SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

(Mark One)

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

                     For the fiscal year ended June 30, 2005

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

           For the transition period from ___________ to _____________

                         Commission file number: 0-30810

                        ELECTRONIC CONTROL SECURITY INC.
                 (Name of small business issuer in its charter)

          New Jersey                                     22-2138196
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

790 Bloomfield Avenue, Clifton, New Jersey                 07012
(Address of principal executive offices)                 (Zip code)

Issuer's telephone number, including area code: (973) 574-8555

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

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

          30,000,000 shares of Common Stock, par value $0.001 per share
                                (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. |X| Yes |_| No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|

State the issuer's revenues for its most recent fiscal year: $5,967,469

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.): $6,681,054 as of September 9, 2005.

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

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,978,267 as of September 9, 2005.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure Format (Check one): |_| Yes |X| No


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview.

      The Company designs, develops, manufactures and markets technology-based
security systems for government and commercial facilities worldwide. We provide
a range of programs and systems that including turn-key integrated security
technologies for a comprehensive security system. Integrated security systems
are comprised of one or more subsystems and components that perform a variety of
security functions for a facility or group of facilities under the direction of
a single command center and communications network. We also provide consulting
services consisting of (i) risk assessment, vulnerability and criticality
analyses to ascertain a client's security requirements and then develop a
comprehensive risk management and mitigation program and (ii) product design and
engineering services.

      The Company's security programs incorporate various systems from our
portfolio of proprietary and/or licensed technologies and equipment. We provide
our clients with systems that have been designed to meet conventional security
requirements or, if necessary, we design, develop and manufacture customized
systems to meet our clients' specific needs. We retain subcontractors to install
our systems and products under the supervision of our project managers and our
project managers train clients in the operation and maintenance of our systems.

      We are ISO 9001:2000 registered and will seek to maintain our ISO status.

Security Industry Overview.

      The Security Institute of America estimates that the worldwide market for
security products and services in 2006 will exceed $130 billion. The industry
encompasses a wide ranging, highly fragmented group of product and service
providers which includes entities that market comprehensive security systems and
offer security consulting services, dealers/installers, small single product
companies, equipment manufacturers, consultants and systems integrators.

      We believe that the security industry has experienced significant growth
over the last decade, both as to the total dollar amount generated from sales
and the number of entrants offering security related products, and continues to
grow rapidly because:

      o     western nations have been the target of high profile terrorist
            attacks over the last several years that have squarely focused
            attention on security issues and threat mitigation;

      o     perimeter security for airports, maritime, chemical, transportation,
            energy and pharmaceutical facilities has been mandated by Homeland
            Security;

      o     newer, more effective and efficient security equipment incorporating
            advancements in security technology is replacing obsolete equipment;

      o     the proliferation of computers and advanced communications systems
            has created a new and growing need for information technology
            security to prevent the misuse of proprietary information and other
            intellectual property; and


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      o     private industry is operating in more remote geographic locations
            and higher risk environments.

Products and Services.

      The services and technologies required to create a secure environment must
address the entire range of security concerns that challenge government and
commercial institutions, including the protection of:

      o     life;

      o     tangible assets, such as buildings, vessels and personal
            possessions;

      o     intangible assets, such as intellectual property, sensitive research
            and other confidential information; and

      o     electronic data and information technology.

Systems and Technologies.

      Integrated security systems are comprised of one or more subsystems and
components that perform a variety of security functions for a facility or group
of facilities under the direction of a single command center and communications
network. The Company offers both integrated, turn-key security solutions that
incorporate many of our systems and stand-alone systems that comprise an
individual technology of a security program.

      The integrated security systems and/or stand alone products we market
include:

      o     Computer Based Command, Control and Communications Networks. The
            command network consists of a central processor, a common database
            and software that link various subsystems and components, allowing
            them to communicate with each other and integrates the subsystems
            and components into a single system.

      o     Intrusion Detection Systems. Fixed location and rapid deployable
            infrared and fiber optic perimeter intrusion detection systems
            consist of sensors which detect an intruder passing through the
            system's sensors.

      o     Video Motion Detection and Assessment Systems. As an adjunct to our
            perimeter intrusion detection systems, we offer video surveillance
            equipment using closed circuit television cameras, digital
            processing and fiber optic links to monitor and assess the nature of
            an annunciated threat at the control center.

      o     Electronic Surveillance System. This system creates a detection and
            verification band outside and parallel to a secured perimeter and is
            geared toward high-level security demands such as border control,
            military bases, power stations, oil and gas storage facilities,
            nuclear power plants, industrial sites, prisons, airports, with
            high-level security demands.

      o     Ordnance Flash Detection System. Our VIPER is a muzzle flash
            detection system that detects and locates the discharge of firearms
            and provides counter fire response.

      o     Aerial Warning System (AWS). The Aerial Warning System is designed
            to improve security through an intrusion detection system for
            restricted air space and flight restricted areas.


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      o     Environmental Monitoring Systems. Our Sentinal(TM) system remotely
            monitors drinking water quality throughout the drinking water
            distribution system to detect and instantly report the evidence of
            chemical, biological, or radiological contamination.

      o     Facial Recognition System. This system is based on biometric
            technology that identifies individuals by their unique facial
            characteristics. This technology can be utilized for virtually any
            application that requires real-time identification or verification
            of an individual.

      o     Architectural Security Lighting Systems. As a complement to our
            security systems, we offer interior and exterior lighting systems
            that can enhance a facility's security by illuminating areas which
            otherwise may be subject to infiltration because of darkness or a
            location remote from a facility's main security center.

      o     Computer Intrusion Detection Equipment. An information technology
            security system designed to protect computer local area networks
            (LANs) from illegal access via the Internet or by persons seeking to
            splice into the LANs hard wiring.

      o     Access control systems: The access control systems are designed to
            exclude unauthorized personnel from specified areas and provide
            access control that is typically card-activated.

      In order to provide clients with the highest quality and most advanced
systems, we incorporate technologies and products developed and manufactured by
the Company or which have been licensed from other entities. Frequently, we
enter into technology transfer agreements covering the technologies or products
to be used so that we may design and execute the best possible security
solutions for a client within the confines of their security budget. Products
incorporate state of the art components that can be configured to develop
flexible systems tailored specifically to meet the needs of risk mitigation in
high threat environments.

      The products offered are qualitatively comparable to or more effective
than those offered by our competitors because our products:

      o     provide low nuisance and false alarm rates;

      o     are reliable in virtually any environmental condition;

      o     in many cases can be user specified and adapted to their
            environment; and

      o     are subject to low installation and maintenance costs.

      We believe that we have built a solid reputation as a provider of
leading-edge, high technology security solutions and services. Our view is
shared and supported by the many international government sectors and commercial
clients that engage our services and products on a continuing basis.

Consulting Services.

      The consulting services we provide are an integral part of the security
solutions offered to our clients. Effective and efficient use of technology can
be achieved only if used intelligently. Toward that end, the Company:


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      o     conducts risk assessment, vulnerability and criticality studies to
            ascertain a client's security requirements and develop a
            comprehensive risk management and mitigation program; and

      o     provides security system design services.

      The Company's consulting and advisory services generally represent the
first steps in the development of a security solution. The risk assessment,
threat, vulnerability and criticality analyses we utilize allow us to undertake
a detailed risk management investigation of our clients' operations to determine
realistic threats, develop effective responses and programs necessary to address
and mitigate the range of threats, and to implement the appropriate solutions.
We utilize "adversary perspective" penetration analysis, Department of Energy
and military-developed threat modeling systems, and interactive, integrated
systems performance testing of total protection strategies to formulate a
comprehensive security system. The testing involves not only systems but the
human operators who must assess intrusions and generate instant responses and
the security forces that must successfully interrupt adversary actions to
prevent injury, theft or sabotage.

      The Company's customers benefit from an integrated, interactive process by
which our vulnerability/threat/penetration analysts examine existing and/or
candidate systems to determine levels of risk. The analysts consult with our
systems design staff to determine systems configurations and human operation
requirements that will provide the most cost-effective options for mitigating
risk. Our security advisors are technically accomplished and fully familiar with
the latest trends in planning, programming, and designing systems utilizing
standard peripheral components, mini/micro architecture, and "user friendly"
software/firmware applications. Many of our security advisors have the federal
government's highest security clearances.

      The Company also provides security system design services involving the
evaluation, design and specifications of security systems and components that
meet a client's operating and budgetary requirements. Typically, these services
are provided within the context of a comprehensive security evaluation and
implementation program in conjunction with risk management analysis.
Occasionally, we may be asked to evaluate and design a single component of a
security system.

      The Company works closely with the client and facility owner, architect,
engineer, system integrators and/or construction manager to develop and design
security monitoring and control systems that afford a normal but secure
environment for management, staff and visitors. Our design personnel are expert
in their knowledge of the various technologies (mature and emerging) as they
apply to security challenges, both in the U.S. and abroad, because they continue
to be intimately involved in developing security systems for government
facilities around the world.

Product Design.

      The Company designs and develops new products based upon market
requirements and as deemed necessary to meet the clients' specific needs. We
research and assess threat and vulnerability issues and 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 based upon the results
of such research. We investigate new and emerging technologies that have
application in the security industry and seek to license these technologies
which we then incorporate into our product line.

Markets for Our Products.

      The Company has identified a number of markets for our products and has
developed programs to gain access to those target markets. Generally, private
industry and government facilities which possess


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sensitive information, valuable assets or by virtue of the nature of their
business and may be subject to terrorist threats, recognize the need to
implement security measures to protect personnel and property. In many
instances, laws have been enacted and mandates decreed for compliance with some
minimum-security standards. Airport security is a prime example. We target these
entities as well as entities where we can demonstrate the need for security
measures.

      Primary markets which we target include:

      o     the U.S. Government, its agencies and departments, including the
            Department of Defense and the Department of Energy;

      o     large industrial facilities, including pharmaceutical companies and
            major office complexes;

      o     energy facilities, including nuclear power plants, utilities, and
            chemical and petrochemical pipelines;

      o     commercial aviation and maritime facilities;

      o     rail and bus transportation;

      o     foreign/export opportunities in all of the above-mentioned areas.

      The U.S. Government along with many of its agencies and departments
represent a significant market for our products. We actively market our products
to the following U.S. Government agencies all of which have purchased our
products in the past and continue to be among our top customers:

      o     The U.S. Department of Defense and a number of its subdivisions have
            been using our products for force and asset protection at numerous
            military bases and air force installations around the world. Certain
            of our products have been certified and included as part of the
            government's tested and approved technologies.

      o     The U.S. Department of Energy, in connection with the clean-up and
            operation of military bases and government-owned nuclear processing
            facilities, offers an expansive and varied market. We are involved
            with the supply and support services at nine sites on an ongoing
            basis.

      o     The Department of Transportation includes airports, trucking and
            distribution centers and marine terminals. Our products and systems
            directly apply to the security needs of this multi-billion dollar
            market opportunity.

      Our open-ended contract with the General Services Administration (GSA),
which has been extended through July 31, 2009, authorizes the U.S. Government
and a network of eligible sources to purchase materials and services from us
without having to undergo a full competition. In September, 2003, we announced
the finalization of a 5-year indefinite delivery/indefinite quantity contract
for the Integrated Base Defense Security System (IBDSS) with the United States
Air Force (USAF) to secure highly strategic military facilities throughout the
world. During fiscal 2005, the Company was awarded an additional modification to
the IBDSS contract for Tactical Automated Sensor Systems (TASS).

      We also target state and local governments and governmental authorities
and agencies fulfilling the roles described above.

Large Industrial Facilities and Major Office Complexes. These types of
facilities, such as pharmaceutical companies, frequently house sensitive data
where research and product development occur and are likely to acquire
integrated security packages to create a "smart building." The technologies
required to create a smart building in today's environment must address life,
safety, power, lighting, information technology


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protection and other security systems to create a normal yet secure environment
for employees, visitors and service personnel.

Energy Facilities, Including Nuclear Power Plants, Utilities and Petrochemical
Pipelines. Nuclear power stations and utilities that house sensitive information
and dangerous materials represent a large and lucrative market for our products.
Petrochemical, natural gas and pipeline companies, many of which operate in high
risk environments and remote geographic locations, invest huge sums in the
assets necessary to operate those businesses and adopt appropriate measures to
protect their investments through the acquisition of security equipment and
systems.

Commercial Aviation, Maritime, Rail and Bus Line Transportation. Infrastructure
security has been at the forefront of security consciousness for many years. The
federal government has appropriated significant funds for the acquisition and
installation of new, high-technology security systems at these facilities. There
are approximately 1,200 facilities in the U.S. which the Federal Aviation Agency
has identified and mandated for security systems upgrade to be completed over
the next several years and we will bid to provide products and services to many
of these sites.

Foreign/Export Opportunities. Government operations and private industries in
foreign countries are all subject to the same security issues that challenge
similar entities in the United States. We, along with our strategic teaming
partners and international sales representatives, continue to seek penetration
of these markets. Although, during 2005 and 2004, we generated approximately 5%
and 11%, respectively of our revenues from projects completed outside the United
States, we believe the export opportunities will be significant in fiscal 2006
and beyond.

Marketing.

      The Company has developed a multi-tiered marketing plan, allowing us to
effectively market products to each of the separate government and industry
segments identified as target markets both in the United States and
internationally. Our marketing strategy highlights product strengths as they
apply to each particular industry.

The primary goals of our marketing strategy are to:

      o     broaden the base of potential clients, and

      o     demonstrate the efficacy of our products.

      To that end, the Company has entered into strategic partnerships, teaming,
representative and joint venture relationships with major multi-national
corporations in each of the industries which comprise our target markets. These
companies generally enjoy a strong market presence in their respective
industries and we believe that our association with these entities affords the
Company and our products added credibility. These entities frequently
subcontract our services and purchase our products in connection with larger
projects. During fiscal 2005, we entered into teaming agreements with Lockheed
Martin Transportation and Security Solutions, SIGCOM, and Hudson Marine/Hudson
Trident.

      Members of our management team have many years of experience in the
security industry. Each member is assigned an industry area and makes direct
contact with, and sales proposals to, government and commercial organizations in
that area. We attempt to cultivate and maintain relationships and contacts with
employees of the major government agencies encompassing our target markets.

      We generate a significant portion of our international business through a
network of independent sales representatives. Agreements are in place with
various entities that allow us to maintain a presence


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in twenty five countries worldwide. These agreements generally extend for a
period of two years and provide the dealer/installer with price discounts from
current price schedules as an incentive to market our products in their
geographic area. We rely on our dealer/installer base to represent our product
line throughout the world and to apprise us of potential projects where the
products can be incorporated. In addition, we rely on our dealers/installers to
introduce our company and products to key government and private enterprise
personnel in their respective geographic regions.

      We also market directly to providers of integrated security systems,
security systems dealers/installers, systems engineers and other entities that
may be contracted for a security system on behalf of a client.

      We maintain a presence at the major trade conferences that address our
target markets and advertise in the relevant conference publications.

      We employ a variety of pricing strategies for our services. Proposals for
consulting services are based on an estimate of hours multiplied by standard
rates. Systems integration projects are based on the estimated cost of the
components including subcontractors and equipment, plus a profit margin. Pricing
for engineering and maintenance services vary widely depending on the scope of
the specific project and the length of engagement.

Growth Strategy.

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

      o     Increase sales and marketing personnel. This year, we added a sales
            representative who has extensive sales and marketing experience in
            the Middle Atlantic States. We believe this individual will allow us
            to access wider markets and focus sales efforts required to develop
            business in our target markets. We will seek to add further sales
            and marketing personnel as necessary.

      o     Expand our base of dealers/installers/integrators worldwide. This is
            an effective and cost efficient means of increasing sales. 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.

      o     Expand our global presence. We formed a subsidiary in the Middle
            East to represent and support product sales. We have entered into
            sales agreements with a number of multi-national companies to
            represent and support their products as well. Management believes
            the Mid-East operation will provide access to potential projects in
            Africa, India and Eastern Europe.

      o     Design and develop new systems. We will continue to develop new
            security systems to expand our portfolio of proprietary products.
            This will allow us to open up new markets and retain our position as
            a leading edge provider of technology based security equipment and
            increase interest in the Company.

      o     License new and emerging technologies. We will continue to identify,
            analyze and acquire new and emerging technologies for application in
            the security industry. We will


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            seek to acquire technologies that will enhance our existing systems
            and develop new products.

      o     Upgrade existing products. We have and will continue to upgrade
            existing products to take advantage of technological advancements to
            ensure they remain state-of-the-art.

      o     Purchase laboratory and testing equipment. We will seek to purchase
            certain laboratory and testing equipment which will allow us to
            enhance and maintain product quality standards and support our
            extended warranty program.

      o     Strengthen our management team. We have added a Vice President &
            General Manager of Operations to support the projected increase in
            manufacturing, production engineering and purchasing required to
            meet the Company's delivery requirements.

      o     Improve our telecommunications infrastructure. We expect to install
            a TI line for network connectivity between our various US
            facilities. This will permit an integrated method of communication
            between and among the Company's management and key employees.

Clients.

      The Company provides products and services to customers through direct
sales to end-users and through subcontracting agreements. During the past five
years we have provided products to approximately 50 clients covering over 220
projects.

Competition.

      As the public and private sectors become increasingly concerned with
security issues, the security and anti-terrorism industry will experience
substantial growth. Competition is intense among a fragmented and wide ranging
group of product and service providers, including security equipment
manufacturers, providers of integrated security systems, systems integrators,
consulting, engineering and design firms and others that provide individual
elements of a system. Many of our current and potential competitors possess
greater name recognition and financial, technical and marketing resources than
we do. As a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion, sale and support of their products than
we can. Because of growth in the marketplace, we anticipate increased
competition from other sources, ranging from emerging to established companies.
We believe that the principal factors affecting competition in the industry
include applied technology, product performance, price and customer service. We
cannot be certain that we will be able to compete successfully in the future
against existing or potential competitors.

      We believe that we are able to sustain our competitive position in the
industry because:

      o     our principal officers, security analysts, design personnel and
            sales persons have an aggregate of over 200 years of combined
            experience in the security industry;

      o     we have the ability to analyze security risks, design, engineer and
            manufacture products customized to a client's requirements;

      o     our products address a wide range of security requirements;


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      o     our products are among the most technologically advanced and the
            highest quality available;

      o     our products are flexible in that many of them can be configured and
            customized to meet a client's specific needs and can be integrated
            with each other in new or existing security systems;

      o     our products are reliable, and relatively easy and inexpensive to
            install and maintain;

      o     we have been successful in teaming with large multinational
            companies to market and incorporate our products into their product
            offerings, thereby contributing to the credibility and efficacy of
            our products.

Manufacturing.

      We maintain manufacturing operations at our facilities in New Jersey and
Alabama. These activities include the procurement of materials, product assembly
and component integration, product assurance, quality control and final testing.
Our manufacturing facilities in New Jersey were inadequate to satisfy the
anticipated demand for our products under the USAF contract award. Therefore, we
have leased 2,600 square feet of manufacturing space which became available
bordering our premises affording us the flexibility to enlarge our manufacturing
facilities, increase equipment and hire additional personnel as required to fill
orders for product without undue delay. Further, we are planning to open a
logistical engineering and sales support facility in Virginia to support the
USAF contract and expand our government base to cover the expected market for
our products which may result from The Homeland Security Act.

      Compliance with environmental laws has no impact on our manufacturing or
other operations.

Sources and Availability of Components and Manufacturing Materials.

      We purchase the individual components that comprise our products or
subcontract the manufacture of specific subsystems to third parties. We are not
dependent on any one supplier for the components of our products and, in the
event of any disruption in supply or discontinuation of production by any of our
present suppliers; we believe that the components used in our products are
available from numerous sources at competitive prices. Various aspects of the
software programming required in connection with our computer products are
designed and written by in-house personnel or are subcontracted to third
parties.

      We have not entered into any long-term contracts for the purchase of
components but rather rely on rolling forecasts to determine the number of units
we will sell and the components required. We maintain an inventory of certain
long-term lead items required in the manufacture of our products, as reflected
in our balance sheet. To date, we have been able to obtain supplies of these
components and we believe that adequate quantities are available to meet our
needs.

