                                |     
|Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds                          |     
|                                                                                                |     
|Item 3.    Defaults Upon Senior Securities                                                      |     
|                                                                                                |     
|Item 4.    Submission of Matter to a Vote of Security Holders                                   |     
|                                                                                                |     
|Item 5.    Other Information                                                                    |     
|                                                                                                |     
|Item 6.    Exhibits                                                                             |     
|                                                                                                |     
|Signatures                                                                                      |     

2

---



PART I  FINANCIAL
INFORMATION

# Security With Advanced
Technology, Inc.                                        Consolidated Balance Sheets

|                                                                          | June 30, 2008
(Unaudited) |  | December 31, 2007 |            
|------------------------------------------------------------------------- | ------------------------- |  | ----------------- | -----------
|ASSETS                                                                    |                           |  |                   |            
|Current assets:                                                           |                           | 
|Cash                                                                      |                           |  | $                 | 1,740,986  
|                                                                          |                          
|Trade accounts receivable, net of allowance for doubtful accounts         |                           | 
|($22,000 in 2008 and $72,000 in 2007) (Note 7)                            |                           |  |                   | 242,648    
|Inventories (Note 3)                                                      |                           |  |                   | 799,132    
|Prepaid inventory deposits (Note 3)                                       |                           |  |                   | 1,021,892  
|Prepaid expenses and other current assets                                 |                           |  |                   | 31,156     
|                                                                          |                           |  |                   |            
|Total current assets                                                      |                           |  |                   | 3,835,814  
|                                                                          |                           | 
|Property and equipment, net (Note 4)                                      |                           |  |                   | 358,805    
|                                                                          |                           | 
|Intangible and other assets, net (Note 5)                                 |                           |  |                   | 3,873,519  
|                                                                          |                           |  |                   |            
|Total assets                                                              |                           |  | $                 | 8,068,138  
|                                                                          |                           |  |                   |            
|LIABILITIES AND STOCKHOLDERS' EQUITY                                      |                           | 
|                                                                          |                           | 
|Current liabilities:                                                      |                           | 
|Accounts payable                                                          |                           |  | $                 | 172,546    
|Accrued expenses                                                          |                           |  |                   | 412,014    
|Deferred revenues                                                         |                           |  |                   | 296,583    
|Current portion of capital lease obligation                               |                           |  |                   | 1,850      
|Current portion of minimum royalty obligation                             |                           |  |                   | 157,000    
|                                                                          |                           |  |                   |            
|Total current liabilities                                                 |                           |  |                   | 1,039,993  
|                                                                          |                           | 
|Long-term capital lease obligation, net of current portion                |                           |  |                   | 7,784      
|Minimum royalty obligation, net of current portion                        |                           |  |                   | 584,362    
|                                                                          |                           |  |                   |            
|Total liabilities                                                         |                           |  |                   | 1,632,139  
|                                                                          |                           |  |                   |            
|Commitments and contingencies (Note 8)                                    |                           | 
|                                                                          |                           | 
|Stockholders' equity (Note 6):                                            |                           | 
|Preferred stock, no par value, 5,000,000 shares authorized:               |                           | 
|Series A, 2,528,266 (2008) and 2,629,654 (2007)                           |                           | 
|shares issued and outstanding                                             |                           |  |                   | 7,567,602  
|Series B, 747,813 (2008) and 612,788 (2007) shares issued and outstanding |                           |  |                   | 3,614,499  
|Common stock, no par value, 30,000,000 shares authorized;                 |                           | 
|7,213,403 (2008) and 7,112,015 (2007) shares issued and outstanding       |                           |  |                   | 37,125,461 
|Accumulated deficit                                                       |                           |  |                   | (41,871,563
|                                                                          |                           |  |                   |            
|Total stockholders' equity                                                |                           |  |                   | 6,435,999  
|                                                                          |                           |  |                   |            
|Total liabilities and stockholders' equity                                |                           |  | $                 | 8,068,138  
|                                                                          |                           |  |                   |            

See Accompanying Notes
to Unaudited Condensed Consolidated Financial Statements.

3

---



# Security With Advanced
Technology, Inc.                                   Consolidated Statements of Operations
                                          Periods ended June 30,
                                               (Unaudited)

|                                                 | Three Months Ended |  | Six Months Ended |           
|------------------------------------------------ | ------------------ |  | ---------------- | ----------
|
|Net sales (Note 8)                               |                    |  | $                | 247,043   
|Cost of sales                                    |                    |  |                  | 150,874   
|                                                 |                    |  |                  |           
|Gross profit (loss)                              |                    |  |                  | 96,169    
|                                                 |                    |  |                  |           
|Operating expenses:                              |                    | 
|Selling, general and administrative (includes    |                    | 
|non-cash compensation of $258,301, $360,792,     |                    | 
|$552,571 and $1,464,607)                         |                    |  |                  | 1,093,847 
|Research and development                         |                    |  |                  | 51,342    
|                                                 |                    |  |                  |           
|Total operating expenses                         |                    |  |                  | 1,145,189 
|                                                 |                    |  |                  |           
|Operating loss                                   |                    |  |                  | (1,049,020
|                                                 |                    |  |                  |           
|Other income (expense):                          |                    | 
|Interest expense                                 |                    |  |                  | (21,820   
|Interest expense, non-cash contingent beneficial |                    | 
|conversion feature (Note 6)                      |                    |  |                  |          
|Interest income                                  |                    |  |                  | 14,857    
|Other income (expense), net                      |                    |  |                  | 4,140     
|                                                 |                    |  |                  |           
|Total other income (expense)                     |                    |  |                  | (2,823    
|                                                 |                    |  |                  |           
|Net loss                                         |                    |  | $                | (1,051,843
|                                                 |                    |  |                  |           
|Basic and diluted net loss per share             |                    |  | $                | (0.15     
|                                                 |                    |  |                  |           
|Basic and diluted weighted                       |                    | 
|average number of common shares                  |                    | 
|outstanding                                      |                    |  |                  | 7,213,403 
|                                                 |                    |  |                  |           
|                                                 |                    |  |                  |           

See Accompanying Notes
to Unaudited Condensed Consolidated Financial Statements.

4

---



# Security With Advanced
Technology, Inc.                                   Consolidated Statements of Cash Flows
                               Six Month Periods Ended June 30, (Unaudited)

|                                                                 | 2008 |  | 2007 |           
|---------------------------------------------------------------- | ---- |  | ---- | ----------
|Cash flows from operating activities:                            |      |  |      |           
|Net loss                                                         |      |  | $    | (2,431,615
|Adjustments to reconcile net loss to                             |      | 
|net cash used by operating activities:                           |      | 
|Non-cash stock based compensation                                |      |  |      | 552,571   
|Depreciation and amortization                                    |      |  |      | 353,814   
|Interest accretion on royalty obligation                         |      |  |      | 45,288    
|Amortization of discount on debt to interest expense             |      |  |      |          
|Loss on disposal of equipment                                    |      |  |      | 17,943    
|(Increase) decrease in:                                          |      | 
|Accounts receivable                                              |      |  |      | 89,964    
|Inventories                                                      |      |  |      | (117,039  
|Prepaid expenses and other assets                                |      |  |      | (466,982  
|Increase (decrease) in:                                          |      | 
|Accounts payable                                                 |      |  |      | (412,582  
|Accrued expenses and deferred revenue                            |      |  |      | (10,569   
|                                                                 |      |  |      |           
|Net cash used by operating activities                            |      |  |      | (2,379,207
|                                                                 |      |  |      |           
|Cash flows from investing activities:                            |      | 
|Sale of short term investments                                   |      |  |      |          
|Investment in restricted escrow cash                             |      |  |      |          
|Investment in advance note                                       |      |  |      | (495,000  
|Purchases of property and equipment                              |      |  |      | (9,628    
|Purchases of intangible and other assets                         |      |  |      | (407      
|                                                                 |      |  |      |           
|Net cash used by investing activities                            |      |  |      | (505,035  
|                                                                 |      |  |      |           
|Cash flows from financing activities:                            |      | 
|Proceeds from issuance of convertible notes payable and warrants |      |  |      |          
|Payment of deferred financing costs                              |      |  |      |          
|Repayment of line of credit and installment obligations          |      |  |      | (48,614   
|Proceeds from issuance of common stock                           |      |  |      | 675,125   
|                                                                 |      |  |      |           
|Net cash provided by financing activities                        |      |  |      | 626,511   
|                                                                 |      |  |      |           
|Net decrease in cash and cash equivalents                        |      |  |      | (2,257,731
|                                                                 |      | 
|Cash and cash equivalents at beginning of period                 |      |  |      | 3,998,717 
|                                                                 |      |  |      |           
|Cash and cash equivalents at end of period                       |      |  | $    | 1,740,986 
|                                                                 |      |  |      |           
|Supplemental disclosure of cash flow information                 |      | 
|Cash paid during the period for interest                         |      |  | $    | 1,400     
|                                                                 |      |  |      |           
|Schedule of non-cash investing and financing transactions        |      | 
|Conversion of preferred shares into common shares                |      |  | $    | 304,164   
|                                                                 |      |  |      |           

