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

                                   FORM 10-KSB
              Annual Report for the fiscal year ended June 30, 2001

                        Electronic Control Security Inc.
             (Exact name of registrant as specified in its chapter)

         New Jersey                    0-30810                   22-2138196
(State or Other Jurisdiction      (Commission File              (IRS Employer
     of Incorporation)                Number)                Identification No.)

                790 Bloomfield Avenue, Clifton, New Jersey 07012
                    (Address of Principal Executive Offices)

                                 (973) 574-8555
              (Registrant's Telephone Number, including Area Code)

                                   [Mark One]

|X|   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended June 30, 2001

|_|   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

      Securities registered pursuant to Section 12(b) of the Exchange Act:
                                      None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          $.001 Par Value Common Stock

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Company 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 contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Company'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 its most recent fiscal year were $5,226,901.

The aggregate market value of the voting and non-voting common equity,
consisting solely of common stock, held by non-affiliates of the issuer computed
by reference to the closing price of such stock was $2,143,200 as of September
17, 2001.

The number of shares of outstanding common stock of the issuer as of September
17, 2001 was 3,572,000.

DOCUMENTS INCORPORATED BY REFERENCE

The issuer's Proxy Statement for the 2001 Annual Meeting of Shareholders to be
held on November 14, 2001 is incorporated into Part III of this Form 10-KSB.
<PAGE>

PART I

Item 1. Description of Business.

Introduction.

Electronic Control Security Inc. ("we", "us", or "our") was incorporated under
the laws of the State of New Jersey in 1976. We and our wholly owned
subsidiaries design, manufacture and market security detection equipment for
correctional, commercial and industrial use and provide consulting and advisory
services with respect to risk assessment, including threat, vulnerability and
criticality analysis. Our product line includes:

      o     perimeter detection equipment (pulsed infrared, fiber-optic, thermal
            and video detection);
      o     Intrusion Detection and Monitoring System which integrates access
            control, perimeter infra-red detection systems, video assessment,
            and video badging systems;
      o     computer security systems, which detect entry into a computer
            network;
      o     vehicle and vessel tracking devices;
      o     asset tracking devices; and
      o     a personal identification and location system.

Many of our products are designed to protect a site against terrorism, theft and
arson. We market our products to large correctional facilities, government
facilities such as military bases, nuclear power stations, airports and private
corporations including international oil producers and high technology companies
desiring to protect trade secrets and prevent intrusion into facilities.

Industry Overview.

Traditional markets for our security equipment encompassed correctional
facilities and detention centers, and sales to those markets accounted for a
significant portion of our revenues during the 1980's.

During our formative years, we derived the material portion of our revenues from
sales to correctional and detention facilities. This market has stabilized
during this past year based on Justice Department statistics which reveal that
the number of felonies has decreased over the last year. We believe that the
current facilities will require an upgrade to their existing security systems
since the cost associated with maintaining a physical security staff would be
cost prohibitive. Therefore we will continue to develop this market in the
coming year.

As world terrorism increased over the last ten years, security issues and
concerns have become a primary consideration at both government and private
facilities. These sources now comprise the material segment of our business and
account for a material portion of our revenues.

The increase in terrorism against United States government facilities and
private entities during the last several years has increased security
considerations. Terrorism can be perpetrated by direct physical harm to
personnel and property, including theft, and indirectly by electronic means
through intrusion into computer networks. Terrorism is now perpetrated for
political, economic, religious and environmental reasons and virtually every
government and multinational corporation is a potential target. The recent spate
of terrorism against American interests both within the United States and abroad
has heightened awareness of the need to enact countermeasures to prevent the
occurrence of such activities. The government and private entities are
implementing the safeguards necessary to avert potentially dangerous acts
against life and property. In addition, foreign governments and foreign private
industry have begun to implement measures to protect against terrorist
activities. We will continue to focus on the market, both domestic and foreign,
for security systems designed to prevent terrorist activities and expect that
this market will continue to grow during the next decade and beyond.


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<PAGE>

Completed Systems and Works in Progress.

We have completed hundreds of projects since our inception including projects
for foreign governments, government owned utilities and multinational
corporations. We work on a regular basis for the United States Department of
Defense, Department of Energy and nuclear regulated power stations.

Products and Services

We market nine separate systems and products, most of which can be adapted,
integrated and configured for specific applications as required by the customer.
We market a number of these systems and products as a comprehensive, fully
integrated, building control security system with a real time, on-line dual
redundant central computer network. Our products are designed and manufactured
to be:

      o     reliable in harsh weather conditions and
      o     subject to low installation and maintenance costs.

In addition, the sensor systems comprising our products have been designed to
provide low nuisance and false alarm rates and are tailored specifically to meet
the needs of risk mitigation in high threat environments. We believe that we
offer the state-of-the-art sensor systems and data communications networks.

We work with our clients' engineers and architects, the systems integrator, and
the construction manager, to develop and design a system to achieve a secure,
yet normal environment for a facility. We employ the latest standard
off-the-shelf components to develop flexible systems that are cost-effective and
state-of-the-art.

In order to provide our clients with the highest quality and most advanced
systems, we incorporate into our projects products and technologies developed or
owned by other entities. After we evaluate a project, we will ascertain the most
effective and efficient solutions to satisfy a client's requirements. We then
examine the range of technologies and products available for the required
purpose and select the most appropriate product or technology for the project.

We frequently enter into technology transfer agreements covering the technology
or product to be used.

Products:

Infrared Perimeter Intrusion Detection System ("IPID(R) System") and Rapid
Deployment Infrared Detection System ("RDIDS")

The IPID(R) System consists of pulsed infrared sensors that detect an intruder
passing through the system's electronic pulsed infrared beams. Once a beam is
broken, the sensors automatically transmit an alarm signal to the control center
as to the exact zone of intrusion. The IPID(R) System features a self diagnostic
system which differentiates environmental conditions from intruders so that it
does not trigger environmental alarms caused by snow, fog, leaves or small
animals and alarms only when an intruder passes through the infrared beam. The
system detects intruders up to 1,200 feet in dry climate, 400 feet in rain and
snow and up to 300 feet in average fog conditions and operates at extreme
temperature ranges. Various configurations of IPID(R) are available and we can
tailor the systems to the particular installation. Intruder detection sensor
heads are easily affixed on extruded aluminum mounting systems and these poles
can be mounted vertically or horizontally, on buildings, at ground level, on top
of a fence for terrain following configuration, across sally ports, over water
or on roof tops. The system is tamper-proof and stealing the pulsed infrared
beam or fooling the system and is impervious to nuisance alarms. The system is
built to military specifications and is covered by a 10-year warranty. IPID(R)
Systems are in use at nuclear power facilities, the National Security Agency,
the US Department of Energy, the US Department of Defense, the US Department of
Transportation, and detention sites.


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<PAGE>

We also offer rapid deployable stand-alone perimeter intrusion detection systems
similar to the IPID(TM) System, marketed as the RDIDS, wherein the pulsed
infrared sensors are placed on portable tripods for mobile use and rapid
deployment. The RDIDS system employs a self-contained power source and requires
no interconnecting wiring. The RDIDS system is essentially impervious to
environmental conditions, standing water, small animals, waving grass and
vegetation and operates up to 1200 feet in clear weather and up to 300 feet
during average fog conditions. RDIDS is relatively simple to install, align and
maintain. RDIDS systems can be used in full stand-alone operation or may be
integrated with virtually any existing security annunciation system. The system
can operate temporarily on battery power as necessary. The system can be used
for immediate protection of exploration teams, pipeline construction sites,
military aircraft, temporary base camps, ammunition storage facilities and
special operations. All RDIDS carry a ten-year warranty against defects in
workmanship and material. These systems are in use at the US Department of
Defense sites.

Fiber Optic Intelligent Detection System ("FOIDS(R)")

Our FOIDS(R) product consists of a fiber optic sensor cable which can be
attached to any barrier, including a fence, wall or roof line, buried in the
ground or used beneath carpeting, above drop ceilings, imbedded in walls, in or
on any fixed surface. FOIDS(R) sensors are placed on reels, which facilitate
both deployment and recovery of the system. The FOIDS(R) system is designed to
be flexible and zonal detection areas can be configured to extend to a length of
100 to 250 meters and can be located up to 66 kilometers from the power source.

