FORM 10-QSB

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

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

For the quarterly period ended September 30, 2006

OR

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

Commission file number:
 001-32566

SECURITY WITH ADVANCED TECHNOLOGY, INC. (F/K/A A4S SECURITY, INC.
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  [X]  
No  [   ]

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

The number of shares of no par value
common stock outstanding as of November 10, 2006, was 4,792,646.

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

---



SECURITY WITH ADVANCED TECHNOLOGY,
INC.

|                                                                       | Page
|---------------------------------------------------------------------- | ----
|PART 1 Financial Information                                          |     
|                                                                       |     
|Item 1.   Condensed Unaudited Financial Statements                     |     
|                                                                       |     
|Balance Sheet as of September 30, 2006                                 |     
|                                                                       |     
|Statements of Operations For the Three and Nine                        |     
|Months Ended  September 30, 2006 and 2005                              |     
|                                                                       |     
|Statements of Cash Flows For the  Nine                                 |     
|Months Ended September 30, 2006 and 2005                               |     
|                                                                       |     
|Notes to Unaudited Condensed  Financial Statements                     |     
|                                                                       |     
|Item 2.   Management's Discussion and Analysis                         |     
|                                                                       |     
|Item 3.    Controls and Procedures                                     |     
|                                                                       |     
|PART II - Other Information                                            |     
|                                                                       |     
|Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds |     
|                                                                       |     
|Item 4.   Submission of Matter to a Vote of Security Holders           |     
|                                                                       |     
|Item 6.    Exhibits                                                    |     
|                                                                       |     
|Signatures                                                             |     

2

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PART I  FINANCIAL
INFORMATION

# Security With Advanced
Technology, Inc.                                                    Balance Sheet
                                                September 30, 2006
                                                    (Unaudited)

|                                                            | 
|----------------------------------------------------------- | 
|ASSETS                                                      | 
|Current assets:                                             | 
|Cash and cash equivalents                                   | 
|Accounts receivable (Note 7)                                | 
|Inventories (Note 2)                                        | 
|Prepaid expenses and other current assets                   | 
|                                                            | 
|Total current assets                                        | 
|                                                            | 
|Property and equipment, net (Note 3)                        | 
|                                                            | 
|Other assets:                                               | 
|Note receivable (Note 4)                                    | 
|Intangible assets                                           | 
|Deposits and other                                          | 
|                                                            | 
|Total other assets                                          | 
|                                                            | 
|Total assets                                                | 
|                                                            | 
|LIABILITIES AND STOCKHOLDERS' EQUITY                        | 
|Current and total liabilities:                              | 
|Accounts payable                                            | 
|Accrued expenses                                            | 
|Note payable (Note 5)                                       | 
|Installment obligations                                     | 
|                                                            | 
|Total current and total liabilities                         | 
|                                                            | 
|Commitments (Notes 4 and 8)                                 | 
|                                                            | 
|Stockholders' equity (Notes 1, 6 and 8):                    | 
|Preferred stock, no par value, 5,000,000 shares authorized; | 
|no shares issued or outstanding                             | 
|Common stock, no par value, 30,000,000 shares authorized;   | 
|3,968,268 shares issued and outstanding                     | 
|Accumulated deficit                                         | 
|                                                            | 
|Total stockholders' equity                                  | 
|                                                            | 
|Total liabilities and stockholders' equity                  | 
|                                                            | 

See Accompanying Notes to Unaudited Condensed Financial Statements.

3

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# Security With Advanced
Technology, Inc.Statements of Operations Periods Ended September 30, (Unaudited)

|                                                   | Three Months Ended |  | Nine Months Ended |           
|-------------------------------------------------- | ------------------ |  | ----------------- | ----------
|
|Net sales (returns) (Note 7)                       |                    |  | $                 | 361,334   
|Cost of sales (returns)                            |                    |  |                   | 488,601   
|                                                   |                    |  |                   |           
|Gross profit (loss)                                |                    |  |                   | (127,267  
|                                                   |                    |  |                   |           
|Operating expenses:                                |                    | 
|Selling, general and administrative (includes      |                    | 
|non-cash compensation of $187,631 and              |                    | 
|$482,676 for the three and nine-month              |                    | 
|periods ended September 30, 2006)                  |                    |  |                   | 1,095,402 
|Research and development                           |                    |  |                   | 325,215   
|                                                   |                    |  |                   |           
|Total operating expenses                           |                    |  |                   | 1,420,617 
|                                                   |                    |  |                   |           
|Operating loss                                     |                    |  |                   | (1,547,884
|                                                   |                    |  |                   |           
|Other income (expense):                            |                    | 
|Interest expense                                   |                    |  |                   | (2,373    
|Interest expense, non-cash - contingent beneficial |                    | 
|conversion feature (Note 1)                        |                    |  |                   |          
|Interest income                                    |                    |  |                   | 12,897    
|Other income (expense), net                        |                    |  |                   | (657      
|                                                   |                    |  |                   |           
|Total other income (expense)                       |                    |  |                   | 9,867     
|                                                   |                    |  |                   |           
|Net loss                                           |                    |  | $                 | (1,538,017
|                                                   |                    |  |                   |           
|Basic and diluted net loss per share               |                    |  | $                 | (0.39     
|                                                   |                    |  |                   |           
|Basic and diluted weighted average number          |                    | 
|of common shares outstanding                       |                    |  |                   | 3,965,858 
|                                                   |                    |  |                   |           

See
Accompanying Notes to Unaudited Condensed Financial Statements.

4

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# Security With Advanced
Technology, Inc.Statements of Cash Flows Nine Months Ended September 30, (Unaudited)