See Accompanying Notes
to Unaudited Condensed Consolidated Financial Statements.

5

---



# Security With Advanced
Technology, Inc.                                      Notes to Condensed Consolidated
                                           Financial Statements
                                               (Unaudited)

| | INTERIM
FINANCIAL STATEMENTS
| | ----------------------------

The accompanying financial statements
of Security With Advanced Technology, Inc. (the Company, SWAT,
we or us) have been prepared in accordance with the instructions
to quarterly reports on Form 10-Q. 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, 2008, 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 United States
Securities and Exchange Commission (the SEC) for the year ended December 31,
2007, as amended. The results of operations for the period ended June 30, 2008 are not
necessarily an indication of operating results for the full year.

1.    Going concern, management's
plans, recent accounting pronouncements and loss per share:

In the Companys Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2007, as amended, 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 consolidated financial statements for the six months
ended June 30, 2008 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 approximately $2,432,000 and $2,379,000, respectively, for the six months
ended June 30, 2008.

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 in Item 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations. The accompanying
consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty. We expect to continue to incur losses from operations in
2008. While we expect the recent Veritas segments product introductions will help
increase revenues, such increases for the near term may only provide limited additional
cash flow from such sales. The Companys ability to continue as a going concern
depends on the success of managements plans to bridge such cash shortfalls in 2008
including the following:

| | 1. | Aggressively
pursuing additional fund raising activities in 2008;
| | -- | -----------------------------------------------------------------

| | 2. | Continuing
to work to complete the closing of the previously announced merger                with
PepperBall Technologies to gain access to additional products and revenues
               (Note 2);
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Continuing
to advance development of the Companys products, particularly the Veritas
non-lethal launchers, to begin achieving additional sales of such products in 2008,
thereby generating cash flow from such sales;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Attempting
to sub-lease portions of the Company's facilities that are currently not fully utilized
to reduce               operating expenses;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Contingent
upon the Company's ability to locate perspective buyers or partners, attempt to explore
alternative               revenue sources from licensing or partnering opportunities for
the ShiftWatch TVS; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Continuing
to monitor and implement cost control initiatives to conserve cash.
| | -- | ------------------------------------------------------------------------------

6

---



# Recently issued
accounting pronouncements:

In February 2007, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 allows entities to
voluntarily choose to measure certain financial assets and liabilities at fair value
(fair value option). The fair value option may be elected on an
instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If
the fair value option is elected for an instrument, SFAS 159 specifies that unrealized
gains and losses for that instrument be reported in earnings at each subsequent reporting
date. SFAS 159 was effective for us on January 1, 2008. We did not apply the fair
value option to any of our outstanding instruments and, therefore, SFAS 159 did not have
an impact on our consolidated financial statements.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements (SFAS 157), which defines
fair value, establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value measurements.
SFAS 157 was effective for us on January 1, 2008 for all financial assets and
liabilities. For all nonfinancial assets and liabilities, SFAS 157 is effective for us on
January 1, 2009. As it relates to our financial assets and liabilities, the adoption
of SFAS 157 did not have a material impact on our consolidated financial statements. We
are still in the process of evaluating the impact that SFAS 157 will have on our
non-financial assets and liabilities.

# Loss per share:

SFAS No. 128, Earnings Per
Share, requires dual presentation of basic and diluted earnings per share (EPS) with a
reconciliation of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution.
Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the entity.

Loss per share of common stock is computed based on the weighted average number of common shares
outstanding during the period. Common shares subject to issuance in the conversion of convertible notes
(2007), preferred shares into common shares, and the exercise of stock options and warrants are not
considered in the calculation, as the impact of the potential common shares (totaling approximately
15,586,000 shares at June 30, 2008 and approximately 12,967,000 shares at June 30, 2007) would be to
decrease loss per share. Therefore, diluted loss per share is equivalent to basic loss per share.

# 2.
    PepperBall Merger Agreement:

On May 27, 2008, SWAT entered into
an Agreement and Plan of Merger and Reorganization with PepperBall Technologies, Inc., a
Delaware corporation, and PTI Acquisition Corp., a newly formed Delaware corporation and
wholly-owned subsidiary of SWAT (the Merger Sub).

Subject to the terms and conditions
of the merger agreement, upon the filing of a certificate of merger with the Delaware
Secretary of State (the Effective Time), the Merger Sub will be merged with
and into PepperBall, with PepperBall surviving the merger as a wholly-owned subsidiary of
SWAT. The merger is intended to qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended.

As consideration for the merger, the
stockholders of PepperBall immediately prior to the Effective Time of the merger will be
issued shares of SWATs common stock comprising an aggregate of 50% of the
outstanding capital stock of SWAT at the Effective Time of the merger (assuming the
conversion of all of SWATs and PepperBalls outstanding shares of preferred
stock and subject to the payment of any of PepperBalls dissenting stockholders).
Accordingly, SWATs shareholders immediately prior to the Effective Time of the
merger will own the remaining 50% of the outstanding capital stock of SWAT at the
Effective Time of the merger (assuming the conversion of all of SWATs and
PepperBalls outstanding shares of preferred stock and subject to the payment of any
of PepperBalls dissenting stockholders). PepperBalls stockholders are entitled
to dissent from the merger and obtain an appraisal of the fair value of their PepperBall
shares in accordance with their appraisal rights under Delaware law, in which case
properly dissenting stockholders of PepperBall may not be permitted to participate in the
merger. In addition, if within nine months following the closing of the merger, the
combined company raises additional financing through the sale of equity securities,
PepperBalls former stockholders will be entitled to receive additional shares of the
combined companys common stock as anti-dilution protection upon the closing of such
subsequent equity financing based upon a formula set forth in the merger agreement.

Pursuant to the merger agreement,
following the closing of the merger, SWAT will change its name to PepperBall
Technologies, Inc.
Based upon factors demonstrating that PepperBall represents the accounting acquiror, upon closing the
acquisition is to be accounted for as a reverse acquisition.

7

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SWAT will assume all of
PepperBalls outstanding stock options and warrants, whether vested or unvested, and
the assumed options and warrants shall continue to have and be subject to the same terms
and conditions governing such options or warrants, except that such options or warrants
will be exercisable for shares of SWATs common stock on the same basis established
for the exchange of PepperBalls outstanding common stock for shares of SWATs
common stock as described above. SWAT will include the shares of its common stock issuable
upon exercise of the assumed PepperBall options in its previously filed registration
statement on Form S-8 or, if unable to include the shares in the previously filed
registration statement, SWAT will prepare and file with the SEC another registration
statement on Form S-8 to register such shares.