The fiber optic sensors used in the system are immune to most external
electronic impulses such as radio frequency emissions, static electricity
(including lightning), and moisture and ambient temperature variations. Digital
processing minimizes nuisance alarms and permits the operator to set the desired
probability of detection (i.e., sensitivity to certain conditions or
intrusions). The expanded alarm discrimination and sensitivity control features
of the FOIDS(R) (and the RDIDS) systems allow the user to fine tune the system
and fully optimize the sensor to its environment. FOIDS(R) systems can be
equipped with audio "listen-in" capability from each fiber optic sensor to
permit quick assessment of alarm conditions. The system can operate temporarily
on battery power as necessary. The FOIDS(R) system can be fully integrated with
a variety of digital security platforms. The FOIDS(R) system was designed to
provide long service life with low maintenance requirements.

FOIDS(R) systems employed with top-of-the-fence-terrain-following-sensors
provide fiber optic intrusion detection, which can create an environment whereby
an 8-foot fence, provides 11 1/2 feet of vertical detection.

The FOIDS(R) and RDIDS systems can be combined to create an easily deployable
single-mode optical fiber sensor incorporating the most recent developments in
optical and electronic technologies to provide state-of-the-art security in
tactical situations where temporary barrier security is required. The electronic
and photonic components of these systems are housed in a single enclosure to
protect the system from damage or exposure to unfavorable environmental
conditions.

FOIDS(R) systems are in use at Department of Defense, Department of Energy
National Security Agency Department of Transportation and detention sites. The
product line is listed under a pre-negotiated contract with General Services
Agency (GSA) Contract No. GS-07F-0329J. Any government agency can purchase
materials under this contract at 55% off published end user prices. Terms
include 2%10, 1%20, Net 30, freight prepaid destination USA. This contract
expires on July 31, 2004.


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<PAGE>

The FOIDS(R) and RDIDS systems incorporate certain technology, which we have
licensed from each of Lucent Technologies, Inc. and Mason Hanger National, Inc.
By agreement dated as of January 15, 1997, Lucent Technologies, Inc. granted to
us a nonexclusive right to use certain technology relating to Optical Fiber
Sensing Systems covered by United States patent number 4,904,050. Lucent also
furnished to us all technical information relating to this technology. The
license extends through the term of the patent, which is the subject of the
license. In consideration of the grant of the license, we (i) paid to Lucent an
aggregate of $50,000, (ii) agreed to pay Lucent a minimum continuing annual
royalty of $10,000 and (iii) an annual royalty equal to 4.4% of the gross
revenues derived from each product sold by us which incorporates the technology.

Under the terms of the license, we are entitled to sublicense this technology to
any of our subsidiaries.

By agreement dated March 5, 1997, we purchased from Mason Hanger National, Inc.
certain assets relating to the manufacture of the FOIDS(R) product line for an
aggregate purchase price of $151,500. In addition, we entered into a license
agreement with Mason Hanger whereby we obtained a license to use certain
intellectual property, consisting of 3 United States patents, which it developed
in connection with the FOIDS(R) systems. In accordance with this license, we
have now agreed to pay a royalty equal to 1% of the net sales price of products
incorporating the licensed patents less refunds, credits, taxes and normal trade
discounts for products incorporating the patents licensed to us.

Video Motion Detection System ("VMDS") and Video Assessment Systems ("VAS")

As an adjunct to its IPID(R), RDIDS and FOIDS(R), systems, we offer video
surveillance equipment to ascertain the nature of, and monitor, the announced
threat. The sole purpose of a perimeter detection system is to reliably sense an
intrusion into a prescribed physical area. Once an alarm has sounded, it is the
operator's function to confirm that the breach represents a risk requiring some
response. The video aspect of the system allows the operator to make a visual
corroboration of the breach and to determine whether the breach constitutes a
threat (e.g., one man or ten men) or whether the alarm represents something less
(e.g., a deer). Upon confirmation of a threatening intrusion, the operator can
deploy an appropriate response to that threat. If the perimeter system is not
complimented with some form of assessment (i.e., video confirmation), then the
response force will follow the same established procedures whether it is a deer
or a man or a group of men. The purpose of video assessment is to help the user
understand the cause of the alarm so that an adequate and appropriate response
can be initiated.

The Video Motion Detection System ("VMDS") is designed and constructed for
outdoor intrusion detection by using closed circuit television ("CCTV") cameras,
digital processing and fiber optic links. The CCTV camera field of view, up to
200 meters in length, is divided into discrete cells, which remain invisible to
the operator until an intruder moves into a field. The system is configured to
react to human characteristics of size, speed and direction. Once an intrusion
occurs, the operator's attention is drawn to the monitor by graphical and
audible warnings. Any cell that has been crossed is highlighted on screen,
creating a progress indicator. Multi-directional features enable detection of
intruders moving in any direction relative to the camera. Digital processing
minimizes false and nuisance alarms caused by small animals, birds and
environmental effects such as contrast changes, cloud shadows, wind induced
camera vibration, rain and snow.

VMDS can be integrated with existing security systems and with video motion or
video assessment systems and can be used with smoke and fire detection equipment
to detect fires indoors (electrical systems) and outdoors, and in hazardous
areas under risk of explosion.

Video Assessment Systems ("VAS") are integrated with other security measures to
aid in the assessment of alarm conditions. Constant attention to video monitors
can cause security control personnel to lose effectiveness. Using video
assessment as an adjunct to intrusion detection can assist in reducing operator
fatigue, ensure appropriate response and provide a record of intrusions.


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<PAGE>

Key features of our primary VAS include automatic camera selection based on the
specific alarm detected; storage of multiple alarm area scenes immediately when
the alarm is detected; random access retrieval of stored alarm scenes; cameras
positioned to view the same direction as the perimeter system detectors; and
real-time viewing of intruded area for comparison with stored alarm scenes.

Gamma 2000 System

In February 1998, we entered into an agreement with Rafael Armament Development
Authority, a department of the Israeli Ministry of Defense, which developed the
GAMMA 2000 Preemptive Intrusion System. Pursuant to this agreement, Rafael
appointed us as the exclusive marketing agent for the Gamma 2000 system in the
United States for a three-year period subject to extension for an additional
three years which extension should be granted based upon sales volume of the
products which is to be determined prior to the end of the initial term of the
agreement. No monetary consideration has been paid to the company since Rafael
retains the rights to this product. The original agreement was for the period of
three years from February 28, 1998. This agreement has now been extended through
February 13, 2004 with an option for an additional three-year term if sales meet
satisfactory volumes. The Gamma 2000 system is an electronic surveillance system
that detects intruders before they reach the perimeter of a secured zone. The
system's field units include a passive infrared ("PIR") sensor, closed circuit
digital camera, and projectors for nighttime use. Spaced at regular intervals,
the units relay data and real-time video images to a central control unit. The
system creates a 15-to 20-meter detection and verification band outside the
parallel to a secured perimeter. The system can operate in extreme temperature
ranges and in a variety of weather conditions.

The GAMMA 2000 system integrates with established systems, and, by providing
early warning that someone may attempt to breach a perimeter, it increases the
difficulties that terrorists or other intruders will encounter in their efforts.
The GAMMA 2000 system is suited for border control, military bases, power
stations, oil and gas storage facilities, nuclear power plants, industrial
sites, prisons and airports or other situations with high-level security
demands.

Intrusion Detection and Monitoring System ("IDMS")

IDMS represent the heart of any security system and allow several different
systems to be integrated into a single coherent security and detection unit. We
market a comprehensive PC based high-speed IDMS which integrates access control,
perimeter IDS, video assessment, and video badging systems and which is capable
of linking multiple buildings and multiple sites worldwide. Our system is
readily expandable and modular and can be operated by the user's own computer
server. Systems are available in Windows 95 and Windows NT software platforms
and can transmit voice, video and alarm data on a single fiber optic, copper or
twisted pair wire. Further, our systems employ hot swappable keyboards,
resulting in no down time. These systems can be configured to operate on
Ethernet, dedicated telephone lines, by radio frequency communications and
satellite communication links.

The system was in use at the World Trade Center and is in use at the DOE site in
Colorado, Brookhaven National Laboratories, among other locations.

