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, 2004

     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:

          15,000,000 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 is not 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: $2,061,412

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.): $4,553,359 as of September 13, 2004.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 5,541,874 as of September 14, 2004.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

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

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Overview.

      We design, develop, manufacture and market technology-based security
systems for government and commercial facilities worldwide. We provide a range
of programs and systems that include turn-key integrated security systems or
individual components of 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 to develop a
comprehensive risk management and mitigation program and (ii) product design and
engineering services.

      Our security programs incorporate various systems from our portfolio of
proprietary and licensed technologies and equipment. We select systems that we
have designed to meet conventional security requirements facing clients or, as
necessary, design, develop and manufacture systems customized for clients'
specific needs. When we are engaged to provide a comprehensive turnkey security
program, we retain subcontractors to install our systems and products under the
supervision of our project managers. When we provide products and services as a
subcontractor to a systems integrator, dealer, installer, engineer or other
entity that is implementing a security project, we may use their employees or
contractors to complete our portion of the job under the direction of one of our
project managers. Our project managers train clients with respect to the use of
our systems.

      We differentiate ourselves from security systems integrators and others in
the industry on the basis of our ability to analyze a security risk and develop
security solutions specifically tailored to mitigate that risk, including
designing, engineering and manufacturing the individual technologies comprising
a fully integrated security system. The preponderance of companies designated as
integrated security systems providers are essentially security systems
architects. These entities examine a client's security needs and then select
products from an existing array of security product offerings designed and
manufactured by third parties to create a security system which they integrate
into the master blueprint of a site or structure. These entities are constrained
by and limited to the product offerings of others. In some cases, they rely on
security systems manufacturers to select the proper equipment for a given
project. 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 systems that support them in the completion of a
project.

      We are ISO 9001 registered and expect to re-register to maintain ISO 9001
status.

Security Industry Overview.

      The Security Institute of America estimates that the worldwide market for
security products and services exceeds $130 billion annually. 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.

<PAGE>

      We believe that the security industry has experienced significant growth
over the last decade, both in terms of 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     Homeland Security has mandated perimeter security for airports,
            maritime, chemical, transportation, energy and pharmaceutical
            facilities.

      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.

      o     Private industry is operating in high risk and remote environments
            and geographic locations.

Products and Services.

      The services and technologies required to create a secure environment must
address the entire range of security concerns that challenge public 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. We offer both integrated, turn-key security programs that incorporate
any or all of our systems and stand-alone systems that comprise an individual
component 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, allows
            them to communicate with each other and integrates the subsystems
            and components into a single system.

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


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<PAGE>

      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 ascertain the nature of, and
            monitor, an announced threat.

      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 and airports or
            other situations with high-level security demands.

      o     Facial Recognition Systems. These systems are based on biometric
            technology that identifies humans by the unique characteristics of
            their faces. 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
            which can enhance a facility's security by illuminating areas which
            otherwise may be subject to infiltration because of darkness or
            remote location from a facility's main security center.

      o     Computer Intrusion Detection Equipment. We offer an information
            technology security system designed to protect computer local area
            networks (LAN's) from illegal external access via the Internet or by
            persons seeking to splice into the LAN's hard wiring.

      o     Asset and Personal Protection Systems. Our global positioning
            system, radio frequency and personal alarm systems are designed to
            protect people, vehicles, vessels and other assets in real time.

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

      In order to provide our clients with the highest quality and most advanced
systems, we incorporate into our security systems technologies and products both
developed by us or which we license from other entities. We frequently enter
into technology transfer agreements covering the technologies or products to be
used so that we can design and execute the best possible security program for a
client within the confines of their security budget. Our 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.

      We believe that the products we offer 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 conditions;

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

      o     are subject to low installation and maintenance costs.


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<PAGE>

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

      Consulting Services

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

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

      o     provide security system design services.

      Our consulting and advisory services generally represent the first step in
the development of a security program. 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 responses, and the
security forces that must successfully interrupt adversary actions and prevent
theft or sabotage.

      Our customers benefit from an integrated, interactive process by which our
vulnerability/threat/penetration analysts examine existing and/or candidate
systems, and determine levels of risk. These analysts consult with our systems
design experts to determine systems configurations and human operation
requirements that will provide the most cost-effective options for mitigating
the 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, "user friendly"
software/firmware selection and application. Many of our security advisors have
the government's highest security clearances.

      We also provide security system design services which comprise the
evaluation, design and specification of security systems and components that
meet a client's operating and budgetary requirements. Typically, we provide
these services within the context of a comprehensive security evaluation and
implementation program in conjunction with risk management analysis. However, we
may be asked to evaluate and design a single element of a security system. We
work closely with the client and the facility's owner, architect, engineer,
system integrators and construction manager to develop and design security
monitoring and control systems that afford a normative but secure environment
for management, staff and visitors. Our design experts have unequalled knowledge
of the various technologies (both mature and emerging) being applied to security
challenges, both in the U.S. and around the world, because they have been, and
continue to be, intimately involved in developing security systems for
government facilities around the world.

Product Design.

      We design and develop new products based upon market requirements and as
necessary to meet our clients' specific needs. We research and assess threat and
vulnerability issues at selected facilities


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<PAGE>

within our target markets and we design and engineer our products in-house, with
outside consultants as necessary, and in conjunction with joint venture partners
to meet the needs of clients within the target markets based upon the results of
such research. We investigate new and emerging technologies that have
application in the security industry and seek to license these technologies
which we then incorporate into our products.

Markets for Our Products.

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

The following represent the primary markets which we target:

      o     the United States Government and 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 plants, power utilities and
            petrochemical pipelines;

      o     commercial airports and seaports;

      o     campus security; and

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

      The United States Government and many of its agencies and departments
represent a significant market for our products and have been a major customer
in the past. U.S. Government and agencies which have purchased our products in
the past and to which we currently actively market our products include:

      o     The United States Department of Defense and a number of its
            subdivisions have been using our products for force and asset
            protection at numerous 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 United States Department of Energy, in connection with the
            clean-up and operation of military bases and government-owned
            nuclear processing facilities, offer an expansive and varied market
            for our products. We presently are involved with the supply and
            support services at 9 sites on an ongoing basis.

      o     The Department of Transportation, including airports, trucking and
            distribution centers and marine terminals, are current target
            marketing objectives and 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, allows the US government to
purchase materials and services from us without having to go through a full
competition. In September, 2003, we announced the finalization of a


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<PAGE>

5-year indefinite delivery/indefinite quantity contract with the United States
Department of the Air Force to secure highly strategic military facilities
throughout the world.

      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
and are the primary locations where research and product development occur.
Facilities such as these 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 protection and other security systems to create a normal yet secure
environment for employees, visitors and service personnel.

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

Commercial Airports and Seaports. 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 United States which the Federal
Aviation Agency has identified and mandated for security systems upgrades 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 to penetrate
these markets. During 2003 and 2002, we generated approximately 30% and 26%,
respectively, of our revenues from projects performed outside the United States.

Marketing.

      We obtain engagements through existing contract vehicles with commercial
and government organizations, direct negotiation with clients, competitive bid
processes and referrals.

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

The primary goals of our marketing strategy are to:

      o     broaden the base of potential clients to which we can market our
            products, and

      o     demonstrate the efficacy of our products.

