<PAGE>
 
                   U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                   AMENDMENT NO. 1 TO FORM 10-KSB
                                 FORM 10-KSB/A

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934.

     For the fiscal year ended December 31, 1996

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

     For the transition period from______________ to ________________

                       Commission File Number:   0-21361
                                        
                           ENSEC INTERNATIONAL, INC.
                ----------------------------------------------    
                (Name of small business issuer in its charter)

            FLORIDA                            65-0654330         
   -------------------------------      ------------------------------------
   (State or other Jurisdiction of      (I.R.S. Employer Identification No.)
    Incorporation or Organization
    
        751 Park Of Commerce Drive, Suite 104, Boca Raton FL 33487
        ---------------------------------------------------------- 
         (Address of principal executive offices)     (zip code)

                                 (561) 997-2511
                                 --------------
               Registrant's telephone number, including area code

                                NOT APPLICABLE
               --------------------------------------------------
   (Former name, former address and former fiscal year, if changed since last
                                    report)

Securities registered under Section 12(b) of the Exchange Act:

NONE.

Securities registered under Section 12(g) of the Exchange Act:

     Common Stock, $.01 par value per share
-----------------------------------------------------------------------------
                                (Title of Class)

     Redeemable Warrants to Purchase Common Stock, $.01 par value per share
     ----------------------------------------------------------------------    
                                (Title of Class)
<PAGE>
 
   Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.__
     -
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [X]

     The issuer's revenues for the fiscal year ended December 31, 1996 were
$7,807,915.

     As of March 13, 1997, the aggregate market value of the registrant's Common
Stock held by non-affiliates computed by reference to the closing price of such
stock as of such date was $11,992,969.

     As of March 13, 1997, there were 5,656,250 shares of Common Stock issued
and outstanding.
<PAGE>
 
     The purpose of this amendment to the Form 10-KSB for Ensec International,
Inc. (the "Company") is to reflect certain adjustments to Item 7, Consolidated
Financial Statements, and corresponding adjustments to Item 6, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." These
adjustments were required to properly exclude certain transactions from sales
and cost of goods sold recognized in 1996 related to the Company's discontinued
operations which were disposed of in 1995 to a former minority shareholder.
These transactions were inadvertently recorded by the Company during a period of
time when the Company temporarily processed such transactions as an
accommodation to such former shareholder.

                                    PART II

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------   ----------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

    Amounts presented herein have generally been rounded to the nearest hundred
thousand dollars and the related dollar and percentage fluctuations are
calculated based on such rounding.
 
    This Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain statements which are forward-looking and the
accuracy of which are based upon certain uncertainties in the Company's future
operations and results. For a discussion of important factors that could cause
the actual results to differ materially from those contained in such forward-
looking statements, see "Forward-Looking Statements" below.

General

    The Company derives its revenue primarily from the sales, installation and
service of its integrated security systems and related products. In 1995, the
Company derived a material portion of its revenues from two sources which did
not contribute to the Company's revenues in 1996 and will not contribute to the
Company's revenue in future years: the leasing of postal tracking and tracing
equipment to a single customer pursuant to a contract which terminated in the
second fiscal quarter of 1995, and the sale, installation, service and
maintenance of currency sorting equipment through a division which was sold in
December 1995. The revenue and related costs from the currency sorting equipment
division was classified as a discontinued operation with respect to fiscal year
1995.

    The Company began selling its integrated security systems in 1983.  In 1995,
the Company completed over four years of the development of and began marketing
its second generation of integrated security systems: the EnWorks/(R)/ family of
products, including the Company's flagship En2000/(TM)/ system. At such time,
the Company began the amortization of approximately $3.6 million of capitalized
software costs incurred in connection with the development of the EnWorks/(R)/
family of products. These and other
<PAGE>
 
additional capitalized costs will be amortized over the product's seven-year
estimated useful life.

    In connection with the sale of the Company's currency sorting equipment
division and its business strategy in Brazil, the Company has been implementing
a downsizing plan which it expects to complete by the end of the first quarter
of 1997, except for the sale of the Company's Brazilian headquarters, which the
Company expects to occur by the end of fiscal year 1997.  Pursuant to these
efforts, the Company has, as of December 31, 1996, reduced its workforce in
Brazil by approximately 78% as compared to 1995.  These workforce reductions are
expected to continue through the end of the first quarter of 1997, which
reductions are expected to accumulate to an 82% total reduction from the 1995
Brazilian workforce.

    Additionally, the Company is attempting to reduce or eliminate expenses
associated with its Brazilian headquarters by leasing the unused portion of such
buildings, by selling the buildings outright, and/or by taking other actions.
The implementation of the Company's downsizing plan has had a material adverse
impact on the Company's operating results in the years during which such
downsizing steps were taken even though the Company began to realize the
benefits of such steps in fiscal year 1996.  The Company expects to continue to
realize increasing benefits of its downsizing efforts in fiscal year 1997.  The
costs associated with these efforts for each of the years ended December 31,
1995 and 1996 include employee termination expenses of $1.4 million and $.2
million, respectively.  Furthermore, the Company anticipates the termination of
certain fixed operating costs associated with the Company's Brazilian
headquarters upon the completion of the Company's downsizing efforts.

    As a result of the effects of the Company's downsizing efforts, the results
of operations of the Company for the years ended December 31, 1995 and 1996 are
in certain respects not comparable.

Foreign Currency Exchange Rates and Translation Gains and Losses

    The Company's functional currency is the U.S. dollar.  The Company has a
substantial portion of its operations located in Brazil.  Therefore, a
substantial portion of its sales are collected in Brazilian reais (plural of
real, the Brazilian currency) and a substantial portion of the Company's
expenses are incurred in Brazilian reais, in each case rather than U.S. dollars.
Although it is impossible to predict future exchange rate fluctuations between
the U.S. dollar and other currencies, it can be anticipated that, to the extent
the U.S. dollar strengthens or weakens against the Brazilian real or other
currencies, a substantial portion of the Company's reported net sales, cost of
goods sold and operating expenses will be commensurably lower or higher than
they would have been with a stable foreign currency relationship.  The Company
and its subsidiaries translate into their functional currency on a monthly basis
based on a combination of the then current and historical exchange rates for the
currency in which their assets and liabilities are valued. Gains or losses
arising from these monthly translations are reflected as translation income

                                       2
<PAGE>
 
or expense.  As a result of these monthly translations, the Company recognized a
loss of $1.2 million for the year ended December 31, 1995 and a gain of $.5
million for the year ended December 31, 1996.

    Prior to 1995, Brazil experienced a highly inflationary economy.
Accordingly, under the required temporal method of currency translation, both
current and historical exchange rates are used depending upon the nature of the
asset or liability being translated. Translation gains and losses result from
fluctuations in the assets or liabilities being translated at current rates as
well as from fluctuations in the dollar/real exchange rate itself. The Company
experienced translation losses in 1995 as a result of the dollar strengthening
against the real.  For the year ended December 31, 1996, the dollar weakened
against the real, thus causing the translation gain in such period since the
Company was in a net liability position related to the items translated at
current rates.

    Although in 1994, the inflation rate in Brazil was approximately 900%, in
1995 and 1996  inflation rates decreased to 22% and 10%, respectively.  For
1997, the Company believes that inflation in Brazil will continue to remain at
or about the 1996 rate.