Intellectual Property and Other Proprietary Rights.

      Proprietary protection for our technological know-how, products and
product candidates are important to our business. Currently, we rely upon trade
secrets, know-how and continuing technological innovation to develop and
maintain our competitive position. We also rely on a combination of trade secret
protection and non-disclosure agreements to establish and protect our
proprietary rights.


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      Our success is dependent to a great extent on our proprietary knowledge,
innovative skills, technical expertise and marketing ability. Our intention is
not to rely primarily on patents or other intellectual property rights to
protect or establish our market position.

      We have obtained trademarks in the United States, South Korea, United
Kingdom and Saudi Arabia for "FOIDS(R)" (Fiber Optic Intelligent Detection
System); "IPID(R)" (Infrared Perimeter Intrusion Detection); "RDIDS(R)" (Rapid
Deployment Intrusion Detection System); "IDMS(R)" (Intrusion Detection &
Monitoring System). We have also filed for trademarks in other countries.

      We require all employees, consultants and contractors to execute
non-disclosure agreements as a condition of employment with or engagement by the
Company. We cannot be certain, however, that we can limit unauthorized or
wrongful disclosures of unpatented trade secret information.

      Although we continue to implement protective measures and intend to defend
our proprietary rights, policing unauthorized use of our technology or products
is difficult and we cannot be certain that these measures will be effective or
successful.

Research and Development.

      The forces that drive the design and development of new products include
the need to meet new security threats, incorporate newly developed technologies
or to satisfy a client's unique security requirements. We research and assess
threat and vulnerability issues at selected facilities within our target markets
and design and engineer products in-house with outside consultants as necessary
and in conjunction with joint venture partners, to meet the needs of clients
based upon the results of such research. We investigate new and emerging
technologies in the security industry and seek to license certain technologies
which we then incorporate into our products.

      During the years ended June 30, 2005 and 2004, we expended $285,916 and
$322,912, respectively on research and development activities.

Product Warranty.

      IPID(R) sensors are warranted for ten (10) years, under normal use,
against defects in workmanship and material from date of installation of the
system on the customer's premises. All other components are warranted for one
year from date of purchase. FOIDS(R) processors are warranted for a ten (10)
year period. For the years ended June 30, 2005 and 2004, net expenses
attributable to warranties were not material.

Technology Licensing Arrangements.

      As we endeavor to design and manufacture the most effective and efficient
technology based security solutions, we review and investigate new and emerging
technologies that have application in the security industry. Frequently, we seek
to incorporate these technologies into our systems. We are party to agreements
to use certain technologies including licenses with Lucent Technologies, Visage,
Inc., and Hyperdyne, Inc.


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Employees.

      As of August 6, 2005, we employed twenty-eight (28) individuals on a
full-time basis including six (6) design and engineering staff, eight (8)
manufacturing and assembly employees, five (5) marketing employees, two (2)
project managers and seven (7) administrative employees. A number of the
employees serve in multiple capacities. For example, Arthur Barchenko serves as
our President but is also an integral member of the Company's marketing team.
Our manufacturing staff may oversee site installation of the products.

      We have relationships with twelve (12) independent sales representative
organizations covering specific regions in the U.S.A., Central America, South
America, United Kingdom, India, the Middle East, and Southeast Asia.

      None of our employees are covered by a collective bargaining agreement or
are represented by a labor union. We consider our relationship with our
employees to be satisfactory.

Risk Factors.

      An investment in our common stock involves risks and uncertainties. You
should consider the following factors carefully, in addition to the other
information contained in this Form 10-KSB, before deciding to purchase our
securities.

      This Form 10-KSB also contains statements which, to the extent they are
not recitations of historical fact, constitute forward-looking statements within
the meaning of federal securities law. The words believe, estimate, anticipate,
project, intend, expect, plan, outlook, scheduled, forecast and similar
expressions are intended to identify forward-looking statements.

      Statements and assumptions with respect to future revenues, income and
cash flows, are examples of forward-looking statements. Numerous factors,
including potentially the risk factors described in this section, could affect
our forward-looking statements and actual performance.

RISKS RELATING TO OUR BUSINESS

Some of our orders and contracts may be cancelled on short notice with little or
no penalty.

      Some of our contracts are subject to cancellation by clients upon short
notice with little or no penalty so we cannot be certain that our backlog will
be filled. The contracts we enter into with government entities are often
awarded prior to legislative funding appropriations to support those contracts.
Consequently, the entire amount of orders and contracts received from these
entities may never be funded. If a substantial portion of our backlog orders is
cancelled, our business, operating results and financial condition could be
materially and adversely affected. In addition, the cancellation of a
substantial portion of booked orders would negatively impact other areas of our
business. For example, if we have booked orders from a large customer and the
customer cancels its order, it would greatly affect our operating results for
the period during which we would have recognized revenues from that customer.
This could cause our stock price to fluctuate and make it difficult to evaluate
the Company. Moreover, cancellation of a booked order after we have ordered
components and materials to manufacture systems could result in the Company
having excess inventory with no corresponding income.


                                       11
<PAGE>

During the fiscal year ended June 30, 2005, we generated approximately 76% of
our revenues from goods sold and services rendered to two customers. A
substantial decrease in revenues generated from contracts for these customers
could have an adverse effect on our business unless we were able to identify
other customers.

      During the fiscal year ended June 30, 2005, two customers accounted for
approximately 76% of our revenues. One of these customers accounted for
approximately 50% of our revenues during fiscal 2004. A significant decrease in
business from these customers and the revenues lost, if we are unable to replace
them, would have a material adverse effect on our business, financial condition
and results of operations.

Because our sales tend to be concentrated among a small number of customers
during any period, our operating results may be subject to substantial
fluctuations. Accordingly, our revenues and operating results for any particular
quarter may not be indicative of our performance in future quarters, making it
difficult for investors to evaluate our future prospects based solely on the
results of any one quarter.

      Given the nature of our customers and products, we receive relatively
large orders for products from a relatively small number of customers.
Consequently, a single order from one customer may represent a substantial
portion of our sales in any one period and significant orders by any customer
during one period may not be followed by further orders from the same customer
in subsequent periods. Our sales and operating results are subject to very
substantial periodic variations. Since quarterly performance is likely to vary
significantly, our results of operations for any quarter are not necessarily
indicative of the results that we might achieve for any subsequent period.
Accordingly, quarter-to-quarter comparisons of our operating results may not be
meaningful.

We rely on rolling forecasts when ordering components and materials for the
manufacture of our products which could cause us to overestimate or
underestimate our actual requirements. This may result in an increase in our
costs or prevent us from meeting customer demand.

      We use rolling forecasts based on anticipated orders to determine
component requirements. Lead times for materials and components vary
significantly and depend on factors such as specific supplier requirements,
contract terms and current market demand for such components. As a result, our
component requirement forecasts may not be accurate. If management overestimates
our component requirements, we may have excess inventory, which would increase
our costs. If management underestimates component requirements, we may have
inadequate inventory, which could interrupt manufacturing and delay delivery of
product to customers. Any of these occurrences would negatively impact our
business and results of operations.

Our product offerings involve a lengthy sales cycle and management may not
anticipate sales levels appropriately, which could impair profitability.

      Our products and services are designed for medium to large commercial,
industrial and government facilities, such as military installations, office
buildings, nuclear power stations and other energy facilities, airports,
correctional institutions and high technology companies desiring to protect
valuable assets and/or prevent intrusion into high security facilities. Given
the nature of our products and customers, sales cycles can be lengthy as
customers conduct intensive investigations of specific competing technologies
and providers. Moreover, orders received from governments may be subject to
funding appropriations which may not be approved. For these and other reasons,
the sales cycle associated with our products is typically lengthy and subject to
a number of significant risks over which we have little or no control.


                                       12
<PAGE>

      If sales in any period fall significantly below anticipated levels, our
financial condition and results of operations could suffer. In addition, our
operating expenses are based on anticipated sales levels, and a high percentage
of our expenses are generally fixed in the short term. As a result of these
factors, a small fluctuation in timing of sales can cause operating results to
vary from period to period. Moreover, operating results from quarter to quarter
which are tied to the marketing and sale of our products could fluctuate widely.

Risks of doing business in foreign countries.

      During the fiscal years ended June 30, 2005 and 2004, we generated
approximately 5% and 11%, respectively, of our business from projects outside
the United States. Our international business operations are subject, generally,
to the financial and operating risks of conducting business internationally,
including, but not limited to:

      o     unexpected changes in or impositions of legislative or regulatory
            requirements;

      o     potential hostilities and changes in diplomatic and trade
            relationships; and

      o     political instability.

      One or more of these or other factors not referenced herein or now known
to us could materially impact our business and results of operations could
suffer.

We depend on our relationships with strategic partners as a source of business
and our business and results of operations could suffer if these relationships
are terminated.

      We have entered into strategic partnerships or teaming arrangements with
several large multinational corporations that promote our products and services
and incorporate our products into their projects. In the event that we are
unable to maintain these strategic relationships for any reason, our business,
operating results and financial condition could be adversely affected.

We compete against entities that have significantly greater name recognition and
resources than our Company, enabling them to respond more quickly to changes in
customer requirements and allocate these resources to marketing efforts.

      The security industry is highly competitive and continues to become
increasingly so as security issues and concerns have become a primary
consideration at both government and private facilities worldwide. Competition
is intense among a wide ranging and fragmented group of product and service
providers, including security equipment manufacturers, providers of integrated
security systems, systems integrators, consulting firms, engineering and design
firms and others that provide individual elements of a system, some of which are
larger than us and possess significantly greater name recognition, assets,
personnel, sales and financial resources. These entities may be able to respond
more quickly to changing market conditions by developing new products that meet
customer requirements or are otherwise superior to our products and may be able
to more effectively market their products than we can because of the financial
and personnel resources. We cannot assure investors that we will be able to
distinguish ourselves in a competitive market. To the extent that we are unable
to successfully compete against existing and future competitors, our business,
operating results and financial condition would be materially and adversely
affected.


                                       13
<PAGE>

We rely on suppliers for principal components used in our products, and
disruptions in supply or significant increases in component costs could
materially affect our business.

      We rely on suppliers for several key components utilized in the
manufacture of our products. Our reliance on suppliers involves certain risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. To date,
although we have not experienced any disruption in supplies of components, we
cannot assure you that there will not be a disruption of our supplies in the
future. Disruption or termination of the supply of components could delay
shipments of products and could have a material adverse affect on our business,
operating results and financial condition.

If our subcontractors fail to perform their contractual obligations, our prime
contract performance and our ability to obtain future business could be
materially and adversely impacted.

      Many of our contracts involve subcontracts with other companies upon which
we rely to perform a portion of the services that we must provide to our
customers. There is a risk that we may have disputes with our subcontractors,
including disputes regarding the quality and timeliness of work performed by the
subcontractor. A failure by one or more of our subcontractors to satisfactorily
perform the agreed-upon services may materially and adversely impact our ability
to perform our obligations as the prime contractor. Subcontractor performance
deficiencies could result in a customer terminating our contract for default. A
default termination could expose us to liability and have a material adverse
effect on our ability to compete for future contracts and orders.

Our services and reputation may be adversely affected by product defects or
inadequate performance.

      In the event our products do not perform to specifications or are
defective in any way, our reputation may be adversely affected and we may suffer
a loss of business and a corresponding loss in revenues.

If we are unable to retain key executives or hire new qualified personnel, our
business will be adversely affected.

      Our success greatly depends on our ability to retain existing management
and attract key technical, sales, marketing, information systems, and financial
and executive personnel. We are especially dependent on the continued services
of our senior management team, particularly Arthur Barchenko and Joseph
McAndrew, our President and Vice President, respectively, and our key marketing
personnel. The loss of any of these people could have a materially detrimental
effect on our business. We have not entered into employment agreements with any
of these people. We do not maintain key person life insurance on any of our
personnel. In addition, we are seeking to engage senior sales staff and if we
fail to attract, hire or retain the necessary personnel, or if we lose the
services of any member of our senior management team, our business could be
adversely affected.

We may face risks associated with potential acquisitions, investments, strategic
partnerships or other ventures.

      As part of our long-term growth strategy, we may seek to acquire or make
investments in complementary businesses, technologies, services or products or
enter into strategic relationships with parties who can provide access to those
assets, if appropriate opportunities arise. From time to time, we may enter into
discussions and negotiations with companies regarding acquiring, investing in,
or partnering with their businesses, products, services or technologies. We may
not identify suitable


                                       14
<PAGE>

acquisition, investment or strategic partnership candidates, or if we do
identify suitable candidates, we may not complete those transactions on
commercially acceptable terms or at all. Acquisitions often involve a number of
special risks, including, but not limited to, the following:

      o     difficulty integrating acquired operations, products, services and
            personnel;

      o     disruption of our ongoing business;

      o     inability to successfully incorporate acquired technology and rights
            into our product offerings and maintain uniform standards, controls,
            procedures, and policies;

      o     inability to retain key personnel of the acquired Company;

      o     the businesses we acquire may fail to achieve the revenues and
            earnings anticipated; and

      o     we may ultimately be liable for contingent and other liabilities,
            not previously disclosed.

      We may not successfully overcome problems encountered in connection with
potential future acquisitions. In addition, an acquisition could materially
adversely affect our operating results by:

      o     diluting current shareholders' ownership interest;

      o     causing us to incur additional debt; and

      o     forcing us to expense the cost of certain acquired assets.

      Any of these factors could have a material adverse effect on our business.
These difficulties could disrupt our ongoing business, distract management and
employees and increase expenses. Furthermore, we may incur indebtedness or issue
equity securities to pay for any future acquisitions.

Limitations on liability and indemnification matters.

      As permitted by the corporate laws of the State of New Jersey, our
Certificate of Incorporation includes a provision which eliminates the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
our By-Laws provide that we are required to indemnify our officers and directors
under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we are required to advance
expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified.

RISKS RELATING TO OUR COMMON STOCK.

As we issue additional equity securities in the future, including upon
conversion of any of our preferred stock, share ownership will be diluted. In
particular, one of our outstanding classes of preferred stock has a full ratchet
anti-dilution provision that could significantly dilute our stockholders.

      Our Certificate of Incorporation authorized the issuance of 15,000,000
shares of common stock. On January 21, 2005, the stockholders voted to increase
the number of authorized shares to 30,000,000. The future issuance of all or
part of our remaining authorized common stock may result in substantial dilution
in the percentage of our common stock held by our then existing shareholders.

      The outstanding shares of our 10% Series B Convertible Preferred Stock
(Series B Preferred Stock) currently are convertible into 1,580,000 shares of
common stock (the equivalent of $1.00 per share), and the warrants issued in
connection with the sale of such stock currently entitle the holders to purchase
1,560,728 million shares of common stock at a price of $1.00 per share. The
Series B Preferred Stock and such warrants carry full ratchet anti-dilution
provision, such that if we issue convertible or equity securities (subject to
certain exceptions, including stock option grants and issuances in connection


                                       15
<PAGE>

with certain acquisition transactions) at a price less than the initial $1.00
conversion or exercise price until June 30, 2007, the Series B Preferred Stock
conversion price will be automatically adjusted down to that lesser price. For
example, if we had a non-exempted issuance at $0.50 per share, the Series B
Preferred Stock conversion price would become $0.50, and upon conversion, we
would have to issue two times the number of shares we currently are required to
issue upon the conversion or exercise of such securities shares. Currently
outstanding shares of Series A Preferred Stock are convertible into 420,000
shares of common stock In addition to the conversion rights of the preferred
stock, as we issue stock or convertible securities in the future, including for
any future equity financing or upon exercise of any of the outstanding stock
purchase warrants and stock options, those issuances would also dilute our
stockholders. If any of these additional shares are issued and are sold into the
market, it could decrease the market price of our common stock and could also
encourage short sales. Short sales and other hedging transactions could place
further downward pressure on the price of our common stock.

We have outstanding two classes of preferred stock which have preferences over
the common stock as to dividends and liquidation distributions, among other
preferential rights.

      As of the date hereof, we have issued and outstanding 367,500 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and 1,580
shares of Series B Preferred Stock (which together with the Series A Preferred
Stock is referred to as the "Preferred Stock"). The Preferred Stock affords
holders a preference to assets upon liquidation, a cumulative annual dividend
and is convertible into shares of common stock, all of which rights impact the
outstanding shares of common stock. The Preferred Stock's right to annual
dividends makes less likely the possibility that we will declare dividends on
the common stock. In the event of a liquidation of the Company's assets, holders
of Preferred Stock will have a right to receive as a liquidation payment any
remaining assets of the Company prior to any distributions to holders of the
common stock and the holders of the Preferred Stock may be able to block actions
otherwise approved by the holders of the common stock if such action is adverse
to their rights. In addition, holders of common stock will suffer dilution upon
any conversion of the Preferred Stock which could reduce the market value of the
common stock.

We are authorized to issue 3,898,000 additional shares of non-designated
preferred stock which we may issue from time to time by action of the board of
directors.

      Our Certificate of Incorporation authorizes the issuance of 3,898,000
additional shares of preferred stock. The board of directors has the authority,
without further approval of our stockholders, to issue preferred stock having
such rights, preferences and privileges as it may determine. The board of
directors may designate any or all of these shares without shareholder consent
and may afford such voting and other preferences which designations may give the
holders of the preferred stock voting control and other preferred rights such as
to liquidation and dividends. The authority of the board of directors to issue
stock without shareholder consent may have a depressive effect on the market
price of our common stock even prior to any designation or issuance of the
preferred stock.

      The terms of any series of preferred stock, which may include priority
claims to assets and dividends and special voting rights, could adversely affect
the rights of holders of the common stock and thereby reduce the value of the
common stock. The designation and issuance of preferred stock favorable to
current management or shareholders could make the possible takeover of us or the
removal of our management more difficult and discourage hostile bids for control
of us which bids might have provided shareholders with premiums for their
shares.


                                       16
<PAGE>

The market price of our common stock is influenced by many factors and may
fluctuate widely as a result of factors beyond our control.

      Prices for our common stock could fluctuate widely and will be influenced
by many factors, including the depth and liquidity of the market for the common
stock, investor perception of the industry in which we operate and our products,
and general economic and market conditions. Factors which could cause
fluctuation in the price of our common stock include:

      o     conditions or trends in the industry;

      o     failure to keep pace with changing technology;

      o     costs associated with developing new products and services;

      o     cost associated with marketing products and services may increase
            significantly;

      o     the timing of sales and the recognition of revenues therefrom;

      o     government regulations may be enacted which affect how we do
            business and the products which may be used at government
            facilities;

      o     downward pressure on prices due to increased competition;

      o     changes in our operating expenses;

      o     sales of common stock;

      o     actual or anticipated variations in quarterly results; and

      o     changes in financial estimates by securities analysts.

Extreme fluctuations caused by these and other factors could cause our business
to suffer.

Additional shares of common stock entering the market pursuant to Rule 144
without additional capital contribution could decrease the public trading price
of the common stock.

      An increase in the number of shares of common stock available for public
sale without any increase to our capitalization could decrease the market price
of our common stock. After a one-year holding period restricted shares of common
stock will become eligible for trading pursuant to Rule 144 of the General Rules
and Regulations of the Securities and Exchange Commission without any additional
payment to the Company or any increase to our capitalization.

Our common stock is traded over the counter, which may deprive stockholders of
the full value of their shares.

      Our common stock is quoted via the Over the Counter Bulletin Board
(OTCBB). As such, our common stock may have fewer market makers, lower trading
volumes and larger spreads between bid and asked prices than securities listed
on an exchange such as the New York Stock Exchange or the NASDAQ. These factors
may result in higher price volatility and less market liquidity for the common
stock.

A low market price may severely limit the potential market for the common stock.