The merger agreement further provides
that holders of certain outstanding promissory notes issued by PepperBall (totaling
$2,028,000 as of March 31, 2008) shall be exchanged for new promissory notes issued by
SWAT at the Effective Time of the merger in the same principal amount plus accrued
interest thereon. The new promissory notes shall be unsecured, bear interest (accruing to
maturity) at the rate of 10% per annum and mature 15 months from the closing date of the
merger. At the note holders option (and subject to certain limitations), the
principal amount and all accrued interest under the promissory notes may be converted at
any time into shares of SWATs common stock at a rate based upon the average closing
price of SWATs common stock for the six-month period ended on the trading day
immediately prior to the date the holder of the promissory note requests conversion.

Pursuant to the terms of the merger
agreement, following the execution of the merger agreement, SWAT and PepperBall will enter
into a mutual full settlement (with prejudice) agreement relating to the current
litigation pending in the United States District Court, Southern District of California
between SWAT and PepperBall (the Litigation), which settlement agreement shall
become effective, if at all, upon the consummation of the merger and shall be filed no
later than 10 days after the closing of the merger.

The merger agreement provides for
certain other provisions and conditions which are customary for agreements of this nature,
such as representations, warranties, covenants, confidentiality agreements, indemnities,
consent requirements and exchange procedures.

The closing of the merger will be on
a date specified by the parties to the merger agreement but no later than the third
business day after satisfaction or waiver of certain conditions set forth in the merger
agreement, including, but not limited to: (i) approval of the merger by the shareholders
of each of SWAT and PepperBall; (ii) approval by SWATs shareholders of (a) the
proposal to change SWATs name to PepperBall Technologies, Inc., (b) the
conversion of SWATs Series B Convertible Preferred Stock into shares of SWATs
common stock and (c) such other proposals as SWAT and PepperBall shall mutually agree to
include in a joint proxy statement; (iii) the effectiveness of a registration statement on
Form S-4 (which shall include a joint proxy statement and prospectus regarding the merger
agreement and the merger) pursuant to which the shares of SWATs common stock to be
issued as consideration for the merger and any shares issuable pursuant to the
anti-dilution provisions of the merger agreement discussed above shall be registered with
the SEC and no stop order suspending the effectiveness of the registration statement shall
have been issued and no action, suit, proceeding or investigation by the SEC to suspend
the effectiveness of the registration statement shall have been initiated and be
continuing; (iv) approval of the listing on the Nasdaq Capital Market of SWATs
common stock issuable under the merger agreement; (v) obtaining necessary governmental and
third party approvals, waivers and consents required for the consummation of the merger;
(vi) the conversion of all of PepperBalls outstanding preferred stock into common
stock; (vii) SWATs possession of minimum unrestricted cash on hand of $1,000,000,
 exclusive of the $495,000 Advance Note;
and (viii) entry into a mutually acceptable employment agreement between SWAT and Eric
Wenaas.

The merger agreement may be
terminated at any time prior to the Effective Time of the merger by: (i) mutual written
consent of the board of directors of SWAT and PepperBall; (ii) the board of directors of
either PepperBall or SWAT, if (a) the merger shall not have been consummated by February
27, 2009, (b) PepperBalls stockholders do not approve the merger, (c) SWATs
shareholders do not approve the merger, or (d) any law permanently restraining, enjoining
or otherwise prohibiting the consummation of the merger shall become final and
non-appealable and the terminating party shall not have breached in any material respect
its obligations under the merger agreement, which breach causes the failure of the merger
to be consummated; (iii) PepperBalls board of directors (a) if SWATs board of
directors has withdrawn its recommendation of the merger or modified its recommendation in
a manner adverse to PepperBall or (b) upon the occurrence of certain other events
customary to agreements of this nature; and (iv) SWATs board of directors (a) if
PepperBalls board of directors has withdrawn its recommendation of the merger, or
modified its recommendation in a manner adverse to SWAT or (b) upon the occurrence of
certain other events customary to agreements of this nature.

Concurrently with the execution of
the merger agreement, SWAT delivered $495,000 to PepperBall in exchange for a promissory
note from PepperBall (the Advance Note) as further discussed in Note 5.

8

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# 3.
    Inventories:

Inventories consisted of the
following:

|                                  | June 30, 2008(Unaudited) |  | December 31, 2007 |        
|--------------------------------- | ------------------------ |  | ----------------- | -------
|Finished products  and components |                          |  | $                 | 561,520
|Work in process                   |                          |  |                   | 179,444
|Raw materials                     |                          |  |                   | 58,168 
|                                  |                          |  |                   |        
|                                  |                          |  | $                 | 799,132
|                                  |                          |  |                   |        

Prepaid inventory deposits consist
primarily of cash advances made to the supplier of the Veritas launcher products.  Such
amounts represent approximately 80% of the product's cost that will be credited as
batches of launchers are completed and shipped to the Company.

# 4.
    Property and Equipment:

Property and equipment consisted of
the following:

|                                   | June 30, 2008(Unaudited) |  | December 31, 2007 |         
|---------------------------------- | ------------------------ |  | ----------------- | --------
|Computer equipment and software    |                          |  | $                 | 243,739 
|Production and warehouse equipment |                          |  |                   | 259,655 
|Office equipment and improvements  |                          |  |                   | 97,445  
|Vehicles                           |                          |  |                   |        
|                                   |                          |  |                   |         
|                                   |                          |  |                   | 600,839 
|Less accumulated depreciation      |                          |  |                   | (242,034
|                                   |                          |  |                   |         
|                                   |                          |  | $                 | 358,805 
|                                   |                          |  |                   |         

# 5.    
Intangible and other assets:

Intangible and other assets consisted
of the following:

|                                    | June 30, 2008(Unaudited) |  | December 31, 2007 |          
|----------------------------------- | ------------------------ |  | ----------------- | ---------
|Vizer e-Link technology             |                          |  | $                 | 1,167,372
|Product rights / reseller agreement |                          |  |                   | 2,423,282
|Patents and trademarks              |                          |  |                   | 207,459  
|Non-compete (PCP)                   |                          |  |                   | 50,000   
|Deposits and other                  |                          |  |                   | 12,213   
|Goodwill                            |                          |  |                   | 280,000  
|Advance Note                        |                          |  |                   | 495,000  
|                                    |                          |  |                   |          
|                                    |                          |  |                   | 4,635,326
|Less accumulated amortization       |                          |  |                   | (761,807 
|                                    |                          |  |                   |          
|                                    |                          |  | $                 | 3,873,519
|                                    |                          |  |                   |          

Concurrently with the execution of
the merger agreement with PepperBall as discussed in Note 2, SWAT delivered $495,000 to
PepperBall in exchange for the Advance Note from PepperBall. PepperBall is not obligated
to repay the Advance Note unless the merger is not consummated due to the failure of
PepperBalls stockholders to approve the merger or if the board of directors of
PepperBall withdraws its recommendation of the merger. The Advance Note is
  non-interest bearing and payable within
90 days of either event.

9

---



If PepperBall must repay the Advance
Note, SWAT, at its option, may waive the repayment of $250,000 of the Advance Note in
exchange for: (i) a mutual settlement of all claims and matters relating to the
intellectual property litigation between SWAT and PepperBall; and (ii) a non-exclusive
worldwide license to use PepperBalls intellectual property rights for projectiles
and any technology contained in the launchers or subsequent version of such launchers that
SWAT is having produced by Tiberius Arms. Such license shall (a) have a five year initial
term and SWAT shall have the right to renew the license for additional five year terms
unless SWAT is in default under the license, (b) carry a royalty equal to 3% of
SWATs net sales of non-lethal projectiles and launchers (subject to a $100,000 per
year maximum) and (c) provide for payment by SWAT to PepperBall of $250,000 upon the
execution of the license (which shall be satisfied by SWATs waiver of the repayment
of $250,000 of the Advance Note as described above), with 50% of such payment to be
treated as a royalty prepayment. The Advance Note contains certain other customary
provisions such as default provisions.