RESULTS OF OPERATIONS

Comparison of the Year Ended December 31, 1996 to the Year Ended December 31,
1995

    Sales. Total sales decreased approximately $.8 million, or 9.3%, from $8.6
million for fiscal year 1995 to $7.8 million for fiscal year 1996. This decrease
in total sales was attributable to the Company's focus during the second and
third quarters of 1996 on completing its initial public offering, rather than
focusing solely on generating sales of its products as in 1995. The mix of sales
revenue changed dramatically from year to year, reflecting the Company's
refocusing on its core business of sales and service of integrated security
systems and related products. Sales from the leasing of postal tracking and
tracing equipment and related service revenue decreased $1.3 million, or 100%,
in 1996 from the comparable 1995 period as a result of the termination of a
contract with the Brazilian postal authority in the second quarter of 1996.
Sales of integrated security systems and related products increased $.5 million,
or 6.9%, to $7.8 million in 1996 from $7.3 million in 1995, which reflected the
refocusing of the Company's efforts on its integrated security systems.

    In fiscal year 1997, the Company expects overall sales growth resulting from
its U.S. operations. To accomplish this growth, the Company intends to increase
its sales force in order to strengthen the Company's direct marketing efforts.
The Company will also seek to further develop its distribution channels and
joint marketing and strategic alliances in order to both take advantage of
indirect-marketing potential and to supplement the Company's direct-marketing
efforts.

    Cost of Goods Sold. Cost of goods sold decreased $1.1 million, or 19%, from
$5.8 million in fiscal year 1995 to $4.7 million in fiscal year 1996.  Both the
dollar amount and the mix of cost of goods sold changed significantly from year
to year.  This decrease from

                                       3
<PAGE>
 
year to year resulted in part from a decrease in the Company's sales as well as
the nonrecurrence of $.4 million of employee termination costs which were
incurred in 1995 in connection with the Company's downsizing plan. During the
second quarter of 1995, revenues from postal tracking and tracing equipment and
related services ceased due to the Company's refocusing on its core business of
sales and service of integrated security systems and related products.

    The cost of goods sold, gross profit and gross profit percentage for the
postal tracking and tracing equipment and related services was $.9 million, $.4
million and 30.8%, respectively. The cost of goods sold related to sales and
service of the Company's integrated security systems and related products was
$4.9 million in 1995, inclusive of employee termination costs of $.4 million, as
compared to costs of $4.7 million in 1996. The resulting gross profit and gross
profit percentages in 1995 and 1996 were $2.3 million and 31.9%, and $3.1
million and 39.7%, respectively. The overall increase in gross profit and gross
profit percentage resulted primarily from both the decrease in employee
termination costs and the concentration of the Company's sales on its integrated
security systems and related products, which in 1996 featured higher gross
profit and gross profit percentages than those of sales of postal tracking and
tracing equipment in 1995.

    The Company expects this increase to be maintained during 1997 along with a
projected increase in sales.  It is anticipated that further increases in gross
profit and gross profit percentage will occur, together with a commensurate
increase in sales, because the Company's software amortization expense will
remain at its current level and because the Company expects to reduce certain
costs of materials through a standardization of its production methods.

    Selling, General and Administrative Expenses.  Selling, general and
administrative expenses in 1996 increased $ .7 million, or 13.2%, to $6.0
million from $5.3 million in 1995. As a part of its downsizing efforts, the
Company reduced the number of employees in its Brazilian operations during the
latter part of 1995 and in 1996. These workforce reductions resulted in a
decrease of $.4 million of payroll and related costs during 1996. These
decreases were offset by public company expenses of $.1 million, professional
fees of $.1 million in connection with the Company's downsizing efforts and
employee litigation and bad debt expenses totaling $.9 million. The bad debt
expenses were associated with the Company's Brazilian operations and resulted
from the Company (i) writing off $.5 million in disputed accounts receivable;
(ii) writing off $.2 million in accounts receivable from certain governmental
agencies for inflation adjustments; and (iii) increasing reserves by $.2 million
primarily to cover a doubtful account receivable from a Brazilian governmental
agency. The bad debt reserve was associated with a project that had been halted
because of the agency's failure to sufficiently fund the project. The Company
believes that the continued viability of this project is questionable.

    As a result of the Company's continued downsizing efforts, the Company's
selling, general and administrative costs, including those costs associated with
the Company's fixed assets in Brazil, are expected to decrease in fiscal year
1997.

                                       4
<PAGE>
 
    Research and Development Expenses.  Research and development expenses for
the year ended 1996 increased $.6 million, or 100%, from $.6 million in 1995 to
$1.2 million in 1996. This increase resulted due to the fact that in 1995 the
Company's development efforts were focused on completing the En2000/(TM)/ family
of products and were thus capitalized, whereas in 1996, the Company's
development efforts focused on new features whose costs have been expensed in
the period in which such costs were incurred. In addition, the Company incurred
employee termination costs of $.1 million in connection with relocating its
research and development personnel to the U.S.

    Other Income and Expense.  Interest income decreased $.6 million, or 85.7%,
from $.7 million in 1995 to $.1 million in 1996.  This decrease was attributable
to a decrease in the amount of interest-bearing assets.  Interest expense for
1996 increased $1.0 million, or 40%, to $3.5 million from $2.5 million in the
comparable 1995 period due to interest paid on $2.5 million of indebtedness
which was incurred in May 1996 in connection with the Company's bridge
financing, and the amortization of deferred financing costs incurred in
connection therewith.  Other, net expense decreased by $.3 million, or 75%, to
$.1 million in fiscal year 1996 from $.4 million in the year prior period.  In
1995, the remaining book value of approximately $.4 million of certain postal
tracking and tracing equipment was written down in connection with the
termination of leases for such equipment.  In 1996, an impairment loss of $.1
million was recognized in connection with certain furniture and fixtures which
were no longer being used in the Company's operations.

    Income Tax Benefit.  Income tax benefit in 1996 decreased by $1.1 million,
or 78.6%, to $.3 million from $1.4 million in the comparable 1995 period.  This
decrease was primarily attributable to a decrease in the Company's available net
deferred tax liability which could have been offset by foreign net operating
losses generated in fiscal year 1996.

    Discontinued Operations.  Because the currency sorting equipment division
was sold in December 1995, there was no discontinued operations during 1996.

LIQUIDITY AND CAPITAL RESOURCES

    Net cash used in operating activities for the year ended 1996 amounted to
$4.0 million which primarily resulted from the Company's net loss from
operations of $6.9 million (adjusted for non-cash charges (credits) totaling
$2.3 million) and a reduction in accounts payable of $.5 million.  Net cash used
in investing activities for the year ended 1996 amounted to $.5 million which
resulted from costs of $.4 million associated with capital investment in the
development of the Company's software and hardware products during the first
quarter and costs of $.1 million associated with the purchase of infrastructure
equipment for the Company's U.S. operations.  Net cash provided by financing
activities for the same period was $6.3 million which primarily resulted from
the receipt of net proceeds in September 1996 from the Company's initial public
offering of 1,900,000 shares of Common Stock and 2,185,000 redeemable common
stock purchase warrants (the "Public Offering").

                                       5
<PAGE>
 
    On November 19, 1996, pursuant to the exercise of the underwriter's over-
allotment option in connection with the Public Offering, the Company sold an
additional 25,000 shares of Common Stock.  The net proceeds from sales related
to the Public Offering totaled $9.6 million, which were used to retire (i) $2.5
million of senior subordinated notes issued in May 1996 in connection with a
completed private placement, (ii) approximately $2.7 million of notes payable
and borrowings under loan agreements, and (iii) $.3 million of dividends
payable.  Of the $2.7 million of notes payable and borrowings under loan
agreements, $2.6 million was due to several Brazilian banks and bore interest at
rates of approximately 4% to 5% per month, and $.1 million was payable to the
Company's Chief Executive Officer.