      Our common stock is currently trading at a price substantially below $5.00
per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
non-NASDAQ equity security that has a market price share of less than $5.00 per
share, subject to certain exceptions (a "penny stock"). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and institutional or wealthy investors.
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have


                                       17
<PAGE>

received the purchaser's written consent to the transaction prior to the sale.
The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the
broker-dealer is the sole market maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Such information
must be provided to the customer orally or in writing before or with the written
confirmation of trade sent to the customer. Monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. The additional burdens
imposed upon broker-dealers by such requirements could discourage broker-dealers
from effecting transactions in our common stock.

We do not expect to pay cash dividends in the future, so stockholders will only
benefit from owning common stock if it appreciates.

      We do not expect to pay cash dividends for the foreseeable future. For the
foreseeable future, it is anticipated that earnings, if any, that may be
generated from our operations will be used to finance our operations and that
cash dividends will not be paid to holders of our common stock. Accordingly, any
potential investor who anticipates the need for current dividends from his
investment should not purchase our common stock.

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

      This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions, including, among other things:

      o the fact that all orders and contracts placed by government entities may
be cancelled, so there is a risk that our backlog may not be fulfilled;

      o because our sales tend to be concentrated among a small number of
customers in any period, our operating results may be subject to substantial
fluctuations;

      o we rely on rolling forecasts when ordering components and materials from
which we manufactures products which could cause us to overestimate or
underestimate our actual requirements which could cause an increase in our costs
or prevent us from meeting customer demand;

      o our product offerings involve a lengthy sales cycle and management may
not anticipate sales levels appropriately, which could impair profitability; and

      o we are subject to the risks of doing business in foreign countries.

      In addition, in this report, we use words such as "anticipates,"
"believes," "plans," "expects," "future," "intends," and similar expressions to
identify forward-looking statements.

      We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.


                                       18
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTIES

      Our corporate headquarters are located at 790 Bloomfield Avenue, Clifton,
New Jersey where we lease approximately 12,200 square feet of space divided
among administrative (2,600 sq. feet) and manufacturing (9,600 sq. feet) space.
We have leased this space through April 30, 2008 at a rent of $5,256 per month
increasing to $5,361 per month by the end the lease term. We also lease
approximately 2,500 square feet of manufacturing space at 102 Commerce Circle,
Madison, Alabama. We have leased this space through February, 2007 at a cost of
$2,000 per month. Our newly formed foreign subsidiary in the Middle East leases
approximately 2,000 square feet of office space through December, 2006 at a cost
of $1,170 per month. Our newly acquired subsidiary, Clarion Sensing Systems,
Inc. leases 1,000 sq. ft. of office and laboratory space through 2006 at a cost
of $1,520.00 per month. Clarion is located at 3901 W. 30th. Street,
Indianapolis, Indiana.

ITEM 3. LEGAL PROCEEDINGS.

      We are not currently party to any legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The common stock of the Company trades on the OTC Bulletin Board under the
trading symbol EKCS. The prices set forth below reflect the quarterly high, low
and closing sales prices for shares of common stock since the Company's stock
commenced trading as reported by the National Quotation Bureau, Inc. These
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not represent actual transactions.

--------------------------------------------------------------------------------
                                                                Closing Bid
                                                              High        Low
                                                              ----        ---
--------------------------------------------------------------------------------
   fiscal 2005
--------------------------------------------------------------------------------
   April 1 - June 30                                          1.70       1.07
   January 1 - March 31                                       2.50       1.30
   Oct. 1 - December 31                                       3.20       1.90
   July 1 - September 30                                      2.25       1.10

--------------------------------------------------------------------------------
   fiscal 2004
--------------------------------------------------------------------------------
   April 1 - June 30                                          2.24        .60
   January 1 - March 31                                       1.30        .59
   Oct. 1 - December 31, 2003                                 1.80        .96
   July 1 - September 30, 2003                                1.75        .26

--------------------------------------------------------------------------------


                                       19
<PAGE>

      As of September 9, 2005, ECSI had approximately 196 holders of common
stock. This number of holders of record does not include beneficial owners of
the Company's common stock whose shares are held in the names of various
security holders, dealers, and clearing agencies.

      The Company has not paid any cash dividends on its common stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
intends to retain any earnings to finance the growth of its business. There can
be no assurance that the Company will ever pay cash dividends. See Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

Recent Sales of Unregistered Securities

      Section 4(2) Offerings. The transactions described below reference shares
of common stock issued by the Company pursuant to the exemption from the
registration requirements of the Securities Act of 1933, as amended, afforded by
Rule 4(2) thereof:

            Fiscal 2005

                  Corporate Acquisition

      On March 4, 2005, the Company issued 394,682 shares of common stock
("Shares") to Clarion pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
afforded by Section 4(2) thereof. The Shares are being held in escrow pursuant
to the terms of an escrow agreement among the Company, Clarion and the Clarion
Stockholders in order to indemnify the Company and the Subsidiary from and
against, ceratin adverse consequences (as defined in the agreement by which the
Company purchased the Clarion stock) which result from an inaccuracy in or
breach of any representation, warranty, covenant or other provision set forth in
any of the various transaction documents.

                  Exercises of Options

      The transaction described below represents shares of common stock that
were issued upon the exercise of stock options:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Name of Issuee and Relationship to Company (if any)     Date of Issuance       No. of Shares    Price Paid
---------------------------------------------------     ----------------       -------------    ----------
----------------------------------------------------------------------------------------------------------
<S>                                                     <C>                    <C>              <C>
Edward Snow, Director and Audit Committee Member        June 30, 2005            5,000          $0.88
----------------------------------------------------------------------------------------------------------

Yaser Hasan, employee                                   February 24, 2005       10,000          $0.39
----------------------------------------------------------------------------------------------------------

Gene Rabois, Director and Audit Committee Member        November 10, 2005       37,500          $0.30
----------------------------------------------------------------------------------------------------------

Endeavor Asset Management, Inc.                         November 5, 2004       100,000          $1.00
----------------------------------------------------------------------------------------------------------

Thomas Isdanovich, Vice President                       August 16, 2004         20,000          $0.10
----------------------------------------------------------------------------------------------------------

Eldon Moberg, Vice President                            August 16, 2004         20,000          $0.10
----------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------
</TABLE>


                                       20
<PAGE>

            Exercise of Warrants

      The transactions described below represent shares of common stock that
were issued upon the exercise of common stock purchase warrants at a price of
$1.00 per share, unless otherwise noted:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                                         Price Per Share (if
Name of Issuee                                Date of Issuance         No. of Shares     other than $1.00)
------------------------------------------------------------------------------------------------------------
<S>                                           <C>                      <C>               <C>
Virginia Casadonte                            January 11, 2005          14,879

------------------------------------------------------------------------------------------------------------
Lipman Capital Group Inc.                     January 11, 2005          59,514

------------------------------------------------------------------------------------------------------------
Diversified Investors of North America        April 14, 2005            40,000           $1.50
                                              April 4, 2005             35,000           $1.50
                                              February 4, 2005          10,000           $1.50
                                              March 4, 2005             20,000           $1.50
                                              March 23, 2005            30,000           $1.50

------------------------------------------------------------------------------------------------------------
John Pappajohn                                December 22, 2004        200,000

------------------------------------------------------------------------------------------------------------
Kathleen Zomack, employee                     November 16, 2004          5,000           $0.39

------------------------------------------------------------------------------------------------------------
Endeavor Asset Management                     November 5, 2005         100,000

------------------------------------------------------------------------------------------------------------
Corsair Capital Partners, L.P.                November 5, 2005         112,000

------------------------------------------------------------------------------------------------------------
Corsair Select, L.P.                          November 5, 2005          60,000

------------------------------------------------------------------------------------------------------------
Corsair Capital Investors, Ltd.               November 5, 2005          16,000

------------------------------------------------------------------------------------------------------------
Corsair Long Short International, Ltd.        November 5, 2005           6,667

------------------------------------------------------------------------------------------------------------
Corsair Capital Partners 100, L.P.            November 5, 2005           5,333
------------------------------------------------------------------------------------------------------------
</TABLE>

            Conversion of Debt

      On April 7, 2004, the Company issued 735,294 shares of common stock to
Natalie Barchenko, the Treasurer and a director of the Company and the wife of
Arthur Barchenko, the Company's president and a director, upon the conversion of
loans made by Ms. Barchenko to the Company in the aggregate amount of $250,000.
The shares were issued at a price of $0.39 per share in reliance on the
exemption from the registration requirements of the Securities Act of 1933
afforded by Section 4(2) thereof. The offering price of the shares was based
upon a then outstanding offer from a third party to purchase shares of common
stock at such price.

            Preferred Stock Conversion

      The transactions described below represent shares of common stock issued
upon conversion of shares of Series A Preferred Stock by the holders thereof,
all of whom acquired their shares in the March 2002 506 offering, in accordance
with the terms of said class of stock.


                                       21
<PAGE>

            Fiscal 2005

      On May 20, 2005, the Company issued 28,570 shares of common stock to
Edward Rotter.

      On August 16, 2004, five persons not affiliated with the company or each
other converted an aggregate of 150,000 shares of Series A Preferred Stock into
an aggregate of 171,426 shares of common stock.

      On July 6, 2004, the Company issued an aggregate of 85,712 shares of
common stock to two persons upon the conversion of 75,000 shares of of Series A
Preferred Stock.

            Fiscal 2004

      On January 9, 2004, the Company issued 12,500 shares of common stock to
Mark Goodman, M.D.

      On December 12, 2003, the Company issued 12,500 shares of common stock to
Mitchell Finesod.

            Fiscal 2003

      On January 17, 2003, the Company issued 50,000 shares of common stock to
Dominic Bassani.

      On July 15, 2003, the Company issued 25,000 shares of common stock to Fred
Franks.

      On March 20, 2003, the Company issued an aggregate of 287,500 shares to
Angela Sabella, Douglas J. Bowen and Jeffrey Kessler.

      On February 10, 2003, the Company issued 25,000 shares of common stock to
TCMP 3 Partners.

            Exercises of Options

      The transactions described below represent shares of common stock that
were issued upon the exercise of statutory stock options.

      In June, 2005, Edward F. Snow, a director of the Company exercised options
for 5,000 shares of Common Stock. He paid an exercise price of $0.88 per share.

            Issuance of Warrants

      On January 2, 2005, the Company issued warrants to Lipman Capital Group
LLC to purchase 100,000 shares of common stock for a period of six months from
date of registration of the underlying shares of common stock at an exercise
price of $1.20 per share for services rendered.

      On June 30, 2004, the Company issued warrants to purchase up to an
aggregate of 2,200,000 shares of common stock for a period of of four years and
an exercise price of $1.00 per share in connection with the sale of Series B
Preferred Stock, as more fully described above.


                                       22
<PAGE>

      Issuance of Options Under Stock Option Plan

      The transactions described below represent options issued by the Company
under and subject to the provisions of the 1986 Stock Option Plan (as extended)
and were issued in reliance on the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.

            Fiscal 2005

      On January 21, 2005, the Company issued stock options to the persons named
below at a price of $2.40 per share. The options are exercisable for a period of
ten years from the date of the grant and vest in equal annual installments over
a five-year period commencing in 2005.

            Arthur Barchenko, Officer      50,000/year =  250,000
            Natalie Barchenko, Officer     30,000/year =  150,000
            Joseph McAndrew, Officer       10,000/year =   50,000
            William Ruffa, Counsel         5,000/year =    25,000
            Stephen Rossetti, Director     5,000/year =    25,000
            Gene Rabois, Director          5,000/year =    25,000
            Thomas Donahue, Director       5,000/year =    15,000
            Edward Snow, Director          5,000/year =    25,000

            Fiscal 2004

      On June 18, 2004, the Company granted options to an employee entitling him
to purchase 10,000 shares of common stock at a price of $0.55 per share,
exercisable for a period ten years from the date of the grant.

      On March 5, 2004, the Company granted options to an employee entitling him
to purchase 30,000 shares of common stock at a price of $0.60 per share (10%
above closing bid price on the date of the grant) for a period of 10 years from
the date of the grant.

      On January 2, 2004, the Company granted options to purchase an aggregate
of 155,000 shares of common stock to the persons named below, all of whom are
officers and or directors of the company, in the amounts specified opposite
their respective names. The options are exercisable for a period of ten years at
a price of $1.00 per share, except as otherwise noted.

      Arthur Barchenko           50,000
      Natalie Barchenko          50,000
      Mark Barchenko             10,000
      Joseph McAndrew            10,000
      Jake Muller                 5,000
      Thomas Isdanavich          10,000
      Eldon Moberg                5,000
      Richard Stern               5,000
      Lil Tsipouras              10,000

            Fiscal 2003

      On August 25, 2003, the Company granted options to Joseph McAndrew, an
officer, entitling him to purchase 10,000 shares of common stock at a price of
$0.60 per share (10% above closing bid price on the date of the grant) for a
period of ten years from the date of the grant.


                                       23
<PAGE>

      On August 22, 2003, the Company granted options to two employees entitling
them to purchase up to an aggregate of 15,000 shares each of common stock at a
price of $0.39 per share (10% above closing bid price on the date of the grant)
for a period of five years from the date of the grant.

      Issuance of Securities for Services or in Satisfaction of Obligations

      On April 13, 2005, the Company issued 10,000 shares of common stock to
James Janis in payment of director's fees for the 2003 fiscal year.

      In February 2004, the Company issued an aggregate of 85,000 shares of its
common stock, including 30,000 shares to directors and 35,000 to consultants for
services rendered in the aggregate amount of $96,900, or a price of $1.14 per
share, pursuant to the exemption from the registration requirements of the
Securities Act of 1933 afforded by Section 4(2) thereof..

      Issuance of Securities Pursuant to Rule 506. The Company issued the
following securities pursuant to the exemption from the registration provisions
of the Securities Act of 1933, as amended, afforded by Rule 506 of Regulation D:

      On June 30, 2004, the Company consummated the issuance of (i) 2,000 shares
("Preferred Shares") of 10% Series B Convertible Preferred Stock, and (ii) Unit
Warrants to purchase 2,000,000 shares of the Company's common stock to eight
institutional and other accredited investors. In addition, the Company issued to
certain persons who identified the investors in the Preferred Shares Finders'
Warrants to purchase 200,000 shares of the Company's common stock. The sale of
the Preferred Shares and Unit Warrants resulted in $2 million in gross proceeds
to the Company prior to the exercise of the Warrants. The Preferred Shares are
initially convertible into an aggregate of 2 million shares of common stock. The
Company agreed to file a registration statement in respect of the common stock
issuable upon conversion of the Preferred Shares and the shares of common stock
underlying the Warrants. The effective price in the private placement was $1,000
for each unit. Each unit consists of one Preferred Share and a Unit Warrant to
purchase 1,000 shares of common stock. The unit purchase price was determined
based on negotiation between the company and the purchasers of the units. The
Unit Warrants have an exercise period of four years and an exercise price of
$1.00 per share. The Unit Warrants are exercisable in cash, and, under certain
circumstances, allow for cashless exercise, representing a potential $2 million
in additional proceeds. The company could realize and additional $200,000 in
proceeds from the sale of the Finders' Warrants.

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

      The following discussion should be read together with our Financial
Statements and the Notes related to those statements, as well as the other
financial information included in this Form 10-KSB. Some of our discussion is
forward-looking and involves risks and uncertainties. For information regarding
risk factors that could have a material adverse effect on our business, refer to
Item I of this Form 10-KSB, "DESCRIPTION OF BUSINESS - Risk Factors" and
"CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS."

Overview

      We design, develop, manufacture and market technology-based integrated
security systems. We also provide consulting services consisting of risk
assessment and vulnerability studies to ascertain a


                                       24
<PAGE>

client's security requirements to develop a comprehensive risk management and
mitigation program and product design and engineering services.

      We market our products domestically and internationally to:

      o     national and local government entities;

      o     large industrial facilities and major office complexes;

      o     energy facilities, including nuclear plants, power utilities and
            pipelines; and

      o     commercial transportation centers, such as airports and seaports.

      We believe that we are one of the few true comprehensive security solution
providers in the industry. We are able to analyze a security risk and develop
security solutions specifically tailored to mitigate that risk, including
designing, engineering and manufacturing individual components of a system as
may be necessary to deliver a fully integrated security system customized to a
client's requirements. We are frequently engaged by security system integrators,
security system dealers/installers, and commercial architects and engineers
because we are able to deliver the integrated platform of design, engineering
services and fully integrated security solutions that support their requirements
for the completion of a given project.

      We believe that we have developed a superior reputation as a provider of
integrated security systems since our inception in 1976 because we:

o     offer the complete range of solutions-driven responses to accommodate our
      customer's needs;

o     offer technologically superior products;

o     are able to design, engineer and manufacture systems customized to our
      client's specific requirements;

o     deliver systems that are easy to operate and maintain while providing
      superior life cycle cost performance compared to systems offered by our
      competitors;

o     have established solid credentials in protecting high value targets; and

o     offer our customers perhaps the best warranty in the industry.

Fiscal 2005 Accomplishments

      Fiscal 2005 was an important year for the Company because:

      o     We obtained verbal authorization to proceed on the Tinker Air Force
            Base contract after completing our 95% design review on schedule.
            Since the 95% design review, as of June 30, 2005, we have shipped
            products or rendered services values at approximately $3,472,000 in
            connection with this project.

      o     We received $640,000 from the exercise of common stock warrants
            exercised in the second fiscal quarter of 2006 ended on December 31,
            2004.

      o     We entered into agreements with Hudson Marine/Hudson Trident and
            Amata Inc. Hudson Marine/Trident provides effective solutions to all
            security problems faced in the maritime industry. Amata Inc provides
            construction management to the Homeland Security and national
            defense sectors. Currently Amata is a subcontractor of the Company
            on the Tinker Air Force Base project.


                                       25
<PAGE>

      o     The Department of Defense (DoD) increased the amount to be spent to
            secure Tinker Air Force Base by $500,000 bringing the total to
            approximately $4.8 million.

      o     We entered into a strategic alliance with SIGCOM an organization
            specializing in a broad array of information technology and
            technical services to the Federal Government and ECSI expects to
            expand its sales and services to all areas of government.

      o     Arthur Barchenko addressed the 21st International Port Conference in
            Alexandria, Egypt and presented a white paper outlining a
            multi-phased security approach for port facilities.

      o     We acquired the assets of Clarion Sensing Systems, a provider of
            proprietary nuclear, bio-chemical and radiological remote monitoring
            sensor systems for air and water applications, for an aggregate
            purchase price of approximately $1.4 million, including the
            issuance of 394,682 shares of common stock and the assumption of
            $655,587 of certain liabilities of Clarion of which the Company
            already has paid approximately $413,144. We believe that the remote
            environmental monitoring sensor systems we can offer as a result of
            this acquisition enhance our product line and we expect to see rapid
            growth in sales of these products over the next several years.

      o     We formed an advisory board comprised of representatives from
            government, academia and industry.

      o     We selected Lockheed Martin, a large scale systems integrator with a
            worldwide customer base, for its expertise in complex electronic
            security systems, installation, integration and support services as
            a subcontractor. This alliance is in conjunction with the U.S. Air
            Force $540M IBDSS award. In turn, Lockheed issued a three-year ID/IQ
            contract to the Company for technology and support services on
            Lockheed projects.

      o     We received a multi-million dollar commitment from the Israeli
            Ministry of Defense (MOD) to supply its security technologies for
            their high threat facilities. ECSI will deliver its primary
            Perimeter Intrusion Detection Systems (PIDS) designed to prevent
            unauthorized entry or access to high threat complexes during the
            current fiscal year 2005 and through fiscal 2006 and possibly 2007.
            The first release amounts to over $230,000.

      o     We were selected as a technology supplier for the National Capital
            Security Program. The program addresses transportation and other
            essential infrastructure for the Washington, Maryland and Virginia
            area. The multi-million dollar National Capital Security Program is
            scheduled to move ahead in fiscal 2006.

Results of Operations

Year Ended June 30, 2005 ("Fiscal 2005 period") Compared to Year Ended June 30,
2004 ("Fiscal 2004 period").