Architectural Security Lighting Systems

A significant component of any security system includes proper and effective
lighting of the area to be protected. As a complement to our security systems,
we offer lighting systems which can enhance a facility's security by
illuminating areas which otherwise may be subject to infiltration because of
darkness or because of their location at some distance away from a facility's
main security center. Our lighting systems can be designed for interior and
exterior use and can be integrated directly into the security system, for
example, by mounting IPID sensors into custom lighting bollards. We work with
clients to design appropriate lighting systems for a project and the equipment
is built to design specifications. We have designed and developed lighting
systems for landscape architects, interior designers, lighting consultants and
end-users. We have completed lighting system projects for, among others, the FBI
Building


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<PAGE>

in Washington, D.C., the Immigration and Naturalization Service Building in
Burlington, Vermont, and the Dartmouth University Medical Center.

SecureLan

SecureLan is a local area network (a series of computers linked together by a
dual path fiber optic cable or copper wire and herein referred to as a "LAN")
physical security system. As more and more entities are linked to the Internet,
computer hackers are able to gain illegal access to the entities' computer
systems. We have developed a system, which identifies an unauthorized access to
a LAN and annunciates the intrusion. Any unauthorized access to the LAN will
alert the user to shut down the network, thereby denying the intruder access to
sensitive or confidential information. A graphical map details the location of
the alarm and other pertinent information relating to the intrusion. The active
component of the SecureLan is its fiber optic sensor cable, which can be trained
to sense, unauthorized access to the LAN.

Vehicle and Vessel Protection Systems

We manufacture and market systems designed to protect vehicles and vessels by
installing or affixing small global positioning system ("GPS"), which tracks the
position of the item.

The StarLog 8 and StarLink are locating devices which are capable of tracking a
vehicle or vessel and reporting and logging its location at user-specified
intervals in real-time or in batched download. The StarLog 8 consists of an
eight channel GPS tracking unit that is installed in the vehicle or vessel and
the software necessary to record its location based upon several available
mapping options, which can be displayed to show position trails, and current
location. The StarLink system is similar in all respects to StarLog except its
route of travel is downloaded when the vehicle returns. The StarLog 8 and
StarLink have applications in law enforcement, covert surveillance, cargo
tracking, fleet management, traffic analysis and billing verification.

Asset Protection

We market a radio frequency ("RF") unit, which can be affixed to an asset such
as a computer or other valuable piece of property. Each RF unit transmits a
unique electronic signature to the owner's computer, which identifies the
property. The software installed in the owner's computer system automatically
activates if the property is moved or tampered with. The device's tracking
capability displays movement of the property.

Personal Alarm Devices

We market a line of personal alarm systems, which permit individuals to signal
for assistance instantly. The signal transmitted identifies and locates the
person in seconds. The Company hopes to market these devices to hospitals,
colleges (for protection of coeds at night), and mental health facilities. This
system integrated with area lighting, intercom and an architectural enclosure is
being marketed to large campuses on a sale or lease basis.

Consulting Services.

We furnish consulting and advisory services with respect to risk assessment,
including threat, vulnerability and criticality analysis. Our consulting
services generally consist of evaluation and then the design and specification
of security systems that meet the client's operating and budgetary requirements.

Product Design, Manufacturing and Installation.

We design and develop new products based upon market requirements. We research
and assess threat and vulnerability issues at selected facilities within our
target markets and we design and engineer our products in-house, with outside
consultants as necessary, and in conjunction with joint venture partners to meet
the needs of clients within the target markets based upon the results of such
research. We purchase the


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<PAGE>

individual components comprising our products from third party suppliers, or
subcontract to third parties the manufacture of specific subsystems necessary
for a particular product. We assemble and finish our products at our facilities
in New Jersey and Alabama. Various aspects of the software programming required
in connection with our computer products are designed and written by in-house
personnel. We are not dependent on any major suppliers for the components of our
products and we believe, should it become necessary, that substitute suppliers
for any of the components are readily available.

We have engaged twenty dealers/installers with locations in thirty-seven
countries around the world. These entities serve to market our products in their
geographic area and to install our products in client facilities. Our
dealers/installers also serve as the support network for product installations.
Our major dealers/installers are strategically located in the key growth markets
of North and South America, the Asian rim and the Middle East.

Markets for Our Products.

We have identified a number of major geographic and industrial markets for our
products and have developed a marketing plan to access those markets and
industries. Generally, private industry and public and government facilities
possessing sensitive information, valuable assets or which otherwise may be
subject to terrorist threats by virtue of the nature of their business have
recognized the need to implement security measures to protect personnel and
property. In many instances, laws have been enacted and judicial mandates have
been handed down decreeing compliance with some minimum-security standards. We
target these entities as well as entities to which we can demonstrate the need
for security measures.

The following represent the primary markets, which we target:

      o     United States Government and Agencies. The United States Government
            and many of its departments represent a significant market for our
            products and has been a significant customer in the past. US
            Government departments that have purchased our products in the past
            and to which we currently actively market our products include:
      o     The United States Department of Defense and a number of its
            subdivisions have been using our products for force and asset
            protection at numerous sites including military bases and
            installations;
      o     The United States Department of Energy in connection with its
            clean-up program of military bases and government-owned nuclear
            energy facilities, offer an expansive and varied market for our
            products;
      o     In the past, we have marketed and sold products to other United
            States government departments including the Immigration and
            Naturalization Services and the National Aeronautic and Space
            Agency. We will continue to focus on these and other government
            departments in the future.
      o     We plan to supply a significant portion of the products and services
            to these facilities. The technologies required to create a secure
            airport facility in today's environment must address power,
            lighting, life safety, local area network and wide area network
            protection and other security systems to create a normal yet secure
            environment for employees, passengers and service personnel. Our
            Intrusion Detection and Monitoring System can be applied to create
            the security needed in today's airports.
      o     Energy Facilities, Including Nuclear Plants, Power Utilities and
            Petrochemical Pipelines. Nuclear and utility power stations which
            house sensitive information and dangerous materials represent a
            large and lucrative market for our products. These entities are
            critical to the normal function of society and must be protected at
            all costs. Petrochemical, natural gas and pipeline companies, many
            of which operate in high risk and remote environments and geographic
            locations, invest huge sums in the assets necessary to operate these
            businesses and are taking steps to protect these investments through
            the acquisition of security equipment and systems.
      o     Commercial Airports. Commercial airport security has been at the
            forefront of security consciousness for many years. There are
            approximately 1,200 facilities in the United


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<PAGE>

            States, which the Federal Aviation Agency has identified and
            mandated for security systems, upgrades to be completed over the
            next several years.
      o     Foreign/Export Opportunities. Government operations and private
            industries in foreign countries all have similar security issues
            which must be addressed and we, along with our strategic teaming
            partners, continue to seek to penetrate these markets as time and
            capital warrant. During 2000 and 2001, we generated approximately
            40% and 6%, respectively, of our revenues from projects performed
            outside the United States. We have completed projects in numerous
            foreign countries including the Russian Federation, Saudi Arabia,
            Korea, Ukraine, Columbia, Malaysia and Hong Kong. We currently are
            working on projects in Brazil, South Korea, Israel, Egypt, Bahrain,
            Kuwait, Turkey, Greece, a number of African countries and other
            nations around the world. We believe that the market for our
            products is as strong or stronger than in the United States and we
            intend to continue to pursue vigorously opportunities abroad.

Marketing.

We have developed a multi-tiered marketing plan which allows us to effectively
market our products to each of the separate government and industry segments we
have identified as target markets both in the United States and internationally.
Our marketing strategy highlights its products strengths as they apply to that
particular industry.

The primary goals of our marketing strategy are to

      o     broaden the base of potential clients to which we can market our
            products and
      o     validate the efficacy of our product line to those not familiar with
            our product offerings.

To that end, we have entered into teaming, representative and joint venture
relationships with major corporations in each of the industries, which comprise
our target markets. These entities generally enjoy a strong market presence in
their respective industries and we believe that our association with these
entities affords us and our products with added credibility.

From time to time, we have entered verbal or written teaming arrangements with
companies, i.e., the Aerospace Corporation, Horne Engineering services, E2
Engineering & Services, Duke Engineering & Services, Inc., Honeywell Corp., KDN,
Lau Technologies, Engineered Professional Services, Science Applications
International Corporation, Secure Applications Inc., and TRW Systems Integration
Group to pursue specific projects. Each of our teaming associates has expertise
in the different industries, which we have identified as markets for our
products and assists in introducing us to potential clients and purchasers, or
otherwise includes our products as subsystems of a larger project.