    While the Company has no commitments for capital expenditures as of December
31, 1996, it anticipates that it will incur approximately $1.0 million of
research and development expenditures during the next 12 months in order to
enhance existing products and to develop new products.

    The Company believes that the financing provided by the Public Offering,
together with the net cash to be provided by operations, if any, available
borrowings under lines of credit and other possible sources of future
financings, should be sufficient to meet its presently anticipated cash needs
for at least the next 12 months.  However, there can be no assurance that the
Company will achieve profitability in the next 12 months, and the Company may
need to raise additional capital in the future.

FORWARD-LOOKING STATEMENTS

    The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which represent the Company's expectations or beliefs concerning future
events, including without limitation the following: changes in the Company's
sales, costs, expenses and other financial information; changes or adjustments
in the Company's marketing and business strategies; the scope, nature and
effects of the Company's downsizing plan, including without limitation the
reduction of the Company's workforce and the potential sale of the Company's
Brazilian headquarters; the possibility of fluctuations in the Brazilian
economy, interest rates and currency and the effects thereof, if any, on the
Company;  the Company's ability to secure additional credit facilities or other
future sources of financing in the U.S. and Brazil, as well as other sources, if
necessary for the Company to do so; and the sufficiency of the Company's cash
provided by operating, investing and financing activities for the Company's
future liquidity and capital resource needs.

    The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those contained in the forward-looking statements, including without limitation
the following: general economic conditions; specific economic conditions
relating to the production of integrated security systems (including software);
the economic, social and political conditions in Brazil; the

                                       6
<PAGE>
 
demand for the Company's products; the size and timing of future orders and new
contracts; specific feature requests by customers; production delays or
manufacturing inefficiencies; management decisions to commence or discontinue
product lines; the Company's ability to design and introduce new products on a
cost-effective and timely basis; the amount and timing of research and
development expenditures; the maintenance of present and the availability of
future strategic alliances and joint marketing or servicing agreements; the
introduction of new products and product enhancements by the Company or its
competitors; the budgeting cycle of customers; changes in the proportion of
revenues attributable to license fees and maintenance and support services;
changes in the level of operating expenses; and the present and future level of
competition in the industry. As a result of these and other important factors,
the results actually achieved may differ materially from expected results
included in these statements.

ITEM 7.  FINANCIAL STATEMENTS
         --------------------

        The Company's Consolidated Financial Statements which are required to be
included in this Item 7 are set forth in a separate section of this Report and
commence on Page F-1 immediately following Page 9 of this Report.

                                   PART III

Item 13.   EXHIBITS AND REPORTS ON FORM 8-K
--------   --------------------------------

Exhibit Index

3.1*          Articles of Incorporation of the Company, as amended
3.2*          Bylaws of the Company
4.1*          Form of Common Stock Certificate
4.2*          Form of Redeemable Warrant Certificate
10.1*         1996 Stock Option Plan, as amended
10.2*         Strategic Alliance Agreement between Lockheed Martin IMS and Ensec
              Inc.
10.3*         Card Access Systems Agreement between Ensec Inc. and Electronic 
              Data Systems Corporation, as amended to the date hereof
10.4*         Software Value Added Reseller Agreement between Ensec Inc. and ICL
              Enterprises
10.5*         Agreement between Ensec Inc. and The Port Authority of New York 
              and New Jersey
10.6*         Agreement for Purchase and Sale of the Bank Automation Division of
              Ensec, S.A. between De La Rue Investimentos Ltda. and Ensec S.A.
10.7*         Form of Employment Agreement representing Employment Agreements
              between the Company and each of Charles N. Finkel, 
              James K. Norman, Flavio R. da Silva, Steven T. Geffin, Edward
              Morelli, David J. Rottner and John De George
10.8**        ADT Original Equipment Manufacturer Agreement between Ensec Inc. 
              and ADT
11.1***       Statement Regarding Computation of Per Share Earnings
21.1*         Subsidiaries of the Registrant
23.1****      Consent of Grant Thornton LLP
27.1****      Financial Data Schedule

-----------------------
*       Filed as an exhibit to Amendment No. 3 to the Company's Registration 
        Statement on Form SB-2 (File No. 333-06223), as filed with and declared 
        effective by the Commission on September 25, 1996.
**      To be filed by amendment to the Company's Quarterly Report on Form 
        10-QSB, dated as of September 30, 1996, as filed with the Commission on
        November 13, 1996 (File No. 0-21361).
***     Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
        the year ended December 31, 1996, as filed with the Commission on \
        March 20, 1997 (File No. 0-21361).
****    Filed as an exhibit hereto.

Reports on Form 8-K

        The Company did not file any reports on Form 8-K during the fourth 
quarter of the fiscal year ended December 31, 1996.



                                       7
<PAGE>
 
                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.


                           ENSEC INTERNATIONAL, INC.
                         -----------------------------------
                                  (Registrant)



Date: April 28, 1997            By:  /s/ Charles N. Finkel
                                   -----------------------
                                   Charles N. Finkel
                                   President and Chief Executive Officer
 
     In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


DATE: April 28, 1997            By:  /s/ Charles N. Finkel
                                   ------------------------
                                   Charles N. Finkel
                                   Director, President and Chief
                                   Executive Officer
                                   (Principal Executive Officer)


DATE: April 28, 1997            By:  /s/ David J. Rottner
                                   -----------------------
                                   David J. Rottner
                                   Vice President, Chief Financial Officer and
                                   Secretary
                                   (Principal Financial Officer)


DATE: April 28, 1997            By:  /s/ James K. Norman
                                   ---------------------
                                   James K. Norman
                                   Director


DATE: April 28, 1997            By:  /s/ Flavio R. da Silva
                                   ------------------------
                                   Flavio R. da Silva
                                   Director

                                       8
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                          Pages
                                                          -----
<S>                                                     <C>
 
Report of Independent Certified Public Accountants...      F-2
                                                              
Consolidated Balance Sheets..........................      F-3
                                                              
Consolidated Statements of Operations................      F-4
                                                              
Consolidated Statement of Stockholders' Equity.......      F-5
                                                              
Consolidated Statements of Cash Flows................      F-6 
 
Notes to Consolidated Financial Statements              F-7 to F-21
</TABLE>

                                      F-1
<PAGE>
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Ensec International, Inc.


     We have audited the accompanying consolidated balance sheets of Ensec
International, Inc. and Subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ensec
International, Inc. as of December 31, 1996 and 1995 and the consolidated
results of their operations and their consolidated cash flows for the years then
ended in conformity with generally accepted accounting principles.