      To that end, we have 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


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<PAGE>

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 for use in connection with larger projects they are
performing for their clients. In September 2002, we entered into an agreement
with a security industry dealer-installer network that has over 200 members
located throughout the United States.

      The strategic relationship framework depicts a comprehensive and thorough
mechanism for developing and implementing corporate strategy. Our board of
directors determined early in the process that given our size and the
criticality of our business situation that the framework would be followed in a
non resource exhaustive manner to permit more expedient and efficient access to
lucrative markets as the industry evolves.

      Members of our management team have many years of experience in the
security industry. Each member of the management team 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 each of the major government
agencies encompassing our target markets. In addition, we rely on our teaming
and strategic partners for introductions to appropriate personnel at these
agencies.

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

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

      We also attend the major trade shows for each industry and advertise in
relevant industry publications.

      We employ a variety of pricing strategies for our services. Proposals for
consulting services are priced based on an estimate of hours multiplied by
standard rates. Systems integration engagements are priced based upon the
estimated cost of the components of the engagement, 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 our sales and marketing personnel. We have added one more
            person to our sales team who has extensive sales and marketing
            experience in the middle Atlantic states. We believe this additional
            sales and marketing person 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.


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<PAGE>

      o     Expand our base of dealers/installers/integrators worldwide. We
            believe that an effective and cost efficient means of increasing
            sales is to expand our base of independent dealers/sales
            representatives worldwide. These entities serve as our local agents
            to market products and provide customer support. Furthermore, these
            entities are familiar with local laws and frequently have local
            contacts in government and business at decision-making levels. We
            will seek to expand our international base of sales representatives
            by advertising in trade publications through our Company web site
            and through international customer referrals.

      o     Expand our global presence. The Company formed a subsidiary in the
            Middle East to represent and support our 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 us with
            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 that may have
            application in the security industry. We will seek to acquire
            technologies that will allow us to enhance our existing systems and
            develop new products.

      o     Upgrade existing products. We have and will continue to upgrade our
            existing products to take advantage of technological advancements so
            that 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 DSL 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.

      We provide our 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 on over 220 projects.


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<PAGE>

Competition.

      As the public and private sectors become increasingly concerned with
security issues, the security and anti-terrorism industry has experienced
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 firms and engineering and design firms and others that provide
individual elements of a system. Many of our current and potential competitors
have significantly greater name recognition and financial, technical, marketing
and other 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     principal officers, security analysts, design personnel and sales
            persons have over 170 years of combined experience in the security
            industry;

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

      o     our products address a wide range of security requirements;

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

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

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

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

Manufacturing.

      We conduct our manufacturing operations at our facilities in New Jersey
and Alabama. These activities consist of procurement of materials, product
assembly and component integration, product assurance, quality control and final
testing. We believe that our manufacturing facilities will not be adequate to
satisfy the anticipated demand for our products under the USAF contract award.
We have completed negotiations with our landlord at our headquarters in New
Jersey to add 2,600 square feet of manufacturing space which will afford us the
flexibility to enlarge our manufacturing facilities, and increase equipment and
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.


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<PAGE>

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

Sources and Availability of Components and Manufacturing Materials.

      We depend heavily on our suppliers to provide high-quality materials on a
timely basis and at reasonable prices. We purchase the individual components
comprising our products from third party suppliers, or subcontract to third
parties the manufacture of specific subsystems necessary for a particular
product. We are not dependent on any major suppliers for the components of our
products and we believe, should it become necessary in the event of any
disruption in supply or discontinuation of production by any of our present
suppliers, that all of 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 therefore. 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 is 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.

      Our success is dependent to a great extent on our proprietary knowledge,
innovative skills, technical expertise and marketing ability. Our present
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 the terms "FOIDs(R)" (Fiber Optic Intelligent
Detection System), "IPIDS(R)" (Infrared Perimeter Intrusion Detection System),
"RDIDS(R)" (Rapid Deployment Infrared Detection System), "IDMS(R)" (Intrusion
Detection & Monitoring System) and "APIDS(R)" (Acoustic Perimeter Intrusion
Detection System). We have also filed in other countries.

      We require all employees, consultants and contractors to execute
non-disclosure agreements as a condition of employment or engagement by us. 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.

      We design and develop new products based upon market requirements. The
forces which drive the design and development of new products include developing
products to meet new security threats, incorporate new technologies or to
satisfy a client's security requirements. We research and assess threat and
vulnerability issues at selected facilities within our target markets and we
design and engineer our


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<PAGE>

products in-house, with outside consultants as necessary, and in conjunction
with joint venture partners to meet the needs of clients within the target
markets based upon the results of such research. We investigate new and emerging
technologies that have application in the security industry and seek to license
these technologies which we then incorporate into our products.

      During the years ended June 30, 2004 and 2003, we expended $322,912 and
$257,123, respectively on research and development activities.

Product Warranty.

      We offer warranties on all our products, including parts and labor.
IPID(R) sensors and related equipment, such as mounting brackets, poles and
termination boxes are warranted for ten (10) years, under normal use, against
defects in workmanship and material from date of purchase. All other components
are warranted for one year from date of purchase. FOIDS(R) systems are warranted
for a ten year period. For the years ended June 30, 2004 and 2003, 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. We frequently seek
to incorporate these technologies into our systems. We are party to agreements
to use certain technologies including licenses with Lucent Technologies, Rafael
Armament Development Authority, Visage, Inc., Penn State University, Textron
Corp. and Hyperdyne, Inc.

Employees.

      As of August 6, 2004, we employed eighteen (18) individuals on a full-time
basis including four (4) design and engineering staff, five (5) manufacturing
and assembly employees, four (4) marketing employees and five (5) administrative
employees. A number of the employees serve in multiple capacities, for example,
Arthur Barchenko serves as our President but also is an integral member of the
Company's marketing team and our manufacturing staff may oversee site
installation of the products which they are responsible for manufacturing.

      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.


                                       12
<PAGE>

Risk Factors

      The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the prospects discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those listed below.

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 approval of the funding 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 for 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 that
customer cancels its order, it would greatly affect our operating results for
the period during which we would have recognized revenues from that customer,
which could cause our stock price to fluctuate and make it difficult for you to
evaluate our company. Moreover, cancellation of a booked order after we have
ordered components and materials to manufacture systems for that customer could
result in our having excess inventory and no corresponding income.

During the fiscal year ended June 30, 2004, we generated approximately 41% of
our revenues from goods sold and services rendered to 4 customers. A substantial
decrease in revenues generated from contracts performed for these customers
could have a negative adverse effect on our business if we are unable to
identify other customers.

      During the fiscal year ended June 30, 2004, 4 customers accounted for
approximately 41% of our revenues. One of these customers accounted for
approximately 25% of our revenues during fiscal 2003. 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 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.


                                       13
<PAGE>

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. This could cause an increase in our costs or prevent us
from meeting customer demand.

      We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order 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 products 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, airports, correctional institutions, energy
facilities and high technology companies desiring to protect valuable assets
and/or prevent intrusion into high security facilities in the United States and
abroad. Given the nature of our products and the customers that purchase them,
sales cycles can be lengthy as customers conduct intensive investigations of,
and internally deliberate with respect to, specific competing technologies and
providers. Moreover, orders received from governments may be subject to funding
legislation which may not be enacted. 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.