# 6.
    Stockholders equity:

# Preferred stock:

In December 2007, holders of a total
of 7,478,133 warrants agreed to exercise their warrants for an aggregate of approximately
747,813 shares of the Companys Series B preferred stock (equivalent to 7,478,133
common share rights) at $5.00 per share each ($0.50 per equivalent common share), with the
Series B preferred stock convertible into ten shares each of common stock. The transaction
generated gross proceeds to the Company of approximately $3,739,066, of which $3,063,942,
representing 612,788 shares of Series B preferred stock, had been received by the Company
in December 2007. The remaining funds totaling $675,125 were received in January 2008. The
Series B preferred stock is non-voting, pays no dividends, contains no liquidation
preference and each share of Series B preferred stock is convertible for no additional
consideration into ten shares of common stock.

During March 2008, a holder of
101,388 shares of Series A preferred stock elected to convert such shares into 101,388
shares of the Companys common stock on a one-for-one basis as provided for under the
terms of the Series A preferred stock. As a result of this conversion, a total of $304,164
was reclassified from preferred stock to common stock in the period.

# Common stock
transactions:

On March 26, 2007, the holders of
warrants to purchase 12,229 shares of the Companys common stock, elected to exercise
the warrants at the exercise price of $1.66 per share. These warrant exercises generated
proceeds to the Company of $20,299.

During the six months ended June 30,
2007, a total of $5,199,900 received in the private placement of unregistered securities
was allocated to the value of the Investor Warrants and the beneficial conversion feature
of the Notes, as part of the March 2007 offering. This amount was recognized as additional
interest expense over the life of the Notes.

# Stock-based compensation:

SWAT currently provides stock-based
compensation to employees and directors, under the Companys 2004 Stock Incentive
Plan (Plan) that has been approved by the Companys shareholders. Stock
options granted under the 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. During the three and six month periods ended June 30, 2008 and 2007, SWAT recorded
share-based compensation expense related to stock options resulting in non-cash expenses
of $258,301, $360,792, $552,571 and $1,464,607, respectively.

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 during the six months
ended June 30, 2008 and 2007:

10

---



|                        | 2008 |  | 2007         | 
|----------------------- | ---- |  | ------------ | 
|Expected term           |      |  | 10 years     | 
|Volatility              |      |  | 93% to 99%   | 
|Risk-free interest rate |      |  | 3.5% to 3.9% | 
|Dividend yield          |      |  | 0%           | 
|Forfeitures             |      |  | 5%           | 

The expected term 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 SWAT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 SWAT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.

A summary of stock option activity of
options to employees and directors for the six months ended June 30, 2008, is presented
below:

|                               | Shares
Under
Option |  | Weighted
Average
Exercise
Price |           | Weighted
Average
Remaining
Contractual
Life (Years) |   | Aggregate
Intrinsic
Value | 
|------------------------------ | ------------------- |  | ------------------------------- | --------- | --------------------------------------------------- | - | ------------------------- | 
|Outstanding at January 1, 2008 |                     |  |                                 | 1,375,172 |                                                     | $ | 4.51                      | 
|Granted                        |                     |  |                                 | 640,000   |                                                     |   | 0.84                      | 
|Exercised                      |                     |  |                                 |          |                                                     |   |                           | 
|Forfeited                      |                     |  |                                 | (436,006  | )                                                   |   | 3.53                      | 
|                               |                     |  |                                 |           |                                                     |   |                           | 
|Outstanding at June 30, 2008   |                     |  |                                 | 1,579,166 |                                                     | $ | 3.19                      | 
|                               |                     |  |                                 |           |                                                     |   |                           | 
|Exercisable at June 30, 2008   |                     |  |                                 | 730,898   |                                                     | $ | 4.56                      | 
|                               |                     |  |                                 |           |                                                     |   |                           | 

Based upon the Companys
experience, approximately 95% of the total stock options or approximately 1,500,000
options are expected to vest in the future, under their terms.

During the six months ended June 30,
2008, options to purchase 640,000 shares of common stock were granted under the Plan to
employees, officers and directors. The options are subject to vesting provisions, are
exercisable at a weighted average of $0.84 per share, and expire generally ten years from
the date of grant. During the six months ended June 30, 2008, options to purchase 436,006
shares of common stock were cancelled due to forfeitures.

The weighted average grant-date fair
value of options granted during the six months ended June 30, 2008 and 2007 was $0.75 and
$3.90  per option, respectively. The total fair value of stock options granted to employees that
vested during the six months ended June 30, 2008 and 2007 was $804,000 and $1,285,000,
respectively. During six months ended June 30, 2008 and 2007, no employee stock options
were exercised.

The aggregate intrinsic value in the
table above represents the total intrinsic value (the difference between our closing stock
price on June 30, 2008 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders, had all option holders been
able to and in fact, had exercised their options on June 30, 2008.

A summary of the status of the
Companys non-vested options to purchase common stock granted to employees, officers
and directors and changes during the period ended June 30, 2008 is presented below.

11

---



|Nonvested Shares             |  | Nonvested
Shares
Under
Option |  | Weighted
Average
Exercise
Price |   | Weighted
Average
Grant Date
Fair Value |     
|---------------------------- |  | ----------------------------- |  | ------------------------------- | - | -------------------------------------- | ----
|Nonvested at January 1, 2008 |  |                               |  | 716,395                         |   | $                                      | 4.47
|Granted                      |  |                               |  | 640,000                         |   |                                        | 0.84
|Vested                       |  |                               |  | (224,569                        | ) |                                        | 4.59
|Forfeited                    |  |                               |  | (283,558                        | ) |                                        | 3.53
|                             |  |                               |  |                                 |   |                                       
|Nonvested at June 30, 2008   |  |                               |  | 848,268                         |   | $                                      | 2.00
|                             |  |                               |  |                                 |   |                                       

As of June 30, 2008, the Company had
approximately $919,000 of unrecognized compensation cost related to stock options that
will be recorded over a weighted average period of approximately 1.3 years.

# Common stock purchase
warrant:

In connection with investor relations
services, during June 2008, the Company issued a warrant to purchase 100,000 shares of
common stock at $0.91 per share exercisable for three years. The value of the warrant was
computed to be $47,066 using the Black-Scholes model, based upon volatility of 105%, risk
free interest rate of 3.16% and a life of three years. The expense was recorded as an
operating expense in the three months ended June 30, 2008.