REVENUES. We had net revenues of $5,967,469 for the Fiscal 2005 period, as
compared to revenues of $2,061,412 for the Fiscal 2004 period, an increase of
approximately 190%. Of the revenues reported in the Fiscal 2005 period,
approximately 95% was domestic and 5% was related to international projects. The
increase in sales in the Fiscal 2005 period is primarily attributable to the
award of Tinker Air Force Base by the DoD and release of other certain projects
that were awaiting funding and/or the approval of


                                       26
<PAGE>

submittal drawings. The funding and/or submitted drawings are related to
domestic projects. Foreign governments as well as private industrial concerns
overseas have slowed the release of other anticipated projects.

GROSS MARGINS. Gross margins for the Fiscal 2005 period were 40.82% of revenue
as compared to 54.95% of revenue for the Fiscal 2004 period. The decrease in the
Fiscal 2005 period is primarily due to an increase in the order mix for lower
gross margin subcontractor services related to the Tinker A.F.B. contract, as
compared to the Fiscal 2004 period, where the fulfillment of orders mostly
entailed the shipment of higher gross margin products and services.

RESEARCH AND DEVELOPMENT (R&D). R&D expenses decreased 11.5% in the Fiscal 2005
period to $285,916 from $322,912 in the Fiscal 2004 period. R&D in the Fiscal
2005 period was for upgrades to existing products and systems and for new
product development work on the Fiber Optic Intrusion Detection System
(FOIDS(R))..

SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased about 17.89%
in the Fiscal 2005 period to $2,101,435 from $1,782,534 in the Fiscal 2004
period. The increase in Fiscal 2005 is primarily the result of management's
action to increase certain fixed overhead and payroll costs commencing January
1, 2005 to support higher revenues. The increase was also partially due to the
write-off of certain accounts receivable totaling $200,025 due to the projects
not being funded.

STOCK BASED COMPENSATION. In the 2005 period, we issued immediately vested stock
to a consultant valued at $120,000. In the Fiscal 2004 period, we issued
immediately vested stock and stock options to various employees, consultants and
to the directors valued at $117,200. Stock-based compensation is non-cash and,
therefore, has no impact on our net worth, cash flow or liquidity.

INTEREST EXPENSE. Interest expense in the Fiscal 2005 period was $118,029 as
compared to $105,916 for the Fiscal 2004 period. The increase was attributable
to the higher average amount of outstanding debt balances.

INTEREST AND DIVIDEND INCOME. Interest income in the Fiscal 2005 period was
$15,498 as compared to $3,128 in the Fiscal 2004 period. The increase was due to
certain investments and certificate of deposit.

MINORITY INTEREST IN SUBSIDIARY LOSS. The minority interest in the loss from the
foreign subsidiaries was $48,899 for the Fiscal 2005 period and $42,633 for the
Fiscal 2004 period. The first foreign subsidiary was formed in January 2002 and
commenced operations in May 2002. In January 2003, it ceased to exist as an
operating subsidiary and the assets were transferred to a newly created foreign
subsidiary. We established the new foreign operating subsidiary, in which we own
a 70% interest, to conduct our business in the Middle East.

INCOME TAX BENEFIT. In the Fiscal 2005 period, we did not recognize any tax
benefits from current year net operating loss. In the Fiscal 2004 period, we
recognized $31,300 of tax benefits from the current year net operating loss,
which will be used to offset taxable income in a future.

NET LOSS. Net loss before dividends for the Fiscal 2005 period was $(122,196) as
compared to a loss of $(1,118,656) for the same period in Fiscal 2004.


                                       27
<PAGE>

Dividends Related to 10% Series B Convertible Preferred Stock.

      We recorded dividends totaling $199,306 on our Series B Convertible
Preferred Stock in Fiscal 2005. In lieu of a cash payment we have elected under
the terms of the agreement by which sold these securities to add this amount to
the stated value of the Series B Convertible Preferred Stock. We recently
declared and paid dividends equal to $154,967 on our Series A Convertible
Preferred Stock for the years ended March 14, 2004 and 2005 which were paid via
the issuance of 100,628 shares of our Common Stock. In addition, we recorded a
deemed dividend totaling $1,044,147 in fiscal 2004 to reflect the beneficial
conversion price of our Series B Convertible Preferred Stock as compared to the
prevailing market price of the common stock on the date of commitment. This
adjustment has no impact on our net equity since the offset to the deemed
dividend is an offsetting increase in additional paid-in capital.

Liquidity and Capital Resources

      At June 30, 2005, we had working capital of $3.20 million compared to
$3.01 million at June 30, 2004. Net cash used by operating activities for fiscal
2005 was $923,953 as compared to net cash used by operating activities of
$1,411,859 for fiscal 2004.

      Inventory has increased by $330,196 since the beginning of fiscal 2005 and
should decrease during the first quarter of 2006 for shipments on committed
projects that have been released. Accounts receivable relative to sales volume
has improved somewhat. Day's sales outstanding (DSO) were 86 days at June 30,
2005 as compared with 139 days at June 30, 2004. This is due to certain payments
being held until final completion of projects in to occur in fiscal 2006.

      Accounts payable and accrued expenses have decreased $571,403 in the
fiscal 2005 period as payments to vendors have been accelerated to match the
timelier collection of receivables.

      Investing activities for fiscal 2005 included the cash used for the
Clarion acquisition. In addition we purchased $95,683 of equipment and software
required to upgrade two major product lines. We do not have any material
commitments for capital expenditures going forward.

      We realized net proceeds of $783,850 from the exercise of outstanding
stock options and warrants in fiscal 2005. In addition, financing activities in
fiscal 2005 included the repayment of a short-term loan in the amount $250,000
from the proceeds of the June 2004 private placement.

      In November 2004, our revolving line of credit of $500,000, was converted
into a five-year $500,000 term loan which is payable in monthly installments of
$8,333 plus interest at the rate of 8% per annum. The loan is secured by
substantially all of our assets, a $250,000 certificate of deposit, and the
personal guaranty of Arthur Barchenko. In addition, we have a five-year $500,000
term loan which is payable in monthly installments of $8,333 plus interest at
the rate of 7.5% per annum. In connection with our acquisition of Clarion
Sensing Systems, we assumed an existing bank debt totaling $117,342. The debt is
to be repaid in 34 monthly installments in the amount of $2,750 plus interest
and is secured by the former officers and directors of Clarion Sensing Systems
and ECSI International Inc.

      To achieve all the elements of our growth strategy and the desired outcome
of a sustainable and continuous growth rate through our teaming and contractual
relationships, we must devote additional capital resources to our sales and
marketing efforts and product development. We have used a significant portion of
the proceeds derived from the $2,000,000 private placement we completed at the
end of June 2004 toward this end.


                                       28
<PAGE>

      We plan to invest in or acquire other entities in the security technology
industry to expand our product offerings to meet all possible security threats,
including emerging security risks. For example, we have to determined to add an
acoustic detection technology to our portfolio of security technologies and will
seek to purchase or license such a technology or acquire a company that
possesses such technology. We will remain attentive to other opportunities as
they arise. We may pay for any such investments or acquisitions using cash,
equity or a combination thereof. To the extent we require cash in connection
with such activities, we likely will have to obtain third party financing.
Therefore, we are continuing to pursue additional capital through selected
investment banking firms.

      We believe that our financial condition continues to remain dependent upon
our ability to:

      o     collect invoices in a consistent timely fashion;

      o     continually generate new business; and

      o     obtain sources of financing to take advantage of business and
            acquisition opportunities as they arise.

      We have shipped orders to clients as required by our agreements and the
more timely receipt of payment for such orders over the last year has improved
our cash flow. We currently have sufficient orders and business to ensure our
financial stability for the foreseeable future. We expect that cash on hand
together with cash generated from operations and the exercise of outstanding
warrants will be sufficient to provide for our working capital needs. We remain
committed to pursuing acquisitions that may add to our revenues and enhance both
our product line and, ultimately, our ability to compete in our industry. It is
likely that we will require additional financing or other sources of capital to
complete any acquisitions, as well as take advantage of any major business
opportunities that arise. We also may seek other sources of funding, though we
cannot be certain that any such funding will become available on favorable
terms.

Discussion of Results, Business Outlook and Identifiable Industry Trends

      Discussion of Results

      Revenue and earnings results during the past fiscal year have met our
revised sales forecasts due to funding constraints by the DoD. Although we did
not see the acceleration of spending in our segment of the security industry
that we expected as a result of the continuing terrorist threat both
domestically and abroad, we still achieved a 190% increase in sales over fiscal
2004 ($5,967,49 in 2005 as compared to $2,061,412 in 2004). Although The
Homeland Security initiatives proposed by the United States Congress during the
last two years have not been adequately funded, we believe that previously
proposed Department of Defense ("DoD") and Department of Homeland Security
projects will move ahead in fiscal 2006.

      During the last fiscal year, we were disappointed at the pace at which the
government appropriated funds to base upgrades under the U.S DoD IBDSS
$540,000,000. Of the twelve bases selected for upgrade under the program, funds
were appropriated for upgrades to only three bases last year, for one of which
we acted as the prime contractor. It is our understanding that funds have been
appropriated to commence upgrading 3 or 4 bases in the coming year and that such
work may begin in December 2005. We expect to submit bids to serve as the prime
contractor on all base upgrades but cannot be certain that we will be awarded
any of these projects.

      How do we plan to address the uneven results of operations we have
experienced over the last several years?


                                       29
<PAGE>

o     We are diversifying and developing our target markets through company
      marketing and sales personnel to increase market penetration by developing
      airport, port, naval, border, pipeline, petro, chemical, water resource,
      State Department and Department of Energy security projects, domestically
      and internationally.

o     We have hired our own professional marketing and sales staff; entered into
      mutual ID/IQ contracts with Lockheed Martin to aggressively target and
      then jointly pursue military and government security projects; developed a
      working relationship with KBR/KUK, a division of Halliburton, and obtained
      approval of the State Department for ECSI to work on the U.S. Embassy
      program; developed a working relationship with Exxon Mobile and Honeywell
      Technology Solutions; entered into a mutual contract relationship with
      Lockheed Martin TSS on IBDSS and other programs CONUS/OCONUS.

o     We have filed with the Deptartment of Defense to obtain top secret
      clearances for projects within the Deptartment of State and have obtained
      interim facility top secret clearance while staff members are being
      processed.

o     During the third quarter of fiscal 2005, we completed the acquisition of
      the assets of Clarion Sensing Systems to develop opportunities in the
      water and agricultural security market. Clarion is an innovative
      technology leader that integrates complete systems to remotely monitor,
      analyze, and communicate information about water and air quality.

o     We continued to perform under existing agreements and to render services
      and supply products at Tinker Air Force Base, Hanscom Air Force Base, Duke
      nuclear power facilities, the Israeli Ministry of Defense and other
      facilities.

o     We submitted bids on ten new projects for work to be performed at our
      Clifton, NJ and Madison, AL facilities. We cannot be certain that we will
      be successful in winning any of the bids tendered. Even if we do receive
      orders, contracts are subject to cancellation by clients upon short notice
      with little or no penalty, as is typical in our industry. Moreover,
      contracts we enter into with government entities are often awarded prior
      to legislative approval of the funding to support those contracts and,
      consequently, the entire amount of orders and contracts received from
      these entities may never be funded.

      We believe these steps and others we expect to implement during fiscal
2006 will help us to achieve revenue stability and consistent and steady growth
in the years ahead.

      In December 2004, we organized a committee to evaluate and update our
internal control structure and procedures for financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002 (the "404 Committee"). The 404
Committee is comprised of members of our Audit Committee and personnel drawn
from our finance, operations and marketing departments. The 404 Committee is
responsible for preparing an internal control report that attests to the
effectiveness of the Company's internal control structure and procedures for
financial reporting, and to the extent applicable, describes any material
weakness in internal control over financial reporting identified by the 404
Committee. The 404 Committee's report is to be filed with the Annual Report on
Form 10-KSB along with a report of the Company's registered public accounting
firm which includes the auditor's opinions on whether management's assessment of
internal control over financial reporting is fairly stated and whether the
Company maintained effective internal control over financial reporting. The 404
Committee is working toward meeting our June 30, 2007 internal control over
financial reporting requirements.


                                       30
<PAGE>

      As global economic prospects began to change during 2005, orders and
commitments increased. Currently, purchase order commitments continue to grow.
However, our historical results have taught us that the release of funds that
support contracts and orders may never be forthcoming. Furthermore, as is
customary in the security industry, our contracts are subject to cancellation or
delay at any time with little notice or penalty. Government based orders which
are subject to legislative appropriations are particularly sensitive to economic
and political conditions. Thus we cannot be certain as to the total realized
value and revenue which we will generate from committed orders. We expect to
receive releases and task orders for a significant portion of our contract
commitments sometime within the next 12 to 18 months, although we cannot be
certain that we will complete any or all of such orders within the anticipated
time frame.

      The Security Industry

      The security industry as a whole has not changed. The security market
historically has been a product oriented opportunity for manufacturers, both
within the United States and internationally. The difficulty the industry
traditionally has faced has been the ability to develop a standard security
platform that would permit systems integrators to design a seamless interface
between the multiple products and subsystems required to address threats in
high-security environments. A number of companies are attempting to develop
platforms that address seamless integration of multiple technologies. We expect
this trend continuing for the foreseeable future, since the demand for
integrated platforms will continue.

      We recognized this trend early in our existence and to that end, we have
developed, marketed and installed integrated platforms which encompass multiple
technologies. We continue to seek to improve our integrated systems and have
retained a highly-competent system oriented software programmer and two
computer-oriented electronic engineers to further develop and enhance the
integrated platform for current and future projects.

      Further, the security industry, which has been characterized by a
fragmented and wide ranging group of single-product manufacturers and small
service providers, has begun to consolidate as multi-national corporations
acquire smaller market and single product entities to form multi-technology
corporations. We believe this trend will continue. Therefore, teaming
relationships will be important for independent entities in the security field
to thrive and grow in the years ahead. To address this consolidation, we have
implemented a corporate account development department both to work with and
support the large corporate integrators and to establish teaming agreements
going forward. We believe that our technologies and capabilities compliment
those of the large system integrators in the security industry both domestically
and in the international arena thereby allowing us to work together on major
projects.

      Business Approach and Outlook

      Over the last several years we have sought to develop the contacts and
relationships enjoyed by our directors by obtaining introductions to potential
strategic partners. The strategic relationship framework provides a
comprehensive and thorough mechanism for developing and implementing corporate
strategy. Our board of directors determined early in our existence that given
our size and the criticality of our business situation that the strategic
relationship framework would provide us with a non-resource exhaustive and more
expedient and efficient means of entering new markets. This approach has met
with considerable success and we continue to seek strategic alliances.

      During this past fiscal year we formed an advisory board comprised of
representatives from government, academia and industry to share their expertise
and provide guidance in building a sound foundation for future growth.


                                       31
<PAGE>

      Our strategic relationships with multi-national firms also have afforded
us direct and indirect access to sophisticated market analysis and research that
we otherwise would not have the resources to undertake on our own. This
information has allowed us to frame the overall growth and size of the
technology markets within which we operate and provide us with a sense not only
of the strength of our technology base but also of our relative market share
within the industry. This approach has allowed us to analyze customer and market
segmentation and develop a value proposition for the security solutions we offer
which has been and will be an invaluable source of information as a means of
generating income.

      During April 2005 we renewed our relationship with a financial public
relations firm to disseminate information about our Company to the investment
community and increase public awareness of and interest in our stock. We hope
that the efforts of this entity will broaden the appeal of our stock and
facilitate our ability to raise funds for expansion activities as required.

      In March and April of the last quarter, Taglich Brothers, Inc. and Micro
Cap Gems, financial analysts firms, began to monitor the Company's results and
issue financial reports on the Company to investors through their website and
distribution channels.

      Sales continue to be materially dependent upon the ability of Arthur
Barchenko, our President, to generate orders and sales to meet our revenue
objectives. In the past, Arthur Barchenko has been responsible for the majority
of our sales. We expect this to change as our marketing and sales team has begun
to develop a significant amount of accounts and new proposals.

      We believe we are well positioned for economic success during fiscal 2006
and beyond. A number of factors contribute to this outlook.

o     The influx of cash from the private placement we completed in June 2004
      will allow us to invest in revenue generating activities such as sales and
      marketing efforts, the maintenance and growth of existing strategic
      alliances and the identification of new strategic partners, the
      development of new products and software to enhance our product offerings
      and the retention of critical new personnel.

o     Our selection by the United States Air Force, Force Protection Office, as
      one of four companies, among two multinational and two small business
      organizations, entitling us to submit proposals to obtain contracts to
      supply and install security system upgrades for thirty-four (34) military
      facilities worldwide over a five year period with a total value in excess
      of $540 million, which, since the date of such award, has increased to two
      hundred thirteen (213) fixed and two hundred (200) tactical bases and over
      $1.3 billion in total value.

o     We estimate that orders recently received including nuclear power station
      security upgrades, Hanscom A.F. tactical equipment purchases and IDF - MOD
      P.O. purchase order commitments, and a multi-million dollar classified
      border security project in Eastern Europe (which is awaiting release) and
      the U.S. Air Force IBDSS contract will amount to $8,500,000.

o     The conclusion of agreements with new strategic partners that we
      anticipate will be a source for material orders in the years ahead.


                                       32
<PAGE>

Critical Accounting Policies

      The Company prepares its financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. On an ongoing basis, management evaluates its estimates, including
those related to inventory reserves, allowance for doubtful accounts and
deferred taxes. Actual results may differ from these estimates under different
assumptions or conditions. Management believes the following critical accounting
policies and the related judgments and estimates affect the preparation of our
financial statements.

Inventory Valuation - Inventories are valued at lower of cost or market. The
Company routinely evaluates the composition of its inventory to identify
obsolete or otherwise impaired inventories. Inventories identified as impaired
are evaluated to determine if reserves are required. The Company does not
currently have any reserves against inventory.

Allowance for Doubtful Accounts - The allowance for doubtful accounts is
comprised of two parts, a specific account analysis and a general reserve.
Accounts where specific information indicates a potential loss may exist are
reviewed and a specific reserve against amounts due is recorded. As additional
information becomes available such specific account reserves are updated.
Additionally, a general reserve is applied to the aging categories based on
historical collection and write-off experience.

Accounting for Income Taxes - The Company records a valuation allowance to its
deferred tax assets to the amount that is more likely than not to be realized.
While we consider historical levels of income, expectations and risks associated
with estimates of future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event that we determine that we would be able to realize deferred tax assets in
the future in excess of the net amount recorded, an adjustment to the deferred
tax asset would increase income in the period such determination has been made.
Likewise, should we determine that we would not be able to realize all or part
of the net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged against income in the period such determination was made.
A valuation allowance in the amount of $515,553 has been recorded against our
deferred tax asset at June 30, 2005.

Recently Issued Accounting Pronouncements

      In November 2004, the FASB issued SFAS 151, "Inventory Costs." SFAS 151
amends the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) under the guidance in ARB 43,
Chapter 4, "Inventory Pricing." Paragraph 5 of ARB 43, Chapter 4, previously
stated that "...under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal as
to require treatment as current period charges...." This Statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not expect adoption of SFAS 151 to have a material impact on the
Company's financial statements.

      In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS
123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB
Opinion 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS


                                       33
<PAGE>

123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entity's shares or other equity
instruments. This statement is effective for public companies qualifying as SEC
small business issuers, as of the first interim period or fiscal year beginning
after December 15, 2005

      As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method and,
as such, generally recognizes no compensation expenses for employee stock
options. Accordingly, the adoption of SFAS 123(R)'s, fair value method will have
a significant impact on our results of operations, although it will have no
impact on our overall financial position. The impact of adoption of SFAS No.
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future, however, had the Company adopted
SFAS 123(R) in prior periods, the impact of the standard would have approximated
the impact of SFAS No. 123 as described in the disclosure of pro forma net
income (loss) and net income (loss) per share in Note 2 to the consolidated
financial statements. SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While the Company
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), there were no
operating cash flows recognized in the years ended June 30, 2005 and 2004 for
such excess tax deductions.