      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 years ended June 30, 2004 and 2003, we generated approximately
11% and 30% respectively, of our business from projects which were performed
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 such factors could materially impact our business and
results of operations could suffer.


                                       14
<PAGE>

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 materially adversely
affected.

We compete against entities that have significantly greater name recognition and
resources than we do, that may be able to respond to changes in customer
requirements more quickly than we can and that are able to allocate greater
resources to the marketing of their products.

      The security industry is highly competitive and has become more so over
the last several years 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 and 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 they possess. We can not assure investors that
we will be able to distinguish our self 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.

We are dependent on third party suppliers for principal components used in our
products, and disruptions in supply or significant increases in component costs
could materially harm our business.

      We rely on third parties to supply 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. Although to
date, we have not experienced any disruption in supplies of components, we can
not assure you that there will not be a disruption of our supplies in the
future. Disruption or termination of the supply of these components could delay
shipments of products and could have a material adverse affect on our business,
operating results and financial condition.

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

      Management believes that we offer state-of-the art products that are
reliable and competitively priced. In the event that our products do not perform
to specifications or are defective in any way, our reputation may be materially
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


                                       15
<PAGE>

especially dependent on the continued services of our senior management team,
particularly Arthur Barchenko, Mark Barchenko and Joseph McAndrew, the
President, and Vice Presidents, 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 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     we may experience difficulty integrating acquired operations,
            products, services and personnel;

      o     the acquisition may disrupt our ongoing business;

      o     we may not be able to successfully incorporate acquired technology
            and rights into our product offerings and maintain uniform
            standards, controls, procedures, and policies;

      o     we may not be able to retain the 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 to us, of the companies that we acquire.

      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.


                                       16
<PAGE>

RISKS RELATING TO OUR COMMON STOCK

As we issue additional equity securities in the future, including upon
conversion of any of our preferred stock, your 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 authorizes the issuance of 15,000,000
shares of common stock. 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.

      In connection with a recent financing, we issued 10% Series B Convertible
Preferred Stock (Series B Preferred Stock) and warrants entitling the holders to
purchase shares of common stock. The Series B Preferred Stock is convertible
initially into 2 million shares of common stock, an initial conversion price of
$1.00 per share, and the warrants entitle the holders to purchase 2.2 million
shares of common stock at a price of $1.00 per share. The Series B Preferred
Stock carries a 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 with certain acquisition transactions)
at a price less than the initial $1.00 conversion 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 4,000,000 shares. 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
rights.

      As of the date hereof, we have issued and outstanding 512,500 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and 2,000
shares of 10% Series B Convertible Preferred Stock ("Series B Preferred Stock"
and together with the Series A Preferred Stock, 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 make 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

                                       17
<PAGE>

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.

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 effect 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


                                       18
<PAGE>

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 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;


                                       19
<PAGE>

      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.

ITEM 2. DESCRIPTION OF PROPERTIES

      Our corporate headquarters are located at 790 Bloomfield Avenue, Clifton,
New Jersey where we lease approximately 12,600 square feet of space divided
among administrative (3,000 sq. feet) and manufacturing (9,600 sq. feet) space.
We have leased this space through May 1, 2008 at a rent of $5,153 per month
increasing to $5,468 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 has
leased approximately 2000 square feet of office space through December, 2006 at
a cost of $1,363 per month.

      We believe that our manufacturing facilities are inadequate to meet demand
for our products based on the USAF contract award. We have started negotiations
with our landlord for additional space within our existing industrial complex
thereby being in a position to add manufacturing facilities, equipment and
personnel as required to fill orders for product without undue delay. We are
planning to open a logistical engineering and sales support facility in Virginia
to support our contract with the US Air Force and expand our government base for
The Homeland Security market.

ITEM 3. LEGAL PROCEEDINGS.

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

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

      None.


                                       20
<PAGE>

                                     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 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

-------------------------------------------------------------------------------
     Fiscal 2003
-------------------------------------------------------------------------------
     April 1 - June 30                           1.00                .54
     January 1 - March 31                        1.60               1.00
     Oct. 1 - December 31, 2002                  1.10                .42
     July 1 - September 30, 2002                 1.01                .61
-------------------------------------------------------------------------------

      As of September 14, 2004, ECSI had approximately 180 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

      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.


                                       21
<PAGE>

      Rule 506 Offerings

                  2004

      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 five 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.

                  2002

      On March 14, 2002, ECSI completed a private placement of 40 units of its
securities, each consisting of 25,000 shares of Series A Convertible Preferred
Stock and Redeemable Warrants entitling the holders to purchase 12,500 shares of
common stock at an exercise price of $3.00 per share until March 14, 2005. The
offering was made and sold to 25 accredited investors. The Company received
gross proceeds of $2 million from the sale of the units. The Company paid
aggregate cash commissions of $187,500 in connection with the placement of the
units, including $50,000 to DC Capital Corp., a broker dealer registered with
the Securities and Exchange Commission and the National Association of
Securities Dealers, and $137,500 to certain finders where the payment of such
commissions was permissible under local law. In addition, the Company issued to
the finders warrants to purchase up to an aggregate of four units identical to
those offered in the offering, the underlying shares of common stock of which
are being registered in this registration statement.

      The above sales were made in reliance upon the private offering exemptions
contained in Rule 506 of Regulation D of the Securities Act of 1933. Each
investor represented that he/she/it was acquiring the securities for investment
purposes only and not with a view to distribute. Each investor further
represented that he/she/it (a) had such knowledge and experience in financial
and business matters and was capable of evaluating the merits and risks of the
investment, (b) was able to bear the complete loss of the investment, and (c)
had the opportunity to ask questions of, and receive answers from, the Company
and its management concerning the terms and conditions of the offering and to
obtain additional information. Each investor further represented to the Company
that he/she/it was an "accredited investor" as such term is defined in Rule 501
of the Securities Act of 1933.

      Exercises of Options

      The transactions described below represent shares of common stock that
were issued upon the exercise of statutory stock options in reliance on the
exemption from registration afforded by Section 4(2).


                                       22
<PAGE>

      On May 27, 2004, Richard Stern, a director of the Company, exercised
options for 100,000 shares of Common Stock. He paid an exercise price of $0.015
per share.

      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 and in reliance on Section 3(b) of the
Securities Act of 1933.

                  2004

      On July 6, 2004, the Company issued an aggregate of 85,712 shares to
Charles Gargano; Carol Berardino, Robert Baumeister, and Linda Ravella, as
Tenants in Common; and JCM Capital Corp.

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

                  2003

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

      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.

      Securities Authorized For Issuance 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.

                  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 145,000 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.


                                       23
<PAGE>

      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 @$1.10

                  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.

      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.

                  2002

      On February 15, 2002, the Company granted options to Arthur Barchenko and
Natalie Barchenko entitling them to purchase 100,000 shares each of common stock
at a price of $2.97 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.

      On February 15, 2002, the Company granted options to seven persons
entitling them to purchase an aggregate of 60,000 shares of common stock at
$2.70 per share (the closing bid price per share on the date of the grant) for a
period of ten years from the date of the grant.