|                                                           | 2006 |  | 2005 |           
|---------------------------------------------------------- | ---- |  | ---- | ----------
|Cash flows from operating activities:                      |      |  |      |           
|Net loss                                                   |      |  | $    | (4,139,367
|Adjustments to reconcile net loss to                       |      | 
|net cash used by operating activities:                     |      | 
|Non-cash stock based compensation                          |      |  |      | 482,676   
|Depreciation and amortization                              |      |  |      | 63,716    
|Amortization of interest on convertible debt allocation    |      |  |      |          
|Recovery of doubtful accounts receivable                   |      |  |      |          
|(Increase) decrease in:                                    |      | 
|Accounts receivable                                        |      |  |      | (569,182  
|Inventories                                                |      |  |      | (44,996   
|Prepaid expenses and other assets                          |      |  |      | 26,146    
|Increase (decrease) in:                                    |      | 
|Accounts payable                                           |      |  |      | 261,951   
|Accrued expenses                                           |      |  |      | 63,360    
|                                                           |      |  |      |           
|Net cash used by operating activities                      |      |  |      | (3,855,696
|                                                           |      |  |      |           
|Cash flows from investing activities:                      |      | 
|Advances under note receivable                             |      |  |      | (450,000  
|Purchases of property and equipment                        |      |  |      | (54,830   
|Purchase of intangibles and other assets                   |      |  |      | (85,602   
|                                                           |      |  |      |           
|Net cash used by investing activities                      |      |  |      | (590,432  
|                                                           |      |  |      |           
|Cash flows from financing activities:                      |      | 
|Proceeds from issuance of notes payable                    |      |  |      | 200,000   
|Payment of deferred financing costs                        |      |  |      |          
|Repayment of bridge loans                                  |      |  |      |          
|Repayment of installment obligations                       |      |  |      | (4,434    
|Proceeds from issuance of common stock and warrants        |      |  |      | 10,826    
|                                                           |      |  |      |           
|Net cash provided by financing activities                  |      |  |      | 206,392   
|                                                           |      |  |      |           
|Net (decrease) increase in cash and cash equivalents       |      |  |      | (4,239,736
|                                                           |      |  |      |           
|Cash and cash equivalents at beginning of period           |      |  |      | 4,665,955 
|                                                           |      |  |      |           
|Cash and cash equivalents at end of period                 |      |  | $    | 426,219   
|                                                           |      |  |      |           
|Supplemental disclosure of cash flow information           |      | 
|Cash paid during the period for interest                   |      |  | $    | 1,800     
|                                                           |      |  |      |           
|Schedule of non-cash investing and financing transactions: |      | 
|Conversion of debt into shares of common stock             |      |  | $    |          
|                                                           |      |  |      |           

See
Accompanying Notes to Unaudited Condensed Financial Statements.

5

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

INTERIM FINANCIAL STATEMENTS

The accompanying financial statements
of Security With Advanced Technology, Inc. (formerly  A4S Security, Inc.) (the
Company or SWAT) have been prepared in accordance with the
instructions to quarterly reports on Form 10-QSB. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in financial position at
September 30, 2006, and for all periods presented have been made. Certain information and
footnote data necessary for a fair presentation of financial position and results of
operations in conformity with accounting principles generally accepted in the United
States of America have been condensed or omitted. It is therefore suggested that these
financial statements be read in conjunction with the summary of significant accounting
policies and notes to financial statements included in the Companys Form 10-KSB
filed with the SEC for the year ended December 31, 2005. The results of operations for the
period ended September 30, 2006 are not necessarily an indication of operating results for
the full year. Certain amounts in the 2005 interim financial statements have been
reclassified to conform to the  2006 presentation.

At the annual meeting of its
shareholders held October 6, 2006, the Companys shareholders, among other actions,
approved changing the Companys name to Security With Advanced Technology, Inc., from
A4S Security, Inc., with such change effective October 9, 2006. The accompanying financial
statements reflect the new name for all periods presented.

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

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

| | In
July 2005, the Company completed an initial public offering (IPO) of
securities. The offering, including the over-allotment option exercised by the
underwriter, resulted in the sale of a total of 1,380,000 units at $6.00 each for total
gross proceeds of $8,280,000. Each unit consisted of one share of common stock and one
warrant to purchase one share of common stock at $9.00 per share, expiring in 2010. The
offering generated net proceeds to the Company of approximately $6,967,000, after
underwriting discounts and non-accountable expense allowance to the underwriters and
offering expenses payable by the Company. Concurrent with the IPO, the Companys
convertible notes payable and related accrued interest were converted into shares of
common stock (Note 5).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Emerging Issues Task Force (EITF) Issue No. 98-5 discusses among other
topics, accounting for Convertible Securities with Beneficial Conversion Features (BCF).
The EITF requires that convertible instruments issued with a conversion option that is
in-the-money at the date of such offering generally be accounted for with a portion of
the offering proceeds allocated to equity for the BCF and such amount be accreted back to
the face amount of the debt as additional interest expense. Such difference between the
prior conversion amount and the IPO value is a contingent BCF and is therefore not
recognized until the IPO is completed. In July 2005, the Company recorded a contingent
BCF as non-cash interest expense totaling $758,907, upon the completion of the IPO.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the impact of the IPO combined with the conversion of the convertible notes
payable and related accrued interest, the Companys outstanding common shares
increased from 147,389 outstanding prior to these 2005 transactions to a total of
3,961,441 outstanding afterwards. This increased number of additional shares outstanding
has a significant impact on the computation of earnings (loss) per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31,
2005, the Report of the Independent Registered Public Accounting Firm includes an
explanatory paragraph that describes substantial doubt about the Companys ability
to continue as a going concern. The Companys interim financial statements for the
nine months ended September 30, 2006 have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. The Company incurred a net loss and utilized net cash
in operating activities of $4,139,000 and $3,856,000, respectively, for the nine months
ended September 30, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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

| | 1. | Monitor potential additional fund raising activities in
2006 and 2007 in addition to the approximate $5.2 million
     that was received in October 2006 from the Company's debt and equity
     offerings. (Note 8);
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 3. | Attempt
to complete the recently announced acquisitions of Vizer Group, Inc. and Avurt
International, Inc. (Note 4), and               integrate their business operations and
opportunities into the Company's to expand revenue and market base;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 5. | Continue to monitor and implement cost control
initiatives to conserve the current, approximate $5.1 million cash
balance including the October 2006 funding, net of expenses, as described in Note
8, through the remainder of 2006.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

7

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|4. | Note
Receivable and Acquisition Agreement:
|-- | ------------------------------------------

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

| | Effective
September 3, 2006, the Company executed a Plan of Merger to acquire privately held
Westminster, Colorado based Vizer Group, Inc. (Vizer) and Avurt
International, Inc. (Avurt), owned and managed by a common group of
individuals.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The acquisition of the
commonlycontrolled companies, calls for a purchase price, payable in the
Companys common stock for the combined companies estimated to total approximately $3 million (800,000
shares) plus a contingent $2 million (up to 533,333 shares, of which up to $750,000 at
the option of the sellers can be taken in cash) earn-out based upon achieving
specified future minimum revenue and operating thresholds. The Company also plans to enter
employment contracts with the key Vizer and Avurt management personnel and Scott Sutton,
the founder and president of Vizer and Avurt, is expected to join SWATs board of
directors and become SWATs president, subject to shareholder approval. Closing of
the acquisition is subject to, among other items, finalization and approval of the audits
currently in process on Vizer and Avurt and approval by the Companys shareholders.
The Company has agreed to advance funds under a secured note to Vizer and Avurt to fund
completion of the Avurt personal protection device launcher and expand marketing efforts.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Note
Receivable:
| | ----------------