# 7.
    Industry Segments and Customer Concentration:

# Industry Segments

The Company  operates in business
segments that are divided into three distinct business reporting units. The first business
unit, called Veritas, includes the operations of Veritas Tactical,
which distributes and produces non-lethal personal protection devices and compliance
products and creates innovative training systems and tools to increase the quality of
training worldwide for law enforcement, militaries, both private and government, and
civilians. Veritas also includes the results of the Perfect Circle operations, which were
acquired in July 2007 and in 2007 included the IM-5 launcher division, which was
terminated as of December 31, 2007. The second business unit called the Technology
Division includes the operations of Vizer, which specializes in product design,
system design, engineering, installation, and integration of facility security systems
including access control, video surveillance, intrusion detection, and wireless mesh
network systems. The third business unit operates within the Technology
Division and includes the operations of ShiftWatch which is a product line of mobile
digital video surveillance solutions for public transportation. All of the industry
segments are located at the Companys headquarters in Louisville, Colorado. The
Company determines its segment results consistent with its management reporting and
consolidated accounting policies. Selected financial information from the Companys
business segments is as follows:

|Six months ended
June 30, 2008 |  | Veritas |   | Vizer     |   | ShiftWatch |           | Corporate
Overhead /
Eliminations |   | Totals   |  
|------------------------------ |  | ------- | - | --------- | - | ---------- | --------- | --------------------------------- | - | -------- | -
|Net sales                      |  |         | $ | 301,514   |   | $          | 167,149   |                                   | $ | 4,456    |  
|Gross profit (loss)            |  |         |   | 198,957   |   |            | (94       | )                                 |   | (67,668  | )
|Operating loss                 |  |         |   | (365,891  | ) |            | (410,619  | )                                 |   | (258,963 | )
|Interest expense               |  |         |   | 45,227    |   |            |          |                                   |   |         |  
|Net loss                       |  |         |   | (406,058  | ) |            | (404,073  | )                                 |   | (207,210 | )
|Depreciation and               |  |        
|amortization                   |  |         |   | 232,396   |   |            | 73,074    |                                   |   | 48,344   |  
|Capital expenditures           |  |         |   | 10,620    |   |            | 2,031     |                                   |   |         |  
|Total assets                   |  |         |   | 4,281,168 |   |            | 1,039,616 |                                   |   | 498,164  |  
|Stock based compensation       |  |         |   | 67,533    |   |            | 80,429    |                                   |   | 11,147   |  

12

---



|Six months ended
June 30, 2007 |  | Veritas |   | Vizer      |   | ShiftWatch |          | Corporate
Overhead /
Eliminations |   | Totals     |  
|------------------------------ |  | ------- | - | ---------- | - | ---------- | -------- | --------------------------------- | - | ---------- | -
|Net sales                      |  |         | $ | 14,250     |   | $          | 347,321  |                                   | $ | 205,832    |  
|Gross profit (loss)            |  |         |   | (19,689    | ) |            | 29,734   |                                   |   | (201,180   | )
|Operating loss                 |  |         |   | (1,215,827 | ) |            | (366,733 | )                                 |   | (1,270,776 | )
|Interest expense               |  |         |   | 3,174      |   |            | 5,981    |                                   |   |           |  
|Net loss                       |  |         |   | (1,219,470 | ) |            | (372,714 | )                                 |   | (1,273,162 | )
|Depreciation                   |  |         |   | 869        |   |            | 8,008    |                                   |   | 41,689     |  
|Capital expenditures           |  |         |   | 223,383    |   |            | 58,161   |                                   |   | 47,823     |  
|Stock based compensation       |  |         |   | 321,829    |   |            | 250,163  |                                   |   | 87,670     |  

|Three months ended
June 30, 2008 |  | Veritas |   | Vizer    |   | ShiftWatch |          | Corporate
Overhead /
Eliminations |   | Totals   |  
|-------------------------------- |  | ------- | - | -------- | - | ---------- | -------- | --------------------------------- | - | -------- | -
|Net sales                        |  |         | $ | 169,588  |   | $          | 73,711   |                                   | $ | 3,744    |  
|Gross profit (loss)              |  |         |   | 109,304  |   |            | (4,046   | )                                 |   | (9,089   | )
|Operating loss                   |  |         |   | (101,434 | ) |            | (214,721 | )                                 |   | (167,744 | )
|Interest expense                 |  |         |   | 21,512   |   |            |         |                                   |   |         |  
|Net loss                         |  |         |   | (122,793 | ) |            | (210,613 | )                                 |   | (115,991 | )
|Depreciation                     |  |         |   | 118,214  |   |            | 4,908    |                                   |   | 29,099   |  
|Stock based compensation         |  |         |   | 22,034   |   |            | 36,122   |                                   |   | 5,752    |  

|Three months ended
June 30, 2007 |  | Veritas |   | Vizer    |   | ShiftWatch |          | Corporate
Overhead /
Eliminations |   | Totals   |  
|-------------------------------- |  | ------- | - | -------- | - | ---------- | -------- | --------------------------------- | - | -------- | -
|Net sales                        |  |         | $ | 1,992    |   | $          | 299,317  |                                   | $ | 113,774  |  
|Gross profit (loss)              |  |         |   | (25,018  | ) |            | 53,235   |                                   |   | (110,116 | )
|Operating loss                   |  |         |   | (383,658 | ) |            | (241,636 | )                                 |   | (823,883 | )
|Interest expense                 |  |         |   | 3,174    |   |            | 1,311    |                                   |   | (22      | )
|Net loss                         |  |         |   | (387,251 | ) |            | (245,347 | )                                 |   | (830,219 | )
|Depreciation                     |  |         |   | 869      |   |            | 7,108    |                                   |   | 31,939   |  
|Stock based compensation         |  |         |   | 58,825   |   |            | 44,143   |                                   |   | 17,778   |  

Certain of our contracts require that
the Company provide installation of our products either at the customers location or
in some cases at the original equipment bus manufacturer. In these cases, the revenue
recognition process is not completed until the Company has completed the installation and
the products are working and accepted by the customer and overall revenue recognition
criteria have been satisfied. Products and materials issued in connection with such jobs
in progress are treated as the Companys inventory until such revenue is recognized.
Any billings issued or cash collected under the terms of the contracts in advance of the
revenue being recognized are recorded in the meantime as deferred revenue.

# Customer concentration

As of June 30, 2008, two customers
comprised 50% and 14%, respectively, of the outstanding total accounts receivable balance.
For the six and three month periods ended June 30, 2008, one customer accounted for 35%
and 43%, respectively, of net sales. For the six-month period ended June 30, 2007, two
customers accounted for 35% and 13%, respectively, of net sales and for the three-month
period ended June 30, 2007, two customers accounted for 32% and 14%, respectively, of net
sales. As of December 31, 2007, two customers comprised 51% and 11%, respectively, of the
outstanding total accounts receivable balance.

13

---



# 8.
    Contingencies:

On April 13, 2007, a complaint was
filed in United States District Court, Southern District of California, Case No.
07CV 0672 JAH POR, by Pepperball Technologies, Inc. (PTI) against
Security With Advanced Technology, Inc., Vizer Group, Inc. and Avurt International, Inc.
PTI alleges in the civil action that the prospective manufacture and distribution of our
non-lethal projectile launchers infringed certain of their patents and breached a Reseller
Agreement and Non- Disclosure Agreement between Vizer Group, Inc. and PTI.  PTI is
seeking (a) an unspecified amount of monetary damages for the alleged patent infringement
and breach of contract, (b) an injunction to prohibit further alleged patent infringement
and (c) other relief and costs. We believe that PTIs claims are without merit
and we are vigorously defending this matter, including pursuing counterclaims against PTI.
As discussed in Note 2 to these financial statements, if the PepperBall merger is
completed, the litigation will be settled and dismissed.

On January 26, 2008, the Company and
a director, Gregory Pusey, and an officer, Jeffrey G. McGonegal, were served with a
complaint filed in District Court  Larimer County, Fort Collins, Colorado, by Scott
G. and Sandy Sutton concerning amounts that Mr. and Mrs. Sutton allege are due to them in
connection with the termination of Mr. Suttons employment agreement with the Company
and in connection with the merger agreement effective as of December 31, 2006 between the
Company and Vizer Group, Inc. (Vizer), the Company we acquired from the
shareholders of Vizer, including Mr. and Mrs. Sutton. Specifically, the complaint asserts
that Mr. Sutton is due severance and other amounts under his employment agreement and that
Mr. and Mrs. Sutton are due earn-out consideration and other amounts under the merger
agreement. The complaint also asserts that the Company and the named individual defendants
knew or should have known that certain information, representations and warranties
associated with the Company as part of the merger agreement were inaccurate and untrue at
the time the merger agreement was executed. We believe that the Suttons claims are
without merit and we are vigorously defending this matter, including pursuing
counterclaims against them.