                  2001

      On August 10, 2001, the Company granted options to Eldon Moberg, an
director, entitling him to purchase 40,000 shares of common stock at a price of
$0.30 per share for a period of ten years from the date of the grant.

      On August 1, 2001, the Company granted options to Andrzej Mchocki, an
employee, entitling him to purchase 5,000 shares of common stock at a price of
$0.25 per share for a period of ten years from the date of the grant.

        Issuance of Securities for Services or in Satisfaction of Obligations

      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..

      In March 2002, the Company issued 20,000 shares of common stock and
warrants to purchase 10,000 shares of common stock at a price of $2.00 per share
to CFG Media Inc. in accordance with the terms of an agreement whereby CFG Media
provided financial public relations services to the Company.


                                       24
<PAGE>

In addition, the Company issues to CFG Media 2,500 warrants per month as
continuing payment for services rendered (including 5,000 additional warrants as
the date hereof). The Company issued the shares pursuant to the exemption from
registration provisions of the Securities Act of 1933 afforded by section 4(2)
thereof. The Company valued the shares at an aggregate price of $13.333, or
$0.67 per share.

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 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.


                                       25
<PAGE>

Fiscal 2004 Accomplishments

      Fiscal 2004 was an important year for us because we:

      o     Were awarded a task order by the Department of Defense of the United
            States in August 2004 to secure Tinker Air Force Base, a highly
            strategic North American military facility, as a supplier selected
            by the US Air Force under the indefinite delivery/indefinite supply
            contract noted below. The task order has an estimated value of in
            excess of $4,300,000.

      o     Completed a private placement of $2 million of shares of 10% Series
            B Convertible Preferred Stock and warrants to purchase up to
            2,000,000 shares of common stock on June 30, 2004. The Series B
            Preferred Stock carries a 10% cumulative dividend payable quarterly
            in cash or by adding the amount of the dividend to the stated value
            of each share of Series B Preferred Stock and is convertible
            initially into an aggregate of 2,000,000 shares of common stock,
            subject to anti-dilution adjustments. The Warrants are exercisable
            at a price of $1.00 per share through June 29, 2008.

      o     Were selected by the United States Air Force, Force Protection
            Office, as one of four companies, among two multinational and two
            small business organizations, permitted to submit proposals to
            obtain contracts to supply and install security system upgrades for
            thirty-four military facilities worldwide over a five year period
            with a total value in excess of $500 million, which, since the date
            of such award, has increased to 108 bases and may reach over $1
            billion in total value.

      o     Entered into a Cooperative Research & Development Agreement with the
            Naval Surface Warfare Center, Panama City, for the integration and
            marketing of technologies for military and commercial applications;

      o     Received a number of orders to complete jobs at high-profile
            facilities around the world, including a border security project in
            Eastern Europe now awaiting release and orders for nuclear power
            station security upgrades amounting to over $1,500,000;

      o     Entered into strategic alliances or marketing relationships with
            companies that we believe will provide us access to markets in which
            we heretofore have had only a limited presence, including alliances
            with:

                  (i) Radio Holland Greece (SRH Marine) Division of the Radio
                  Holland Group, an international organization specializing in
                  communication, satellite navigational safety-distress and ship
                  automation equipment, installation, integration and support
                  services worldwide, which will allow us to offer our security
                  solutions to government and corporate clients in Greece and
                  Cyprus to protect their airports, ports, cargo, and military
                  vessels. This alliance will enable us to effectively address
                  many government and industrial projects in those nations
                  without adding a layer of cost; and

                  (ii) M.A. Kharafi National, an international organization that
                  provides security systems installation, integration and
                  support services in the Middle East. This alliance allows us
                  to expand sales and service capability to include virtually
                  all areas of the Middle East including the most active and
                  demanding areas of Kuwait and Iraq. Kharafi National members
                  will partner with us when additional


                                       26
<PAGE>

                  resources are needed to effectively complete sophisticated
                  system integration projects in Iraq to meet particularly
                  aggressive timetables or specialized requirements. It also
                  allows us to offer our clients in Kuwait and Iraq expert
                  logistical support with minimal geographic or resource
                  constraints. This alliance will enable us to effectively
                  address the many government and industrial projects in Iraq
                  and help us meet one of its major strategic objectives for
                  fiscal 2005 and beyond with two entities that will allow us to
                  bid on jobs in fields in which we heretofore have had only
                  limited access and which we consider important, including the
                  geographic regions of Iraq and Kuwait and the area of maritime
                  security.

      o     Entered into Revolving Line of Credit with Fairchild in the amount
            of $250,000, the entire principal amount of which has been drawn
            down and since repaid. We used the proceeds of this loan for working
            capital. We continue to discuss the nature of our relationship with
            Fairchild and the possibility of a future investment by Fairchild in
            the Company. We believe that our future relationship with Fairchild
            will remain intact and afford us the opportunity to develop business
            contacts with major global organizations.

      o     Established a strategic marketing relationship with a security
            company with offices in Washington, D.C. to address Homeland
            Security opportunities. This company is a fully integrated single
            source for experienced management services focused in the Government
            Security, Homeland Security and Defense Industry. It provides
            consulting and planning services in the area of management,
            marketing and sales development.

Results of Operations

Results of Operations

Year Ended June 30, 2004 ("fiscal 2004 period") Compared to Year Ended June 30,
2003 ("fiscal 2003 period").

REVENUES. We had net revenues of $2,061,412 for the fiscal 2004 period, as
compared to revenues of $4,346,816 for the fiscal 2003 period, a decrease of
about 53%. Of the revenues reported in the fiscal 2004 period, approximately 89%
was domestic and 11% was related to international projects. The decrease in
sales in the fiscal 2004 period is primarily attributable to an indefinite hold
put on certain projects that were waiting for funding and/or the approval of
submitted documents. The funding and/or submitted documents are related to
projects for both domestic and foreign governments as well as private industrial
concerns in the Middle East.

GROSS MARGINS. Gross margins for the fiscal 2004 period were 55% of revenue as
compared to 47% of revenue for the fiscal 2003 period. The increase in the
fiscal 2004 period is primarily due to an increase in the order mix for higher
gross margin engineering and design services, as compared to the fiscal 2003
period, where the fulfillment of orders mostly entailed the shipment of lower
gross margin product.

RESEARCH AND DEVELOPMENT (R&D). R&D expenses increased 26% in the fiscal 2004
period to $322,912 from $257,123 in the fiscal 2003 period. R&D in the fiscal
2004 period was for upgrades to existing products and systems and for new
product development work on the UAV technologies.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses decreased about 8% in
the fiscal 2004 period to $1,782,534 from $1,933,540 in the fiscal 2003 period.
The decrease in fiscal 2004 is primarily the result of management's aggressive
action to reduce fixed overhead and payroll costs


                                       27
<PAGE>

commencing January 1, 2004 based on lower projected revenue. The decrease
however was partially offset by a legal settlement in the amount of $101,000 and
the write-off of certain accounts receivable totaling $191,000.

STOCK BASED COMPENSATION. 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. In fiscal 2002, we issued stock and stock options
to various consultants which were being amortized over the related service
periods resulting in a charge of $503,814 in the fiscal 2003 period. 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 2004 period was $105,916 as
compared to $68,179 for the fiscal 2003 period. The increase was attributable to
the higher average amount of outstanding debt balances.