| | In connection with the pending acquisitions of Vizer and Avurt, the Company
agreed to advance up to $1.0 million in pre-closing cash advances to Vizer and
Avurt to fund completion of the Avurt launcher and expand marketing efforts. The
advances are being made under a secured promissory note due on demand (subject
to up to 120 days notice for demand under certain conditions), with interest at
4% per annum and secured personal guarantees from certain Vizer and Avurt
shareholders and a pledge of their Vizer and Avurt common stock. As of September
30, 2006, $450,000 had been advanced under the arrangement and subsequent to
September 30, 2006 an additional $265,000 has been advanced.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Notes
Payable and Bridge Loans:
|-- | -------------------------------

| | Note
Payable:
| | -------------

| | During
September 2006 the Company borrowed $200,000 from a bank under a note payable due
December 11, 2006 with interest at 11.25%. The loan is collateralized by a purchase order
from a customer, among other assets. As of September 30, 2006 the principal outstanding
on the loan totaled $200,000 and subsequent to September 30, 2006 a $100,000 principal
reduction has been made on the note.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Convertible
notes payable:
| | --------------------------

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

| | The
proceeds of the note offerings were allocated between the estimated value of the notes
and any warrants based upon their relative estimated fair values and allocated to
beneficial conversion features, based upon their relative estimated intrinsic values.
Approximately $506,000 of the convertible notes had been allocated to the warrants and
beneficial conversion features. The amounts so allocated were recorded as additional
interest expense over the terms of the loans, giving rise to an effective interest rate
on the loans of approximately 15% per annum. Such amounts were expensed upon the conversion of the
notes with approximately $121,000 having been previously recorded as additional interest
expense during the nine months ended September 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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

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

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

|6. | Stockholders equity:
|-- | ---------------------

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

| | During
the nine months ended September 30, 2006, 6,522 common shares were issued upon the
exercise of warrants held by the Companys Chairman and his affiliates. The warrants
were exercised at $1.66 each, generating proceeds to the Company of $10,826.
Additionally, 305 common shares with a fair market value of $1,223 were issued to a
former employee in connection with agreed upon severance payments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the nine months ended September 30, 2005, $3,283 was received from the sale of warrants
and an additional $174,600 was allocated to the value of warrants sold as part of the
debt offerings in 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Companys non-vested options to acquire common shares
granted to employees, officers and directors and changes during the period ended
September 30, 2006 is presented below.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Nonvested Shares                |  | Nonvested
Shares
Under
Option |  | Weighted
Average
Exercise 
Price |   | Weighted
Average
Grant Date
Fair Value |     
|------------------------------- |  | ----------------------------- |  | -------------------------------- | - | -------------------------------------- | ----
|Nonvested at January 1, 2006    |  |                               |  | 492,447                          |   | $                                      | 3.90
|Granted                         |  |                               |  | 308,500                          |   |                                        | 5.07
|Vested                          |  |                               |  | (72,485                          | ) |                                        | 4.77
|Forfeited                       |  |                               |  | (4,348                           | ) |                                        | 4.43
|                                |  |                               |  |                                 
|                                |  |                              
|Nonvested at September 30, 2006 |  |                               |  | 724,114                          |   | $                                      | 4.36
|                                |  |                               |  |                                  |   |                                       
|                                |  |                              

| | Stock-based
compensation:
| | -------------------------

| | SWAT
currently provides stock-based compensation under the Companys 2004 Stock Incentive
Plan (Plan) that has been approved by the Companys shareholders. Stock
options granted under this plan generally vest over three to four years from the date of
grant as specified in the Plan or by the compensation committee of the Companys
board of directors and are exercisable for a period of up to ten years from the date of
grant. At the annual shareholder meeting held October 6, 2006, the Companys
shareholders approved an increase in the number of common shares available for grants
under the Companys 2004 Stock Incentive Plan to 1,500,000 from 1,000,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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

|                        | 2006 |  | 2005 |           
|----------------------- | ---- |  | ---- | ----------
|Expected life           |      |  |      | 5-10 years
|Volatility              |      |  |      | 116       
|Risk-free interest rate |      |  |      | 4.2       
|Dividend yield          |      |  |      | 0         
|Forfeitures             |      |  |      | 5         

| | The
expected life of stock options represents the period of time that the stock options
granted are expected to be outstanding based on historical exercise trends. The expected
volatility is based on the historical price volatility of 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the three and nine months ended September 30, 2006, SWAT recorded compensation expense
related to stock options that increased the net loss by $187,631 and $481,453,
respectively, and basic and diluted net loss per share by $0.05 and $0.12, respectively.
The stock option compensation expense was included in operating expenses in the
accompanying statement of operations. The Company also recorded a non-cash expense of
$1,223 during the nine months ended September 30, 2006 related to the issuance of 305
common shares to an employee as part of a severance agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of stock option activity of options to employees and directors for the nine
months ended September 30, 2006 is presented below:
| | -----------------------------------------------------------------------------------------------------------------------------------------

|                                  | Shares
Under
Option |  | Weighted
Average
Exercise
Price |         | Weighted
Average
Remaining
Contractual
Life (Years) |   | Weighted
Average
Grant Date
Fair Value | 
|--------------------------------- | ------------------- |  | ------------------------------- | ------- | --------------------------------------------------- | - | -------------------------------------- | 
|Outstanding at January 1, 2006    |                     |  |                                 | 650,374 |                                                     | $ | 4.18                                   | 
|Granted                           |                     |  |                                 | 308,500 |                                                     |   | 5.07                                   | 
|Exercised                         |                     |  |                                 |        |                                                     |   |                                        | 
|Forfeited                         |                     |  |                                 | (8,696  | )                                                   |   | 4.43                                   | 
|                                  |                     |  |                                 |         |                                                     |   |                                        | 
|Outstanding at September 30, 2006 |                     |  |                                 | 950,178 |                                                     | $ | 4.51                                   | 
|                                  |                     |  |                                 |         |                                                     |   |                                        | 
|Exercisable at September 30, 2006 |                     |  |                                 | 226,064 |                                                     | $ | 4.99                                   | 
|                                  |                     |  |                                 |         |                                                     |   |                                        | 