# 9.
    Subsequent Event:

Subsequent to June 30, 2008, the
Company entered into a non-binding letter of intent with an un-related party and expects
to execute a sublease in the near future to sublease the Companys Louisville,
Colorado, facilities. The agreement covers the entire facility and is expected to commence
in August 2008 with a term coinciding with the Companys existing lease. The Company
has agreed to provide five months base rent at no charge and the sub-tenant has the right
to terminate the agreement after three years with a nine month notice and a three month
penalty payment, among other provisions.

14

---



# ITEM 2.

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements in
Managements Discussion and Analysis of Financial Condition and Results of Operations
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, 2007, as amended, and the Companys proxy statement and registration
statement on Form S-4 filed with the SEC on July 30, 2008, as amended 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.

# Overview

Security
With Advanced Technology, Inc. (SWAT, the Company, we
or us) is a provider of high-tech security products and services, which
include non-lethal devices, surveillance and intrusion detection systems and mobile
digital video surveillance solutions.  SWATs products and services are designed
for government agencies, the military and law enforcement, in addition to transportation,
commercial facilities and non-lethal protection. The nature of our business includes sales
and marketing, engineering, customer support, manufacturing, administration and finance.
We maintain our primary facilities and personnel in Louisville, Colorado.

Effective
December 31, 2006, we completed the acquisition of Vizer Group, Inc. (Vizer)
and Vizers wholly-owned subsidiary, Avurt International, Inc. (Avurt).
As consideration, we issued Vizers shareholders 754,380 shares of the Companys
newly-issued, restricted common stock and assumed a note payable of approximately
$114,000. Up to an additional 533,333 shares of our restricted common stock are issuable
subject to the terms of an earn-out provision contingent upon the achievement of specified
future revenue and operating thresholds. Due to our abandonment in late 2007 of the Avurt
launcher business that was acquired from Vizer, we do not expect to ever be able to
achieve the milestones required to issue the Vizer earn-out shares (subject to the outcome
of our litigation with our former President and Chief Executive Officer described in Part
II  Item 1  Legal Proceedings).

On
July 10, 2007, the Companys subsidiary, Avurt International, Inc.
(Avurt), acquired certain assets and rights owned by Perfect Circle
Projectiles, LLC (PCP) for approximately $2.8 million. The assets acquired in
the acquisition consist of PCPs spherical projectile business for tactical and
related uses including PCPs and one of its affiliates domestic and
international patent portfolio, trade secrets, machinery, tooling and associated assets
and rights.

On
May 27, 2008, we entered into an Agreement and Plan of Merger and Reorganization with
PepperBall Technologies, Inc., a Delaware corporation, whereby if the merger is completed,
we will issue shares of SWAT common stock comprising an aggregate of 50% of the
outstanding capital stock of SWAT at the effective time of the merger. The merger
agreement further provides that holders of certain outstanding promissory notes issued by
PepperBall (totaling $2,028,000 as of March 31, 2008) shall be exchanged for new
promissory notes issued by SWAT at the Effective Time of the merger in the same principal
amount plus accrued interest thereon. The new promissory notes shall be unsecured, bear
interest (accruing to maturity) at the rate of 10% per annum and mature 15 months from the
closing date of the merger. At the note holders option (and subject to certain
limitations), the principal amount and all accrued interest under the promissory notes may
be converted at any time into shares of SWATs common stock at a rate based upon the
average closing price of SWATs common stock for the six-month period ended on the
trading day immediately prior to the date the holder of the promissory note requests
conversion. The merger agreement provides for certain other provisions and conditions
which are customary for agreements of this nature, such as representations, warranties,
covenants, confidentiality agreements, indemnities, consent requirements and exchange
procedures. The closing of the merger is subject to a number of conditions, including, but
not limited to: (i) approval of the merger by the shareholders of each of SWAT and
PepperBall; (ii) approval by SWATs shareholders of (a) the proposal to change
SWATs name to PepperBall Technologies, Inc., (b) the approval for the
conversion of SWATs Series B Convertible Preferred Stock into shares of SWATs
common stock and (c) such other proposals as SWAT and PepperBall shall mutually agree to
include in a joint proxy statement; (iii) the effectiveness of a registration statement on
Form S-4; (iv) approval of the listing on the Nasdaq Capital Market of SWATs common
stock issuable under the merger agreement; (v) obtaining necessary governmental and third
party approvals, waivers and consents required for the consummation of the merger; (vi)
the conversion of all of PepperBalls outstanding preferred stock into common stock;
(vii) SWATs possession of minimum unrestricted cash on hand of $1,000,000; and
(viii) entry into a mutually acceptable employment agreement between SWAT and Eric Wenaas.
Concurrently with the execution of the merger agreement, SWAT delivered $495,000 to
PepperBall in exchange for a promissory note from PepperBall (the Advance
Note). The Advance Note contains customary provisions and rights, such as default
provisions. Pursuant to the merger agreement, following the closing of the merger, SWAT
will change its name to PepperBall Technologies, Inc.
 Based upon factors demonstrating that PepperBall represents the accounting acquiror, upon closing the
acquisition is to be accounted for as a reverse acquisition.

15

---



# Results of Operations

In
the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31,
2007, as amended, 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 consolidated financial
statements for the six months ended June 30, 2008 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  approximately $2,432,000 and $2,379,000, respectively, for the six
months ended June 30, 2008.

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 in Item
2  Managements Discussion and Analysis of Financial Condition and Results of
Operations. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. We expect to continue
to incur losses from operations in 2008. While we expect the recent Veritas segments
product introductions to help increase revenues, such increases for the near term may only
provide limited additional cash flow from such sales. The Companys ability to
continue as a going concern depends on the success of managements plans to bridge
such cash shortfalls in 2008 including the following:

| | 1. | Aggressively
pursuing additional fund raising activities in 2008;
| | -- | -----------------------------------------------------------------

| | 2. | Continuing
to work to complete the closing of the previously announced merger                with
PepperBall Technologies to gain access to additional products and revenues;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Continuing
to advance development of the Companys products, particularly the Veritas
non-lethal launchers, to begin achieving additional sales of such products in 2008,
thereby generating cash flow from such sales;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Attempting
to sub-lease portions of the Company's facilities that are currently not fully utilized
to reduce               operating expenses;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Contingent
upon the Company's ability to locate perspective buyers or partners, attempt to explore
alternative               revenue sources from licensing or partnering opportunities for
the ShiftWatch TVS; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Continuing
to monitor and implement cost control initiatives to conserve cash.
| | -- | ------------------------------------------------------------------------------

# Comparison of the six
months ended June 30, 2008 to 2007

Net
sales for the six months ended June 30, 2008 totaled $473,100, which is a $17,900 or 4%
decrease from net sales of $491,000 for the six months ended June 30, 2007. The change in
sales between 2008 and 2007 is attributable to an increase in sales in the Veritas segment
of $287,000 net of a decrease in revenues from the ShiftWatch division of $201,000 and a
decrease in revenues from the Vizer division of $104,000, in 2008.

Cost of sales for the six months ended June 30, 2008 totaled $341,900, which is a $340,200
decrease as compared to the 2007 period. The change in cost of sales primarily resulted
from the additional costs incurred in 2007 associated with the previously disclosed issues
related to the ShiftWatch TVS 300 unit installation, testing and re-work which resulted in
the reported gross loss in 2007.

Selling,
general and administrative expenses in the six months ended June 30, 2008, totaled
$2,453,700, which is a $2,042,700 or 45% decrease as compared to the 2007 period.
Commencing in late 2007 and continuing into early 2008, the Company undertook a
significant expense reduction program, primarily as a result of the delay in achieving
product revenues. The decrease impacted most operational areas and resulted in a net
decrease of $408,000 in payroll related expenses, a $543,000 reduction in marketing and
advertising among other reductions. Stock based compensation decreased by $912,000 in 2008
due primarily to the fact that the options granted in the six months ended June 30, 2007
to the new Vizer and Avurt employees were one-third vested upon grant.