We develop and maintain relationships with large systems integrators such as
Lockheed Martin, TRW, Honeywell, Dyne McDermott, Kaiser-Hill, Westinghouse,
Sandia, Bechtel, NISE East, and others, and have built a reputation among these
companies as a technology resource, technology application and support
organization with respect to the security industry. Numerous orders are
generated from our association with these entities, which are among the largest
in the world in their respective fields, conduct business with other large
companies in the development and construction of huge projects and have the
ability to influence project purchases. The percentage of the companies' total
revenues derived from each customer vary from year to year.

Members of our management team have many years of experience in the field of
security. Each member of the management team is assigned an area and makes
direct contact with, and sales proposals to, government and industrial
organizations in that area. In addition, we have engaged dealers/sales
representatives (many of which also serve as installers of ours products)
throughout the United States and around the world to actively market our
products to governments and private industry.


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<PAGE>

We attempt to develop and maintain relationships and contacts with employees of
each of the major government agencies encompassing our target markets and have
cultivated such relationships in the past. In addition, we rely on our teaming
and strategic partners for introductions to appropriate personnel at these
agencies.

A significant portion of our international business is generated through our
network of independent dealers/installers. We have entered into agreements with
dealers/installers, which allow us to maintain a presence in thirty-five
countries worldwide. Our agreements generally extend for a period of two years
and provide the dealer/installer with discounts from current product prices as
an incentive to market our products in their geographic area. We rely on our
dealer/installer base to represent us and our product line throughout the world
and to apprise us of potential projects, which can incorporate our products. In
addition, we rely on our dealers/installers to introduce our company and our
products to key government and private enterprise personnel in their respective
geographic regions.

We also attend the major trade shows for each industry and advertise in relevant
industry publications. If additional working capital becomes available, we will
seek to increase our advertising in industry specific publications to create
greater name recognition.

Growth Strategy.

In order to achieve a sustainable and realistic growth rate, we believe that the
company must devote additional resources to marketing and product development.
Specifically, we intend to:

      o     Add two persons to our marketing and sales team. We will seek to add
            two persons to our marketing team who have extensive sales and
            marketing experience in the areas of marketing to the United States
            government and the petroleum and chemical markets, as we believe
            these areas represent the greatest potential for growth in the near
            and medium term. We believe that additional sales and marketing
            personnel will allow us to access additional markets and develop the
            focused marketing efforts required to develop business in our target
            markets.
      o     Commence the development of new products and software to support the
            new and existing products. We intend to develop new products and
            software to up-grade the current IPID system to a microprocessor
            system using a Window NT platform. We also intend to up-grade the
            FOIDS product line by incorporating new hardware and software based
            on the Windows NT platform. We will use the Window NT software to
            integrate these systems as well as our video motion detection
            systems to meet our customers' requirements. We believe that the new
            products and software will add sales volume by enabling us to expand
            product application capabilities, which will result in the expansion
            of marketing opportunities.
      o     Expand our base of dealers/installers worldwide. We believe that an
            effective and cost efficient means of increasing sales is to expand
            our base of dealers/installers worldwide. These entities serve as
            our local agents to market products and provide customer support.
            Furthermore, these entities are familiar with local laws and
            frequently have local contacts in government and business at
            decision-making levels. We will seek to expand our international
            base of dealers/installers by advertising in trade publications,
            though our company web site and through international customer
            referrals.
      o     Purchase laboratory and testing equipment. We intend to purchase
            certain laboratory and testing equipment, which will allow us to
            enhance and maintain product quality standards and support our
            extended warranty program.

We anticipate that we will require approximately $1,200,000 to implement our
business plan and growth strategy. We have identified our sources of such funds
and have discussed this subject further under the liquidity and capital resource
section on Page 14.


                                       10
<PAGE>

Competition.

As the government and private industry become increasingly concerned with
security issues, the security and anti-terrorism industry has grown accordingly.
Competition is intense among a wide ranging group of product and service
providers, most of which are larger than us and possess significantly greater
assets, personnel, sales and financial resources, but most of which, we believe,
specialize in only one or two products or product lines or sales to a limited
number of the industries which comprise the market for security products. The
principal factors affecting competition in the industry include applied
technology, product performance, price and customer service. We believe that we
have a competitive advantage over other product and service providers in the
industry because:

      o     we offer a wide range of products to meet numerous security
            requirements;
      o     our products are flexible (many of our products can be configured to
            meet specific needs and can be integrated with each other and with
            and into existing security systems);
      o     our products are reliable;
      o     our products are relatively easy and inexpensive to install and
            maintain;
      o     our products do not have high incidence of nuisance or false alarms,
            and
      o     we have been successful in teaming with large multinational
            companies which market and incorporate the Company's products in
            their product offerings, thereby lending credibility to the efficacy
            of the Company's products.

Employees.

As of June 30, 2001 we employed twenty one (21) individuals on a full-time basis
including four (4) design and engineering staff, eight (8) manufacturing and
assembly employees, three (3) marketing employees and six (6) administrative
employees. A number of the employees serve in multiple capacities, for example,
Arthur Barchenko serves as our President but also is an integral member of the
Company's marketing team. The company has eight independent sales representative
organizations covering specific regions in the U.S.A., Middle East, and
Southeast Asia.

Item 2. Description of Properties

Our corporate headquarters are located at 790 Bloomfield Avenue, Clifton, New
Jersey where we lease approximately 10,000 square feet of space divided among
administrative (3,000 sq. feet) and manufacturing (7,000 sq. feet) space.

We have leased this space through May 1, 2008 at a rent of $3,917 per month. We
also lease approximately 3,500 square feet of manufacturing space at 102 Madison
Circle, Suite D, Madison, Alabama. We have leased this space through June 30,
2005 at a rent of $1,800 per month. We believe that this space is sufficient for
our current requirements and that additional space is available on commercially
reasonable terms, if necessary

Item 3. Legal Proceedings

We have commenced an action in Federal District court in New Jersey against four
companies, alleging infringement of certain of our proprietary technology and
trademarks, and civil conspiracy. Two of the defendants have filed
counterclaims. The case remains in the discovery stage and no opinion can be
expressed at this time as to its eventual outcome.

We are a defendant in a case brought in State Court in Oregon, with a claim of
misappropriation of trade secrets and related claims. The plaintiff has sought a
preliminary injunction. An evidentiary hearing was concluded on May 16th and
17th, 2001 and written opinion has been submitted including minor restrictions
pertaining to us a $250,000 bond imposed against the Plaintiff. The case remains
in the trial stage and no opinions can be expressed at this time as to its
eventual outcome.


                                       11
<PAGE>

We intend to defend our position vigorously and we do not believe that the final
outcome will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.

We are currently party to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, we do not believe that the
outcome of any of these or any of the above mentioned legal matters would have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.

Item 5. Market Price and Dividends on Registrant's Common Equity and Related
Stockholder Matters

Following our initial public offering on February 26, 1987, our units,
comprising one share of common stock and one common stock purchase warrant were
traded principally on the over-the-counter Bulletin Board ("OTC-BB") under the
symbol "EKCSU". On December 1, 2000, the securities were delisted. On June 5,
2001, the common stock began trading on the OTC-BB under the symbol "EKCS.OB".

The following table sets forth the high and low bid quotations of a unit of our
Common Stock and Warrants under the symbol "EKCSU" for the periods indicated, as
reported by the National Quotation Bureau.

                                                Closing Bid
                                          High               Low
                                         -------------------------
Fiscal 2000
First Quarter                              .50              .125
Second Quarter                             .25              .0625
Third Quarter                             1.25              .50
Fourth Quarter                            1.31              .81
JUNE 30

Fiscal 2001
First Quarter                              .02              .02
Second Quarter                             .02              .02
Third Quarter                              .02              .02
Fourth Quarter *                           .02              .02
* through June 4, 2001

The following table sets forth the high and low bid quotations per share of our
Common Stock "EKCS.OB" as reported on OTCBB.

                                                Closing Bid
                                          High               Low
                                         -------------------------
Fiscal 2001
Fourth Quarter *                          3.00              .30
* Commencing June 5, 2001

The foregoing quotations reflect prices between dealers, do not include retail
mark-ups, markdowns or commissions and may not necessarily represent actual
transactions. The closing price of our common stock on September 17, 2001 was
$.75 per share.