INTEREST INCOME. Interest income in the fiscal 2004 period was $3,128 as
compared to $11,449 in the fiscal 2003 period. The decrease was due to the
redemption of a $300,000 certificate of deposit.

MINORITY INTEREST IN SUBSIDIARY LOSS. The minority interest in the loss from the
foreign subsidiaries was $42,633 for the fiscal 2004 period and $50,938 for the
fiscal 2003 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 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 year as compared to $89,000 in fiscal 2003.

NET LOSS. Net loss before dividends for the fiscal 2004 and fiscal 2003 periods
was $(1,118,656) and $(559,832), respectively.

Dividends Related to 10% Series B Convertible Preferred Stock.

      We recorded a deemed dividend totaling $1,044,147 in June 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.
Similarly, in 2003 we recorded amortization of $100,886 resulting from a deemed
dividend totaling $1,008,861 which reflected the beneficial conversion price of
our Series A Convertible Preferred Stock issued in fiscal 2002. In addition we
declared dividends totaling $123,000 and $196,250 on our Series A Convertible
Preferred Stock in fiscal 2004 and 2003, respectively. These dividends were paid
via the issuance of additional shares of our Common Stock.

Liquidity and Capital Resources

      At June 30, 2004, we had working capital of $3.09 million compared to
$1.89 million at June 30, 2003. Net cash used by operating activities for fiscal
2004 was $1,411,859 as compared to net cash provided by operating activities of
$265,252 for fiscal 2003.

      Inventory has increased by $264,186 since the beginning of fiscal 2004 in
anticipation of shipments for committed projects that were supposed to have been
released and on new proposals that


                                       28
<PAGE>

have not materialized thus far. Accounts receivable relative to sales volume has
deteriorated somewhat on a quarter to quarter basis. Day's sales outstanding
(DSO) were 139 days at June 30, 2004 as compared with 71 days at June 30, 2003.
This is due to certain payments being held until final completion of projects.
We expect the DSO to significantly improve during fiscal 2005.

      Accounts payable and accrued expenses have increased $197,702 in the
fiscal 2004 period as payments to vendors has been slowed in an attempt to match
the slower collection of receivables and to preserve the cash available for
daily operations.

      Investing activities for fiscal 2004 included purchases of $132,745 for
equipment and software required to upgrade two major product lines. We do not
have any material commitments for capital expenditures going forward.

      Financing activities in the fiscal 2004 period included the redemption of
a certificate of deposit in the amount of $300,000 which was used to repay an
expiring credit line and gain an additional $15,000 of available funds.

      Currently, we are fully drawn on our revolving line of credit of $500,000,
which is due to expire November 15, 2004. The line bears interest at the rate of
1% above prime and is secured by substantially all of our assets and the
personal guaranty of Arthur Barchenko.

      With the revolving line of credit fully drawn and business results for the
fiscal 2004 period being materially weaker than expected, officers have loaned
the Company $700,044 as working capital. Of this amount, $250,000 was converted
into 735,294 of additional shares of common stock in April 2004. The remaining
officer loans have no specified maturity date and bear interest at a rate of 10%
per annum. The Company is restricted from repaying the principal amount of the
loans by the Purchase Agreement dated June 30, 2004 by which we sold the shares
of Series B Preferred Stock. Under the Purchase Agreement, we may not repay the
loans to officers until December 31, 2005, at the earliest, and only if certain
other conditions have been satisfied.

      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. All
payments have been made on time leaving a balance due as of June 30, 2004 in the
amount of $241,667. The term loan is due to be paid in full by November 2006.

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

      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. We have identified a specific area in which
we intend to pursue the acquisition of either a particular technology or 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:


                                       29
<PAGE>

      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, other than
the last quarter, has improved our ongoing 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 cash generated from sale of equity in June 2004 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 can not 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 over the last two fiscal years have been
disappointing although the level of new proposals continues to increase. Early
in this period, 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. The Homeland Security initiatives proposed
by the United States Congress during the last two years have not had nearly as
positive an impact on our committed and released business as we expected.

      We believe the global economic recession during 2002 and the first half of
2003 negatively affected most of our customers and potential customers,
including various government agencies worldwide. Generally, we believe many
private entities experienced level or weaker operating results during this
period and, consequently, chose not to invest in our security equipment.

      As global economic prospects began to change during 2003, orders and
commitments increased. Currently, purchase order commitments are the largest in
Company history. 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 funding approval 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 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


                                       30
<PAGE>

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 conglomerates in the security industry and this allows us to
work together on major projects.

      Business Approach and Outlook

      Over the last several years we have sought to exploit 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.

      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 2004 we retained a new 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.

      Sales continue to be materially dependent upon the ability of Arthur
Barchenko, our President, and Vice President, Mark Barchenko, 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 believe we are well positioned for economic success during fiscal 2005
and beyond. A number of factors contribute to this outlook.


                                       31
<PAGE>

   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 military
      facilities worldwide over a five year period with a total value in excess
      of $500 million, which, since the date of such award, has increased to 108
      bases and over $1 billion in total value.

   o  Various orders we have received recently, including a multi-million dollar
      classified border security project in Eastern Europe awaiting release,
      orders for nuclear power station security upgrades amounting to over
      $1,500,000, and various other orders which we expect over the next several
      months.

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

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


                                       32
<PAGE>

in the period such determination was made. A valuation allowance in the amount
of $631,968 has been recorded against our deferred tax asset at June 30, 2004.

Recently Issued Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN
46 requires unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively disperse the
risks and rewards of ownership among their owners and other parties involved.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to variable interest entities or
arrangements existing before February 1, 2003, in the fourth quarter of calendar
2003. The adoption of FIN 46 did no have a material impact on the Company's
results of operation or financial position.

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.


                                       33
<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 August 6, 2004:

--------------------------------------------------------------------------------
                                                              Year First
       Name                   Position               Age      Became A Director
       ----                   --------               ---      -----------------
--------------------------------------------------------------------------------
Arthur Barchenko     President and Director           71      1976

--------------------------------------------------------------------------------
Mark R. Barchenko    Vice President, Secretary and    48      1996
                     Director

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

--------------------------------------------------------------------------------
Eldon Moberg         Vice President                   52

--------------------------------------------------------------------------------
Thomas Isdanavich    Vice President                   56

--------------------------------------------------------------------------------
Joseph McAndrew      Vice President                   50

--------------------------------------------------------------------------------
Natalie Barchenko    Treasurer and Director           70      2001

--------------------------------------------------------------------------------
James R. Janis       Director                         60      2001

--------------------------------------------------------------------------------
Gene Rabois          Director                         59      1989

--------------------------------------------------------------------------------
Robert F. Reiter     Director                         54      2001

--------------------------------------------------------------------------------
Edward Snow          Director                         65      2000

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

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 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


                                       34
<PAGE>

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.

      Mark Barchenko joined us in 1993 and has served as our Vice-President of
Marketing since June 2000. He has focused his marketing and business development
efforts on Southeast Asian government projects and U.S. airports and maritime
facilities. Mr. Barchenko also participates in the management of our
subsidiaries. Mr. Barchenko is now Vice President of operations and spearheaded
the IS09001 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 entitled "Jet Propulsion Engine Assembly for Aircraft." Mark Barchenko is
the son of Arthur Barchenko, our President and a Director, and Natalie
Barchenko, our Treasurer and a Director.