Research
and development expenses in the six months ended June 30, 2008 totaled $127,300, which is
a $611,100 or 83% decrease as compared to the 2007 period. The decrease is primarily
associated with development costs being substantially suspended in late 2007 and
continuing into early 2008. Outside consulting and engineering on the now terminated IM-5
project was reduced by $460,000 and development payroll related expenses were reduced by
$127,000 in 2008 period as compared to the 2007 period.

16

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Interest
expense for the six months ended June 30, 2008, totaled $46,600, which is a $3,151,000
decrease as compared to the 2007 period. The decrease was primarily attributable to the
non-cash amortization of the $3,106,500 additional interest expense associated with the
amount allocated to the warrants and the beneficial conversion features from the
convertible debt offering completed in March 2007.

No
income tax benefit was recorded on the loss for the six months ended June 30, 2008, as our
management was unable to determine that it was more likely than not that such benefit
would be realized.

# Comparison of the three
months ended June 30, 2008 to 2007

Net
sales for the three months ended June 30, 2008 totaled $247,000, which is a $91,600 or 27%
decrease from net sales of $338,700 for the three months ended June 30, 2007. The change
in sales between 2008 and 2007 is attributable to an increase in sales in the Veritas
segment of $155,400 net of decreases in revenues from the Vizer division of $191,100 and
from the ShiftWatch division of $110,400.

Cost of sales for the three months ended June 30, 2008 totaled $150,900, which is a
$269,700 decrease as compared to the 2007 period. The change in cost of sales primarily
resulted from the additional costs incurred in 2007 associated with the previously
disclosed issues related to the ShiftWatch TVS 300 unit installation, testing and re-work
which resulted in the reported gross loss in 2007. Lower sales for the Vizer division also
reflected lower cost of sales for this division.

Selling,
general and administrative expenses in the three months ended June 30, 2008, totaled
$1,093,800, which is an $884,300 or 45% decrease as compared to the 2007 period.
Commencing in late 2007 and continuing into early 2008, the Company undertook a
significant expense reduction program, primarily as a result of the delay in achieving
product revenues. The decrease impacted most operational areas and resulted in a net
decrease of $204,300 in payroll related expenses, a $309,300 reduction in marketing and
advertising expenses and a $330,200 reduction in legal expenses, among other reductions.
Stock based compensation decreased by $149,900 in 2008 due primarily to the forfeiture of
options for terminated employees combined with a lower number of options being granted in
the 2008 period.

Research
and development expenses in the three months ended June 30, 2008 totaled $51,300, which is
a $195,500 or 79% decrease as compared to the 2007 period. The decrease is primarily
associated with development costs being substantially suspended in late 2007 and
continuing into early 2008. Outside consulting and engineering on the now terminated IM-5
project was reduced by $167,800.

Interest
expense for the three months ended June 30, 2008, totaled $21,800, which is a $3,028,600
decrease as compared to the 2007 period. The decrease was primarily attributable to the
non-cash amortization of the $2,964,000 additional interest expense associated with the
amount allocated to the warrants and the beneficial conversion features from the
convertible debt offering completed in March 2007.

# Issuances of Stock
Options

Our
board of directors has reserved a total of 2,000,000 shares of our common stock for
issuance pursuant to our 2004 Stock Incentive Plan, as amended (the Plan). Our
board of directors administers the plan. During the six month periods ended June 30, 2008
and 2007, the Company issued options to employees and directors to purchase 640,000 shares
of common stock exercisable at an average price of $0.84 and 759,000 shares of common
stock, exercisable at an average price of $4.75, respectively.

17

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# Liquidity and Capital
Resources

We
had a net loss of $2,431,600 including $951,700 in noncash expenses relating to
$552,600 in stock based compensation and $353,800 for depreciation and amortization for
the six months ended June 30, 2008. We expect our expenses for the last half of 2008 to
remain generally at the levels incurred for the six months ended June 30, 2008, prior to
the impact on our operations if the PepperBall merger is successfully completed in 2008.
We are currently engaged in activities to increase our sales from the less lethal products
that have recently moved into production and expansion in the Veritas division.  We
anticipate that spending for research and development for the fiscal year ending December
31, 2008, will be closely controlled and focused on adding new products that have a high
level of probability of achieving near-term revenues. If significant additional revenues
are achieved in 2008, we may increase certain overhead expenses to support such sales. We
expect that a loss will be incurred for 2008.

On
May 27, 2008, SWAT entered into an Agreement and Plan of Merger and Reorganization with
PepperBall Technologies, Inc., a Delaware corporation. Concurrently with the execution of
the merger agreement with PepperBall, SWAT delivered $495,000 to PepperBall in exchange
for the Advance Note from PepperBall. PepperBall is not obligated to repay the Advance
Note unless the merger is not consummated due to the failure of PepperBalls
stockholders to approve the merger or if the board of directors of PepperBall withdraws
its recommendation of the merger. The Advance Note is payable within 90 days of either
event. If PepperBall must repay the Advance Note, SWAT, at its option, may waive the
repayment of $250,000 of the Advance Note in exchange for: (i) a mutual settlement of all
claims and matters relating to the intellectual property litigation between SWAT and
PepperBall; and (ii) a non-exclusive worldwide license to use PepperBalls
intellectual property rights for projectiles and any technology contained in the launchers
or subsequent version of such launchers that SWAT is having produced by Tiberius Arms.
Such license shall (a) have a five year initial term and SWAT shall have the right to
renew the license for additional five year terms unless SWAT is in default under the
license, (b) carry a royalty equal to 3% of SWATs net sales of non-lethal
projectiles and launchers (subject to a $100,000 per year maximum) and (c) provide for
payment by SWAT to PepperBall of $250,000 upon the execution of the license (which shall
be satisfied by SWATs waiver of the repayment of $250,000 of the Advance Note as
described above), with 50% of such payment to be treated as a royalty prepayment. The
Advance Note contains certain other customary provisions such as default provisions.

At
June 30, 2008, we had working capital of $2,796,000, of which $1,741,000 million was in
cash.

Subsequent
to June 30, 2008, the Company entered into a non-binding letter of intent with an
un-related party and expects to execute a sublease in the near future to sublease the
Companys Louisville, Colorado, facilities. The agreement covers the entire facility
and is expected to commence in August 2008 with a term coinciding with the Companys
existing lease. The Company has agreed to provide five months base rent at no charge and
the sub-tenant has the right to terminate the agreement after three years with a nine
month notice and a three month penalty payment, among other provisions.

Capital
expenditures, primarily for tooling, development and testing equipment, office equipment
and facility improvement costs for the balance of the fiscal year ending December 31, 2008
are anticipated to total approximately $25,000 to $75,000.

# Operating Activities

Net
cash consumed by operating activities was $2,379,200 during the six months ended June 30,
2008. Cash was consumed by the loss of $2,431,600, less non-cash expenses of $951,700,
relating to $552,600 in stock based compensation and $353,800 for depreciation and
amortization. Increases in inventories and prepaid expenses and other current assets
totaled $584,000 during the period primarily due to increases associated with payments
made to the Mark-IV launcher manufacturer. Accounts payable, accrued expenses and deferred
revenue decreased by $423,200 during the period consuming cash, generally reflecting the
decrease in over-all overhead and operating expense levels in 2008.

Net
cash consumed by operating activities was $5,008,300 during the six months ended June 30,
2007. Cash was consumed by the loss of $8,562,800, less non-cash expenses of $4,636,600,
relating to $1,464,600 in non-cash stock based compensation, $3,106,600 in interest
accretion on the convertible note offering and $65,400 for depreciation and amortization.
Increases in inventories and prepaid expenses and other current assets totaled $1,437,300
during the period due to increases primarily associated with the launch of the Avurt
launcher. Accounts payable, accrued expenses and deferred revenue increased by $432,900
during the period reflecting the associated inventory build-up as well as the deferred
revenues associated with the delays in the ShiftWatch TVS DVR product installations,
providing cash.