| | The total fair value of stock options granted to employees that vested during the nine months ended September 30,
2006 and 2005 was $173,100 and $128,200, respectively, and no stock options were exercised during either period.
The intrinsic value of options outstanding and exercisable at September 30, 2006 is zero.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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| | As
of September 30, 2006, the Company had approximately $1,950,000 of unrecognized
compensation cost related to stock options that will be recorded over a weighted average
period of approximately four years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the nine months ended September 30, 2006, options to purchase 308,500 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
$5.07 per share, and expire in ten years. During the nine months ended September 30,
2006, 8,696 options to acquire shares of common stock were cancelled due to forfeitures.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Had
compensation expense for stock option grants been determined based on the fair value at
the grant dates consistent with the method prescribed by SFAS 123, the Companys net
loss and net loss per share would have been adjusted to the pro forma amounts for the
three and nine months ended September 30, 2005 as indicated below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|7. | Customer
Concentration:
|-- | -----------------------

| | As
of September 30, 2006, three customers comprised 43%, 38% and 14% of the outstanding
accounts receivable balance. For the three-month period ended September 30, 2006, three
customers accounted for 62%, 23% and 10% of net sales and for the nine-month period ended
September 30, 2006, four customers accounted for 26%, 23%, 12% and 11%, of net sales. For
the nine-month period ended September 30, 2005, one customer accounted for 95% of net
sales.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | Subsequent
Events:
|-- | ------------------

| | Private
Offering of Securities:
| | -------------------------------

| | On
October 2, 2006, SWAT completed a $5,223,750 private placement of unregistered
securities. A total of $2,772,000 was closed consisting of 792,000 common share units at
$3.50 per unit (Common Share Units) with each Common Share Unit including one
share of SWATs common stock (Common Stock) and three warrants (Investor
Warrants) to acquire Common Stock. Additionally, a total of $2,451,750 was closed
consisting of 700,500 convertible promissory note units (Note Units) at $3.50
per unit with each Note Unit consisting of a 5.13% per annum Convertible Promissory Note (Note)
due January 31, 2007, unless earlier converted, and three Investor Warrants. Each $3.50
of principal (plus interest) due under the Notes will automatically be converted into one
share of SWATs Series A Convertible Preferred Stock (Series A Preferred Stock)
upon shareholder approval of such conversion. Approval for the conversion right is
planned to be sought at a special meeting of SWATs shareholders scheduled for the
fourth quarter of 2006. The Series A Preferred Stock is non-voting, pays no dividends,
contains no liquidation preference and is convertible into one share of Common Stock for
each share of Series A Preferred Stock owned.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | Investor
Warrants consist of three separate warrants with the following terms: Warrant A is
exercisable at $4.75 per share and expires four years from closing; Warrant B is
exercisable at $4.75 per share and expires 18 months from closing; and Warrant SWATWs
terms mirror exactly SWATs current publicly-traded warrants, trading under the
symbol: SWATW. Generally, the SWATW Warrants are exercisable at $9.00 per share, expire
in July 2010 and are redeemable by SWAT beginning on July 18, 2008 for $0.10 each, under
defined conditions, including a minimum trading price of the Common Stock of $13.50 per
share. SWAT will use its reasonable best efforts to obtain the same CUSIP number for the
SWATW Warrants issued in the private placement (the new SWATW Warrants)
as is assigned to SWATs current publicly-traded SWATWWarrants (the
existing SWATW Warrants) so that following registration of the new SWATW
Warrants they will trade with the existing SWATW Warrants. If SWAT is unable to do so
prior to the six month anniversary of the closing, the new SWATW Warrants shall thereupon
be exchanged for a warrant, identical in form to Warrant A and Warrant B issued
at the closing, except that the exercise price shall be $8.00 per share and the
expiration date shall be July 18, 2010. All warrants shall be exercisable in cash,
commencing six months after the closing and contain anti-dilution rights for stock splits
and stock dividends.
As required under Generally Accepted Accounting Principles a portion of the proceeds received in the offering
will be allocated to the value of the warrants.  This will result in additional interest expense being recorded
in the future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has agreed to file a registration statement with the Securities and Exchange
Commission (the SEC) for the shares of Common Stock underlying the Common
Share Units and the Note Units within 90 days of the closing. The registration statement
will also register the new SWATW Warrants (unless they have been replaced as discussed
above, in which case they will not be registered). Failure to file the registration
statement within 90 days of the closing or failure to get the registration statement
effective 180 days from the closing would require SWAT to pay each investor a penalty fee
in cash equal to 2% per month up to a maximum of 10% of their investment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The purpose of the private
placement was to raise funds to support the pending acquisitions of Vizer
and Avurt and for ongoing product development and for working capital and general
corporate purposes. The offering was conducted in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the Securities Act), and Rule 506
promulgated thereunder. The placement agent for the offering is being
compensated with a commission of not more than 8%, a non-accountable expense allowance of
2% and warrant rights for up to 20% of the common shares and convertible notes sold
in the offering at exercise prices ranging from $4.92 to $5.00 each.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Exercise
of Employee Stock Options:
| | -----------------------------------

| | Subsequent
to September 30, 2006, employees owning a total of 32,378 stock options under the Plan exercised their options for cash. These exercises generated
proceeds to the Company totaling $113,193.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Matt
Siemens Employment:
| | ------------------------

| | During
October 2006 the full-time employment of Matthew Siemens (Siemens) with the
Company ended. Siemens, who also resigned as an executive officer in October 2006 will
continue to provide defined consulting services to the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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# ITEM 2.

# MANAGEMENTS
DISCUSSION AND ANALYSIS

# Overview

We market high resolution mobile
digital video recording systems for security and surveillance. Our products were designed
originally for use in the law enforcement market. In early 2004, as a result of
significant lead times being encountered in the buying decisions of law enforcement
customers we began marketing products to mass transit customers. Through 2005, Kansas City
Area Transit Authority, or KCATA, was our principal customer. During 2006, in addition to
KCATA, ten additional customers including the Greater Cleveland Regional Transit Agency
ordered units. During the nine months ended September 30, 2006, four customers
collectively accounted for approximately 72% of our revenues for the period. We currently
have approximately a $2.4 million backlog of orders from transit agencies. Our primary
near term focus is the mass transit market, and we are currently engaged in active
discussions with over 100 metropolitan transportation authorities. Our marketing strategy
is to present  our products in person to these potential customers to demonstrate the
advantages we believe our products have. During the nine months ended September 30, 2006,
we were awarded and had substantially completed a contract by the San Joaquin Regional
Rail Commission (SJRRC) to install 31 ShiftWatch® Transportation Video Systems in
SJRRCs Altamont Commuter Express rail system. The SJRRC contract includes options,
as specified, for additional units to be acquired by SJRRC or its assignees, with our
approval. Three additional California based organizations, Capitol Corridor Joint Powers
Authority, City of Elk Grove and City of Vacaville, have ordered ShiftWatch® systems under
the option provisions granted to SJRRC, and we believe that other agencies will purchase
from us, under this option which provides such organizations with an efficient and less
time consuming procurement option.