                                       12
<PAGE>

Holders

As of September 17, 2001, there were approximately 435 shareholders of record of
our common stock.

Dividends

We have not declared any cash dividends with respect to our common stock, and do
not intend to declare dividends in the foreseeable future. Declaration or
payment of dividends, if any, in the future, will be at the discretion of the
Board of Directors and will depend on our then current financial condition,
results of operations, capital requirements and other factors deemed relevant by
the Board of Directors.

Recent Sales Of Unregistered Securities

In May & June 2001, we issued 98,000 shares of common stock to Ruffa & Ruffa in
exchange for legal services.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Certain statements included by reference in this Report containing the words
"believes," "anticipates," "intends," "expects," and similar such words
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Any forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause actual
results, performance, or achievements of the Company to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the impact
of new products, our ability to quickly increase production capacity in the
event of a dramatic increase in demand of new products, our ability to continue
to finance operations and expansion of production through equity and debt
financing, as well as sales, and the increased interest of international
markets. Given these uncertainties, undue reliance should not be placed on
forward-looking statements.

Results of Operations

Year Ended June 30, 2001 ("Fiscal 2001") Compared to Year Ended June 30, 2000
("Fiscal 2000").

NET REVENUES. The Company reported net revenues of $5,226,901 for fiscal 2001,
and increase of $3,379,764, or 183% over revenues reported for fiscal 2000
period. This increase is primarily due to shipments on a Department of Energy
(DOE) project in fiscal 2001. The DOE project was completed in April 2001. We
currently have a backlog and firm contract commitments of approximately $5.5
million.

GROSS MARGINS. Gross margins increased in fiscal 2001 to 48.1% of net revenues
as compared to 45.2% of net revenues in fiscal 2000. This increase is primarily
due to the absorption of fixed manufacturing costs by the increased sales volume
and the sale of higher gross margin products and services in the period.

SELLING GENERAL AND ADMINISTRATIVE. Selling general and administrative expenses
increased in fiscal 2001 to $1,306,873, as compared to $843,042 in fiscal 2000.
The increases in 2001 were attributable to increases in sales commissions,
travel, advertising and sales promotion related to the increase in sales volume.
We also incurred higher professional fees related to filing of our Form 10SB and
certain litigation.

INTEREST EXPENSE. Interest expense in fiscal 2001 was $51,638, an increase of
$21,055 over fiscal 2000, which was $30,583. The increase was attributable to
the use of the bank line of credit.

INCOME TAXES. The credit for income taxes in fiscal 2000 was due to the
recognition of the tax


                                       13
<PAGE>

benefits of net operating loss carryforwards.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In fiscal year 2000, the Company wrote
off $102,000 of previously deferred startup costs in accordance with SOP 98-5,
which prohibits the capitalization of such costs.

NET INCOME (LOSS). The Company reported net income for fiscal 2001 of $773,366,
or $.22 and $.21 per share on a basic and diluted basis, respectively, as
compared to a net loss of $8,267, or $(.002) per share on a basic and diluted
basis for fiscal 2000.

Liquidity and Capital Resources

At June 30, 2001 the Company had working capital of $768,948. Accounts
receivables and inventories increased by $156,205 and $555,437 respectively.
Inventories have increased commensurate with the increase in sales volume. Net
cash provided by operating activities for fiscal 2001 was $493,577 as compared
to net cash used in operations of $321,151 during fiscal 2000.

Investing activities for fiscal 2001 included purchases of $18,959 for equipment
and a $24,000 payment for a licensing fee compared to $31,193 and -0-, in fiscal
2000, respectively. The Company does not have any material commitments for
capital expenditures.

Financing activities in fiscal 2001 period consisted primarily of repayments of
the Company's revolving credit line, bank overdraft, notes payable and loans
from shareholders. The Company has available a revolving line of credit for up
to $500,000 which bears interest at the rate of 1% above prime. The credit
facility, which is due to expire on November 30,2002 is secured by substantially
all of the assets of the Company and by the personal guaranty of Arthur
Barchenko.

To fully implement our business plan and growth strategy we will require
approximately $1,200,000 over the next twelve to eighteen months and expect that
these funds will be available from our line of credit and cash flows from
operations.

Trends That May Affect Future Results

We continue to invest in the upgrade of our existing products as well as
developing new technologies to insure future growth. We have also recently
acquired the licensing rights to manufacture and market a state of the art
vehicle & vessel tracking system, which we expect to begin marketing September
2001. We have expanded our FOIDS operation by moving to larger quarters in
Madison, Alabama in addition to hiring an optical technician to support the
manufacturing and installation requirements of the product line.

The success of these products depends upon a number of factors, including our
ability to meet a set of rigorous customer specifications, and ability to
reliably manufacture such products in sufficient quantity at acceptable yields
to meet anticipated demand.

We expect to maintain our current customer base while expanding market
penetration both in the United States and abroad. We have recently added sale
representatives/dealers installers in South America and many of the Middle
Eastern countries.

Item 7. Financial Statements And Supplementary Data

Our financial statements, which are included in this report on pages F-1 through
F-14, are incorporated herein by reference.


                                       14
<PAGE>

Item 8. Changes In And Disagreements With Accountants On Accounting and
Financial Disclosure

      None.

PART III

Item 9. Directors, Executive Officers, Promoters And Control Persons; Compliance
With Section 16(A) Of The Exchange Act

The Company will furnish to the Securities and Exchange Commission a definitive
Proxy Statement (the "Proxy Statement") not later than 120 days after the close
of its fiscal year ended June 30, 2001. The information required by this item is
incorporated herein by reference to the Proxy Statement

Item 10. Executive Compensation

The information required by this item is incorporated herein by reference to the
Proxy Statement.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated herein by reference to the
Proxy Statement.

Item 12. Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the
Proxy Statement.

PART IV

Item 13. Exhibits and Reports On Form 8-K

(a) EXHIBITS. The exhibits listed below are filed with or incorporated by
reference in this report.

None.

(b) REPORTS ON FORM 8-K.

None.

SIGNATURES

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

                                  ELECTRONIC CONTROL SECURITY INC.


Date: September 28, 2001          By: /s/ Arthur Barchenko
      ------------------          --------------------------------------
                                  Arthur Barchenko, President
                                  Chairman of the Board, Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.


                                       15
<PAGE>

By:/s/ Arthur Barchenko
Arthur Barchenko
President, Secretary and Chief Executive Officer
Date: September 28, 2001

By:/s/ Mark R. Barchenko
Mark R. Barchenko
Vice President, Treasurer
Business Development
Date: September 28, 2001

By:/s/ Gene Rabois, CPA
Gene Rabois, CPA
Director
Date: September 28, 2001

By:/s/ Edward Snow
Edward Snow
Director
Date: September 28, 2001

By: /s/ Dr. Robert F. Reiter
Dr. Robert F. Reiter
Director
Date: September 28, 2001


                                       16
<PAGE>

                        ELECTRONIC CONTROL SECURITY INC.
                                AND SUBSIDIARIES

                              FINANCIAL STATEMENTS
                        With Independent Auditors' Report


Independent Auditors' Report                                              F-1

Consolidated Balance Sheets                                               F-2

Consolidated Statements of Operations                                     F-3

Consolidated Statement of Changes in Shareholders'
Equity (deficit)                                                          F-4

Consolidated Statements of Cash Flow                                      F-5

Notes to Consolidated Financial Statements                              F-6-F-14
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of Electronic Control Security Inc.
and Subsidiaries

We have audited the accompanying consolidated balance sheets of Electronic
Control Security, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders equity
(deficit), 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 audit.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of Electronic Control Security, Inc.
and its subsidiaries as of June 30, 2001 and 2000, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.


DEMETRIUS & COMPANY, L.L.C.