18

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# Investing Activities

Net
cash outflows from investing activities consumed $505,000 during the six months ended June
30, 2008. The outflow was primarily attributable to the PepperBall Advance Note.

Net
cash outflows from investing activities consumed $913,300 during the six months ended June
30, 2007. The outflow was primarily attributable to the funding of $1.0 million into the
PCP supply agreement escrow account plus $373,200 invested in equipment and patents net of
an inflow of $460,000 upon the sale of short term investments.

# Financing Activities

Net
cash inflows from financing activities generated $626,500 during the six months ended June
30, 2008, primarily from the final $675,100 in proceeds received in January 2008, from the
December 2007 warrant conversion, net of $48,600 in scheduled payments on debt agreements.

Net
cash inflows from financing activities generated $5,807,400 during the six months ended
June 30, 2007, primarily from the $6.0 million private placement in 2007, net of $160,000
in financing expenses paid and $54,700 in repayments under debt agreements.

# Recently issued
accounting pronouncements:

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities to
voluntarily choose to measure certain financial assets and liabilities at fair value
(fair value option). The fair value option may be elected on an
instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If
the fair value option is elected for an instrument, SFAS 159 specifies that unrealized
gains and losses for that instrument be reported in earnings at each subsequent reporting
date. SFAS 159 was effective for us on January 1, 2008. We did not apply the fair
value option to any of our outstanding instruments and, therefore, SFAS 159 did not have
an impact on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 was effective for us on
January 1, 2008 for all financial assets and liabilities. For all nonfinancial assets
and liabilities, SFAS 157 is effective for us on January 1, 2009. As it relates to
our financial assets and liabilities, the adoption of SFAS 157 did not have a material
impact on our consolidated financial statements. We are still in the process of evaluating
the impact that SFAS 157 will have on our non-financial assets and liabilities.

# Item 3.  
Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to smaller reporting
companies.

19

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# Item 4T.  
Controls and Procedures

| | (a) | Evaluation
of Disclosure Controls and Procedures.
| | --- | -------------------------------------------------

Our management, including our Chief
Executive Officer / 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 / Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were adequate and
effective and that no changes are required at this time, except as described below.

The Company did not maintain an
effective control environment based on criteria established in the COSO framework.
Specifically, the Company did not adequately design in an effective manner the procedures
necessary to support on a timely basis the requirements of the financial reporting and
closing process.

Our evaluation concluded that,
although policies and procedures appropriate for operating control activities were
designed, and in large part instituted, the Company has not been successful in designing
and implementing polices for the control environment. The control environment sets the
tone of an organization, influences the control consciousness of its people, and is the
foundation of all other components of internal control over financial reporting. A
material weakness in the control environment affects all other internal control
components.

We have also identified conditions as
of June 30, 2008 that we believe are significant deficiencies in internal controls that
include: 1) a lack of segregation of duties in accounting and financial reporting
activities; and 2) the lack of a sufficient number of qualified accounting personnel. Our
former Chief Financial Officer also became our Chief Executive Officer in October 2007.
Our Company has not hired another individual to act as our Chief Financial Officer. We
believe the absence of a full-time Chief Financial Officer has resulted in a significant
deficiency with respect to the lack of qualified accounting personnel. We have been able
to mitigate this deficiency by engaging outside consultants to assist the Company in its
accounting activities, but believe that the only effective long-term solution to our
accounting needs is to hire a qualified replacement Chief Financial Officer or Chief
Accounting Officer. Due to our budgetary constraints, we are uncertain as to when we will
be able to accomplish this.

We do not believe that these
deficiencies constitute material weaknesses because of the use of temporary controllers,
the review by our Chief Executive Officer of accounting information and reconciliations,
and the use of outside consultants.

We are also in the process of taking
additional corrective measures to further remedy the deficiencies in future periods.

Management believes these
deficiencies in internal control did not result in material inaccuracies or omissions of
material fact and, to the best of its knowledge, believes that the consolidated financial
statements for the six months ended June 30, 2008 fairly present in all material respects
the financial condition and results of operations for the Company in conformity with GAAP.
There is however, a reasonable possibility that a material misstatement of the annual or
interim financial statements would not have been prevented or detected as a result of the
control environment weaknesses.

# Changes in Internal
Control Over Financial Reporting

There was no change in internal
controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act or 1934) identified in connection with the evaluation described in
the preceding paragraph that occurred during the Companys first fiscal quarter that
has materially affected or is reasonably likely to materially affect the Companys
internal control over financial reporting.

20

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# PART II  
OTHER INFORMATION

# Item 1.  
Legal Proceedings

On
April 13, 2007, a complaint was filed in United States District Court, Southern District
of California, Case No. 07CV 0672 JAH POR, by Pepperball Technologies, Inc.
(PTI) against Security With Advanced Technology, Inc., Vizer Group, Inc. and
Avurt International, Inc. PTI alleges in the civil action that the prospective manufacture
and distribution of our non-lethal projectile launchers infringed certain of their patents
and breached a Reseller Agreement and Non- Disclosure Agreement between Vizer Group, Inc.
and PTI.  PTI is seeking (a) an unspecified amount of monetary damages for the
alleged patent infringement and breach of contract, (b) an injunction to prohibit further
alleged patent infringement and (c) other relief and costs. We believe that
PTIs claims are without merit and we are vigorously defending this matter, including
pursuing counterclaims against PTI. This lawsuit will be settled and dismissed if the
PepperBall merger is completed.

On
January 26, 2008, the Company and a director, Gregory Pusey, and an officer, Jeffrey G.
McGonegal, were served with a complaint filed in District Court  Larimer County,
Fort Collins, Colorado, by Scott G. and Sandy Sutton concerning amounts that Mr. and Mrs.
Sutton allege are due to them in connection with the termination of Mr. Suttons
employment agreement with the Company and in connection with the merger agreement
effective as of December 31, 2006 between the Company and Vizer Group, Inc.
(Vizer), the Company we acquired from the shareholders of Vizer, including Mr.
and Mrs. Sutton. Specifically, the complaint asserts that Mr. Sutton is due severance and
other amounts under his employment agreement and that Mr. and Mrs. Sutton are due earn-out
consideration and other amounts under the merger agreement. The complaint also asserts
that the Company and the named individual defendants knew or should have known that
certain information, representations and warranties associated with the Company as part of
the merger agreement were inaccurate and untrue at the time the merger agreement was
executed. We believe that the Suttons claims are without merit and we are vigorously
defending this matter, including pursuing counterclaims against them.

We
are not a party to any other legal proceedings, the adverse outcome of which would, in
managements opinion, have a material adverse effect on our business, financial
condition and results of operations.

# ITEM 1A.
  Risk Factors

The
Companys business, financial condition, operating results and cash flows can be
impacted by a number of factors, any one of which could cause the Companys actual
results to vary materially from recent results or from the Companys anticipated
future results. For a discussion identifying risk factors and important factors that could
cause actual results to differ materially from those anticipated, see the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2007, as amended, as well as
the Companys proxy statement and registration statement on Form S-4 filed with the
SEC on July 3, 2008, as amended.

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

None

# Item 3.   Defaults
Upon Senior Securities

None

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

None

# Item 5.   Other
Information

None

21

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# Item 6.  
Exhibits

(a)    
          Exhibits.

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

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

SIGNATURES

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

|                       |                                                                                                                                                              
|---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dated: August 14, 2008 | Security With Advanced Technology, Inc.
(Registrant)
 
By: /s/ Jeffrey G. McGonegal
Jeffrey G. McGonegal,
Chief Financial Officer and
Chief Financial Officer

22

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