      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. His duties include planning and coordinating manufacturing
schedules and resources and the provision of technical data for security system
design and project cost analysis. 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 where he initially was a
production support technician and performed optical / electronic fabrication and
testing of a fiber optic based security system and components. Thereafter, as
Production Supervisor, he was responsible for planning and scheduling personnel,
materials and equipment to support product manufacture. Other duties included
procurement, product acceptance testing QA / QC, inventory control and MRP
system operation. 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


                                       35
<PAGE>

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 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.

      Gene Rabois has served as a member of our Board of Directors since October
1, 1989. He previously had served as our Chief Financial Officer. He has more
that thirty years of progressive 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. Mr. Rabois currently serves as the Controller for SJT
Imaging, Inc., a printing concern.

      Natalie Barchenko has been a director and the Treasurer of ECSI since
2001. Over the last ten years, she has been actively involved with the day to
day operations of the Company in the areas of human resources, accounting,
advertising and sales functions. She works on a voluntary basis for the Library
of Congress preparing Braille translations for the blind. Ms. Barchenko is
married to Arthur Barchenko, our President and a Director, and is Mark
Barchenko's mother.

      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.

      James R. Janis has been a Director since November 2001. Mr. Janis has been
the President of the Janis Group, a management consulting company, since 1996.
From December 1992 through May 1996, he serves as the Executive Vice President
of BNFL, Inc. which engages in nuclear waste management. From February 1980
through 1992, he was the Executive Vice President of ICF Kaiser International,
an environmental consulting firm. Prior thereto, he was Deputy Assistant
Secretary for Planning and Evaluation of the US Department of Energy.

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, 2004, all reports required to be filed were filed
on a timely basis.


                                       36
<PAGE>

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

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 $500 for each meeting attended. 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
  Principle           Salary     Bonus     Compensation    Award(s)     Options/SARs       LTIP         All Other
   Position    Year     ($)       ($)          ($)           ($)             (#)        Payouts ($)   Compensation ($)
-----------------------------------------------------------------------------------------------------------------------
<S>            <C>   <C>          <C>          <C>           <C>          <C>           <C>                <C>
Arthur
Barchenko,
President      2004  $ 96,000                                              50,000

               2003  $101,700

               2002  $ 98,800                                             100,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       37
<PAGE>

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
2004 fiscal year.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                Option/SAR Grants in Last Fiscal Year
---------------------------------------------------------------------------------------------------------
                                          Individual Grants
---------------------------------------------------------------------------------------------------------
                      Number of Securities      % of Total Options/SARs
                          Underlying                   Granted to        Exercise or
                         Options/SARs                 Employees in        Base Price
       Name               Granted (#)                  Fiscal Year          ($/Sh)      Expiration Date
       ----               -----------                  -----------          ------      ---------------
---------------------------------------------------------------------------------------------------------
<S>                         <C>                          <C>                 <C>        <C>
Arthur Barchenko            50,000                       22.73%              1.00       January 2, 2014
---------------------------------------------------------------------------------------------------------
</TABLE>

Fiscal Year-End Option Numbers and Values

      The following table sets forth additional information as of June 30, 2004,
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                    $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 has
reserved 1,000,000 shares of common stock for issuance under the Stock Option
Plan. 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.


                                       38
<PAGE>

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. 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, 2004,
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
                                                                   and rights               in column (a))
-----------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                          <C>                           <C>
Equity compensation                        590,000                      $1.53                         410,000
plans approved
by security holders
-----------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders
-----------------------------------------------------------------------------------------------------------------------------

Total                                      590,000                      $1.53                         410,000
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth information, as of September 15, 2004 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 15, 2004. 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 15, 2004 and the total
number of shares that various people then had the right to acquire within 60
days.


                                       39
<PAGE>

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

Name Beneficial Owner (1)             Number of Shares     Percent of Class (2)
-------------------------             ----------------     --------------------
--------------------------------------------------------------------------------

Arthur Barchenko (3)                     1,154,963        20.29%
--------------------------------------------------------------------------------
Mark R. Barchenko (4)                      209,724         3.71%
--------------------------------------------------------------------------------
Richard Stern (5)                           35,000         *
--------------------------------------------------------------------------------
Eldon Moberg (6)                            65,000         *
--------------------------------------------------------------------------------
Thomas Isdanavich (7)                       30,000         *
--------------------------------------------------------------------------------
Joseph McAndrew (8)                         20,000         *
--------------------------------------------------------------------------------
Natalie Barchenko (9)                    1,579,079        27.74%
--------------------------------------------------------------------------------
James R. Janis (8)                          35,000         *
--------------------------------------------------------------------------------
Gene Rabois                                 62,115         1.12%
--------------------------------------------------------------------------------
Robert F. Reiter (10)                       40,000         *
--------------------------------------------------------------------------------
Edward Snow (11)                            30,000         *
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Directors and officers
as a group (12 persons) (12)             3,100,881        51.79%
--------------------------------------------------------------------------------

*     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 5,541,874 shares outstanding and issuable as of September 15,
      2004.

(3)   Consists of 964,963 shares of common stock, including 193,496 shares not
      registered in Mr. Barchenko's name but over which he has dispository power
      and control, and options to purchase 150,000 shares of common stock.

(4)   Consists of 109,724 shares of common stock and options to purchase 100,000
      shares of common stock.

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

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

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

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

(9)   Consists 1,429,079 shares of common stock and options to purchase 150,000
      shares of common stock.

(10)  Consists of 10,000 shares of common stock and options to purchase 30,000
      shares of common stock.

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

(12)  Includes options to purchase 565,000 shares of common stock which are held
      by all directors in the aggregate.

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, 2004 and 2003, related party debt consisted of $432,545 and
$14,443, respectively. The loans are repayable with interest at rates varying
from no interest through 12% interest per annum. All interest for the fiscal
year 2004 and 2003 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 by


                                       40
<PAGE>

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>


                                       41
<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

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.                                                             5

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.                                                             5
</TABLE>


                                       42
<PAGE>

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.    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, 2004 were $30,000. The reviews of the
consolidated condensed financial statements included in the Company's 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 $8,700. 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, 2003 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, 2003 or 2004.

Tax Services

The aggregate fees billed by Demetrius & Company, L.L.C. for tax services during
the fiscal years ended June 30, 2004 and 2003 were $14,000 and $10,000,
respectively.

All Other Services

      During 2004 Demetrius & Company, L.L.C. billed the Company $5,500 for
services in connection with the preparation of a private placement.