ITEM 7. FINANCIAL STATEMENTS

      The Company submits with this report the financial statements and related
information listed in the Index to Financial Statements on page F-1 following
this report's signature page.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.

ITEM 8A. CONTROLS AND PROCEDURES.

      Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures are
adequately designed to ensure that the information required to be disclosed by
us in the reports we file or submit under the Exchange Act is recorded,
possessed, summarized and reported, within the time periods specified in the
applicable rules and forms. During the period covered by this Annual Report on
Form 10-KSB, there was no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) that materially
effected, or is reasonably likely to materially effect, our internal control
over financial reporting.


                                       34
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

Directors and Executive Officers.

      The following table sets forth certain information about our directors and
executive officers as of September 9, 2005:

--------------------------------------------------------------------------------
                                                              Year First
      Name                     Position              Age      Became A Director
      ----                     --------              ---      -----------------
--------------------------------------------------------------------------------

Arthur Barchenko       President and Director         72      1976

--------------------------------------------------------------------------------
Richard Stern          Vice President                 55

--------------------------------------------------------------------------------
Eldon Moberg           Vice President                 55

--------------------------------------------------------------------------------
Thomas Isdanavich      Vice President                 57

--------------------------------------------------------------------------------
Joseph McAndrew        Vice President                 51

--------------------------------------------------------------------------------
Mark Barchenko         Vice President-Marketing       49

--------------------------------------------------------------------------------
Natalie Barchenko      Treasurer and Director         71      2001

--------------------------------------------------------------------------------
Gene Rabois            Director                       60      1989

--------------------------------------------------------------------------------
Robert F. Reiter       Director                       55      2001

--------------------------------------------------------------------------------
Edward Snow            Director                       66      2000

--------------------------------------------------------------------------------
Thomas F. Donahue      Director                       55      2004

--------------------------------------------------------------------------------
Stephen Rossetti       Director                       54      2004

--------------------------------------------------------------------------------
Martin Harmless        President-Clarion Sensing
                       Systems Inc.
--------------------------------------------------------------------------------

Arthur and Natalie Barchenko are married and Mark Barchenko is their son.

      The Company's directors are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified. The Company's officers serve at the pleasure of the Board of
Directors.

      Set forth below is biographical information concerning our directors and
executive officers for at least the past five years. All of the following
persons who are executive officers are also full-time employees.

      Arthur Barchenko has been our President since December 1976. Mr.
Barchencko also participates in the management of our subsidiaries. From June
1952 to May 1972, he held various sales


                                       35
<PAGE>

and marketing positions at Lightolier, Inc., a company engaged in the
manufacturing and marketing of lighting fixtures. During his tenure at
Lightolier, Inc., Mr. Barchenko served as the vice president of sales and was
responsible for directing a sales force of approximately 150 persons and a
support staff of approximately 50 persons. Mr. Barchenko also served as a member
of the board of directors and on the executive committee Lightolier, Inc. Prior
to organizing Electronic Control Security Inc., Mr. Barchenko co-founded and
directed the operations of Bajer Industries, a lighting manufacturing company
that was subsequently sold to the Charter Group. Mr. Barchenko is active with
American Defense Preparedness Association, and American Society of Industrial
Society. He served on the Radio Technical Commission for Aeronautics Committee
183 for upgrade of FAR 107.14(a) and (b) as a member of the special access
control security task force for the Federal Aviation Administration. Federal
Aviation Regulation 107.14 (FAR 107.14a and b) is the document produced by RTCA
committee 183 for the security upgrade of the access control system and
universal access control system requirements for civilian commercial and shared
civilian/military airports under U.S. jurisdiction.

      Richard Stern has served as our Vice-President-Manufacturing since
December 1, 1997. He is responsible for the overall management of our
manufacturing department, which includes supervising all manufacturing,
maintenance and test personnel; manufacturing engineering, including the review
and evaluation of new and existing product design in a manufacturing
environment; oversight of maintenance of plant equipment and facilities;
mechanical package design of new product development; quality control, including
the development of test equipment and procedures; production scheduling;
shipping and receiving and inventory of all materials and finished products,
purchasing and expediting of materials and supplies, and oversight of
manufacturing personnel, labor reports. Prior to joining us, Mr. Stern spent 25
years in the data communication and temperature processing fields. He has held
managerial positions in manufacturing, engineering, quality control, service, as
well as being involved in the design and development of the product lines within
these fields.

      Eldon Moberg joined us in 1996 as the Vice President of the FOIDS product
division and has served as our Vice-President since July 1, 1999. Mr. Moberg is
responsible for establishing the FOIDS manufacturing and test facility in
Madison, Alabama. Prior to joining us, Mr. Moberg was the Production Supervisor
for Mason & Hanger National, Inc. a company engaged in the manufacture and
marketing of our FOIDS product line. Thereafter, as Production Supervisor, he
was responsible for planning and scheduling personnel, materials and equipment
to support product manufacture. Before entering private industry, Mr. Moberg
served for twenty years in the United States Army where he gained experience as
senior radar repair technician for several Army Air Defense systems, team leader
for missile system direct support maintenance and training developer for newly
acquired Army missile systems.

      Thomas Isdanavich has been Vice President of Product Management at ECSI
since July 1997. He determines installation and service support requirements for
in-house and field applications. His responsibilities include field labor
analysis and the planning and coordination of all administrative phases of sales
and customer support services. Mr. Isdanavich was employed by Beall
Technologies, Inc. a manufacturer of matrix switching equipment for IBM
compatible mainframe computers, from 1973 to 1997. Prior to entering private
industry, Mr. Isdanovich served in the U.S. Navy for four years.

      Joseph McAndrew joined us in June, 2003 as Vice President of Operations.
Prior to that Mr. McAndrew spent 20 years as an innovative, hands-on
manufacturing operations executive with experience in controlling all of the
elements inherent in producing superior products at the lowest possible costs.
He has headed global manufacturing operations for multi-layer radio frequency
signal processing components used in the military, satellite and commercial
markets with annual sales of $25 million. Mr. McAndrew has developed new and
unique process techniques, allowing entry into the commercial market and
resulting in the issuance of two U.S. Patents. His experience is multi-national
with important


                                       36
<PAGE>

technology operation transfers in Canada and production build outs in Central
America. Mr. McAndrew has a master's degree in Engineering Management from the
New Jersey Institute of Technology.

      Mark Barchenko joined us in 1993 and has served as our Vice-President of
Marketing on two separate occasions most recently since 2004. He has focused his
marketing and business development efforts on Southeast Asian government
projects and U.S. airports and maritime facilities. Mr. Barchenko spearheaded
the IS09001-2000 quality program based on the international standard of
operation, from inception through registration during 2000. Mr. Barchenko is
active with American Defense Preparedness Association, and American Society of
Industrial Society. He served on the Radio Technical Commission for Aeronautics
Committee 183 for upgrade of FAR 107.14(a) and (b) as a member of the special
access control security task force for the Federal Aviation Administration.
Federal Aviation Regulation 107.14 (FAR 107.14a and b) is the document produced
by RTCA committee 183 for the security upgrade of the access control system and
universal access control system requirements for civilian commercial and shared
civilian/military airports under U.S. jurisdiction. Mr. Barchenko holds a U.S.
patent titled "Jet Propulsion Engine Assembly for Aircraft."

      Gene Rabois has served as a member of the Board of Directors since October
1, 1989 and as a member of the Audit Committee since 2002. Previously he was
employed at ECSI as Chief Financial Officer. Mr. Rabois has more than thirty
years' experience in accounting and finance, Securities and Exchange Commission
financial reporting, installation and management of computer systems and control
and administration of corporate financial affairs. He served as controller for
SJT Imaging, Inc., a printing concern, through May, 2004 and currently as
controller at e.comm Technologies, East Hanover, NJ.

      Natalie Barchenko has been a director and the Treasurer of ECSI since
2001. During the last ten years, she has been actively involved with the day to
day operations of the Company in the areas of human resources, order entry,
invoicing, advertising and sales materials. Natalie now serves as a member of
the SOX 404 Audit Committee. She is married to Arthur Barchenko, President and
CEO of ECSI

      Edward Snow has been a director of ECSI since June 2000. From October 1996
to October 1999 he was the co-owner and operated Phoenix Fiber Optics Inc., a
manufacturer and marketer of fiber optic products. From October 1999 to October
2000, he has served as the Assistant to the President of Space America Corp.
Since 1996, he has acted as a private consultant to the government and industry.

      Robert F. Reiter has been a director of ECSI since November 2001. Since
November 1997, he has served as the President of R.F. Reiter & Associates, an
engineering consulting firm. Since January 2002, he has been the President of
HAZ-X Holdings, Ltd., which engages in non-intrusive inspection engineering and
operations. From 1977 through 1997, he was the Vice President of Analytical
Systems Engineering Corp. an engineering consulting company.

      Stephen Rossetti joined the Board as a director in October, 2004. Mr.
Rossetti is a former senior staff member of the House Armed Services Committee
where he had an established reputation as a strident government reform advocate.
As director of the Readiness Subcommittee staff, he was responsible for the
oversight of the vast Department of Defense infrastructure and combat readiness,
directing a subcommittee with nearly $90 billion in annual spending. Over the
years, he has served in various capacities with the Department of Defense and
received several honors for his services from Congress, the President and the
Secretary of Defense. Mr. Rossetti currently serves as President of each of
Zegato Solutions and Markquest, Inc.

      Thomas F. Donahue has been a director of the Company since November, 2004.
During 2002 and 2003, he was engaged by ECSI to provide financial analysis with
respect to corporate operations and potential acquisitions. He is the President
of Donahue Consulting and former Vice President & Treasurer


                                       37
<PAGE>

of Sensormatic Electronics Corporation and Citibank Universal Card Services. In
his consulting business, Mr. Donahue is a contract CFO and corporate finance and
management consultant for small cap public and private companies. He teaches
advanced corporate financial analysis in an MBA program.

      Martin Harmless has been the President of our subsidiary, Clarion Sensing
Systems, Inc. since March 2005. He is an environmental engineer with over 30
years of experience consulting to municipalities, military installations, and
governmental agencies on water and air quality issues. His experience in this
area includes engineering management of the design and construction of drinking
water distribution and treatment plants, and wastewater collection system and
waste treatment plant upgrades. Mr. Harmless has supplied remote online water
quality systems to the Limited Objective Experiment (LOE) being conducted at Ft.
Leonard Wood, MO. He has also supplied critical building environmental
monitoring systems to the Naval Surface Warfare Center (NSWC), Crane. Mr.
Harmless envisioned these applications and was instrumental in the basic design.
Recently, he performed research on the elimination of chlorine as a disinfectant
in water and wastewater treatment in order to reduce the amount of this
hazardous substance in populated areas. He has expertise in integration of
Nuclear, Biological, Chemical, and Radiological technologies through online
remote monitoring.

      Advisory Board

      During fiscal 2005, we established an Advisory Board to provide expert
analysis and information to the Company regarding security issues and
technologies applicable to the industry. The Advisory Board is comprised of
representatives from government, academia and industry. The Advisory Board
comprises the following persons:

      Dr. Norris Krone, President and CEO of the University Research Foundation
(URF) and its co-founder, directs all aspects of the Maryland Advanced
Development Lab. Dr. Krone is a highly decorated Vietnam War veteran. He is a
recognized leader in the field of aeronautical sciences and pioneered the
development of the technical principles of the forward swept wing aircraft
concept, a breakthrough in the field. His has also served on NASA committees:
the Aerospace Technology Advisory Committee and the Aerospace Safety and
Advisory Panel.

      Dr. John H. Estes, Principal Research Engineer/Director for San Antonio,
Ops, Georgia Tech Research Institute has over 20 years of leadership in
fast-paced engineering organizations including facilities/project engineering,
management and force protection among others. He has extensive experience in
strategic planning, marketing and execution of major engineering and
environmental programs. He is often selected to present briefings to civic
leaders, the Secretary of Defense and Congressional leaders.

      Brad Billet, Deputy Commissioner, United Nations, has a long and
distinguished record of emergency and response operations service to his native
New York City. As a responder to the September 11th disaster, he was called upon
by Mayor Rudolph Giuliani to provide essential services in the rescue and
recovery process. In 1997, Mr. Billet was appointed to his present position and
is the agency's Chief Operating and Administrative Officer.

      Ambassador (Ret.) Patrick Nickolas Theros has served as the United States
Ambassador to Qatar. Prior to this he served as deputy coordinator for
counterterrorism where he was responsible for the coordination of all U.S.
Government counter-terrorism activities outside the U.S. He also served in
various diplomatic positions in other nations as well as in the State
Department. He currently heads his own company, Theros & Theros LLP, Washington,
DC. which represents firms transacting business in the Middle East and Eastern
Europe.


                                       38
<PAGE>

      Rafi Ron, President and CEO of New Age Security Solutions, is a former
director of security at Ben-Gurion International Airport and the Israeli Airport
Authority. He is a leading expert on aviation, maritime and law enforcement in
Israel and world wide. He also served as a chief security officer in Israeli
embassies around the world where he was implemental in establishing security
systems. Mr. Ron's company conducts security related training and consultation
in the U.S. and other countries.

      Edward Badolato Col. Ed Badolato (Ret.) is the Executive Vice President
for Homeland Security for The Shaw Group, a Fortune 500 corporation. He has a
unique background in security, transportation, energy and risk management
spanning 30 years and has been involved in numerous high profile programs
dealing with security, protection of energy infrastructure, and counterterrorism
operations. Under Presidents Reagan and Bush, he served as a Deputy Assistant
Secretary at the Department of Energy (1985-1989) where he was the principal
director of security, energy contingency planning and international energy
security activities. He was responsible for coordinating nuclear emergency
response and planning activities and played a leading role in many DOE agencies.
He is well experienced in the security of transportation systems, offshore and
land based energy facilities, and maritime assets. In 1989, he founded
Contingency Management Services, Inc., an international energy security
consulting firm. In November 2002, CMS was acquired by the Shaw Group., and he
became Executive Vice President for Homeland Security.

Section 16(a) Beneficial Ownership Reporting Compliance.

      Section 16(a) of the Securities Act of 1934 requires the Company's
officers and directors, and greater than 10% stockholders, to file reports of
ownership and changes in ownership of its securities with the Securities and
Exchange Commission. Copies of the reports are required by SEC regulation to be
furnished to the Company. Based on management's review of these reports during
the fiscal year ended June 30, 2005, all reports required to be filed were filed
on a timely basis.

Code Of Conduct And Ethics.

      We have adopted a code of conduct and ethics that applies to our
directors, officers and all employees. The code of conduct and ethics will be
posted on our website at www. ecsi@anti-terrorism.com by the date of the Annual
Meeting of Shareholders, or shortly thereafter. Until that time, the code of
business conduct and ethics may be obtained free of charge by writing to
Electronic Control Security Inc., Attn: Arthur Barchenko, 790 Bloomfield Avenue,
Building C, Suite 1, Clifton, New Jersey 07012

Sarbanes-Oxley 404 Committee.

      In December 2004, we organized a committee to evaluate and update our
internal control structure and procedures for financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002 (the "404 Committee"). The 404
Committee is comprised of members of our Audit Committee and personnel drawn
from our finance, operations and marketing departments. The 404 Committee is
responsible for preparing an internal control report that attests to the
effectiveness of the Company's internal control structure and procedures for
financial reporting, and to the extent applicable, describes any material
weakness in internal control over financial reporting identified by the 404
Committee. The 404 Committee's report is to be filed with the Annual Report on
Form 10-KSB along with a report of the Company's registered public accounting
firm which includes the auditor's opinions on whether management's assessment of
internal control over financial reporting is fairly stated and whether the
Company maintained effective internal control over financial reporting. The 404
Committee is working toward meeting our June 30, 2007 internal control over
financial reporting requirements.


                                       39
<PAGE>

      As constituted, the 404 Committee consists of the following persons who
also serve the Company in the capacities set forth opposite their names:

      Mark Barchenko, Vice President Marketing
      Joseph McAndrew, Vice President Operations
      Lil Tsipouras, Controller
      Natalie Barchenko, Director, Treasurer, Manager Human Resources/
        Order Entry Control
      Gene Rabois, Director, Chairman Audit Committee
      Edward Snow, Director, Member Audit Committee
      Thomas Donahue, Director, Member Audit Committee

ITEM 10. EXECUTIVE COMPENSATION

Directors Compensation.

      In addition to reimbursing directors for expenses they incur in attending
meetings of the Board or Committees of the Board, the Company pays its directors
a fee of $1,000 for each board meeting attended in person and $500 for each
board meeting attended telephonically. It is expected that the Company's outside
directors will receive an annual award of stock options under the Company's
equity incentive plan. The Company reimburses non-employee directors for travel
and related expenses for attending board meetings.

Executive Compensation.

      The following table sets forth certain information concerning the annual
and long-term compensation of the person serving as the Company's chief
executive officer (the "Named Executive") during the last three years. No other
executive officers received annual compensation in excess of $100,000 during the
last three fiscal years.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------------
                                                                         Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------
                                    Annual Compensation                   Awards                Payouts
-------------------------------------------------------------------------------------------------------------------------
                                                                 Restricted    Securities
Name and                                         Other Annual      Stock       Underlying                     All Other
Principle                    Salary     Bonus    Compensation     Award(s)    Options/SARs       LTIP        Compensation
Position         Year          ($)       ($)         ($)             ($)           (#)        Payouts ($)         ($)
-------------------------------------------------------------------------------------------------------------------------
<S>              <C>        <C>         <C>         <C>            <C>           <C>           <C>             <C>
Arthur
Barchenko,       2005       $130,000                                             250,000
President
                 2004       $ 96,000                                              50,000

                 2003       $101,700

-------------------------------------------------------------------------------------------------------------------------
</TABLE>

Option Grants in the Last Fiscal Year

      The following table presents certain information concerning stock options
granted to the Named Executive under our various stock option plans during the
2005 fiscal year.


                                       40
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                       Option/SAR Grants in Last fiscal Year
------------------------------------------------------------------------------------------------------------------
                                                 Individual Grants
------------------------------------------------------------------------------------------------------------------
                      Number of Securities
                           Underlying              % of Total Options/SARs       Exercise or
                     Options/SARs Granted          Granted to Employees in       Base Price
Name                         (#)                        fiscal Year                 ($/Sh)         Expiration Date
----                         ---                        -----------                 ------         ---------------
------------------------------------------------------------------------------------------------------------------
<S>                      <C>                               <C>                       <C>           <C>
Arthur Barchenko         250,000 (1)                       22.73%                    2.40          January 2, 2014
------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Of the 250,000 options granted to Mr. Barchenko during fiscal 2005, options
to purchase 50,000 shares of common stock vest in each of the next five years.

Fiscal Year-End Option Numbers and Values

      The following table sets forth additional information as of June 30, 2005,
concerning shares of our common stock that may be issued upon the exercise of
options under our existing equity compensation plans, divided between plans
approved by our stockholders and plans or arrangements not submitted to our
stockholders for approval. The information includes the number of shares covered
by, and the weighted average exercise price of, outstanding options and the
number of shares remaining available for future grants excluding the shares to
be issued upon exercise of outstanding options, warrants, and other rights.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                  Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
------------------------------------------------------------------------------------------------------------------
                                                     Number of Securities Underlying   Value of Unexercised In-the
                      Shares                         Unexercised Options/SARs at       Money Options/SARs at
                      Acquired on    Value           FY-End (#)                        FY-End ($)
Name                  Exercise (#)   Realized ($)    Exercisable/Unexercisable         Exercisable/Unexercisable
------------------------------------------------------------------------------------------------------------------
<S>                       <C>            <C>              <C>                                     <C>
Arthur Barchenko          -0-            -0-              150,000/150,000/250,000                 $0/$0
------------------------------------------------------------------------------------------------------------------
</TABLE>

Stock Option Plan.