Wayne, New Jersey
August 16, 2001


                                       F-1
<PAGE>

                       Electronic Control Security, Inc.
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                               June 30,
ASSETS                                                                   2001           2000
                                                                      ----------    -----------
Current assets
<S>                                                                   <C>           <C>
    Cash                                                              $      927    $     1,428
    Accounts receivable, net of allowance of  $25,000 in 2001            274,815        143,610
    Inventories                                                        1,255,785        700,348
    Deferred income taxes                                                132,000         38,000
    Other current assets                                                  61,703         69,578
                                                                      ----------    -----------
        Total current assets                                           1,725,230        952,964

Property, equipment and purchased software at cost
    net of accumulated depreciation of $320,702 and $252,836             159,025        207,932
Intangible assets at cost net of
    accumulated amortization of $25,776 and $17,957                       58,653         42,472
Deferred income taxes                                                      9,000        472,000
Other assets                                                              24,917         23,335
                                                                      ----------    -----------
                                                                      $1,976,825    $ 1,698,703
                                                                      ==========    ===========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current Liabilities
    Bank overdraft                                                    $       --    $   105,284
    Accounts payable and accrued expenses                                551,469        543,258
    Bank line of credit                                                  300,000             --
    Current maturities of long-term debt                                  18,000         28,000
    Obligations under capital leases                                      14,900         19,907
    Payroll taxes payable                                                  9,591         82,471
    Income taxes payable                                                  23,322         13,578
    Due to officers and shareholders                                      39,000         75,004
                                                                      ----------    -----------
        Total current liabilities                                        956,282        867,502

Noncurrent liabilities
    Obligations under capital leases                                      32,796         48,183
    Bank line of credit                                                       --        413,000
    Long-term debt                                                            --         16,000
    Due to officers and shareholders                                     202,679        315,767
    Deferred income taxes                                                  1,000             --
    Other liabilities                                                    104,525        131,874
                                                                      ----------    -----------
        Total liabilities                                              1,297,282      1,792,326

COMMITMENTS AND CONTINGENCIES

Shareholders' equity (deficit)
    Preferred stock, $.01 par value
        5,000,000 shares authorized, none issued and outstanding
    Common Stock, $.001 par value; 15,000,000 authorized;
        3,672,000 and 3,574,000 issued; 3,572,000 and 3,574,000
        outstanding in 2001 and  2000, respectively                        3,672          3,574
    Additional paid-in capital                                         1,456,100      1,446,398
    Accumulated deficit                                                 (770,229)    (1,543,595)
    Treasury stock, at cost, 100,000 shares                              (10,000)            --
                                                                      ----------    -----------
        Total shareholders' equity (deficit)                             679,543        (93,623)
                                                                      ----------    -----------
                                                                     $ 1,976,825    $ 1,698,703
                                                                      ==========    ===========
</TABLE>

                See Notes to Consolidated Financial Statements.


                                       F-2
<PAGE>

                       Electronic Control Security, Inc.
                     Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                        Year
                                                                       Ended
                                                                      June 30,
                                                               2001            2000
                                                            -----------     ----------
<S>                                                          <C>            <C>
Revenues                                                    $ 5,226,901     $1,847,137
Cost of revenues                                              2,711,809      1,012,979
                                                            -----------     ----------

    Gross profit                                              2,515,092        834,158
                                                            -----------     ----------

Selling, general  and administrative expenses                 1,306,873        843,042
                                                            -----------     ----------

    Income (loss) from operations                             1,208,219         (8,884)

Interest expense                                                 51,638         30,583
Other income                                                     (5,285)            --
                                                            -----------     ----------

Income (loss) before provision (credit) for income taxes      1,161,866        (39,467)
                                                            -----------     ----------

Provision (credit) for income taxes                             388,500        (90,400)
                                                            -----------     ----------

Income before cumulative effect of accounting change            773,366         50,933
Cumulative effect of accounting change on years
   prior to 2000 (net of income tax credit of $42,800)               --         59,200
                                                            -----------     ----------

Net income (loss)                                            $  773,366     $   (8,267)
                                                             ==========     ==========
Net income (loss) per share:
     Basic                                                   $     0.22     $    (0.00)
                                                             ==========     ==========
     Fully diluted                                           $     0.21     $    (0.00)
                                                             ==========     ==========

Weighted average number of common shares and equivalents:
     Basic                                                    3,526,866      3,565,667
                                                             ==========     ==========
     Fully diluted                                            3,736,866      3,565,667
                                                             ==========     ==========
</TABLE>

                See Notes to Consolidated Financial Statements.


                                       F-3
<PAGE>

                        Electronic Control Security, Inc.
       Consolidated Statements of Changes in Shareholders Equity (deficit)

<TABLE>
<CAPTION>
                                                                        Additional
                                                   Common Stock           Paid-in    Accumulated    Treasury
                                               Shares        Amount       Capital      Deficit       Stock        Total
                                              ---------     --------    ----------   -----------    --------    ---------
<S>              <C>                          <C>           <C>         <C>          <C>            <C>         <C>
Balances at July 1, 1999                      3,474,000     $  3,474    $1,436,498   $(1,535,328)   $     --    $ (95,356)

Net loss                                                                                  (8,267)                  (8,267)

Issuances of common stock, par value $.001
    Services rendered                           100,000          100         9,900                                 10,000
                                             ----------     --------    ----------   -----------    --------    ---------

Balances at June 30, 2000                     3,574,000        3,574     1,446,398    (1,543,595)         --      (93,623)

Net income                                                                               773,366                  773,366

Purchase of shares for treasury                                                                      (10,000)     (10,000)
Issuances of common stock, par value $.001
    Services rendered                            98,000           98         9,702                                  9,800
                                             ----------     --------    ----------   -----------    --------    ---------

Balances at June 30, 2001                     3,672,000     $  3,672    $1,456,100   $  (770,229)   $(10,000)   $ 679,543
                                             ==========     ========    ==========   ===========    ========    =========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       F-4
<PAGE>

                        Electronic Control Security, Inc.
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                               Year
                                                                               Ended
                                                                              June 30,
                                                                        2001            2000
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
Cash flows from operating activities:
    Cash received from customers                                    $ 5,070,696    $ 1,769,417
    Cash paid to vendors and employees                               (4,527,410)    (2,058,117)
    Interest paid                                                       (46,638)       (30,583)
    Interest received                                                     5,285             --
    Income taxes paid                                                    (8,356)        (1,868)
                                                                    -----------    -----------

        Net cash provided by (used in) operating activities             493,577       (321,151)

Cash flows from investing activities:
    Acquisition of property and equipment                               (18,959)       (31,193)
    Licensing agreement                                                 (24,000)            --
                                                                    -----------    -----------

        Net cash used in investing activities                           (42,959)       (31,193)

Cash flows from financing activities:
    Procceds (payments) of loans                                       (140,349)       393,079
    Increase (decrease) of bank overdraft                              (105,284)        72,241
    Payments on notes payable                                           (26,000)       (18,000)
    Payments on lease obligations                                       (20,394)       (16,504)
    Loan payments to officers and shareholders - net                   (149,092)       (80,076)
    Purchase of treasury stock                                          (10,000)            --
                                                                    -----------    -----------

    Net cash provided (used in)  financing activities                  (451,119)       350,740
                                                                    -----------    -----------

    Net decrease in cash                                                   (501)        (1,604)

Cash at beginning of period                                               1,428          3,032
                                                                    -----------    -----------

    Cash at end of period                                           $       927    $     1,428
                                                                    ===========    ===========

Supplemental schdule of non-cash investing and financing activity:

Equipment acquired under captial lease                                       --    $    35,134
Common stock issued for services                                    $     9,800         10,000
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       F-5
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    NATURE OF OPERATIONS

      Electronic Control Security, Inc. (The "Company") is engaged in the
      design, manufacture and marketing of electronic security and lighting
      systems for high threat environments. The Company currently offers six
      separate security and lighting sub-systems: Infrared Perimeter Intrusion
      Detection (IPID(R)), Fiber Optic Intelligence Detection System (FOIDS(R)),
      Gamma 2000 Temperature Differential & Video Assessment System ("TDVAS");
      Facial Recognition System (FRS), StarLog(TM), A vehicle & Vessel Tracking
      System; Intrusion Detection Monitoring System "IDMS"; and an Architectural
      Lighting Product System. The Company also performs consulting services,
      which consists principally of designing security systems for correctional
      facilities, and offers design services on both in-house projects and for
      outside clients. The Company markets its products internationally.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation

      The financial statements include the accounts of Electronic Control
      Security, Inc. and its subsidiaries, SEM Consultants III, Inc. ECSI
      International, Inc., ECSI-FOIDS, Inc. and ECSI-DSA, Inc., collectively
      "the Company". The statements also include one hundred percent of the
      accounts of ECSI-EAG International, a joint venture until March 1999 when
      the company purchased the remaining forty-nine percent of ECSI-EAG
      International from W.T. Sports Ltd. (See Note 6). All significant
      intercompany accounts and transactions have been eliminated.