Grant Thornton LLP

Fort Lauderdale, Florida
February 6, 1997

                                      F-2
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                  DECEMBER 31,

<TABLE>
<CAPTION>
                                                                                  1996                      1995    
                                                                               -----------              -----------
<S>                                                                            <C>                      <C>                
                                     ASSETS
 
Current assets
 Cash and cash equivalents                                                     $ 2,257,103               $   239,031   
 Short-term investments                                                                 --                   922,775
 Accounts receivable (less allowance for doubtful
   accounts of $258,000 and $115,000
   in 1996 and 1995, respectively)                                               1,395,137                 1,747,550
 Inventory                                                                         736,425                   856,882
 Net current assets of discontinued operations                                          --                   225,000   
 Prepaid expenses and other current assets                                         317,384                   342,652
                                                                               -----------               -----------
        Total current assets                                                     4,706,049                 4,333,890
 
Property and equipment, net                                                      2,333,742                 2,649,913
Other assets                                                                      
 Capitalized software costs, net                                                 3,545,000                 3,825,000
 Refundable income taxes                                                           196,000                    74,000
 Net other assets of discontinued operations                                            --                     5,000
 Other assets                                                                       77,711                    66,400
                                                                               -----------               -----------
 
        Total assets                                                           $10,858,502               $10,954,203
                                                                               ===========               ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities
  Notes payable                                                                         --                 2,120,000    
  Lines of credit                                                                       --                   268,774
  Accounts payable                                                                 619,907                   978,070
  Accrued and other liabilities                                                  1,401,563                   980,384
  Dividends payable                                                                     --                   300,647
  Current portion of long-term debt                                                861,000                 1,191,000
                                                                               -----------               -----------
 
        Total current liabilities                                                2,882,470                 5,838,875
                                                                               -----------               -----------
 
Long-term debt, less current portion                                             2,962,000                 3,209,000
Deferred income taxes                                                                   --                   319,000
 
Commitments and contingencies                                                           --                        --

Stockholders' equity
  Preferred stock, authorized 3,000,000 shares at $.01
     par value; issued and outstanding,0 shares at
     December 31, 1996 and 1995                                                         --                        --   
 Common stock, authorized 20,000,000 shares at $.01
    par value; issued and outstanding, 5,656,250 and
    3,500,000 shares at December 31, 1996 and 1995,
    respectively                                                                    56,563                    35,000
  Additional paid-in capital                                                    13,721,482                 3,434,501
  Accumulated deficit                                                           (8,764,013)               (1,882,173)
                                                                               -----------               -----------
     Total stockholders' equity                                                  5,014,032                 1,587,328
                                                                               -----------               -----------
 
        Total liabilities and stockholders' equity                             $10,858,502               $10,954,203
                                                                               ===========               ===========
</TABLE>
The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                            YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
 
                                                                               1996                          1995
                                                                           -----------                   ------------
<S>                                                                       <C>                           <C>
 
Sales                                                                      $ 7,807,915                   $ 8,560,815
Cost of goods sold                                                           4,737,674                     5,833,695
                                                                           -----------                   -----------
 
Gross profit                                                                 3,070,241                     2,727,120

Selling, general and administrative expenses                                 6,001,953                     5,287,938
Research and development expenses                                            1,162,168                       600,000
Translation loss (gain)                                                       (450,000)                    1,229,960
                                                                           -----------                   -----------
 (Loss) from operations                                                     (3,643,880)                   (4,390,778)
 
Other (income) expenses
 Interest income                                                              (125,308)                     (648,341)
 Interest expense                                                            3,542,107                     2,519,517    
 Other, net                                                                    140,161                       395,329 
                                                                           -----------                   -----------
                                                                             3,556,960                     2,266,505  
                                                                           -----------                   -----------
  Loss from continuing
   operations before income taxes                                           (7,200,840)                   (6,657,283)

Income tax (benefit)                                                          (319,000)                   (1,395,857)
                                                                           -----------                   -----------
  Loss from continuing  operations                                          (6,881,840)                   (5,261,426)
                                                                           -----------                   -----------
 
Discontinued operations       
  Earnings from operations of discontinued
   division (less applicable income taxes of $208,773)                              --                       435,587
  Gain on disposal of discontinued division
   (Less applicable income taxes of $483,084)                                       --                     1,007,916
                                                                           -----------                   -----------
 
 Net loss                                                                 $(6,881,840)                   $(3,817,923)
                                                                          ===========                    ===========
 Net earnings (loss) per common share:
   Continuing operations                                                  $     (1.63)                   $     (1.35)
   Discontinued operations                                                         --                            .37
                                                                          -----------                    -----------
Net (loss) per common share                                               $     (1.63)                   $      (.98)
                                                                          ===========                    ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                       TWO YEARS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                   Retained
                                    Common Stock              Additional           Earnings
                               ---------------------          Paid-In          (Accumulated           
                                 Shares       Amount          Capital              Deficit)           Total
                               ---------     -------         ------------      ------------       ------------
<S>                            <C>           <C>             <C>               <C>                 <C>
 
Balance at
 January 1, 1995                3,500,000     $35,000        $ 3,434,501         $ 1,935,750        $ 5,405,251

Net loss                               --          --                 --          (3,817,923)        (3,817,923)
                                ---------     -------        -----------         -----------        -----------
 
Balance at
  December 31, 1995             3,500,000      35,000          3,434,501          (1,882,173)         1,587,328
 
Warrants issued in
  connection with senior
  subordinated notes, net              --          --            642,704                  --            642,704
 
Net proceeds from
  issuance of common
  stock and warrants            1,925,000      19,250          9,623,465                  --          9,642,715

Exercise of warrants              231,250       2,313             20,812                  --             23,125

Net loss                               --          --                 --          (6,881,840)        (6,881,840)
                                ---------     -------        -----------         -----------        -----------
Balance at
  December 31, 1996             5,656,250     $56,563        $13,721,482         $(8,764,013)       $ 5,014,032
                                =========     =======        ===========         ===========        ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                      F-5
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            YEAR ENDED DECEMBER 31,


<TABLE>
<CAPTION>
                                                                                1996                     1995
                                                                            ------------             ------------
<S>                                                                         <C>                      <C>
Cash flows from operating activities:                                                    
 Net (loss)                                                                  $(6,881,840)             $(3,817,923)  
 Adjustments to reconcile net loss to net cash used in                                   
   operating activities:                                                                 
   Depreciation and amortization expense                                         953,234                  674,832    
   (Gain) on sale of division                                                         --               (1,491,000)
   Provision for deferred taxes                                                 (319,000)                      --
   Increase in allowance for doubtful accounts                                           
     and write-off of accounts receivable                                        890,000                       --
 Amortization of debt discount                                                   725,000                       --
 Changes in assets and liabilities:                                                      
   Decrease (increase) in short-term investments                                 922,775                 (922,775)   
   (Increase) decrease in accounts receivable                                   (485,320)                 337,450
   Decrease (increase) in inventory                                              120,457                 (418,094)
   (Increase) decrease in prepaid and other current assets                       (27,384)                  70,122
   Decrease in net assets of discontinued operations                             230,000                   67,000
   (Increase) decrease in other assets and refundable income taxes                (9,311)                  15,557
   (Decrease) increase in accounts payable                                      (534,307)                 321,585
   Increase (decrease) in accrued and other liabilities                          466,563               (1,144,795)
                                                                             -----------              -----------
 Net cash used in operating activities                                        (3,949,133)              (6,308,041)
                                                                                         
Cash flows from investing activities:                                                    
 Computer software costs                                                        (372,400)              (1,202,000)
 Proceeds from sale of fixed assets                                                   --                  575,000
 Proceeds from sale of currency sorting equipment                                     --                1,812,000
 Purchase of fixed assets                                                       (147,662)                (181,487)
                                                                             -----------              -----------
                                                                                         
 Net cash (used in) provided by investing activities                            (520,062)               1,003,513
                                                                                         