Over the past year we have focused
our efforts on developing our ShiftWatch® 3.0 software architecture, which is in final
development and is being implemented in our new mass transit TVS 300 product. We believe
this new version of our technology will meet or exceed high resolution digital video
specifications that will be valuable in a variety of surveillance application into the
future. Our primary efforts in product development to date have been focused on designing
a mass transit product (previously a police product) that would provide unequaled remote
access through state of the art wireless capability for near real time review and download
to a fully scalable back end server model. We have anticipated that our product will lead
the industry in interoperable capabilities, while providing the highest allowable video
resolution that will comply with or exceed anticipated industry minimum specifications. We
are evaluating the estimated elapsed time and costs to bring several new products to
market off of a variation of our base technology. SWAT is also evaluating marketing and
distribution options and alternatives to cost effectively address different markets.

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

During July 2005, we completed our
initial public offering resulting in the sale of 1,380,000 units each consisting of one
common share and one warrant to purchase one common share, exercisable at $9.00 per
share. The public offering raised approximately $8,280,000 million in gross proceeds for
us. Under provisions contained in their terms, approximately $3,510,000 million in
convertible notes and accrued interest were automatically converted into approximately
2,434,000 shares of common stock upon the completion of the public offering.

Effective September 3, 2006, the Company executed a Plan of Merger to acquire privately held Westminster,
Colorado based Vizer and Avurt, owned and managed by a common group of individuals.

The acquisition of the
commonly-controlled companies, calls for a purchase price, payable in the
Companys common stock, for the combined companies estimated to total approximately $3 million (800,000
shares) plus a contingent $2 million (up to 533,333 shares, of which up to $750,000 at
the option of the sellers can be taken in cash) earn-out based upon achieving
specified future minimum revenue and operating thresholds. The Company also plans to enter
employment contracts with the key Vizer and Avurt management personnel and Scott Sutton,
founder and president of Vizer and Avurt is expected to join SWATs board of
directors and become SWATs president, subject to shareholder approval. Closing of
the acquisition is subject to, among other items, finalization and approval of the audits
currently in process on Vizer and Avurt and approval by the Companys shareholders.
The Company has agreed to advance funds under a secured note to Vizer and Avurt to fund
completion of the Avurt launcher and expand marketing efforts.

13

---



In connection with the pending
acquisitions of Vizer and Avurt, the Company agreed to advance up to $1.0 million in
pre-closing cash advances to Vizer and Avurt to fund completion of the Avurt launcher and
expand marketing efforts. The advances are being made under a secured promissory note due
on demand (subject to up to 120 days notice for demand under certain conditions), with
interest at 4% per annum and secured by personal guarantees from certain of the Vizer and
Avurt shareholders and pledges of their Vizer and Avurt common stock. As of September 30,
2006, $450,000 had been advanced under the arrangement and subsequent to September 30,
2006 an additional $265,000 has been advanced.

Vizer specializes in product design,
system design, engineering, installation, and integration of facility security systems
including access control, video surveillance, intrusion detection, and wireless mesh
networking and transmission. With a focus on network centric technology and hosted
services, Vizer developed a unique proprietary e-Link solution which is built
around a web hosted software platform and a unique network based device providing a
business complete control over access, alarms, and video systems remotely through a secure
and easy-to-use website.  This product is sold primarily on the basis of a monthly
service fee thereby creating recurring revenue.  Revisions and enhancement to e-Link
are ongoing and our final version is not completed although it is currently in use by
customers and we are getting positive feedback from them. We are in discussions with
several potentially large distributors of this product.

In addition, Vizer distributes non-lethal devices and compliance products manufactured under another company's
brand.  Vizer currently sells these products primarily for use by federal and state agencies. The devices
accurately fire a projectile that breaks on impact dispersing a cloud of potent pepper based powder five times
more powerful than pepper spray causing a severe debilitating reaction in the target area, effective on both
humans and animals.  Vizer currently sells projectiles and launchers to law enforcement, corrections, and guard
agencies.

Avurt is developing a new non-lethal
personal protection device based on extensive market research with focus groups as diverse
as from government agencies to consumers. The device is being designed to fire a
projectile that breaks on impact dispersing a cloud of potent pepper spray based powder
causing a severe debilitating reaction in the target area, effective on both humans and
animals. The new proprietary (patent pending) handheld launcher is scheduled to be
released for sale by Avurt in the first quarter of 2007. In addition to the current
customer base, the new launcher is anticipated to be marketed to: security guards, postal
carriers, animal control officers, animal owners, campers, hikers, bikers, aid workers,
military police and consumers that desire additional personal protection.

On October 2, 2006, SWAT completed a
$5,223,750 private placement of unregistered securities. A total of $2,772,000 was closed
consisting of 792,000 common share units at $3.50 per unit (Common Share
Units) with each Common Share Unit including one share of SWATs common stock
(Common Stock) and three warrants (Investor Warrants) to acquire
Common Stock. Additionally, a total of $2,451,750 was closed consisting of 700,500
convertible promissory note units (Note Units) at $3.50 per unit with each
Note Unit consisting of a 5.13% per annum Convertible Promissory Note (Note)
due January 31, 2007, unless earlier converted, and three Investor Warrants. Each $3.50 of
principal (plus interest) due under the Notes will automatically be converted into one
share of SWATs Series A Convertible Preferred Stock (Series A Preferred
Stock) upon shareholder approval of such conversion. Approval for the conversion
right is planned to be sought at a special meeting of SWATs shareholders scheduled
for the fourth quarter of 2006. The Series A Preferred Stock is non-voting, pays no
dividends, contains no liquidation preference and is convertible into one share of Common
Stock for each share of Series A Preferred Stock owned.

Investor Warrants consist of three
separate warrants with the following terms: Warrant A is exercisable at $4.75
per share and expires four years from closing; Warrant B is exercisable at
$4.75 per share and expires 18 months from closing; and Warrant SWATWs
terms mirror exactly SWATs current publicly-traded warrants, trading under the
symbol: SWATW. Generally, the SWATW Warrants are exercisable at $9.00 per share, expire in
July 2010 and are redeemable by SWAT beginning on July 18, 2008 for $0.10 each, under
defined conditions, including a minimum trading price of the Common Stock of $13.50 per
share. SWAT will use its reasonable best efforts to obtain the same CUSIP number for the
SWATW Warrants issued in the private placement (the new SWATW
Warrants) as is assigned to SWATs current publicly-traded SWATW
Warrants (the existing SWATW Warrants) so that following registration of the
new SWATW Warrants they will trade with the existing SWATW Warrants. If SWAT is unable to
do so prior to the six month anniversary of the closing, the new SWATW Warrants shall
thereupon be exchanged for a warrant, identical in form to Warrant A and
Warrant B issued at the closing, except that the exercise price shall be $8.00
per share and the expiration date shall be July 18, 2010. All warrants shall be
exercisable in cash, commencing six months after the closing and contain anti-dilution
rights for stock splits and stock dividends.
As required under Generally Accepted Accounting Principles a portion of the proceeds received in the offering
will be allocated to the value of the warrants.  This will result in additional interest expense being recorded
in the future.