                                       43
<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, 2004

      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, 2004
--------------------
Arthur Barchenko

--------------------------------------------------------------------------------
/s/ Mark Barchenko         Vice President and Director     September 14, 2004
------------------
Mark Barchenko

--------------------------------------------------------------------------------
/s/  Natalie Barchenko     Treasurer and Director          September 14, 2004
----------------------
Natalie Barchenko

--------------------------------------------------------------------------------
/s/  James R. Janis        Director                        September 14, 2004
-------------------
James R. Janis

--------------------------------------------------------------------------------
/s/ Gene Rabois            Director                        September 14, 2004
---------------
Gene Rabois

--------------------------------------------------------------------------------
/s/  Robert F. Reiter      Director                        September 14, 2004
---------------------
Robert F. Reiter

--------------------------------------------------------------------------------
/s/ Edward Snow            Director                        September 14, 2004
---------------
Edward Snow

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

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

                        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-17

<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, 2004 and 2003, 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, 2004 and
2003, 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 13, 2004

                                       F-1

<PAGE>

                        Electronic Control Security Inc.
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                       June 30,
                                                                                  2004           2003
                                                                                  ----           ----
<S>                                                                           <C>            <C>
ASSETS
Current assets
      Cash and cash equivalents                                               $ 1,552,575    $    75,081
      Certificates of deposit                                                     101,723        300,000
      Accounts receivable, net of allowance of  $100,000 and $50,000              729,070        702,016
      Inventories                                                               1,635,305      1,371,119
      Deferred income taxes                                                            --        405,000
      Other current assets                                                        318,795        325,199
                                                                              -----------    -----------

          Total current assets                                                  4,337,468      3,178,415

Property, equipment and software development costs - net                          549,727        575,136
Intangible assets - net                                                            40,733         46,467
Goodwill                                                                           50,000         50,000
Deferred income taxes                                                             441,800          4,000
Other assets                                                                       84,709        126,914
                                                                              -----------    -----------

                                                                              $ 5,504,437    $ 3,980,932
                                                                              ===========    ===========
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
      Accounts payable and accrued expenses                                   $   387,641    $   585,343
      Bank line of credit                                                         500,000        560,000
      Short-term loan                                                             250,000             --
      Current maturities of long-term debt                                         99,996         99,996
      Obligations under capital leases                                              4,396         10,826
      Payroll taxes payable                                                         3,012         12,859
      Income taxes payable                                                          2,500          6,000
      Due to officers and shareholders                                                 --         14,443
                                                                              -----------    -----------

          Total current liabilities                                             1,247,545      1,289,467

Noncurrent liabilities
      Obligations under capital leases                                                 --          4,986
      Long-term debt                                                              141,671        241,671
      Due to officers and shareholders                                            464,487             --
      Deferred income taxes                                                        48,000         49,000
                                                                              -----------    -----------

          Total liabilities                                                     1,901,703      1,585,124

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,
          587,500 and 637,500 shares issued and outstanding, respectively           5,875          6,375
     Series B 10% Convertible Preferred stock, cumulative, $.001 par value;
         $1,000 per share liquidation preference; 2,000 shares authorized,
          2,000 and -0- shares issued and outstanding, respectively                     2
      Common Stock, $.001 par value; 15,000,000 shares authorized;
          5,555,707 and 4,494,753 shares issued; 5,382,957 and 4,394,753
         shares outstanding, respectively                                           5,556          4,495
      Additional paid-in capital                                                8,577,764      5,098,787
      Accumulated deficit                                                      (4,990,305)    (2,704,502)
      Accumulated other comprehensive income                                       13,842            653
      Treasury stock, at cost, 100,000 shares                                     (10,000)       (10,000)
                                                                              -----------    -----------

          Total shareholders' equity                                            3,602,734      2,395,808
                                                                              -----------    -----------

                                                                              $ 5,504,437    $ 3,980,932
                                                                              ===========    ===========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       F-2
<PAGE>

                        Electronic Control Security Inc.
                      Consolidated Statements of Operations

                                                              Year
                                                             Ended
                                                            June 30,
                                                       2004           2003
                                                       ----           ----

Revenues                                           $ 2,061,412    $ 4,346,816
Cost of revenues                                       928,567      2,290,953
                                                   -----------    -----------

          Gross profit                               1,132,845      2,055,863
                                                   -----------    -----------

 Research and development                              322,912        257,123
 Selling, general  and administrative expenses       1,782,534      1,933,540
 Stock based compensation                              117,200        503,814
                                                   -----------    -----------

          Loss from operations                      (1,089,801)      (638,614)

Other (income) expense
     Interest expense                                  105,916         68,179
     Interest income                                    (3,128)       (11,449)
     Minority interest in subsidiary loss              (42,633)       (50,938)
     Loss on sale of marketable securities                  --          3,916
                                                   -----------    -----------

Total other (income) expense                            60,155          9,708
                                                   -----------    -----------

Loss before tax benefit                             (1,149,956)      (648,322)

Income tax benefit                                     (31,300)       (89,000)
                                                   -----------    -----------

Net loss before dividends                           (1,118,656)      (559,322)

Dividends related to convertible preferred stock     1,167,147        297,136
                                                   -----------    -----------

Net loss attributable to common shareholders       $(2,285,803)   $  (856,458)
                                                   ===========    ===========


Net loss per share:
     Basic                                         $     (0.49)   $     (0.21)
                                                   ===========    ===========
     Diluted                                       $     (0.49)   $     (0.21)
                                                   ===========    ===========

Weighted average number of
        common shares and equivalents:
     Basic                                           4,705,027      4,076,366
                                                   ===========    ===========
     Diluted                                         4,705,027      4,076,366
                                                   ===========    ===========

                 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                       Additional
                                                     Preferred Stock          Preferred Stock         Common Stock        Paid-in
                                                    Shares     Amount         Shares    Amount      Shares     Amount     Capital
                                                   ---------  --------        -------   -------    ---------   -------   ----------
<S>                                                <C>         <C>              <C>     <C>        <C>         <C>       <C>
Balances at July 1, 2002                           1,000,000   $10,000             --   $    --    4,034,128   $ 4,034   $4,790,361

Conversion of preferred stock                       (362,500)   (3,625)                              362,500       363        3,263

Common stock dividend on preferred stock                                                              98,125        98      196,152

Minority interest contribution                                                                                                8,126

Amortization of deferred compensation

Amortization of deemed dividend on convertible                                                                              100,886

Realized loss on marketable securities

Foreign currency translation adjustments

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

Balances at June 30, 2003                            637,500     6,375             --        --    4,494,753     4,495    5,098,787

Conversion of preferred stock                        (50,000)     (500)                               50,000        50          450

Common stock dividend on preferred stock                                                              61,500        62      122,939

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                                                   2,000         2                           1,943,691

Beneficial conversion feature of prefered stock                                                                           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

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

Balances at June 30, 2004                            587,500   $ 5,875          2,000   $     2    5,555,707   $ 5,556   $8,577,764
                                                   =========   =======        =======   =======    =========   =======   ==========

<CAPTION>

                                                                 Accumulated
                                                                    Other
                                                   Accumulated   Comprehensive    Deferred       Treasury
                                                     Deficit        Income      Compensation       Stock          Total
                                                   -----------   -------------  -------------   -----------    -----------
<S>                                                <C>            <C>           <C>             <C>            <C>
Balances at July 1, 2002                           $(1,848,044)   $    (2,297)  $    (503,814)  $   (10,000)   $ 2,440,240

Conversion of preferred stock                                                                                           --

Common stock dividend on preferred stock              (196,250)                                                         --

Minority interest contribution                                                                                       8,126

Amortization of deferred compensation                                                 503,814                      503,814

Amortization of deemed dividend on convertible        (100,886)                                                         --