Cash flows from financing activities:                                                    
 Net borrowings (repayments) under credit line agreements                       (268,774)                 268,774
 Dividends paid                                                                 (300,647)                      --
 Proceeds of issuance of senior subordinated notes                             2,500,000                       --
 Principal payments on long term debt and senior subordinated notes           (3,077,000)                      --
 Net proceeds from issuance of common stock and warrants                       9,642,715                       --
 Exercise of warrants                                                             23,125                       --
 Cost of warrants issued in connection with senior subordinated notes            (82,296)                      --
 Net borrowings from affiliates                                                       --                    8,228
 Net borrowings (repayments) under loan agreements                            (2,120,000)               3,753,000
                                                                             -----------              -----------
                                                                                         
 Net cash provided by financing activities                                     6,317,123                4,030,002
                                                                             -----------              -----------
                                                                                         
Net increase (decrease) in cash and cash equivalents                           1,847,928               (1,274,526)
Translation gain (loss) on cash and  cash equivalents                            170,144                 (392,455)
                                                                                         
Cash and cash equivalents at beginning of year                                   239,031                1,906,012
                                                                             -----------              -----------
Cash and cash equivalents at end of year                                     $ 2,257,103              $   239,031
                                                                             ===========              ===========
                                                                                         
Supplemental disclosure of cash flow information:                                        
 Cash paid during the period for:                                                        
   Interest                                                                  $ 3,395,107              $ 1,175,517
                                                                             ===========              ===========
   Income taxes                                                              $        --              $    48,000
                                                                             ===========              ===========
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - SUMMARY OF ACCOUNTING POLICIES

Ensec International, Inc. and Subsidiaries (the "Company") designs, develops,
assembles, sells and maintains integrated security systems. Ensec International,
Inc. has two wholly-owned subsidiaries, Ensec Engenharia e Sistemas de Seguranca
S.A. ("Ensec, S.A."), a Brazilian corporation, and Ensec Inc., a Florida
corporation. All intercompany transactions have been eliminated in
consolidation.
 
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.

Cash and Cash Equivalents
-------------------------

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.

Short-Term Investments
----------------------

The short-term investment at December 31, 1995, consists of a certificate of
deposit which was restricted because it was pledged as a performance guarantee
under a contract.  The certificate of deposit was released in September 1996.

Inventories
-----------

Inventories are stated at the lower of cost or market based on a first-in, 
first-out basis. Inventories are comprised of the following:

<TABLE>
<CAPTION>
                                                                  1996                                   1995
                                                                --------                               --------
<S>                                                             <C>                                    <C>

Parts and supplies                                              $360,012                               $369,028
Inventory applicable to contracts in
 progress, net of billings of $2,592,490 and
 $1,002,341 in 1996 and 1995, respectively                       376,413                                487,854
                                                                --------                               --------
                                                                $736,425                               $856,882
                                                                ========                               ========
</TABLE>

Depreciation
------------

Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for financial reporting
purposes. The useful lives are as follows:

               Equipment                  5 to 10 years
               Furniture and fixtures     5 to 10 years
               Building and improvements       40 years
 

                                      F-7
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Income Taxes
------------

Deferred taxes have been provided on temporary differences in reporting certain
transactions for financial accounting and tax purposes.  Under the liability
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the current enacted tax rates which will be in effect
when these differences reverse.  Deferred tax expense is the result of changes
in deferred tax assets and liabilities.

Use of Estimates
----------------

In preparing the Company's financial statements, management  is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported period.  Actual results could differ from those estimates.

The Company's estimates of the percentage of completion on contracts are based
on management's best estimate of total costs to be incurred.  However, the
actual results may be different from management's estimates.

Fair Value of Financial Instruments
-----------------------------------

The financial statements include various estimated fair value information at
December 31, 1996 and 1995, as required by Statement of Financial Accounting
Standards 107, "Disclosures about Fair Value of Financial Instruments." Such
information, which pertains to the Company's financial instruments, is based on
the requirements set forth in that Statement and does not purport to represent
the aggregate net fair value to the Company.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash, Cash Equivalents and Short-Term Investments: The carrying amount
approximates fair value because of the short-term maturity of those instruments.

Receivables and Payables: The carrying amounts approximate fair value because of
the short maturity of those instruments.
 
Debt, Lines of Credit and Notes Payable: The carrying amounts of debt, lines
of credit and notes payable approximate fair value due to the length of the
maturities, the interest rates being tied to

                                      F-8
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED




market indices and/or due to the interest rates not being significantly
different from the current market rates available to the Company.
 
All of the Company's financial instruments are held for purposes other than
trading.

Revenue Recognition
-------------------

Revenue is recognized upon delivery and acceptance for normal product sales,
which are those systems which do not require significant software customization
and are completed within relatively short time-frames.  Revenues from those
turnkey systems that require significant customization are recognized as
contract revenues under the percentage of completion method. Earned revenue is
based on the percentage that incurred costs to date bear to total estimated
costs after giving effect to the most recent estimates of total cost.  The
cumulative impact of revisions in total cost estimates during the progress of
work is reflected in the year in which these changes become known.   Earned
revenue reflects the original contract price adjusted for agreed upon claim and
change order revenue, if any.  Progress billings in accounts receivable are
currently due in accordance with the contract terms.  Revenue received under
maintenance contracts is recognized over the term of the related agreements.

Research and Development
------------------------

Research and development cost in connection with the development of the
Company's computerized security systems software are expensed as incurred until
technological feasibility has been established at which time these costs are
capitalized.

Capitalized Software Costs
--------------------------

The Company capitalized costs incurred for internally developed software to be
sold, leased, or otherwise marketed where economic and technological feasibility
has been established. Capitalized software costs are amortized over the
estimated economic useful life of the software product (7 years).  Capitalized
software costs amounted to $4,491,000 and $4,119,000 at December 31, 1996 and
1995, respectively.  Accumulated amortization at December 31, 1996 and 1995,
amounted to $946,000 and $294,000, respectively.  Costs of product enhancements
are capitalized and amortized over the remaining life of the product.

Impairment of Assets
--------------------

The Company periodically assesses the realizability of the capitalized software
costs.  This assessment includes calculations of the estimated future gross
profits to be realized from product sales as well as consideration of changes in
hardware and software technology.

                                      F-9
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121).  SFAS 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  There was no material impact from the adoption of the provisions
of SFAS 121 in 1996.

Foreign Currency Translation
----------------------------

Ensec, S.A. operates in a highly inflationary country (Brazil).  As a result,
the U.S. dollar is considered the functional currency and a combination of
current and historical rates is used in translating assets and liabilities.  The
related exchange adjustments are included in operations.

The adjustments to reflect the effects of inflation, which are required by
generally accepted accounting principles in Brazil, have been eliminated in
these translated financial statements to conform them with generally accepted
accounting principles in the United States.

Earnings Per Common Share
-------------------------

Net loss per share has been computed by dividing net loss by the weighted
average number of common and common equivalent shares outstanding during each
period. The weighted average number of shares of common stock and common stock
equivalent shares used for computing net loss was 4,223,408 and 3,904,896 in
1996 and 1995, respectively. Weighted average shares includes the effect of the
options and warrants issued with exercise prices below the initial public
offering price and excludes options issued after the initial public offering
because such options were issued at fair market value, as calculated under the
treasury stock method.

In May 1996, the Company completed the bridge financing as discussed in Note N.
A part of those proceeds, along with a part of the proceeds from the public
offering (see Note L) were used to retire certain indebtedness.  Supplementary
loss per share data, assuming the issuance of the shares and the retirement of
debt at the beginning of the period, would be $(.92) and $(.67) for the years
ended December 31, 1996 and 1995, respectively.