Incentive Stock Option Plan. In 1986, the Company adopted an Incentive Stock
Option Plan which it renewed in 1996 for a second ten-year term. The Company
initially had reserved 1,000,000 shares of common stock for issuance under the
Stock Option Plan which was increased to 2,000,000 shares upon the approval of
the stockholders at the 2005 annual meeting. The Board of Directors administers
the Stock Option Plan but may delegate such administration to a committee of
three persons, one of whom must be a member of the Board. The Board or the
Committee has the authority to determine the number of options to be granted,
when the options may be exercised and the exercise price of the options,
provided that the exercise price may never be less than the fair market value of
the shares of the Common Stock on the date the option is granted (110% in the
case of any employee who owns more than 10% of the combined voting power or
value of all classes of stock). Options may be granted for terms not exceeding
ten years from the date of the grant, except for options granted to person
holding in excess of 5% of the common stock, in which case the options may not
be granted for a term not to exceed five years from the date of the grant.

Non-statutory Stock Option Plan. The Company also has adopted a non-statutory
stock option plan and has reserved 250,000 shares of common stock for issuance
to Directors, employees and non-employees. Options granted pursuant to this plan
will be non-transferable and expire, if not exercised within five


                                       41
<PAGE>

years from the date of the grant. Options will be granted in such amounts and at
such exercise prices as the Board of Directors may determine.

Equity Compensation Plan Information

      The following table sets forth additional information as of June 30, 2005,
concerning shares of our common stock that may be issued upon the exercise of
options and other rights under our existing equity compensation plans and
arrangements, divided between plans approved by our stockholders and plans or
arrangements not submitted to our stockholders for approval. The information
includes the number of shares covered by and the weighted average exercise price
of, outstanding options and other rights and the number of shares remaining
available for future grants excluding the shares to be issued upon exercise of
outstanding options, warrants, and other rights.

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Plan Category                 Number of securities to be           Weighted-average         Number of securities available
                              issued upon exercise of              exercise price of        for future issuance under equity
                              outstanding  options, warrants       outstanding              compensation plans (excluding
                              and rights                           options, warrants        securities reflected in column (a))
                                                                   and rights
-------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                              <C>                             <C>
Equity compensation                     1,110,000                        $2.03                           945,000
plans approved
by security holders
-------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders
-------------------------------------------------------------------------------------------------------------------------------

Total                                   1,110,000                        $2.03                           945,000

-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth information, as of September 9, 2005 with
respect to the beneficial ownership of our common stock by each person known by
us to be the beneficial owner of more than 5% of the outstanding common stock,
by each of our officers and directors, and by all of our officers and directors
as a group.

      For the purpose of this table, the beneficial ownership of a person
includes shares as to which that person has sole or shared voting or investment
power as well as shares that the person has the right to acquire within 60 days
(such as upon conversion of convertible securities or exercise of warrants or
options) as of September 9, 2005. For the purpose of calculating the ownership
percentages for each person listed, we have considered to be outstanding both
the total number shares actually outstanding on September 9, 2005 and the total
number of shares that various people then had the right to acquire within 60
days of said date.


                                       42
<PAGE>

--------------------------------------------------------------------------------

Name Beneficial Owner (1)          Number of Shares    Percent of Class (2)
-------------------------          ----------------    --------------------
--------------------------------------------------------------------------------
Arthur Barchenko (3)                  1,186,643        14.51%
--------------------------------------------------------------------------------
Richard Stern (4)                        35,000            *
--------------------------------------------------------------------------------
Eldon Moberg (5)                         65,000            *
--------------------------------------------------------------------------------
Thomas Isdanavich (6)                    30,000            *
--------------------------------------------------------------------------------
Joseph McAndrew (7)                      30,000            *
--------------------------------------------------------------------------------
Natalie Barchenko (8)                 1,609,079        19.72%
--------------------------------------------------------------------------------
Gene Rabois (9)                         100,203         1.25%
--------------------------------------------------------------------------------
Robert F. Reiter (10)                    30,000            *
--------------------------------------------------------------------------------
Edward Snow (11)                         35,000            *
--------------------------------------------------------------------------------
Stephen Rossetti (12)                     5,000            *
--------------------------------------------------------------------------------
Thomas Donahue (13)                      45,000            *
--------------------------------------------------------------------------------
Directors and officers
as a group (11 persons) (14)          3,070,722        35.96%
--------------------------------------------------------------------------------

*     Less than 1%.

(1)   As used in this table, "beneficial ownership" means the sole or shared
      power to vote, or to direct the voting of, a security, or the sole or
      shared investment power with respect to common stock (i.e., the power to
      dispose of, or to direct the disposition of, a security). The address of
      each person is in care of the Company.

(2)   Based on 7,978,267 shares outstanding and issuable as of September 9,
      2005.

(3)   Consists of 984,643 shares of common stock, including 155,536 shares not
      registered in Mr. Barchenko's name but over which he has dispository power
      and control, and options to purchase 200,000 shares of common stock.

(4)   Consists of 30,000 shares of common stock and options to purchase 5,000
      shares of common stock.

(5)   Consists of 20,000 shares of common stock and options to purchase 45,000
      shares of common stock.

(6)   Consists of 20,000 shares of common stock and options to purchase 10,000
      shares of common stock.

(7)   Consists solely of options to purchase shares of common stock.

(8)   Consists 1,429,079 shares of common stock and options to purchase 180,000
      shares of common stock.

(9)   Consists of 95,203 shares of common stock and options to purchase 5,000
      shares of common stock.

(10)  Consists of 10,000 shares of common stock and options to purchase 25,000
      shares of common stock.

(11)  Consists of 5,000 shares of common stock and options to purchase 30,000
      shares of common stock.

(12)  Consists of options to purchase 5,000 shares of common stock.

(13)  Consists of 20,000 shares of common stock and 25,000 shares of common
      stock and options to purchase shares of common stock.

(14)  Includes options to purchase an aggregate of up to 560,000 shares of
      common stock which are held by all directors and officers.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      In March 2004, we issued 735,294 shares of common stock to Natalie
Barchenko, the Treasurer and a director of the Company and the wife of Arthur
Barchenko, the Company's president and a director, upon the conversion of loans
made by Ms. Barchenko to the Company in the aggregate amount of $250,000. The
offering price of the shares was based upon a then outstanding offer by a third
party to purchase shares of common stock at such price.

      Until the Company achieved profitability, we relied on loans from
officers, directors, shareholders and their affiliates to assist in the funding
of our operations.

      At June 30, 2005 and 2004, related party debt consisted of $500,697 and
$432,545, respectively. The loans are repayable with interest at rates varying
from no interest through 12% interest per annum. All interest for the fiscal
year 2005 and 2004 has been paid. The Company is restricted from repaying the
principal amount of the loans except as permitted under the Purchase Agreement
dated June 30, 2004


                                       43
<PAGE>

under which we sold the shares of Series B Preferred Stock which provides that
(i) repayment shall be later than December 31, 2005, (ii) for the six month
period ended June 30, 2005 (x) the reported revenues of the Company shall not be
less than $11 million and (y) the reported earnings per share of Common Stock
shall be not less than $0.23 based upon 7,250,000 shares of Common Stock
outstanding, and (iii) both at December 31, 2005 and at the time of any such
repayment, the Selling Stockholders are entitled to sell their shares under an
effective registration statement.

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

<TABLE>
<CAPTION>
Exhibit No.       Description                                                      Location Reference
-----------       -----------                                                      ------------------
<S>               <C>                                                                       <C>
3.1               Certificate of Incorporation of Electronic Control Security
                  Inc.                                                                      1

3.1(a)            Certificate of Amendment to Certificate of Incorporation of
                  Electronic Control Security Inc.                                          2

3.1(b)            Certificate of Amendment to Certificate of Incorporation                  3

3.2               By-Laws of Electronic Control Security Inc.                               1

3.3               Certificate of Incorporation of SEM Consultants III, Inc.                 1

3.4               By-Laws of SEM Consultants III, Inc.                                      1

3.5               Certificate of Incorporation of ECSI International, Inc.                  1

3.6               By-Laws of ECSI International, Inc.                                       1

3.7               Certificate of Incorporation of ECSI FOIDS, Inc.                          1

3.8               By-Laws of ECSI FOIDS, Inc.                                               1

3.9               Certificate of Incorporation of ECSI-DSA, Inc.                            1

3.10              By-Laws of ECSI-DSA, Inc.                                                 1

3.11              Memorandum of Association of ECSI Security Communications,
                  Inc., an Israeli Corporation                                              2

3.12              Articles of Association of ECSI Security Communications, Inc.,
                  an Israeli Corporation                                                    2

4.1               Specimen Form of Common Stock Certificate.                                1

4.2               Form of Redeemable Common Stock Purchase Warrant issued to
                  public in 1987.                                                           1

4.3               Form of Qualified Stock Option Certificate.                               1

4.4               Form of Non-Qualified Stock Option Certificate.                           1
</TABLE>


                                       44
<PAGE>

<TABLE>
<S>               <C>                                                                       <C>
4.5               Form of Series A Convertible Preferred Stock Certificate                  2

10.1              Patent License and Technical Information Agreement Relating to
                  Fiber Optic Sensing Systems dated as of January 15, 1997
                  between Lucent Technologies Inc. and Electronic Control
                  Security Inc.                                                             1

10.2              Agreement dated March 5, 1997 between Mason Hanger National,
                  Inc. and Electronic Control Security Inc. relating to the
                  purchase of certain assets relating to the FOIDS Product Line.            1

10.3              License dated March 5, 1997 between Mason Hanger National,
                  Inc. and Electronic Control Security Inc. relating to the
                  license of certain intellectual property used in connection
                  with the manufacture of the FOIDS Product Line.                           1

10.4              Lease Agreement with 580 Brighton Road Associates for space in
                  Clifton New Jersey.                                                       1

10.5              Lease Agreement with The Theta Group for space in Huntsville,
                  Alabama.                                                                  1

10.6              Teaming agreement with Rafael Armament Development Authority.             1

10.7              Lease Agreement with Dewey Brazelton dated March 1, 2001 for
                  the space in Madison, Alabama.                                            2

10.8              Agreement with LAU Technologies dated September 13, 1999
                  relating to facial recognition technology.                                2

10.9              License Agreement with Hyperdyne, Inc. dated June 13, 2001                2

10.10             Investment Banking Agreement dated as of November 18, 2001,
                  between Diversified Investors Capital Services of NA, Inc. and
                  Electronic Control Security Inc.                                          2

10.11             Marketing Agreement dated February 1, 2002 between 3 Media
                  Consultants, Inc. and ECSI International, Inc.                            2

10.12             Securities Purchase Agreement dated June 30, 2004.                        3

10.13             Registration Rights Agreement dated June 30, 2004.                        3

10.14             Asset Purchase Agreement dated March 4, 2005 among Electronic
                  Control Security Inc., Clarion Sensing Systems Acquisition
                  Corp., a New Jersey corporation, and Clarion Sensing Systems,
                  Inc., an Indiana corporation.                                             5

10.15             Assumption Agreement dated March 4, 2005, among Clarion
                  Sensing Systems Acquisition Corp. Clarion Sensing Systems,
                  Inc.                                                                      5
</TABLE>


                                       45
<PAGE>

<TABLE>
<S>               <C>                                                                       <C>
10.16             Escrow Agreement dated March 4, 2005, among Electronic Control
                  Security Inc., Clarion Sensing Systems, Inc., the shareholders
                  of Clarion Sensing Systems, Inc. and Lasser Hochman, L.L.C.,
                  as escrow agent.                                                          5

10.17             Form of Target Stockholders Agreement dated March 4, 2005,
                  among Electronic Control Security Inc., Clarion Sensing
                  Systems Acquisition Corp. and each shareholder of Clarion
                  Sensing Systems, Inc.                                                     5

10.18             Form of Confidentiality and Non-Compete Agreement among
                  Electronic Control Security Inc., Clarion Sensing Systems
                  Acquisition Corp. and each shareholder of Clarion Sensing
                  Systems, Inc.                                                             5

14.1              Code of Ethics and Business Conduct                                       4

31.1              Certification of Chief Executive Officer pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 302 of the
                  Sarbanes- Oxley Act of 2002.                                              6

32.1              Certification of Chief Executive Officer pursuant to 18 U.S.C.
                  Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes- Oxley Act of 2002.                                              6

99.1              Press release dated September 16, 2005, titled "ECSI Reports A
                  Record $6,000,000 In Sales."
</TABLE>

Legend

1.    Incorporated by reference to such exhibit filed with Electronic Control
      Security Inc.'s Registration Statement on Form 10-SB filed with the
      Commission on February 16, 2001.

2.    Incorporated by reference to such exhibit filed with Electronic Control
      Security Inc.'s Registration Statement on Form SB-2 filed with the
      Commission on June 6, 2002.

3.    Incorporated by reference to such exhibit filed with Electronic Control
      Security Inc.'s Current Report on Form 8-K filed with the Commission on
      July 1, 2004.

4.    Incorporated by reference to such exhibit filed with Electronic Control
      Security Inc.'s Registration Statement on Form SB-2 filed with the
      Commission on August 6, 2004.

5.    Incorporated by reference to such exhibit filed with Electronic Control
      Security Inc.'s Current Report on Form 8-K filed with the Commission on
      March 8, 2005.

6.    Filed as an Exhibit to the current filing.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

      The aggregate fees billed by Demetrius & Company, L.L.C. for professional
services related to the audit of the Company's consolidated financial statements
for the fiscal year ended June 30, 2005 were $36,789. The reviews of the
consolidated condensed financial statements included in the Company's


                                       46
<PAGE>

Quarterly reports on Forms 10-QSB for the fiscal year ended June 30, 2004 were
performed by Demetrius & Company, L.L.C. The fees billed by Demetrius & Company,
L.L.C. for those services plus its consent were $10,200. The aggregate fees
billed by Demetrius & Company, L.L.C. in connection with the year end audit and
quarterly reviews for the fiscal year ended June 30, 2004 were $35,000.

Audit Related Fees

      There were no fees billed by Demetrius & Company, L.L.C. for audit related
services for the fiscal years ended June 30, 2004 or 2005.

Tax Services

      The aggregate fees billed by Demetrius & Company, L.L.C. for tax services
during the fiscal years ended June 30, 2005 and 2004 were $13,000 and $14,000,
respectively.

All Other Services

      During 2004 Demetrius & Company, L.L.C. billed the Company $5,000 for
services in connection with the preparation of a SEC filing of a private
placement.


                                       47
<PAGE>

                                   SIGNATURES

      In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.


                                        By: /s/ Arthur Barchenko
                                            ------------------------
                                        Name: Arthur Barchenko
                                        Title: President, Chief Financial
                                        Officer and Principal Accounting Officer
                                        Dated: September 14, 2005

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

--------------------------------------------------------------------------------

          Person               Capacity                               Date
          ------               --------                               ----

--------------------------------------------------------------------------------
  /s/ Arthur Barchenko         President and Director         September 14, 2005
  ---------------------
  Arthur Barchenko

--------------------------------------------------------------------------------
  /s/ Natalie Barchenko        Treasurer and Director         September 14, 2005
  ---------------------
  Natalie Barchenko

--------------------------------------------------------------------------------
  /s/ Gene Rabois              Director                       September 14, 2005
  ---------------------
  Gene Rabois

--------------------------------------------------------------------------------
  /s/ Robert F. Reiter         Director                       September 14, 2005
  ---------------------
  Robert F. Reiter

--------------------------------------------------------------------------------
  /s/ Edward Snow              Director                       September 14, 2005
  ---------------------
  Edward Snow

--------------------------------------------------------------------------------
  /s/ Stephen Rossetti         Director                       September 14, 2005
  ---------------------
  Stephen Rossetti

--------------------------------------------------------------------------------
  /s/ Thomas F. Donahue        Director                       September 14, 2005
  ---------------------
  Thomas F. Donahue

--------------------------------------------------------------------------------


                                       48
<PAGE>
                        ELECTRONIC CONTROL SECURITY INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
          With Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm                   F-1

Consolidated Balance Sheets                                               F-2

Consolidated Statements of Operations                                     F-3

Consolidated Statement of Changes in Shareholders' Equity                 F-4

Consolidated Statements of Cash Flow                                      F-5

Notes to Consolidated Financial Statements                              F-6-F-18

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and  Shareholders 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, 2005 and 2004, and the
related consolidated statements of operations,  changes in shareholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits 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 consolidated  financial  statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Electronic  Control Security,  Inc. and its subsidiaries as of June 30, 2005 and
2004, and the  consolidated  results of their  operations and 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
September 12, 2005


                                      F-1
<PAGE>


ITEM 7. FINANCIAL STATEMENTS

                        Electronic Control Security Inc.
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                           June 30,
                                                                                    2005            2004
                                                                                ------------     -----------
<S>                                                                             <C>              <C>
ASSETS
Current assets
      Cash and cash equivalents                                                 $    221,293     $ 1,552,575
      Certificate of deposit                                                              --         101,723
      Accounts receivable, net of allowance of $100,000                            2,088,546         729,070
      Inventories                                                                  1,965,501       1,635,305
      Other current assets                                                           363,868         318,795
                                                                                ------------     -----------

          Total current assets                                                     4,639,208       4,337,468

Property, equipment and software development costs - net                             502,644         549,727
Intangible assets - net                                                            1,438,999          40,733
Certificate of deposit, pledged                                                      253,084              --
Goodwill                                                                              50,000          50,000
Deferred income taxes                                                                456,300         441,800
Other assets                                                                          59,827          84,709
                                                                                ------------     -----------

                                                                                $  7,400,062     $ 5,504,437
                                                                                ============     ===========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
      Accounts payable and accrued expenses                                     $  1,185,423     $   465,078
      Bank line of credit                                                                 --         500,000
      Short-term loan                                                                     --         250,000
      Current maturities of long-term debt                                           232,992          99,996
      Obligations under capital leases                                                    --           4,396
      Payroll taxes payable                                                           16,234           3,012
      Income taxes payable                                                                --           2,500
                                                                                ------------     -----------

          Total current liabilities                                                1,434,649       1,324,982

Noncurrent liabilities
      Long-term debt                                                                 437,565         141,671
      Due to officers and shareholders                                               431,617         387,050
      Deferred income taxes                                                           62,500          48,000
                                                                                ------------     -----------

          Total liabilities                                                        2,366,331       1,901,703

COMMITMENTS AND CONTINGENCIES - see notes

Shareholders' equity
     Series A Convertible Preferred stock, cumulative, $.01 par value; $2.00
         liquidation preference; 5,000,000 shares authorized,
          325,000 and 587,500 shares issued and outstanding, respectively              3,250           5,875
     Series B 10% Convertible Preferred stock, cumulative, $.001 par value;
         $1,000 per share liquidation preference; 2,000 shares authorized,
          1,900 and 2,000 shares issued and outstanding, respectively                      2               2
      Common Stock, $.001 par value; 30,000,000 shares authorized;
          7,384,935 and 5,555,707 shares issued; 7,284,935 and 5,455,707
         shares outstanding, respectively                                              7,385           5,556
      Additional paid-in capital                                                  10,344,782       8,577,764
      Accumulated deficit                                                         (5,311,807)     (4,990,305)
      Accumulated other comprehensive income                                             119          13,842
      Treasury stock, at cost, 100,000 shares                                        (10,000)        (10,000)
                                                                                ------------     -----------

          Total shareholders' equity                                               5,033,731       3,602,734
                                                                                ------------     -----------

                                                                                $  7,400,062     $ 5,504,437
                                                                                ============     ===========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-2
<PAGE>

                        Electronic Control Security Inc.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                         Year
                                                                         Ended
                                                                       June 30,
                                                                 2005            2004
                                                             -----------     -----------
<S>                                                          <C>             <C>
Revenues                                                     $ 5,967,469     $ 2,061,412
Cost of revenues                                               3,531,312         928,567
                                                             -----------     -----------

          Gross profit                                         2,436,157       1,132,845
                                                             -----------     -----------

 Research and development                                        285,916         322,912
 Selling, general  and administrative expenses                 2,101,435       1,782,534
 Stock based compensation                                        120,000         117,200
                                                             -----------     -----------

          Loss from operations                                   (71,194)     (1,089,801)

Other (income) expense
     Interest expense                                            118,029         105,916
     Interest income                                             (15,498)         (3,128)
     Minority interest in subsidiary loss                        (48,899)        (42,633)
     Gain on sale of marketable securities                        (2,630)             --
                                                             -----------     -----------