14

---



The Company has agreed to file a
registration statement with the SEC for the shares of Common Stock underlying the Common
Share Units and the Note Units within 90 days of the closing. The registration statement
will also register the new SWATW Warrants (unless they have been replaced as discussed
above, in which case they will not be registered). Failure to file the registration
statement within 90 days of the closing or failure to get the registration statement
effective 180 days from the closing would require SWAT to pay each investor a penalty fee
in cash equal to 2% per month up to a maximum of 10% of their investment.

The purpose of the private placement is to raise funds to support the pending acquisitions of
Vizer and Avurt and for ongoing product development and for working capital and general corporate purposes. The
offering was conducted in reliance on Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. The
placement agent for the offering is being compensated with a commission of not more than 8%, a non-accountable
expense allowance of 2% and warrant rights for up to 20% of the common shares and convertible notes sold in the
offering at exercise prices ranging from $4.92 to $5.00 each.

# Results of Operations

In the Companys Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2005, the Report of the Independent
Registered Public Accounting Firm includes an explanatory paragraph that describes
substantial doubt about the Companys ability to continue as a going concern. The
Companys interim financial statements for the nine months ended September 30, 2006
have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. The
Company incurred a net loss and utilized net cash in operating activities of $4,139,000
and $3,856,000, respectively, for the nine months ended September 30, 2006.

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

| | 1. | Monitor
potential additional fund raising activities in 2006 and 2007 in addition to the
approximate $5.2 million that was               received in October 2006 from the
Company's debt and securities offerings;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | 5. | Continue to monitor and implement cost control initiatives to conserve the
current, approximate $5.1 million cash balance including the October 2006
funding, net of expenses as described above, through the remainder of 2006.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Comparison of the
nine-month periods ended September 30, 2006 to 2005

Net sales for the nine months ended
September 30, 2006 totaled $876,100, a $768,000 or 711% increase over the comparable 2005
period. Net sales for the 2006 and 2005 periods were comprised almost entirely of products
sold into the mass transit market and in 2005 related primarily of sales to KCATA, which
was obtained as a customer during mid-2004. In the nine months ended September 30, 2006,
four customers represented approximately 72% of sales.

15

---



Cost of sales for the nine months
ended September 30, 2006 totaled $1,169,700, a $1,089,300 or 1,354% increase over the
comparable 2005 period. Cost of sales includes additional costs in 2006 associated with
increased fixed overhead costs that have been added to support recent and anticipated
sales increases. Additionally, product installation costs have increased in 2006 over 2005
due to more installations being conducted by Company personnel and contractors, as
compared to higher percentage of prior installations being done by bus manufacturers as
well as the learning curve associated with retro-fitting trains, light-rail vehicles and
certain bus models. Extra time and resources is also being devoted to ensure customer
satisfaction was high especially for the new customer installation relationships. Such
additional costs resulted in a negative gross profit for the period.

Selling, general and administrative
expenses in the nine months ended September 30, 2006 totaled $3,114,900, which is a
$1,368,500 or 78% increase as compared to the 2005 period. The increase is primarily
attributable to an increase of approximately $585,700 in payroll and contract labor costs
from additions to sales, engineering and management personnel and the balance represents
costs associated primarily with additional sales and marketing costs. Additionally,
employee non-cash equity compensation totaled $482,700 for the nine months ended September
30, 2006 as compared to none in the 2005 period. Such amount relates to the estimated
value of options granted to employees and directors under the Companys option plan,
calculated based upon the Black-Scholes method. Effective January 1, 2006, we began
applying the fair value recognition provisions of FASB Statement No. 123R to our
stock-based employee plans.

Research and development expenses in
the nine months ended September 30, 2006 totaled $803,800, which is a $468,700 or 140%
increase as compared to the 2005 period. The increase is due to a number of factors,
primarily additional development personnel and outsourced research and development
activities being incurred. Such amounts can vary quarter to quarter.

Interest expense for the nine months
ended September 30, 2006 totaled $2,800. Interest expense for the nine months ended
September 30, 2005 totaled $1,214,800 due to the average outstanding interest bearing
obligations and the non-cash amortization totaling $758,900, of the additional interest
expense associated with the amount allocated to the warrants and the beneficial conversion
features from the convertible debt offerings. Interest expense significantly reduced in
2006 as a result of the repayment or conversion of substantially all of the interest
bearing debt upon the completion of the public offering in July 2005. During the nine
months ended September 30, 2006, interest income of approximately $77,300 was recognized
from earnings of excess cash in short term investments.

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

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

Net sales for the three months ended
September 30, 2006 totaled $361,300, a $373,800 increase over the comparable 2005 period,
which reflected a $12,500 net sales return. During the 2006 period, three customers
represented approximately 95% of sales that were comprised almost entirely of products
sold into the mass transit market.

Cost of sales for the three months
ended September 30, 2006 totaled $488,600, a $495,500 increase over the comparable 2005
period, which reflected a $6,900 net sales return. Cost of sales includes additional costs
in 2006 associated with increased fixed overhead costs that have been added to support
recent and anticipated sales increases. Cost of sales for the three months ended September
30, 2006 exceeded net sales primarily due to product installation costs have increased in
2006 over 2005 due to more installations being conducted by Company personnel and
contractors, as compared to higher percentage of prior installations being done by bus
manufacturers. Additionally, first time learning installation costs especially on
retro-fitting of trains, light-rail vehicles and certain bus models was a significant cost
factor in the three month period. Extra time and resources is also being devoted to ensure
customer satisfaction was high especially for the new customer installation relationships.
Such additional costs resulted in a negative gross profit for the period.