      Inventories

      Inventories are stated at the lower of cost (first-in, first-out) or
      market. Ending inventory is primarily composed of raw materials and
      work-in-process.

      Property and Equipment and Depreciation

      Depreciation is provided for by straight-line and accelerated methods over
      the estimated useful lives of the assets, which vary from three to ten
      years. Cost of repairs and maintenance are charged to operations in the
      period incurred.

      Earnings Per Share

      Basic earnings (loss) per share (EPS) is computed by dividing net income
      (loss) applicable to common shares by the weighted-average of common
      shares outstanding during the period. Diluted earnings (loss) per share
      adjusts basic earnings (loss) per share for the effects of stock options
      and other potentially dilutive instruments, only in the periods in which
      such effect is dilutive.

      Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those estimates.

      Foreign Sales

      All foreign sales are in dollars and accordingly the Company recognizes no
      gain or loss on such transactions.


                                       F-6
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont)

      Revenue Recognition

      The Company recognizes product revenue at the time of shipment. Revenues
      from consulting and design services are recognized at the time the
      services are rendered.

      Warranty Reserves

      The Company's products carry a 7 - 10 year warranty that includes factory
      repair services as needed for replacement parts. Estimated expenses for
      warranty obligations are accrued at the same time as related product
      revenue is recognized.

      Software Purchased

      Software purchased by the Company and utilized in providing contract
      services is capitalized at cost and amortized on a straight-line basis
      over three to five years.

      Income Taxes

      The Company accounts for income taxes under Statement of Financial
      Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes,"
      which requires the use of the liability method of accounting for income
      taxes. The liability method measures deferred income taxes by applying
      enacted statutory rates in effect at the balance sheet date to the
      differences between the tax bases of the assets and liabilities and their
      reported amounts in the financial statements. The resulting deferred tax
      asset or liability is adjusted to reflect changes in tax laws as they
      occur.

      Deferred income taxes reflect temporary differences in reporting assets
      and liabilities for income tax and financial accounting purposes. These
      temporary differences arise primarily from net operating loss carry
      forwards.

      Fair Value of Financial Instruments

      The carrying values of cash, accounts receivable, accounts payable,
      accrued expenses and other current liabilities are representative of their
      fair value due to the short-term maturity of these instruments. The
      carrying value of the Company's long-term debt is considered to
      approximate its fair value, based on current market rates and conditions.

      Intangible Assets

      The cost of licenses, trademarks and software development acquired are
      being amortized on the straight-line method over their useful lives,
      ranging from 5 to 15 years. Amortization expense charged to operations was
      $13,398 and $5,351 for the years ended June 30, 2001 and 2000.

      Start-up Costs

      As of July 1, 1999, the Company adopted SOP 98-5, and accordingly charges
      to income start-up costs, including advertising, as incurred. Prior to
      July 1, 1999, these costs were capitalized and amortized over one to three
      years. For the year ended June 30, 2000 operations was charged with
      $20,255 of such amortization. Previously capitalized start up costs
      (incurred prior to July 1, 1999) of $59,200 (net of tax), were reflected
      as the cumulative effect of the accounting change during the fiscal year
      ending June 30, 2000 respectively.


                                       F-7
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont)

      Advertising Costs

      Advertising costs are reported in selling, general and administrative
      expenses, and include advertising, marketing and promotional programs.
      These costs are charged to expense in the year in which they are incurred.
      Advertising costs for the years ended June 30, 2001 and 2000 were
      approximately $9,103 and $21,000, respectively.

      Recent Pronouncements

      In July 2001, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards ("SFAS") No. 141 "Business Combinations"
      and SFAS No. 142 "Goodwill and Intangible Assets ("SFAS No. 142"). SFAS
      No. 141 requires that all business combinations initiated after June 30,
      2001 be accounted for using the purchase method of accounting and
      prohibits the use of the pooling-of-interests method for such
      transactions. SFAS No. 142 applies to all goodwill and intangible assets
      acquired in a business combination. Under the new standard, all goodwill,
      including goodwill acquired before initial application of the standard,
      should not be amortized but should be tested for impairment at least
      annually at the reporting level, as defined in the standard. Intangible
      assets other than goodwill should be amortized over their useful lives and
      reviewed for impairment in accordance with SFAS no. 121. The new standard
      is effective for fiscal years beginning after December 15, 2001. The
      Company must adopt this standard on July 1, 2002. Management believes that
      the adoption of these Statements will not have a material impact on the
      Company's financial position or results of operations.

3.    SHAREHOLDERS' EQUITY

      Common Stock Warrants

      The Company had 1,300,000 common stock warrants outstanding that expired
      unexercised on February 26, 2001.

      Stock Option Plans

      Pursuant to Statement of Financial Accounting Standard No. 123 (SFAS 123)
      "Accounting for Stock-Based Compensation" the Company has elected to
      account for its employee stock option plans under APB Opinion No. 25
      "Accounting for Stock Issued To Employees". Accordingly, no compensation
      cost has been recognized for these plans.

      The Company's stock has not been actively traded in recent years, and
      there are no consistent market quotes available. Accordingly, it is
      impractical to compute the effects on earnings, if any, had compensation
      costs for the stock option plans been determined based on the fair value
      at the grant date for awards made for fiscal year 2001, consistent with
      the provisions of SFAS No. 123.

      a.    Incentive Stock Option Plan

            During September 1986, the Company adopted an incentive stock option
            plan for which 750,000 shares of common stock have been reserved.
            The plan has since been extended until September 2006.

            Under the plan, incentive stock options were granted to certain
            employees of the Company. The exercise price is not less than 100%
            of the fair market value of the stock at the date of the grant.
            These options expire ten years from the date of grant.


                                       F-8
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            Stock Option Plans (Cont)

            The following table summarizes option plan activity:

                                                    Number        Price
                                                  of Shares       Ranges

            Outstanding at June 30, 1999           260,000     $.05 - $.25
                                                   =======
            Outstanding at June 30, 2000           260,000     $.05 - $.25
                                                   =======
              Forfeited                            (65,000)    $.05 - $.25
                                                    ------
            Outstanding at June 30, 2001           195,000     $.05 - $.25
                                                   =======

      b.    Nonstatutory Stock Option Plan

            As of June 30, 2001, the Company had a non-statutory stock option
            plan with shares of common stock reserved as follows:

                                                    Number        Price
                                                  of Shares       Ranges

            Outstanding at June 30, 1999            10,000        $.25
                                                    ======
            Outstanding at June 30, 2000            10,000        $.25
                                                    ======
              Issued                                 5,000        $.25
                                                    -----
            Outstanding at June 30, 2001            15,000        $.25
                                                    ======

4.    INVENTORIES

Inventories at June 30, 2001 and 2000 consist of the following:

                                                            2001        2000
                                                            ----        ----
Raw materials                                            $  270,447  $  188,307
Work-in-process                                             230,080     210,632
Finished goods                                              755,258     301,409
                                                         ----------  ----------
                                                         $1,255,785  $  700,348
                                                         ==========  ==========

5.    PROPERTY EQUIPMENT AND PURCHASED SOFTWARE

Property, equipment and purchased software also consists of the following:

                                                            2001        2000
                                                            ----        ----
Furniture and fixtures                                   $   21,930  $   21,930
Machinery and equipment                                     296,001     277,042
Improvements                                                 65,081       9,296
Software                                                     96,715     152,500
                                                         ----------  ----------
                                                            479,727     460,768
  Less: accumulated depreciation and amortization           320,702     252,836
                                                         ----------  ----------
                                                         $  159,025  $  207,932
                                                         ==========  ==========

Equipment under capital leases included in
property, equipment and purchased software are as follows:

Machinery and equipment                                  $   69,944  $   97,966
Less: accumulated depreciation                               20,684  $   24,979
                                                         ----------  ----------
                                                         $   49,260  $   72,987
                                                         ==========  ==========


                                       F-9
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.    NOTE PAYABLE

      During the year ending June 30, 1999, the Company issued a promissory note
      to W.T. Sports Ltd. the former forty-nine percent owner of ECSI-EAG
      International, for $72,000. The note payable was issued to release all
      assets and liabilities of the joint venture and W.T. Sports, Ltd. and its
      affiliates.