Concentration of Credit Risk
----------------------------

The Company's sales are concentrated in the United States and Brazil.
Approximately 70% of the Company's sales in 1996 and 1995, are in Brazil, of
which one customer represents 18% in 1996 and 1995, respectively.  In the United
States, 29% and 53% of  the 1996 sales were to each of two customers,
respectively, while 62% of the 1995 sales resulted from a single contract.

                                      F-10
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED



At December 31, 1996, the Company had cash deposits with a bank in excess of the
$100,000 FDIC insurance coverage limit in the amount of approximately $220,298.
In addition, cash equivalents consisted of a $2,049,933 investment in money
market funds.

Stock Options
-------------

Options granted under the Company's 1996 Stock Option Plan (the "Plan") are
accounted for under APB 25, "Accounting for Stock Issued to Employees," and
related interpretations.  In November 1995, the Financial Accounting Standards
Board issued Statement 123, "Accounting for Stock-Based Compensation," which
requires additional proforma disclosures for companies that will continue to
account for employee stock options under the intrinsic value method specified in
APB 25.  The Company elected to continue to apply APB 25 in 1996 and has
disclosed the required information of SFAS No. 123 in Note Q.  Stock options
granted to non-employees are accounted for in accordance with SFAS No. 123.

NOTE B - RISKS AND UNCERTAINTIES

The Company will generate an increasing portion of its revenue from the sale and
service of En2000 integrated security system products. These products are
exposed to the risk that new technology could be introduced resulting in
significantly lowered demand for its products.  Also, the estimated useful life
of the Company's capitalized software costs is a significant estimate for which
it is reasonably possible that such a technology change will affect the
estimated useful life.

A significant amount of the Company's operations are based in Brazil.  The
Brazilian market in which the Company  operates is characterized by volatile and
frequently unfavorable economic, political and social conditions.  High
inflation and, with it, high interest rates are common.  Inflation has declined
but continues to be high in Brazil.  In 1996, the per annum inflation rate was
approximately 10% in Brazil (compared to over 22% and 900% in 1995 and 1994
respectively). Historically, Brazil has also experienced significant currency
fluctuations.  In view of the foregoing, the Company's business, earnings, asset
values and prospects may be materially and adversely affected by developments
with respect to inflation, interest rates, currency fluctuations, government
policies, price and wage controls, exchange control regulations, taxation,
expropriation, social instability, and other political, economic or diplomatic
developments in or affecting Brazil.  Although the Company has been able to
operate successfully in Brazil for over 13 years, it has no control over such
conditions and developments, and can provide no assurance that such conditions
and developments will not adversely affect the Company's operations.

NOTE C - ORGANIZATION OF HOLDING COMPANY

On April 2, 1996, Ensec International, Inc. was formed as a holding company and
acquired Ensec, S.A. and Ensec Inc. in a stock for stock transaction.  These
acquisitions have been accounted for as an exchange between entities under
common control in a manner similar to a pooling of

                                      F-11
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED


interest. Accordingly, the consolidated statements include the operations of
both companies for 1996 and 1995.

NOTE D - PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consists of the following:

<TABLE>
<CAPTION>
                                               1996                  1995   
                                            ----------           -----------
<S>                                        <C>                   <C>        
                                                                            
 Prepaid insurance                           $106,194              $     -- 
 Advances to suppliers                         68,000                85,000
 Social taxes receivable, net                      --               125,000
 Compulsory deposits                           66,000                41,385
 Other receivables                             23,312                70,000
 Other                                         53,878                21,267
                                             --------              --------
                                                                    
                                             $317,384              $342,652
                                             ========              ========
</TABLE> 
 
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:

<TABLE> 
<CAPTION> 
                                              1996                  1995  
                                          -----------           -----------
<S>                                       <C>                   <C>       
                                                                           
Land                                      $   279,000           $   279,000
Building                                    1,337,000             1,337,000  
Leasehold                                      16,875                    -- 
Machinery and equipment                     2,454,705             2,346,745  
 Furniture and fixtures                       265,670               532,943
 Vehicles                                          --                60,000
                                          -----------           -----------
                                            4,353,250             4,555,688
 Less accumulated
  depreciation                             (2,019,508)           (1,905,775)
                                          -----------           -----------
 
                                          $ 2,333,742           $ 2,649,913
                                          ===========           ===========
</TABLE>

                                      F-12
<PAGE>
 
                  ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE F - ACCRUED EXPENSES
Accrued expenses consists of the following:

<TABLE> 
<CAPTION> 
                                                    1996        1995
                                                 ----------   --------
<S>                                              <C>          <C>
  Salaries and related taxes                     $  524,292   $518,000
  Taxes other than income taxes                     160,000     83,000
  Advances from customers                           280,213     42,000
  Accrued interest                                   64,000         --
  Other accruals                                    373,058    337,384
                                                 ----------   --------
 
                                                 $1,401,563   $980,384
                                                 ==========   ========
</TABLE>

NOTE G - NOTES PAYABLE

Notes payable to Brazilian banks in 1995 amounted to $2,120,000. These notes
bore interest at rates ranging from 4.06% to 5.30% per month and were guaranteed
by the Chief Executive Officer of the Company.  These notes were repaid in
October and November of 1996.

In July and August 1996, the Company borrowed $100,000 on an unsecured basis
from its Chief Executive Officer and borrowed $400,000 from a financial
institution collateralized by $400,000 pledged by the Chief Executive Officer.
These loans bore interest at 7% per annum and approximately 5% per month
respectively.  In August 1996, the Company borrowed an additional $500,000 from
a Brazilian individual, which bore interest at a rate of approximately 5% per
month. These loans were repaid from the proceeds of the Offering discussed in
Note L.

NOTE H - LINES OF CREDIT

The line of credit balance at December 31, 1996 and 1995, consisted of the
following:

<TABLE>
<CAPTION>
                                                                                   1996           1995
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
 
Note payable to bank under a $200,000 line of credit;
  interest  payable monthly at prime plus 2%
  (effective rate of 10.5%); collateralized by
  accounts  receivable.  The note was repaid in 1996.                           $       --    $   185,400
 
Note payable to bank under a $300,000
  line of credit; interest payable monthly
  at prime plus 2% (effective rate of 10.5%);
  collateralized by accounts receivable.
  The note was repaid in 1996.                                                          --         83,374
                                                                                ----------    -----------
                                                                                $       --    $   268,774
                                                                                ==========    ===========
</TABLE> 

                                      F-13
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


NOTE I - LONG-TERM DEBT
 
Long-term debt at December 31, 1996 and 1995, consisted of the following:
 
<TABLE> 
<CAPTION> 
                                                                                  1996                  1995   
                                                                              -------------         -------------
<S>                                                                           <C>                   <C> 
Note payable to bank; principal and interest
  payable monthly; guaranteed by the
  Chief Executive Officer of the Company;
  maturing on March 15, 1998                                                    $1,057,000          $ 1,729,000
 
 Note payable; interest is payable monthly;
  bank principal is payable as described
  below; collateralized by a mortgage on
  certain real and personal property; maturing
  on April 15, 2002                                                              2,766,000            2,671,000
                                                                                ----------          -----------
                                                                                 3,823,000            4,400,000
Less current portion of long-term debt                                            (861,000)          (1,191,000)
                                                                                ----------          -----------
 
                                                                                $2,962,000          $ 3,209,000
                                                                                ==========          ===========
</TABLE>

The Notes bear interest at 12% plus an inflation adjustment (approximately 10%
in 1996).