Total other (income) expense                                      51,002          60,155
                                                             -----------     -----------

Loss before tax benefit                                         (122,196)     (1,149,956)

Income tax benefit                                                    --         (31,300)
                                                             -----------     -----------

Net loss before dividends                                       (122,196)     (1,118,656)

Dividends related to convertible preferred stock                 199,306       1,167,147
                                                             -----------     -----------

Net loss attributable to common shareholders                 $  (321,502)    $(2,285,803)
                                                             ===========     ===========

Net loss per share:
     Basic                                                   $     (0.05)    $     (0.49)
                                                             ===========     ===========
     Diluted                                                 $     (0.05)    $     (0.49)
                                                             ===========     ===========

Weighted average number of common shares and equivalents:
     Basic                                                     6,450,739       4,705,027
                                                             ===========     ===========
     Diluted                                                   6,450,739       4,705,027
                                                             ===========     ===========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                        Electronic Control Security Inc.
            Consolidated Statements of Changes in Shareholders Equity

<TABLE>
<CAPTION>

                                                         Series A Convertible         Series B 10% Convertible
                                                           Preferred Stock                 Preferred Stock
                                                        Shares          Amount          Shares          Amount
                                                     -----------     -----------     -----------     -----------
<S>                                                     <C>          <C>                   <C>       <C>
Balances at July 1, 2003                                 637,500           6,375              --              --

Conversion of preferred stock                            (50,000)           (500)

Common stock dividend on preferred stock

Issuance of Common Stock for services

Issuance of Common Stock Options for services

Private placement of convertible preferred stock
    and common stock warrants, net of
    offering costs of $56,307                                                              2,000               2

Beneficial conversion feature of prefered stock

Conversion of stockholder loan

Exercise of stock option

Foreign currency translation adjustments

Net loss
                                                     -----------     -----------     -----------     -----------

Balances at June 30, 2004                                587,500           5,875           2,000               2

Conversion of preferred stock                           (262,500)         (2,625)           (100)             (0)

Common stock dividend on preferred stock

Issuance of Common Stock for services

Issuance of Common Stock for Clarion Aquisition

Exercise of stock options

Exercise of  warrants

Foreign currency translation adjustments

Net loss
                                                     -----------     -----------     -----------     -----------

Balances at June 30, 2005                                325,000     $     3,250           1,900     $         2
                                                     ===========     ===========     ===========     ===========

<CAPTION>
                                                                                                     Accumulated
                                                                                     Additional         Other
                                                            Common Stock               Paid-in       Accumulated     Comprehensive
                                                        Shares          Amount         Capital         Deficit           Income
                                                     -----------     -----------     -----------     -----------     -------------
<S>                                                    <C>           <C>             <C>             <C>              <C>
Balances at July 1, 2003                               4,494,753           4,495       5,098,787      (2,704,502)             653

Conversion of preferred stock                             50,000              50             450

Common stock dividend on preferred stock                  61,500              62         122,939        (123,000)

Issuance of Common Stock for services                     85,000              85          96,815

Issuance of Common Stock Options for services                                             20,300

Private placement of convertible preferred stock
    and common stock warrants, net of
    offering costs of $56,307                                                          1,943,691

Beneficial conversion feature of prefered stock                                        1,044,147      (1,044,147)

Conversion of stockholder loan                           735,294             735         249,265

Exercise of stock option                                 129,160             129           1,371

Foreign currency translation adjustments                                                                                   13,189

Net loss                                                                                              (1,118,656)
                                                     -----------     -----------     -----------     -----------      -----------

Balances at June 30, 2004                              5,555,707           5,556       8,577,764      (4,990,305)          13,842

Conversion of preferred stock                            399,994             400           2,225

Common stock dividend on preferred stock                                                 199,306        (199,306)

Issuance of Common Stock for services                     82,192              82         119,918

Issuance of Common Stock for Clarion Aquisition          394,682             395         662,671

Exercise of stock options                                 88,088              88           4,862

Exercise of  warrants                                    864,272             864         778,036

Foreign currency translation adjustments                                                                                  (13,723)

Net loss                                                                                                (122,196)
                                                     -----------     -----------     -----------     -----------      -----------

Balances at June 30, 2005                              7,384,935     $     7,385     $10,344,782     $(5,311,807)     $       119
                                                     ===========     ===========     ===========     ===========      ===========

<CAPTION>
                                                      Treasury
                                                        Stock            Total
                                                     -----------      -----------
<S>                                                  <C>              <C>
Balances at July 1, 2003                                 (10,000)       2,395,808

Conversion of preferred stock                                                  --

Common stock dividend on preferred stock                                       --

Issuance of Common Stock for services                                      96,900

Issuance of Common Stock Options for services                              20,300

Private placement of convertible preferred stock
    and common stock warrants, net of
    offering costs of $56,307                                           1,943,693

Beneficial conversion feature of prefered stock                                --

Conversion of stockholder loan                                            250,000

Exercise of stock option                                                    1,500

Foreign currency translation adjustments                                   13,189

Net loss                                                               (1,118,656)
                                                     -----------      -----------

Balances at June 30, 2004                                (10,000)       3,602,734

Conversion of preferred stock                                                  --

Common stock dividend on preferred stock                                       --

Issuance of Common Stock for services                                     120,000

Issuance of Common Stock for Clarion Aquisition                           663,066

Exercise of stock options                                                   4,950

Exercise of  warrants                                                     778,900

Foreign currency translation adjustments                                  (13,723)

Net loss                                                                 (122,196)
                                                     -----------      -----------

Balances at June 30, 2005                            $   (10,000)     $ 5,033,731
                                                     ===========      ===========
</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,
                                                                        2005            2004
                                                                    -----------     -----------
<S>                                                                 <C>             <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
     Net loss before deemed dividends                               $  (122,196)    $(1,118,656)
     Adjustments to reconcile loss
      to net cash used by operating activities:
          Depreciation and amortization                                 222,336         163,888
          Increase in allowance for bad debts                                --          50,000
          Stock based compensation                                      120,000         117,200
          Minority interest in subsidiary loss                          (48,899)        (42,633)
          Gain on sales marketable securities                            (2,630)             --
          Deferred income taxes                                              --         (33,800)
          Foreign currency translation adjustments                      (13,723)         13,189
          Increase (decrease) in cash attributable
           to changes in assets and liabilities
               Accounts receivable                                   (1,359,478)        (77,054)
               Inventory                                               (330,196)       (264,186)
               Other current assets                                       3,826          49,037
               Other assets                                              24,882         (57,795)
               Accounts payable and accrued expenses                    571,403        (197,702)
               Income taxes payable                                      (2,500)         (3,500)
               Payroll taxes payable                                     13,222          (9,847)
                                                                    -----------     -----------

        Net cash used by operating activities                          (923,953)     (1,411,859)

Cash flows from investing activities:
     Investment in marketable securities                                  2,630              --
     Investment in Clarion                                             (572,327)             --
     Acquisition of property, equipment and software development        (95,683)       (132,745)
                                                                    -----------     -----------

          Net cash used in investing activities                        (665,380)       (132,745)

Cash flows from financing activities:
     Proceeds from issuance of preferred stock                               --       1,943,693
     Proceeds from exercise of stock options and warrants               783,850           1,500
     Proceeds (payments) on bank loan and line of credit                     --         (60,000)
     Repayment of short-term borrowing                                 (250,000)        250,000
     Certificate of deposit (purchased) redeemed                       (151,361)        298,277
     Payments on long-term debt                                        (164,609)       (100,000)
     Payments on lease obligations                                       (4,396)        (11,416)
     Loan officers and shareholders - net                                44,567         700,044
                                                                    -----------     -----------

          Net cash provided by  financing activities                    258,051       3,022,098
                                                                    -----------     -----------

          Net increae (decrease) in cash and cash equivalents        (1,331,282)      1,477,494

Cash and cash equivalents at beginning of period                      1,552,575          75,081
                                                                    -----------     -----------

          Cash and cash equivalents at end of period                $   221,293     $ 1,552,575
                                                                    ===========     ===========

See Notes 3 for a summary of noncash investing activities

Supplemental disclosures of cash flow information
Cash paid during the period for:
          Interest                                                  $   118,029     $    68,179
                                                                    ===========     ===========
          Taxes                                                     $     4,510     $     1,000
                                                                    ===========     ===========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                      F-5

<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 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 also performs consulting
      services,   which  consists   principally  of  designing  security  system
      solutions  in support of their  technologies  to system  integrators,  for
      medium to large government and commercial facilities worldwide.

      In March 2005, the Company,  through its wholly owned subsidiary,  Clarion
      Sensing Systems  Acquisition Corp,  acquired all of the assets and assumed
      certain of the  liabilities of Clarion Sensing  Systems,  Inc., an Indiana
      corporation  ("Clarion").  Clarion is a provider of  proprietary  nuclear,
      biological,  chemical and  radiological  (NBCR) remote  monitoring  sensor
      systems  designed  for  air  and  water  contamination  detection  sensing
      applications.

Note 2 - Summary of Significant Accounting Policies

      Principles of Consolidation

      The financial  statements include the accounts of the Company,  its wholly
      owned  subsidiaries,  and its majority owned  subsidiary.  All significant
      intercompany accounts and transactions have been eliminated.

      Reclassifications

      Certain  prior  year  balances  have been  reclassified  to conform to the
      current year presentation.

      Accounts Receivable

      Trade  accounts  receivable  is recorded net of an allowance  for expected
      losses.  The  allowance  is  estimated  from  historical  performance  and
      projections of trends.

      Inventories

      Inventories  are  stated at the  lower of cost  (first-in,  first-out)  or
      market.

      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.

      Software Development Costs

      Software  development  costs are expensed as incurred until  technological
      feasibility is established. Software development costs incurred subsequent
      to establishing  technological  feasibility are capitalized and amortized.
      Amortization  is provided  based on the greater of the ratios that current
      gross revenues for a product bear to the total of current and  anticipated
      future gross revenues for that product,  or the straight-line  method over
      the estimated  useful life of the product.  The estimated  useful life for
      the  straight-line  method  is  determined  to be 5  years.  Approximately
      $57,000 and $93,000 of software  development  costs have been  capitalized
      for the years ended June 30, 2005 and 2004, respectively.

      Earnings per Share

      In determining  basic or diluted  earnings per share (EPS), the effects of
      dividends related to the Company's convertible preferred stock is added to
      the net loss.


                                      F-6
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Basic EPS is computed by dividing  net income or net loss by the  weighted
      average number of common shares  outstanding  for the period.  Diluted EPS
      reflects the  potential  dilution from the exercise or conversion of other
      securities  into  common  stock,  but  only  if  dilutive.  The  following
      securities  have been excluded from the dilutive per share  computation as
      they are antidilutive.

                                                           2005           2004
                                                           ----           ----
            Stock options                                1,110,000       590,000
            Warrants                                     1,496,875     3,096,875
            Convertible Preferred Stock                  2,269,318     2,667,614

      Foreign Currency Translation

      The functional currency of the Company's foreign subsidiaries is the local
      currency.  Accordingly,  the Company translates all assets and liabilities
      into U.S.  dollars at current  rates.  Revenues,  costs,  and expenses are
      translated at average rates during each reporting period. Gains and losses
      resulting from the translation of the  consolidated  financial  statements
      are excluded from results of operations and are reflected as a translation
      adjustment and a separate component of stockholders' deficit.

      Gains  and  losses  resulting  from  foreign  currency   transactions  are
      recognized in the consolidated  statement of operations in the period they
      occur.

      Cash and Cash Equivalents

      The Company  considers  all  short-term  deposits with a maturity of three
      months or less to be cash equivalents.

      Use of Estimates

      The  preparation  of financial  statements in conformity  with  accounting
      principles  generally  accepted in the United  States of America  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.

      Long-lived assets

      The  Company  records  impairment  losses  on  long-lived  assets  used in
      operations when events and circumstances indicate that the assets might be
      impaired  and the  undiscounted  cash flows  estimated  to be generated by
      those assets are less than the carrying amounts of those assets

      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.

      The Company also  provides  professional  and technical  services  under a
      specific  contract,  based on a time and material plus fixed profit basis.
      Revenue on this  contract is  recognized  to the extent of costs  incurred
      plus a  proportionate  amount of profit earned.  Contract costs  including
      indirect  costs are  subject to audit by  agencies  of the  United  States
      Government.   Management  believes  future   adjustments,   if  any,  from
      government  cost audits will not have a material  effect on the  financial
      statements.


                                      F-7
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Research and Development

      Research and development  expenditures are expensed as incurred.  Research
      an  development  costs for the years ended June 30, 2005 and 2004 amounted
      to $285,916 and $322,912, respectively.

      Income Taxes

      The Company uses the liability  method to determine its income tax expense
      as required  under  Statement of Financial  Accounting  Standards  No. 109
      (SFAS  109).  Under SFAS 109,  deferred  tax assets  and  liabilities  are
      computed based on differences between financial reporting and tax basis of
      assets and  liabilities,  and are measured using the enacted tax rates and
      laws that will be in effect when the  differences are expected to reverse.
      Valuation allowances are established when necessary to reduce deferred tax
      assets, if it is more likely than not that all or a portion of it will not
      be realized.

      Intangible Assets

      The cost of licenses,  patents,  and trademarks are being amortized on the
      straight-line  method over their useful lives, ranging from 5 to 20 years.
      Amortization  expense charged to operations was $31,570 and $5,734 for the
      years ended June 30, 2005 and 2004, respectively.

      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,  2005  and  2004  were
      approximately $23,000 and $49,000, respectively.

      Stock Based Compensation

      The Company  accounts  for  stock-based  employee  and  outside  directors
      compensation  under  Accounting  Principles  Board ("APB") Opinion No. 25,
      "Accounting for Stock Issued to Employees",  and related  interpretations.
      The Company has adopted the  disclosure-only  provisions  of  Statement of
      Financial   Accounting   Standards  ("SFAS")  No.  123,   "Accounting  for
      Stock-Based  Compensation"  and SFAS No. 148,  "Accounting for Stock-Based
      Compensation - Transition and Disclosure",  which was released in December
      2002 as an amendment of SFAS No. 123.  Stock options and warrants  granted
      to  non-employees  are  recorded at their fair  value,  as  determined  in
      accordance  with SFAS No. 123 and Emerging Issues Task Force Consensus No.
      96-18, and recognized over the related service period.

      The following table  illustrates the effect on net income and earnings per
      share if the fair value based method had been applied to all awards

<TABLE>
<CAPTION>
                                                                         Year Ended June 30
                                                                       2005            2004
                                                                       ----            ----
<S>                                                                <C>              <C>
      Net loss, as reported                                        $  (321,502)     $(2,285,803)
      Add: Stock based compensation
              expense, as reported, net of related tax effects              --           20,300
      Deduct: Total stock-based compensation
        expense determined under the fair value based
        method for all awards, net of related tax effects             (107,571)        (206,501)
                                                                   -----------      -----------
                                                                   $  (429,073)     $(2,472,004)
                                                                   ===========      ===========
      Basic and diluted loss per share, as reported                $      (.05)     $      (.49)
      Basic and diluted loss per share, pro forma                  $      (.07)     $      (.53)
</TABLE>


                                      F-8
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The weighted average per share fair value of options granted during fiscal
      2005 and 2004 was  $2.28 and $.93,  respectively.  The fair  value of each
      option granted was estimated using the Black-Scholes  option-pricing model
      with the following weighted average assumptions:

                                            2005           2004
                                            ----           ----

         Expected volatility               151.12%        156.88%
         Risk free rate                     3.65%          3.79%
         Expected life of option             6.5             8
         Dividend yield                       0%             0%

      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.

      Recent Pronouncements

      In November  2004, the FASB issued SFAS 151,  "Inventory  Costs." SFAS 151
      amends the  accounting  for  abnormal  amounts of idle  facility  expense,
      freight, handling costs, and wasted material (spoilage) under the guidance
      in ARB 43, Chapter 4, "Inventory  Pricing." Paragraph 5 of ARB 43, Chapter
      4, previously stated that "...under some circumstances, items such as idle
      facility expense, excessive spoilage, double freight, and rehandling costs
      may be so abnormal as to require treatment as current period  charges...."
      This Statement  requires that those items be recognized as  current-period
      charges regardless of whether they meet the criterion of "so abnormal." In
      addition,  this  Statement  requires that  allocation of fixed  production
      overheads to the costs of  conversion  be based on the normal  capacity of
      the production facilities. This statement is effective for inventory costs
      incurred  during fiscal years  beginning  after June 15, 2005.  Management
      does not  expect  adoption  of SFAS 151 to have a  material  impact on the
      Company's financial statements.

      In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment." SFAS
      123(R) amends SFAS 123, "Accounting for Stock-Based Compensation," and APB
      Opinion  25,  "Accounting  for Stock  Issued to  Employees."  SFAS  123(R)
      requires  that the cost of  share-based  payment  transactions  (including
      those with  employees  and  non-employees)  be recognized in the financial
      statements. SFAS 123(R) applies to all share-based payment transactions in
      which an entity  acquires  goods or services  by issuing  (or  offering to
      issue) its shares,  share options, or other equity instruments (except for
      those held by an ESOP) or by incurring  liabilities  (1) in amounts  based
      (even  in  part)  on the  price of the  entity's  shares  or other  equity
      instruments,  or (2)  that  require  (or may  require)  settlement  by the
      issuance of an entity's shares or other equity instruments. This statement
      is  effective  for  public  companies  qualifying  as SEC  small  business
      issuers,  as of the first interim  period or fiscal year  beginning  after
      December 15, 2005

      As  permitted  by  SFAS  No.  123,  the  Company  currently  accounts  for
      share-based  payments  to  employees  using APB No. 25's  intrinsic  value
      method and, as such,  generally  recognizes no  compensation  expenses for
      employee stock options.  Accordingly,  the adoption of SFAS 123(R)'s, fair
      value method will have a significant  impact on our results of operations,
      although it will have no impact on our  overall  financial  position.  The
      impact of adoption of SFAS No.  123(R)  cannot be  predicted  at this time
      because it will depend on levels of  share-based  payments  granted in the
      future, however, had the Company adopted SFAS 123(R) in prior periods, the
      impact of the standard would have  approximated the impact of SFAS No. 123
      as  described  in the  disclosure  of pro forma net


                                      F-9
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      income  (loss)  and  net  income  (loss)  per  share  in  Note  2  to  the
      consolidated  financial  statements.  SFAS No.  123(R) also  requires  the
      benefits of tax deductions in excess of recognized compensation cost to be
      reported as a financing  cash flow,  rather than as an operating cash flow
      as required under current  literature.  This  requirement  will reduce net
      operating  cash flows and  increase  net  financing  cash flows in periods
      after adoption.  While the Company cannot estimate what those amounts will
      be in the  future  (because  they  depend on,  among  other  things,  when
      employees  exercise  stock  options),  there were no operating  cash flows
      recognized  in the years  ended June 30, 2005 and 2004 for such excess tax
      deductions.

Note 3 - Non-cash Investing and Financing Activities

      Non-cash  investing  and  financing   activities  are  excluded  from  the
      consolidated  statement  of cash flows.  For the year ended June 31, 2005,
      non-cash activities included the following items:

      Asset Acquisition of Clarion Sensing Systems,  Inc., ("Clarion") (See Note
      4).

            Fair value of assets acquired                             $1,477,835
                                                                      ==========

            Cash advanced to sellers                                  $  413,144
            Liabilities assumed                                          242,442
            Stock issued                                                 663,066
            Transaction costs                                            159,183
                                                                      ----------
            Total purchase price                                      $1,477,835
                                                                      ==========

Note 4 - Acquisition

      On March 4,  2005,  the  Company,  through  its wholly  owned  subsidiary,
      Clarion Sensing Systems Acquisition Corp.(the "Subsidiary"),  entered into
      a series of  agreements  with Clarion  Sensing  Systems,  Inc., an Indiana
      corporation ("Clarion"), and its stockholders (the "Clarion Stockholders")
      to acquire all of  Clarion's  assets  (the  "Clarion  Assets")  and assume
      certain of its liabilities.  Clarion is a provider of proprietary nuclear,
      biological,  chemical and  radiological  (NBCR) remote  monitoring  sensor
      systems  designed  for  air  and  water  contamination  detection  sensing
      applications.