Selling, general and administrative
expenses in the three months ended September 30, 2006 totaled $1,095,400, which is a
$319,500 or 41% increase as compared to the 2005 period. The increase is primarily
attributable to an increase of approximately $105,000 in payroll and contract labor costs
from additions to sales, engineering and management personnel and the balance represents
costs associated primarily with additional sales and marketing costs. Additionally,
employee non-cash equity compensation totaled $187,600 for the three months ended
September 30, 2006 as compared to none in the 2005 period. Such amount relates to the
estimated value of options granted to employees and directors under the Companys
option plan, calculated based upon the Black-Scholes method. Effective January 1, 2006, we
began applying the fair value recognition provisions of FASB Statement No. 123R to our
stock-based employee plans.

Research and development expenses in
the three months ended September 30, 2006 totaled $325,200, which is a $127,800 or 65%
increase as compared to the 2005 period. The increase is due to a number of factors,
primarily additional development personnel and outsourced research and development
activities being incurred. Such amounts can vary quarter to quarter.

16

---



Interest expense for the three months
ended September 30, 2006 totaled $2,400. Interest expense for the three months ended
September 30, 2005 totaled $878,900 due to the average outstanding interest bearing
obligations and the non-cash amortization totaling $758,900, of the additional interest
expense associated with the amount allocated to the warrants and the beneficial conversion
features from the convertible debt offerings. Interest expense significantly reduced in
2006 as a result of the repayment or conversion of substantially all of the interest
bearing debt upon the completion of the public offering in July 2005. During the three
months ended September 30, 2006, interest income of approximately $12,900 was recognized
from earnings of excess cash in short term investments.

# Liquidity and Capital
Resources

We had a net loss of $4,139,400,
including $546,400 in noncash expenses relating to depreciation and amortization and
stock based compensation, for the nine months ended September 30, 2006. We expect our
expenses in the upcoming months, prior to any costs associated with the pending
acquisitions, to be at or somewhat below the level incurred for the three months ended
September 30, 2006. We are currently engaged in active sales communications with over 100
metropolitan transit authorities. It is likely that a loss will be incurred for at least
the remainder of 2006, depending upon possible additional revenues to be achieved. During
the nine months ended September 30, 2006, we were awarded and substantially completed a
contract by the San Joaquin Regional Rail Commission (SJRRC) to install 31 ShiftWatch®
Transportation Video Systems in SJRRCs Altamont Commuter Express rail system. The
SJRRC contract includes options, as specified, for additional units to be acquired by
SJRRC or its assignees, with our approval. We have recently been notified that other
California based organizations are evaluating an order under the option provisions granted
to SJRRC, and we believe that other agencies will purchase from us, under this option
which provides such organizations with an efficient and less time consuming procurement
option. The Greater Cleveland Regional Transit Agency (GRCTA) has also awarded SWAT
contracts for installation of its ShiftWatch® mobile video surveillance and facilities
surveillance solution in buses, light rail vehicles and platform stations. These awards
which total approximately $1.6 million are expected to be substantially completed in the
fourth quarter of 2006.

At September 30, 2006, we had working
capital of $630,400, of which $426,200 was cash and cash equivalents. Subsequent to
September 30, 2006, we completed a private offering of securities and certain employees
have exercised stock options. The total of these subsequent activities generated gross
cash proceeds of approximately $5.3 million.

Capital expenditures, primarily for
development, testing and office equipment for the balance of the calendar year ending
December 31, 2006 are anticipated to total approximately $20,000 to $40,000.

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

Effective September 3, 2006, the
Company executed a Plan of Merger to acquire privately held Westminster, Colorado based
Vizer Group, Inc. (Vizer) and Avurt International, Inc. (Avurt),
owned and managed by a common group of individuals.

The acquisition of the
commonlycontrolled companies, calls for a purchase price, payable in the
Companys common stock, for the combined companies estimated to total
approximately $3 million (800,000 shares) plus a contingent $2 million (up to 533,333
shares, of which up to $750,000 at the option of the sellers may be taken in cash)
earn-out based upon achieving specified future minimum revenue and operating
thresholds. The Company also plans to enter employment contracts with the key Vizer and
Avurt management personnel and Scott Sutton, founder and president of Vizer and Avurt, is
expected to join SWATs board of directors and become SWATs president, subject
to shareholder approval. Closing of the acquisition is subject to, among other items,
finalization and approval of the audits currently in process on Vizer and Avurt and
approval by the Companys shareholders. The Company has agreed to advance funds under
a secured note to Vizer and Avurt to fund completion of the Avurt launcher and expand
marketing efforts.

In connection with the pending
acquisitions of Vizer and Avurt, the Company agreed to advance up to $1.0 million in
pre-closing cash advances to Vizer and Avurt to fund completion of the Avurt launcher and
expand marketing efforts. The advances are being made under a secured promissory note due
on demand (subject to up to 120 days notice for demand under certain conditions), with
interest at 4% per annum and secured by a pledge of the Vizer and Avurt stock and a
personal guarantee of the Vizer and Avurt shareholders. As of September 30, 2006 $450,000
had been advanced under the arrangement and subsequent to September 30, 2006, an
additional $265,000 has been advanced.

17

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We have a line of credit arrangement
for up to $395,000 with First Interstate Bank of Kalispell, Montana pursuant to which we
have been able to draw against 100% of eligible purchase orders we receive from customers.
The line of credit relationship is based upon a verbal understanding with the bank, and
advances are made and subject to, individual note agreements executed as purchase orders
that are submitted for funding. Advances under such note agreements, when made, are
collateralized by our inventories, receivables, equipment and intangibles. The interest
rate on advances is established at the time of advance and the notes generally have a
maturity date of 90 days following the advance. During September 2006, we drew $200,000
under this arrangement under a note payable that matures December 2006 and bears interest
of 11.25%. Subsequent to September 30, 2006 a $100,000 principal reduction has been made
on the note. During the nine months ended September 30, 2005, no amounts were advanced
under the arrangement. As the line of credit arrangement is not subject to a written
agreement, the bank may withdraw it at any time; however, the bank has not given any
indication to us that they will not continue to provide the facility.

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

# Operating Activities

Net cash consumed by operating
activities was $3,855,700 during the nine months ended September 30, 2006. Cash was
consumed by the loss of $4,139,400, less non-cash expenses of $546,400 for depreciation,
amortization and non-cash equity compensation. Increases in accounts receivable totaled
$569,200 as a result of 2006 sales increases and inventories totaled $45,000 during the
period as a result of increases and anticipated increases in sales levels. Accounts
payable and accrued expenses increased by $325,300 during the period providing cash.

Net cash consumed by operating activities was $2,278,000 during the nine months ended September 30, 2005. Cash
was consumed by the loss of $3,269,000, less non-cash expenses of $1,094,000 for depreciation, amortization and
interest. Increases in inventories and prepaid expenses totaled $153,000 during the period following the
increased level of funding with the 2005 fund raising activities. A net increase of $47,000 in accounts payable
and accruals during the period provided cash.