During January 1997, the Company completed the restructuring of the mortgage
loan.  The revised terms of the loan extend the commencement of the principal
amortization to March 15, 1998 and the amortization period from 35 to 50 months.
The interest rate charged on the outstanding loan balance remains unchanged.

NOTE J - COMMITMENTS AND CONTINGENCIES

Leases
------

The Company leases certain offices and equipment pursuant to non-cancelable
operating leases which expire in various years through 2001.  The following is a
schedule of future  minimum lease payments as of December 31, 1996:

<TABLE>
                    <S>       <C>
                    1997      $ 75,279
                    1998        55,173
                    1999        61,454
                    2000        64,081
                    2001        66,817
                              --------
                              $322,804
                              ========
</TABLE>

Rent expense was approximately $79,460 and $211,900 in 1996 and 1995,
respectively.

                                      F-14
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Litigation
----------

The Company is engaged in various lawsuits, as defendant, involving alleged
employment law claims.  The Company has established reserves, which, in its
opinion, will be sufficient to satisfy its obligations with respect to such
lawsuits.
 
Employment Agreements
---------------------

The Company has entered into employment agreements with certain of its officers
for a period of three years commencing May or June 1996.  The agreements provide
the employees with severance benefits from 1 or 1 1/2 times total cash
compensation earned in the 12 months preceding the date of termination in the
event the agreements are terminated under certain conditions except for the
agreement with the Company's President and Chief Executive Officer, which
provides for a severance payment of 2.99 times the average annual compensation
paid by the Company or its subsidiaries and includable in such executive's gross
income for federal tax purposes for the five years prior to the year of
termination.  The agreements also provide for each officer a grant of options
under the Company's 1996 Stock Option Plan (the "Plan") which will vest in one-
third equal installments over a two year period. The first third vested upon
consummation of the initial public offering described in Note L.

NOTE K - INCOME TAXES
 
Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
                                         1996             1995
                                       ---------        ---------
<S>                                    <C>              <C>      
   Current
   Federal                             $      --        $      --
   Foreign                                    --               --
                                       ---------        ---------
   Deferred
   Federal                                    --               --
   Foreign                              (319,000)        (704,000)
                                       ---------        ---------
                                       $(319,000)       $(704,000)
                                       =========        =========
</TABLE> 

                                      F-15
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Deferred income taxes and benefits are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences which give rise to significant deferred tax
assets or liabilities follow:

<TABLE> 
<CAPTION> 
                                                          1996          1995
                                                     -----------    -----------
    <S>                                              <C>            <C> 
    Contributions                                    $     1,088    $       884
    Amortization of organization cost                         --          4,527
    Net operating loss - Federal                       1,884,664      1,229,821
    Net operating loss - Foreign                       2,580,000        919,000
    Other                                                     --          9,705
                                                     -----------    -----------
                                                       4,465,752      2,163,937
                                                    
    Less valuation allowance - Federal                   724,725      1,229,821
                             - Foreign                 2,580,000             --
                                                     -----------    -----------
                                                       1,161,027        934,116
                                                    
    Computer software costs                           (1,148,000)    (1,238,000)
    Amortization of organization costs                    (2,312)            --
    Depreciation                                         (10,715)       (15,116)
                                                     -----------    -----------

    Net deferred tax liability                       $       -0-    $  (319,000)
                                                     ===========    ===========
</TABLE> 

The change in the valuation allowance amounted to $2,074,904 and $442,321 in
1996 and 1995, respectively.
 
At December 31, 1996, the Company has net operating loss ("NOL") carry forwards
for income tax purposes as follows:
 
<TABLE> 
<CAPTION> 
                                                                       1996
                                                                    -----------
    <S>                                                             <C> 
    Federal                                                         $ 5,543,128
    Foreign corporate taxes                                         $ 8,022,000
    Foreign social contribution taxes                               $ 7,755,000
</TABLE>

The Federal tax NOL begins to expire in 2006.  The foreign NOL's have no
expiration date and therefore can be carried forward indefinitely.  Due to
historical losses, valuation allowances have been established for the tax
benefits attributed to the Federal and Foreign tax NOL's which cannot be offset
against the deferred tax liabilities.

                                      F-16
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE L - PUBLIC OFFERING OF COMMON STOCK

Pursuant to its initial public offering the Company completed the sale of
1,900,000 shares of Common Stock and redeemable warrants to purchase 2,185,000
shares of Common Stock on September 30, 1996. On November 19, 1996, the Company
sold an additional 25,000 shares of Common Stock pursuant to the exercise of an
over-allotment option by the underwriter. The Common Stock was sold at $6.00 per
share and the redeemable warrants at $.10 per warrant. Each redeemable warrant
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of $7.00 per share, subject to adjustment in certain events, at any time
on or after September 25, 1997 and expiring four years from that date. The
redeemable warrants may be redeemed by the Company commencing on September 25,
1997 at a price of $.10 per warrant subject to certain prior notification
requirements and provided that the closing bid price of the Common Stock has
been at least 150% of the then current exercise price of the warrants for a
period of 20 consecutive trading days ending on the third day prior to the date
on which the Company gives notice of redemption.

The net proceeds received by the Company from the initial public offering were
$9,642,715, inclusive of $2,125,795 of offering costs (including commissions and
discounts).

In conjunction with the initial public offering, 231,250 warrants issued in
connection with the senior subordinated notes (the "Bridge Warrants") were
automatically exercised at a price of $.10 per Bridge Warrant.

NOTE M - DISCONTINUED OPERATIONS

In 1995, the Company sold its currency sorting machine division to a minority
shareholder for the shareholder's interest in the Company plus $1,812,000 in
cash, and a 10% interest in the purchaser, valued at zero. Based on the
division's net book value of $133,000, and employee termination costs of
$188,000, a gain of $1,491,000 resulted from this transaction. The gain on
disposition of the segment has been accounted for as discontinued operations and
the prior year's financial statements have been restated to reflect the
discontinuation of the currency sorting machine segment. Revenues of this
segment for 1995 amounted to $2,896,000.

The 10% interest in the purchaser acquired upon the sale of the segment was
valued at zero due to lack of significant sales and profitability of the
purchaser as shown in its unaudited financial statements.  The Company is
accounting for this investment under the cost method.

NOTE N - SENIOR SUBORDINATED NOTES

In May 1996, the Company completed a $2,500,000 bridge financing whereby it
issued 100 Units at $25,000 each.  Each Unit consisted of: (i) a senior
subordinated promissory note in the principal 

                                      F-17
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


amount of $25,000 bearing interest, payable semi-annually, at the rate of 10%
per annum, which were due and payable on the earliest of (a) the closing of an
initial public offering of the Company's Common Stock, or (b) 12 months from the
date of the initial sale of the Unit; and (ii) Bridge Warrants to purchase 2,500
shares of the Company's Common Stock at an exercise price of $.10 per share. In
September 1996, warrants to purchase 18,750 shares of Common Stock which were
issued in the bridge financing were relinquished by the holders thereof.

The Bridge Warrants were detachable warrants and were accounted for separately
from the senior subordinated notes as an addition to paid-in capital.  The value
assigned to the Bridge Warrants was based on their fair value at the time of
issuance and amounted to $725,000.  Costs associated with the issuance of the
bridge financing allocated to the Bridge Warrants amounted to $82,296 and has
been charged against paid-in capital.

The value assigned to the senior subordinated notes of $1,775,000 created a
discount of $725,000 since the amount owed was $2,500,000.  This discount was
being amortized on the interest method over a 12 month period.  The Company
incurred $201,482 of costs associated with the issuance of the bridge financing
allocated to the senior subordinated notes which were capitalized and were
amortized as interest expense over the life of such notes.