      The purchase price was approximately  $1.45 million  consisting of (i) the
      issuance of 394,682 shares of common stock of ECSI ("Shares") and (ii) the
      assumption of $655,586 of certain  liabilities  of Clarion,  of which ECSI
      already  had paid  approximately  $413,144 as of the date hereof and (iii)
      transaction  fees of  $159,183.  Based on an  independent  valuation,  the
      reported  purchase price includes  approximately  $48,000 of furniture and
      equipment and $1.4 million of identifiable  intangibles.  The identifiable
      intangibles  acquired from Clarion consist of trademarks,  patents pending
      and proposed  patents,  and internet  domain  names.  These assets will be
      amortized on a  straight-line  basis over  estimated  useful lives of from
      five to twenty years.

      In addition to the initial cost of the acquisition,  the Company agreed to
      assume $438,959 of certain  liabilities of Clarion on a contingent basis .
      The Subsidiary will be obligated to pay the Contingent Liabilities,  if at
      all,  only if the  Subsidiary  achieves (A) sales in excess of  $3,000,000
      ("$3,000,000  in Sales") and/or (B) net earnings before taxes in excess of
      $600,000 ("$600,000 in Net Earnings") in one of its fiscal years beginning
      within three (3) years of March 4, 2005. In the event  $3,000,000 in Sales
      are achieved but  $600,000 in Net Earnings are not  achieved,  then 10% of
      the  Subsidiary's net earnings before taxes earned during such fiscal year
      shall be utilized to pay the Contingent Liabilities. In the event $600,000
      in Net  Earnings  are  achieved  (whether or not  $3,000,000  in Sales are
      achieved),  then (I) all net  earnings  before taxes in excess of $600,000
      earned  during  such  fiscal  year plus (II) 10% of the  Subsidiary's  net
      earnings before taxes earned during such fiscal year, shall be utilized to
      pay the Contingent Liabilities. If the Contingent Liabilities are not paid
      in full and $3,000,000 in sales or $600,000 in net earnings  occurs in one
      or more  subsequent  fiscal  years,  then


                                      F-10
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      net  earnings  before  taxes with  respect to such  fiscal  years shall be
      utilized to pay the Contingent  Liabilities in the manner set forth in the
      preceding  two  sentences   until  such  time,  if  ever,  the  Contingent
      Liabilities  are paid in full.  Any  amounts  shall be  payable in cash or
      shares of common stock  (valued as of the closing ask price on the date of
      issuance) as the recipient shall direct.

      The Company  anticipates  the  contingent  payments  made, if any, will be
      treated as  additional  purchase  price and included as an addition to the
      identifiable  intangible  assets.  As of June 30, 2005, the Company is not
      liable for any contingent payments and, therefore,  has not accrued any at
      this time.  The Company  will  continue to asses its  liability  under the
      contingent payment arrangement in each successive quarter, and will record
      additional purchase price through an increase to intangible assets, if and
      when a liability is realized.

      The following  table presents  unaudited pro forma  revenue,  net loss and
      loss per share giving the effect of the Clarion  acquisition  as if it had
      been completed at the beginning of each period presented:

<TABLE>
<CAPTION>
                                                                                Year ended June 30,
                                                                               2005              2004
                                                                               ----              ----
<S>                                                                        <C>              <C>
            Revenue                                                        $  5,975,914     $  2,186,717
                                                                           ============     ============
            Net loss                                                       $   (664,263)    $ (2,537,834)
                                                                           ============     ============
               Net loss per share, basic and diluted                       $      (0.10)    $      (0.50)
</TABLE>

Note 5 - Inventories

         Inventories at June 30, 2005 and 2004 consist of the following:

<TABLE>
<CAPTION>
                                                                               2005              2004
                                                                               ----              ----
<S>                                                                        <C>              <C>
            Raw materials                                                  $    322,958     $    203,765
            Work-in-process                                                     402,045          240,093
            Finished goods                                                    1,240,498        1,191,447
                                                                           ------------     ------------
                                                                           $  1,965,501     $  1,635,305
                                                                           ============     ============
</TABLE>

Note 6 - Property, Equipment and Software Development Costs

      Property, equipment and software development costs consist of the
      following:

<TABLE>
<CAPTION>
                                                                               2005              2004
                                                                               ----              ----
<S>                                                                        <C>              <C>
            Furniture and fixtures                                         $     93,087     $     37,074
            Machinery and equipment                                             579,561          549,140
            Improvements                                                          9,296            9,296
            Software                                                             96,761           96,512
            Software development costs                                          489,228          432,228
                                                                           ------------     ------------
                                                                              1,267,933        1,124,250
                Less: accumulated depreciation and amortization                 765,289          574,523
                                                                           ------------     ------------
                                                                           $    502,644     $    549,727
                                                                           ============     ============
            Equipment under capital leases included in
            property, equipment and purchased software are as follows:
             Machinery and equipment                                       $         --     $     25,694
             Less: accumulated depreciation                                          --           22,696
                                                                           ------------     ------------
                                                                           $         --     $      2,998
                                                                           ============     ============
</TABLE>


                                      F-11
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Depreciation  expense was  $190,766  and $158,154 for the years ended June
      30, 2005 and 2004, respectively.

Note 7 - Short-Term Borrowing

      On  April  1,  2004,  the  company  entered  into a  strategic  investment
      relationship with the Fairchild Corporation.  The investment  relationship
      began with a six-month  revolving line of credit in the amount of $250,000
      at 7% interest per annum. This loan was repaid in July 2004.

Note 8 - Long-Term Debt

      In November 2004, the Company's existing $500,000 revolving line of credit
      was  converted  into a term loan to be repaid  over five  years in monthly
      installments  of $8,333  plus  interest  at the rate of 8% per  annum.  In
      connection with conversion the Company pledged a certificate of deposit in
      the amount of $250,000 as  additional  collateral.  At June 30, 2005,  the
      Company  received  a  waiver  for  non-compliance  of one of the  required
      financial covenants under this agreement.

      In  November  2001,  an  existing  $500,000  revolving  line of credit was
      converted  into a term  loan to be  repaid  over  five  years  in  monthly
      installments of $8,333 plus interest at the rate of 7.5% per annum

      In connection with the Clarion acquisition the Company assumed an existing
      loan  in the  amount  of  $95,300.  The  loan  is  payable  in 34  monthly
      installments  of $2,750  plus  interest at the rate of prime plus 1/2% per
      annum.

      The  annual  maturities  of  long-term  debt as of June  30,  2005  are as
      follows:

              2005                                   $    232,999
              2006                                        174,667
              2007                                        121,224
              2008                                         99,999
              2009                                         41,668
                                                     ------------
                                                     $    670,557
                                                     ============

Note 9 - Due to Officers and Shareholders

      These amounts  represent  interest bearing advances and are due on demand.
      The Company is restricted from repaying the principal  amount of the loans
      except as permitted under the Purchase  Agreement,  in connection with the
      sale of shares of Series B Preferred  Stock.  The agreement  provides that
      the repayment shall not be before December 31, 2005, and for the six month
      period ended June 30, 2005 the reported  revenues of the Company shall not
      be less than $11 million  and the  reported  earnings  per share of Common
      Stock shall be not less than $0.23 based upon  7,250,000  shares of Common
      Stock outstanding.  In addition, both at December 31, 2005 and at the time
      of any such repayment, the Selling Stockholders are entitled to sell their
      shares under an effective registration statement

      In March 2004,  in order to be in compliance  with bank loan  covenants by
      the year  ended  June 30,  2004,  Company's  Board of  Directors  voted to
      convert  $250,000  principal  amount  of  Officer/shareholder  loans  into
      735,294 shares of Common Stock.


                                      F-12
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Income Taxes

      The provision for taxes for the year ended June 30, 2005 and 2004 includes
      the following components:

                                                      2005              2004
                                                      ----              ----
      Current
         Federal                                   $        --      $        --
         State                                              --            2,500
         Foreign                                            --               --
                                                   -----------      -----------
                                                            --            2,500
      Deferred
         Federal                                            --          (31,300)
         State                                              --           (2,500)
         Foreign                                            --               --
                                                   -----------      -----------
                                                            --          (33,800)
                                                   -----------      -----------

                                                   $        --      $   (31,300)
                                                   ===========      ===========

      The  components  of the deferred tax accounts as of June 30, 2005 and 2004
      are as follows:

                                                      2005              2004
                                                      ----              ----

      Deferred tax assets
            Net operating loss carryforward        $   919,353      $   751,939
            Stock based compensation                    31,140          240,283
            Other                                       21,448           80,669
                                                   -----------      -----------
                                                       971,941        1,072,891
      Deferred tax liabilities
            Depreciation and amortization               62,588           47,123
                                                   -----------      -----------
      Subtotal                                         909,353        1,025,768
      Valuation allowance                             (515,553)        (631,968)
                                                   -----------      -----------

      Net deferred tax assets                      $   393,800      $   393,800
                                                   ===========      ===========

      The valuation allowance at June 30, 2003 was $216,817.

      The  reconciliation  of estimated income taxes attributed to operations at
      the statutory tax rates to the reported income tax benefit is as follows:

                                                      2005              2004
                                                      ----              ----

      Expected federal tax at statutory rate       $  (125,936)     $  (781,026)
      State taxes, net of federal tax effect           (12,444)        (129,302)
      Foreign rate differential                         (9,780)          (8,527)
      Non deductible expenses                           86,873          475,682
      Change in valuation allowance                     51,126          415,151
      Other                                             10,161           (3,278)
                                                   -----------      -----------
                                                   $        --      $   (31,300)
                                                   ===========      ===========


                                      F-13
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      At June 30, 2005 the  Company had net  operating  loss  carryforwards  for
      federal  and state  income  tax  purposes  of  $1,748,000  and  $1,485,000
      respectively, expiring through 2025. The Company has foreign net operating
      loss carryforwards of $433,928 with no expiration date.

Note 11- Shareholders' Equity

      Series A Convertible Preferred Stock

      In  January  to  March  2002,  the  Company  realized  gross  proceeds  of
      $2,000,000 from the private placement of 40 Units, each Unit consisting of
      25,000  shares  of  Series  A  Convertible   Preferred  Stock  ("Series  A
      Preferred")  and  12,500  common  stock  purchase  Warrants.  The Series A
      Preferred  provides  for an annual  dividend  of $.20 per  share,  payable
      quarterly,  (payable in cash or shares of common stock valued at $2.00 per
      share), when, as and if declared by the Board of Directors. Dividends will
      be paid on a cumulative basis. Each Series A Preferred share was initially
      convertible at the option of the holder into one common share,  commencing
      120 days  after  closing.  The  conversion  ratio is  subject  to  certain
      adjustments,  as  defined  and has since  been  adjusted  to .88  Series A
      Preferred  shares for one common share. The Series A Preferred shares have
      a liquidation  preference in the amount of $2.00 per share and the Company
      may redeem  them  commencing  one year from date of issuance if the common
      shares have  traded at or above  $4.00 for a period of twenty  consecutive
      trading days. All of the Warrants  issued in connection with this offering
      have since expired unexercised.

      As of June 30, 2005,  675,000  shares of Series A Preferred were converted
      into a like amount of common stock.

      On April 26, 2004, the Company's board of Directors  declared dividends on
      the Series A  Convertible  Preferred  Stock.  The dividend was paid by the
      issuance  of 61,500  additional  shares  of the  Company's  common  stock,
      respectively. Cumulative but undeclared dividends at June 30, 2005 totaled
      approximately  $155,000 This  dividend was declared by Company's  board of
      Directors on July 28, 2005 and the Company paid the dividend by issuing an
      additional 100,628 shares of it's Common Stock

      Series B Convertible Preferred Stock

      On June 30,  2004,  the  Company  completed a private  placement  of 2,000
      shares  of its  10%  Series  B  Convertible  Preferred  Stock  ("Series  B
      Preferred")  and  warrants to purchase  up to  2,000,000  shares of common
      stock for an aggregate  purchase price of $2,000,000.  The Preferred Stock
      provides for a dividend at the rate of 10% per annum,  payable  quarterly,
      (payable in cash or by adding the dollar  amount of such  dividends to the
      Stated Value), dividends will be paid on a cumulative basis. The preferred
      shares have a liquidation preference in the amount of $1,000 per share and
      has  preference  to any  payments to the  Preferred A  shareholders.  Each
      preferred  share is  convertible  at the option of the  holder  into 1,000
      shares of common stock.  The conversion  price is subject to anti-dilution
      adjustments,  including, among other things, in the event that the Company
      sells  common  stock  during the next three years for a price of less than
      one dollar per share.  The Company may require the  conversion of all (but
      not less than all) of the then  outstanding  shares of Series B  Preferred
      Stock, if at any time the volume weighted  average trading price per share
      of  common  stock  for  each of 20  consecutive  trading  days  prior to a
      conversion  notice is greater than $2.50 (subject to adjustment),  and the
      daily trading  volume of the common stock is at least 100,000  shares.  In
      addition  all shares of common  stock  underlying  the Series B  Preferred
      Stock must be covered by an effective registration statement.

      The Warrants are  exercisable  for a period of four years from the date of
      issuance  at an  exercise  price  per  share of $1.00  per  share and have
      similar  anti-dilution  privileges  as the Series B Preferred  Stock.  The
      Company may call the Warrants if the volume weighted average trading price
      per  share of


                                      F-14
<PAGE>

      common stock for each of 20 consecutive  trading days is greater than 200%
      of the exercise price, and the daily trading volume of the common stock is
      at least 100,000 shares. In addition all shares of common stock underlying
      Warrants  must be covered by an  effective  registration.  The Company has
      valued the warrants  issued at $955,853  using the  Black-Scholes  pricing
      model.

      In  connection  with the private  placement,  the Company  issued  200,000
      warrants with identical terms to a placement agent.

      The Company has recorded a deemed  dividend and an offsetting  increase in
      additional  paid-in capital totaling  $1,044,147 to reflect the beneficial
      conversion  price of the  preferred  stock as compared  to the  prevailing
      market price of the common stock.

      Stock Option Plans

      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 may not be less than 100% of the fair
      market  value of the stock at the date of the  grant  (110% in the case of
      any employee who owns more than 10% of the combined  voting power or value
      of all classes of stock).  Options may be granted for terms not  exceeding
      ten years from the date of the grant, except for options granted to person
      holding in excess of 5% of the common stock, in which case the options may
      not be  granted  for a term not to exceed  five years from the date of the
      grant.

      Non-statutory Stock Option Plan

      The Company  also has adopted a  non-statutory  stock  option plan and has
      reserved  250,000  shares  of  common  stock for  issuance  to  Directors,
      employees and non-employees. Options granted pursuant to this plan will be
      non-transferable  and expire,  if not exercised within five years from the
      date of the grant.

      Other Option Grants

      In addition to the  options  granted  under the Stock  Option  Plans,  the
      Company  has issued  options  outside of the  plans,  pursuant  to various
      consulting agreements.


                                      F-15
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Option activity for 2004 and 2005 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                              Weighted
                                                                                              Average
                                               Options                                        Exercise
                                                 Plan          Nonplan          Total          Price
                                                 ----          -------          -----          -----
<S>                                           <C>               <C>           <C>            <C>
      Options outstanding, July 1, 2003         575,000          45,000         620,000      $     1.45
      Granted                                   220,000              --         220,000             .87
      Exercised                                (180,000)             --        (180,000)            .20
      Forfeited                                 (25,000)        (45,000)        (70,000)           2.00
                                             ----------      ----------      ----------      ----------

      Options outstanding, June 30, 2004        590,000              --         590,000      $     1.53

      Granted                                   565,000              --         565,000      $     2.40
      Exercised                                 (45,000)             --         (45,000)            .07
      Forfeited                                      --              --              --              --
                                             ----------      ----------      ----------      ----------

      Options outstanding, June 30, 2005      1,110,000              --       1,110,000      $     2.03
                                             ==========      ==========      ==========      ==========

Shares of common stock available
  for future grant under the plans              945,000
                                             ==========
</TABLE>

      The following table summarizes information about stock options outstanding
      at June 30, 2005.

<TABLE>
<CAPTION>
                                                                      Options Exercisable
                                             Weighted Average                        Weighted
                                        Remaining                                    Average
                         Number        Contractual     Exercise        Number        Exercise
Ranges of price        Outstanding         Life          Price      Exercisable       Price
---------------        -----------         ----          -----      -----------       -----
<S>                     <C>                <C>           <C>          <C>             <C>
$.25-.39                   60,000          5.98          $0.31         60,000         $0.31
$.50-.88                  110,000          4.49          $0.66        110,000         $0.66
$1.00-1.10                155,000          8.51          $1.01        155,000         $1.01
$2.40                     565,000          9.56          $2.40        113,000         $2.40
$2.70-2.97                220,000          1.62          $2.95        220,000         $2.95
                          -------          ----          -----        -------         -----

$.05-$2.97              1,110,000          7.14          $2.03        658,000         $1.77
                        =========          ====          =====        =======         =====
</TABLE>

Note 12 - Concentrations and Economic Dependency

      The Company had two customers that accounted for 76% and 20%, respectively
      of net  revenues  for year ended June 30,  2005 and three  customers  that
      accounted  for 11%,  11% and 10%, of net  revenues for year ended June 30,
      2004. Three customers accounted for 94% of the accounts  receivables as of
      June 30, 2005. At June 30, 2005  approximately 14% of accounts  receivable
      were  from  foreign   customers.   The  Company  performs  ongoing  credit
      evaluations of its customers'  financial  condition and generally requires
      no collateral from its customers.


                                      F-16
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      During the year and at year end,  the Company had cash  deposits in a bank
      in excess of FDIC limits. The Company  periodically  reviews the financial
      condition of the bank to minimize its exposure

Note 13 - Commitments and Contingencies

      Lease Agreements

      Future  minimum  annual  rental  payments  required  under  non-cancelable
      operating leases for years after June 30, 2005 are as follows:

                                2006                 $    103,900
                                2007                       90,700
                                2008                       54,700
                                                     ------------
                                                     $    249,300
                                                     ============

      Rent expense under all  operating  leases was $125,309 and $84,249 for the
      years ended June 30, 2005 and 2004.

      License Agreement

      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)).

      Loss Contingencies

      Loss  contingencies,  including  claims and legal  actions  arising in the
      ordinary  course  of  business,  are  recorded  as  liabilities  when  the
      likelihood  of loss is  probable  and an  amount  or  range of loss can be
      reasonably  estimated.  Management  does not  believe  there  now are such
      matters that will have a material effect on the financial statements

Note 14 - Geographic Data

      The Company  currently  operates in the United States and the Middle East.
      The following is a summary of local operations by geographic area:

<TABLE>
<CAPTION>
                                            U.S.        % of total     Middle East      % of total
                                            ----        ----------     -----------      ----------
<S>                                    <C>               <C>         <C>                  <C>
      For the year ended
        June 30, 2005
           Revenue                     $ 5,898,503         98.84%      $    68,966          1.16%
           Operating income (loss)          89,516       -125.74%         (160,710)       225.74%
           Identifiable assets           7,046,418         95.41%          339,144          4.59%

      For the year ended
        June 30, 2004
           Revenue                     $ 2,009,856         97.50%      $    51,556          2.50%
           Operating loss                 (949,840)        87.16%         (139,961)        12.84%
           Identifiable assets           5,212,101         94.71%          290,836          5.29%
</TABLE>


                                      F-17
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 - Related Party Transactions

      In fiscal 2004,  the Company  earned  revenues  totaling  $234,225  from a
      Company in which one of the Company's Directors is the president and CEO.

      The Company made non-interest bearing advances that are due on demand to a
      former  officer and director of the Company.  The balances  outstanding at
      June 30, 2005 and 2004 were $73,030 and $62,655, respectively.


                                      F-18