      The note is payable in thirty-six monthly payments of $2,000 beginning
      March 26, 1999. The note is non-interest bearing, and collateralized by
      the IPIDTM trademark.

7.    RELATED PARTY TRANSACTIONS

      The Company has loans payable to an officer and shareholders; the loans
      have various payment schedules and interest rates. Some loans are
      non-interest bearing and other loans range from 8% to 12%.

      At June 30, 2001 and 2000 related party debt consisted of:

                                                             2001        2000
                                                             ----        ----
Installment loans due to an officer/shareholder,
non interest bearing due June, 2004                       $   58,180  $  187,140

Installment loans due to  entities owned or controlled
by officer/shareholder, at various installments at
annual interest rates of 8-12%, due June, 2007 *             111,831     110,980

Installment loan due to a former officer/shareholder
non interest bearing,  payable at $1,667 a month *
until February, 2005                                          71,668      92,651
                                                          ----------  ----------
                                                             241,679     390,771
Less: current portion                                         39,000      75,004
                                                          ----------  ----------
                                                          $  202,679  $  315,767
                                                          ==========  ==========

*     All interest for the fiscal year 2001 and 2000 has been waived.

      Maturities of related party debt are as follows:
         Years ending June 30:

                                  2002                               $   39,000
                                  2003                                   30,000
                                  2004                                   35,000
                                  2005                                   35,000
                                  2006                                   40,000
                            Thereafter                                   62,679
                                                                     ----------
                                                                     $  241,679
                                                                     ==========


                                      F-10
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    OBLIGATION UNDER CAPITAL LEASES

      Future minimum lease payments for assets under capital leases at June 30,
      2001

      Years ending June 30:

                                                 2002                $   21,697
                                                 2003                    19,698
                                                 2004                    15,283
                                                 2005                     4,018
                                                                     ----------
                                                                         60,696
                         Amount representing interest                    13,000
                                                                     ----------
          Present value of net minimum lease payments                $   47,696
                                                                     ==========

9.    COMMITMENTS AND CONTINGENCIES

      Lease Agreements

      Future minimum annual rental payments required under noncancellable
      operating leases for years after June 30, 2001 are as follows:

                                  2002                               $   67,597
                                  2003                                   68,517
                                  2004                                   62,255
                                  2005                                   48,812
                                  2006                                   49,787
                            Thereafter                                   93,806
                                                                     ----------
                                                                     $  390,774
                                                                     ==========

      Rent expense under all operating leases was $74,551 and $74,550 for the
      years ended June 30, 2001 and 2000.

      Legal Actions

      The Company has commenced an action in Federal District Court in New
      Jersey against four companies, alleging infringement of certain of the
      Company's proprietary technology and trademarks, and civil conspiracy. Two
      of the defendants have filed counterclaims. The case remains in the
      discovery stage and no opinion can be expressed at this time as to its
      eventual outcome.

      The Company is a defendant in a case brought in State Court in Oregon,
      with a claim of misappropriation of trade secrets and related claims. The
      plaintiff has sought a preliminary injunction. An evidentiary hearing was
      concluded on May 16th and 17th, 2001 and a written opinion has been
      submitted including minor restrictions pertaining to the Company and a
      $250,000 bond imposed against the Plaintiff. The case remains in the trial
      stage and no opinions can be expressed at this time as to its eventual
      outcome.

      The Company intends to defend their position vigorously and management
      does not believe that the final outcome will have a material adverse
      effect on its consolidated financial position, results of operations or
      cash flows


                                      F-11
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    COMMITMENTS AND CONTINGENCIES (Cont)

      License Agreements

      The Company has acquired intellectual property, equipment and a tooling
      license from Mason & Hanger National, Inc. and a patent license from
      Lucent Technologies, Inc. for the Fiber Optic Intelligence Detection
      Systems (FOIDS(R)). In conjunction with these two license agreements
      whereby royalties totaling 5.4% are due on revenues from the Fiber Optic
      Intelligence Detection System (FOIDS(R)).

      License and royalty expenses were $18,778 and $12,839, for the years ended
      June 30, 2001 and 2000, respectively.

10.   INCOME TAXES

      The provision for taxes for the year ended June 30, 2001 and 2000 includes
      the following components:

                                                            2001        2000
                                                            ----        ----
Federal
  Current                                                $   16,900  $       --
  Deferred                                                  382,000    (103,000)

State
  Current                                                     1,600         800
  Deferred                                                  (12,000)    (31,000)
                                                         ----------  ----------
                                                         $  388,500  $ (133,200)
                                                         ==========  ==========

      The components of the deferred tax asset as of June 30, 2001 and 2000 are
      as follows:

                                                           Current   Noncurrent
                                                           -------   ----------
2001
  Total deferred tax assets                              $  132,000  $    9,000
  Less total valuation allowance                                 --          --
                                                         ----------  ----------
    Net Deferred Tax Asset                               $  132,000  $    9,000
                                                         ==========  ==========

2000
  Total deferred tax assets                              $   38,000  $  629,000
  Less total valuation allowance                                 --    (157,000)
                                                         ----------  ----------
    Net Deferred Tax Asset                               $   38,000  $  472,000
                                                         ==========  ==========

      The deferred tax asset valuation decreased by $157,000 and $76,000 in the
      years ended June 30, 2001 and 2000, respectively.


                                      F-12
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.   INCOME TAXES (Cont)

      The reconciliation of estimated income taxes attributed to operations at
      the United States statutory tax rate to reported provision for income
      taxes is as follows:

                                                            2001        2000
                                                            ----        ----
Provision for taxes computed using standard and or
  alternative minimum tax rate                           $  395,034  $      550
State taxes, net of Federal benefit                          69,712          --
Allowance for doubtful  accounts                             10,000          --
Compensated absences                                          7,022          --
Recognition of deferred tax asset                          (106,889)   (133,750)
Other                                                        13,621          --
                                                         ----------  ----------
                                                         $  388,500  $ (133,200)
                                                         ==========  ==========

      At June 30, 2001 the Company had net operating loss carryforwards for
      federal and state income tax purposes of $302,000 and $53,000
      respectively, expiring through 2012.

11.   REVOLVING LINE OF CREDIT

      The Company entered into a financing arrangement for a $500,000 revolving
      credit note with a bank. The note expires on November 15, 2002. The note
      is collateralized by all corporate assets. Guarantees are provided by all
      the Companies and an officer/shareholder. As of June 30, 2001, the
      outstanding balance due was $300,000 with interest payable at 1.0% plus
      the prime rate.

12.   CASH FLOWS

     Reconciliation of Net Income to Net Cash Provided by Operating Activities:

                                                            2001        2000
                                                            ----        ----
Net Income (Loss)                                        $  773,366  $   (8,267)
Adjustments to reconcile net income (loss)
  to net cash provided by (used in)
  operating activities
Increase in allowance for doubtful accounts                  25,000
Deferred income taxes                                       370,000    (134,000)
Depreciation & amortization                                  75,685      82,243
Stock based compensation                                      9,800      10,000
Deferred charges                                                        102,000
(Increases) Decreases
  Accounts receivable                                      (156,205)    (77,720)
  Inventories                                              (555,437)    (28,046)
  Other current assets                                        7,875      (2,268)
  Other assets                                               (1,582)      1,751
Increase (Decrease)
  Accounts payable & accrued expenses                         8,211    (272,845)


                                      F-13
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Payroll taxes payable                                     (72,880)      7,869
  Income taxes payable                                        9,744      (1,868)
                                                         ----------  ----------

Net cash provided by (used in)
  operating activities                                   $  493,577  $ (321,151)
                                                         ==========  ==========

13.   CONCENTRATIONS AND ECONOMIC DEPENDENCY

      The Company had one customer that accounted for 85.6% of net revenues for
      year ended June 30, 2001. This customer accounted for 71% of the accounts
      receivables of June 30,2001.

      The Company had two customers that accounted for 15% and 20% of net
      revenues for the year ended June 30, 2000. Three customers accounted for
      14%, 32% and 46% of accounts receivable at June 30, 2000.


                                      F-14