The senior subordinated notes were repaid, together with accrued interest
thereon, on September 30, 1996 with a portion of the proceeds from the initial
public offering.  The unamortized discount on the notes and the capitalized
issuance costs incurred in connection therewith were fully amortized upon
repayment thereof.

NOTE O  - STOCK OPTION PLAN

In June 1996, the Company adopted the Plan, pursuant to which stock options
(both Nonqualified Stock Options and Incentive Stock Options, as defined in the
Plan), stock appreciation rights and restricted stock may be granted to
directors, key employees and consultants (the "Participants"). The Plan provides
for the automatic grant to directors ("Director Awards") who are not employees
of the Company or its subsidiaries, at such time as an individual becomes a
director of the Company, of Nonqualified Stock Options to purchase 15,000 shares
of Common Stock at an exercise per share equal to the greater of $3.00 or the
fair market value of the shares on the date of grant. The options of a Director
Award vest in increments of 5,000 shares per year, commencing on the date of the
Company's annual meeting of shareholders for the election of directors next
following the date such individual became a director and continuing with each
such successive annual meeting provided such person remains a director of the
Company as of such date. The Plan also provides for the acceleration of the
vesting schedule in certain circumstances.

Stock appreciation rights may be granted in conjunction with the grant of an
Incentive or Nonqualified Stock Option under the Plan or independently of any
such stock option.  A stock appreciation right granted in conjunction with a
stock option may be an alternative right.  In which 

                                      F-18
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


event, the exercise of the stock option terminates the stock appreciation right
to the extent of the shares purchased upon exercise of the stock option, and
correspondingly, the exercise of the stock appreciation right terminates the
stock option to the extent of the shares with respect to which such right is
exercised. Alternatively, a stock appreciation right granted in conjunction with
a stock option may be an additional right, in which case both the stock
appreciation right and the stock option may be exercised. A stock appreciation
right may not, however, be granted in conjunction with an Incentive Stock Option
under circumstances in which the exercise of the stock appreciation right
affects the right to exercise the Incentive Stock Option or vice versa, unless
certain terms and conditions are met. Subject to the terms of the Plan, the
Company may award shares of restricted stock to the Participants. Generally, a
restricted stock award will not require the payment of any option price by the
Participant but will call for the transfer of shares to the Participant subject
to forfeiture, without payment of any consideration by the Company, if the
Participant's employment terminates during a "restricted" period (which must be
at least six months) specified in the award of the restricted stock.

There are 450,000 shares authorized for possible issuance under the Plan, of
which Incentive Stock Options to purchase 355,000 shares were granted in May and
June 1996 with an exercise price of $3.00 per share.

During October 1996, Nonqualified Stock Options to purchase 15,000 shares of
Common Stock at $6.34 per share were issued to two directors.  Options to
purchase 15,000 shares not associated with the Plan were also granted in October
1996 to a consultant.  The consultant's options vest and have the same exercise
price as the options granted to the two directors.

NOTE P - SEGMENT INFORMATION

During 1995, the Company's operations involved two industry segments: one that
designs, develops, assembles, and maintains integrated security systems and
leases security equipment; and another that sells and installs currency sorting
equipment. The currency sorting equipment segment was sold in 1995 and has been
classified as a discontinued operation in the accompanying financial statements.
The geographic areas in which the Company operates are the United States and
Brazil. The Company operated in the two business segments in Brazil and only in
the security business segment in the United States. It is impracticable for the
Company to desegregate its foreign business segments. Therefore, in accordance
with FAS No. 14, these segments are presented on a combined basis. During 1996,
the Company only operated in the security industry segment. Net sales, operating
income (before interest and income taxes) and identifiable assets by geographic
area were as follows:

                                      F-19
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


<TABLE>
<CAPTION>
                                United States       Brazil      Consolidated
                                --------------   ------------   -------------
       <S>                      <C>              <C>            <C>
       1996
       ----
       Net sales                  $ 2,362,915    $ 5,445,000     $ 7,807,915
                                  ===========    ===========     ===========
       Operating loss             $(1,028,880)   $(2,615,000)    $(3,643,880)
                                  ===========    ===========     ===========
       Identifiable assets        $ 3,914,502    $ 6,944,000     $10,858,502
                                  ===========    ===========     ===========
 
       1995
       ----
       Net sales                  $ 2,406,815    $ 6,154,000     $ 8,560,815
                                  ===========    ===========     ===========
       Operating loss             $(1,069,026)   $(3,321,752)    $(4,390,778)
                                  ===========    ===========     ===========
       Identifiable assets        $ 2,000,598    $ 8,953,605     $10,954,203
                                  ===========    ===========     ===========
</TABLE>

NOTE Q - ACCOUNTING FOR STOCK-BASED COMPENSATION

As discussed in Notes A and O, the Company's Plan is accounted for under APB
Opinion 25 and related Interpretations.  Since all options granted under the
Plan were at fair market value, no compensation cost has been recognized for the
Plan.  Had compensation cost for the Plan been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
 
                                      1996
                                      ----
<S>                 <C>               <C>
Net loss            As reported       $(6,881,840)
                    Pro forma         $(7,068,109)
 
Loss per share      As reported       $     (1.63)
                    Pro forma         $     (1.67)
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996: expected volatility of 40 percent, risk-
free interest rate of 6.36 percent and expected life of 5 years.

A summary of the status of the Plan as of December 31, 1996 and changes during
the year ending on that date is presented below:

                                      F-20
<PAGE>
 
                   ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

<TABLE>
<CAPTION>
                                                                                                 Weighted Average
                                                                                      Shares      Exercise Price
                                                                                    -----------   --------------
<S>                                                                                 <C>           <C>
 
Outstanding at beginning of year                                                           --              --
Granted                                                                               385,000         $  3.26
Exercised                                                                                  --              --
Forfeited                                                                                  --              --
Outstanding at end of year                                                            385,000         $  3.26
Options exercisable at year end                                                       118,333         $  3.26
Weighted-average fair value of                                                                      
  options granted during the year                                                                     $  1.47
</TABLE> 
 
The following information applies to options outstanding at December 31, 1996:
 
<TABLE> 
<S>                                                                                 <C>           <C>
Number outstanding                                                                      355,000           30,000
Range of exercise prices                                                            $0 to $3.00   $3.01 to $6.34
Weighted-average exercise price                                                     $      3.00   $         6.34
Weighted-average remaining contractual life                                         $      9.00   $        10.00
</TABLE>

NOTE R - SUBSEQUENT EVENT

On January 1, 1997, Ensec Inc. adopted a 401(k) profit sharing plan (the "401(k)
Plan").  The 401(k) Plan is a defined contribution plan covering all eligible
employees of Ensec Inc.  To become a participant, an employee must be at least
21 years of age and must complete one year of service without an intervening
break in service.  An employee may become a participant in the 401(k) Plan on
the first day of the month following the completion of his or her age and
service requirements.  Ensec Inc., at its discretion, has elected to make a
contribution to the 401(k) Plan equal to 25% of the participant's elected
deferral and has the option to make additional contributions to be allocated
based on the ratio of the participant's salary to the total salary of all the
participants in the 401(k) Plan.  The participants will vest in their allocation
of Ensec Inc.'s contribution on a pro rata basis over the first four years of
service (as defined) with Ensec Inc. after which they will be fully vested in
all of Ensec Inc.'s contributions.

                                      F-21