# Investing Activities

Net cash outflows from investing
activities consumed $590,400 during the nine months ended September 30, 2006. The outflow
was primarily attributable to advances made on the note receivable under the merger
agreement with Vizer and Avurt, purchases of equipment totaling $54,800 and additions to
patents and deposits totaling $85,600.

Net cash outflows from investing
activities consumed $171,400 during the nine months ended September 30, 2005. The outflow
was primarily attributable to purchases of equipment.

# Financing Activities

Net cash outflows from financing
activities generated $206,400 during the nine months ended September 30, 2006, primarily
from the $200,000 advance drawn under the credit arrangement.

Net cash inflows from financing
activities generated $7,763,000 during the nine months ended September 30, 2005. The
public offering generated approximately $7.0 million, and notes payable were increased by
$1,761,000 and we paid costs associated with debt issuances of $206,000 during the 2005
period. During this period $930,000 in bridge loans were repaid, including $825,000 in
bridge loans that had been borrowed in 2005. We also received net proceeds from the sale
of common stock purchase warrants totaling $178,000 during the 2005 period.

18

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# Recently issued
accounting pronouncements:

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. This statement defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007. The Company
is currently assessing the impact the adoption of SFAS No. 157 will have on its financial
statements.

# CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

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

# Item 3.  
Controls and Procedures

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

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

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# PART II  
OTHER INFORMATION

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

On October 2, 2006, SWAT completed a
$5,223,750 private placement of unregistered securities. A total of $2,772,000 was closed
consisting of 792,000 common share units at $3.50 per unit (Common Share
Units) with each Common Share Unit including one share of SWATs common stock
(Common Stock) and three warrants (Investor Warrants) to acquire
Common Stock. Additionally, a total of $2,451,750 was closed consisting of 700,500
convertible promissory note units (Note Units) at $3.50 per unit with each
Note Unit consisting of a 5.13% per annum Convertible Promissory Note (Note)
due January 31, 2007, unless earlier converted, and three Investor Warrants. Each $3.50 of
principal (plus interest) due under the Notes will automatically be converted into one
share of SWATs Series A Convertible Preferred Stock (Series A Preferred
Stock) upon shareholder approval of such conversion. Approval for the conversion
right is planned to be sought at a special meeting of SWATs shareholders scheduled
for the fourth quarter of 2006. The Series A Preferred Stock is non-voting, pays no
dividends, contains no liquidation preference and is convertible into one share of Common
Stock for each share of Series A Preferred Stock owned.

Investor Warrants consist of three
separate warrants with the following terms: Warrant A is exercisable at $4.75
per share and expires four years from closing; Warrant B is exercisable at
$4.75 per share and expires 18 months from closing; and Warrant SWATWs
terms mirror exactly SWATs current publicly-traded warrants, trading under the
symbol: SWATW. Generally, the SWATW Warrants are exercisable at $9.00 per share, expire in
July 2010 and are redeemable by SWAT beginning on July 18, 2008 for $0.10 each, under
defined conditions, including a minimum trading price of the Common Stock of $13.50 per
share. SWAT will use its reasonable best efforts to obtain the same CUSIP number for the
SWATW Warrants issued in the private placement (the new SWATW
Warrants) as is assigned to SWATs current publicly-traded SWATW
Warrants (the existing SWATW Warrants) so that following registration of the
new SWATW Warrants they will trade with the existing SWATW Warrants. If SWAT is unable to
do so prior to the six month anniversary of the closing, the new SWATW Warrants shall
thereupon be exchanged for a warrant, identical in form to Warrant A and
Warrant B issued at the closing, except that the exercise price shall be $8.00
per share and the expiration date shall be July 18, 2010. All warrants shall be
exercisable in cash, commencing six months after the closing and contain anti-dilution
rights for stock splits and stock dividends.
As required under Generally Accepted Accounting Principles a portion of the proceeds received in the offering
will be allocated to the value of the warrants.  This will result in additional interest expense being recorded
in the future.

The Company has agreed to file a
registration statement with the Securities and Exchange Commission (the SEC)
for the shares of Common Stock underlying the Common Share Units and the Note Units within
90 days of the closing. The registration statement will also register the new SWATW
Warrants (unless they have been replaced as discussed above, in which case they will not
be registered). Failure to file the registration statement within 90 days of the closing
or failure to get the registration statement effective 180 days from the closing would
require SWAT to pay each investor a penalty fee in cash equal to 2% per month up to a
maximum of 10% of their investment.

The purpose of the private placement was to raise funds to support the pending acquisitions of Vizer Group, Inc.,
and Avurt International, Inc., and for ongoing product development and for working capital and general corporate
purposes. The offering was conducted in reliance on Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder. Bathgate Capital Partners LLC served as placement agent for the offering and is being compensated
with a commission of not more than 8%, a non-accountable expense allowance of 2% and warrant rights for up to 20%
of the common shares and convertible notes sold in the offering at exercise prices ranging from $4.92 to $5.00
each.

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

On October 6, 2006, the Company held its
2005 Annual Meeting of Shareholders. At the meeting the following directors were elected
to serve until the next annual meeting or until their successors are elected and
qualified:

|Name                | Shares FOR | WITHHOLD Authority To
Vote
|------------------- | ---------- | --------------------------
|
|Barry C. Loder      |            |                           
|Thomas R. Marinelli |            |                           
|Gregory Pusey       |            |                           
|Gail S. Schoettler  |            |                           
|Robert J. Williams  |            |                           

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Proposal: Amendment to the Company's
2004 Stock Incentive Plan Increasing the Common Shares Reserved Under the Plan to
1,500,000 from 1,000,000

|Shares FOR | Shares AGAINST | ABSTAIN | 
|---------- | -------------- | ------- | 
|1,550,211  | 20,202         | 24,832  | 

Proposal: Amendment to the
Companys Articles of Incorporation to Change the Companys Name to
Security With Advanced Technology, Inc.

|Shares FOR | Shares AGAINST | ABSTAIN | 
|---------- | -------------- | ------- | 
|1,590,578  | 4,407          | 260     | 

# Item 6.  
Exhibits

| | (a) | Exhibits.
| | --- | ---------

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

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

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

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

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SIGNATURES

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

|                         |                                                                                                                                  
|------------------------ | ---------------------------------------------------------------------------------------------------------------------------------
|Dated: November 14, 2006 | Security With Advanced Technology, Inc.
(Registrant)
By: /s/ Jeffrey G. McGonegal

Jeffrey G. McGonegal,

Chief Financial Officer

22