Realized loss on marketable securities                                  2,297                                        2,297

Foreign currency translation adjustments                                  653                                          653

Net loss                                              (559,322)                                                   (559,322)
                                                   -----------    -----------   -------------   -----------    -----------

Balances at June 30, 2003                           (2,704,502)           653              --       (10,000)     2,395,808

Conversion of preferred stock                                                                                           --

Common stock dividend on preferred stock                             (123,000)                                          --

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     (1,044,147)                                                         --

Conversion of stockholder loan                                                                                     250,000

Exercise of stock option                                                                                             1,500

Foreign currency translation adjustments                               13,189                                       13,189

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

Balances at June 30, 2004                          $(4,990,305)   $    13,842   $          --   $   (10,000)   $ 3,602,734
                                                   ===========    ===========   =============   ===========    ===========
</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,
                                                                       2004         2003
                                                                       ----         ----
<S>                                                                <C>            <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
     Net loss before deemed dividends                              $(1,118,656)   $(559,322)
     Adjustments to reconcile loss
      to net cash used by operating activities:
          Depreciation and amortization                                163,888      128,520
          Increase in allowance for bad debts                           50,000       25,000
          Stock based compensation                                     117,200      503,814
          Minority interest in subsidiary loss                         (42,633)     (50,938)
          Deferred income taxes                                        (33,800)     (95,000)
          Foreign currency translation adjustments                      13,189          653
          Increase (decrease) in cash attributable
           to changes in assets and liabilities
               Accounts receivable                                     (77,054)     237,108
               Inventory                                              (264,186)     246,377
               Other current assets                                     49,037     (185,606)
               Other assets                                            (57,795)    (100,685)
               Accounts payable and accrued expenses                  (197,702)     139,889
               Customer deposits                                            --      (24,258)
               Income taxes payable                                     (3,500)         678
               Payroll taxes payable                                    (9,847)        (978)
                                                                   -----------    ---------

        Net cash provided by (used in) operating activities         (1,411,859)     265,252

Cash flows from investing activities:
     Investment in marketable securities                                    --       34,782
     Acquisition of property, equipment and software development      (132,745)    (320,103)
                                                                   -----------    ---------

          Net cash used in investing activities                       (132,745)    (285,321)

Cash flows from financing activities:
     Proceeds from issuance of preferred stock                       1,943,693           --
     Proceeds from exercise of stock options                             1,500           --
     Proceeds (payments) on bank loan and line of credit               (60,000)     285,000
     Proceeds from short-term borrowing                                250,000           --
     Certificate of deposit (purchased) redeemed                       298,277     (300,000)
     Payments on long-term debt                                       (100,000)    (150,000)
     Payments on lease obligations                                     (11,416)     (17,226)
     Loan officers and shareholders - net                              700,044       (4,910)
                                                                   -----------    ---------

          Net cash provided by (used in) financing activities        3,022,098     (187,136)
                                                                   -----------    ---------

          Net decrease in cash and cash equivalents                  1,477,494     (207,205)

Cash and cash equivalents at beginning of period                        75,081      282,286
                                                                   -----------    ---------

          Cash and cash equivalents at end of period               $ 1,552,575    $  75,081
                                                                   ===========    =========

Non-cash transaction:
     Issuance of common stock to pay preferred stock dividends
     In March 2004, $250,000 of officers and shareholders loans was converted into 735,294
     shares of common stock.

Supplemental disclosures of cash flow information
  Cash paid during the period for:
          Interest                                                 $   105,916    $  68,179
                                                                   ===========    =========
          Taxes                                                    $     5,224    $   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.

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 subsidiaries. The Company's
      majority owned subsidiary was formed in the Middle East in January 2002
      and commenced business in May 2002. In January 2003, it ceased to exist as
      an operating entity at which time a new majority owned subsidiary was
      formed to conduct the Company's business in the Middle East. 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
      $93,000 and $248,000 of software development costs have been capitalized
      for the years ended June 30, 2004 and 2003, 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

Note 2 - Summary of Significant Accounting Policies (Cont)

      Earnings per Share (Cont)

      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.

                                                2004         2003
                                                ----         ----
            Stock options                      590,000      620,000
            Warrants                         1,096,875      896,875
            Convertible Preferred Stock      2,667,614      637,500

      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.


                                      F-7
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Summary of Significant Accounting Policies (Cont)

      Research and Development

      Research and development expenditures are expensed as incurred. Research
      and development costs for the years ended June 30, 2004 and 2003 amounted
      to $322,912 and $257,123, 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.

      Fair Value of Financial Instruments

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

      Intangible Assets

      The cost of licenses and trademarks are being amortized on the
      straight-line method over their useful lives, ranging from 5 to 15 years.
      Amortization expense charged to operations was $5,734 for the years ended
      June 30, 2004 and 2003, 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, 2004 and 2003 were
      approximately $49,000 and $67,000, 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.


                                      F-8
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Note 2 - Summary of Significant Accounting Policies (Cont)

      Stock Based Compensation (cont)

      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,
                                                                         2004          2003
                                                                         ----          ----
<S>                                                                  <C>             <C>
      Net loss, as reported                                          $(2,285,803)    $(856,458)
      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               (206,501)       (3,742)
                                                                     -----------     ---------
      Pro forma net loss                                             $(2,472,004)    $(860,200)
                                                                     ===========     =========

      Basic and diluted loss per share, as reported                  $      (.49)    $   (0.21)
      Basic and diluted loss per share, pro forma                    $      (.53)    $   (0.21)
</TABLE>

      The weighted average per share fair value of options granted during fiscal
      2004 was $.93. No options were granted in fiscal 2003. The fair value of
      each option granted in 2004 was estimated using the Black-Scholes
      option-pricing model with a volatility of 156.88%, expected life of
      options of 8 years, risk free interest rate of approximately 3.79% and a
      dividend yield of 0%.

      Recent Pronouncements

      In December 2003, the Financial Accounting Standards Board (FASB) issued a
      revised Interpretation No. 46, "Consolidation of Variable Interest
      Entities" (FIN 46R). FIN 46R addresses consolidation by business
      enterprises of variable interest entities and significantly changes the
      consolidation application of consolidation policies to variable interest
      entities and, thus improves comparability between enterprises engaged in
      similar activities when those activities are conducted through variable
      interest entities. The Company does not hold any variable interest
      entities.

Note 3 - Inventories

      Inventories at June 30, 2004 and 2003 consist of the following:

                                                 2004               2003
                                                 ----               ----
      Raw materials                          $  203,765         $  246,923
      Work-in-process                           240,093            229,632
      Finished goods                          1,191,447            894,564
                                             ----------         ----------
                                             $1,635,305         $1,371,119
                                             ==========         ==========


                                      F-9
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Property, Equipment and Software Development Costs

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

<TABLE>
<CAPTION>
                                                                       2004         2003
                                                                       ----         ----
<S>                                                                 <C>           <C>
      Furniture and fixtures                                        $   37,074    $ 35,600
      Machinery and equipment                                          549,140     511,299
      Improvements                                                       9,296       9,296
      Software                                                          96,512      95,978
      Software development costs                                       432,228     339,332
                                                                    ----------    --------
                                                                     1,124,250     991,505
          Less: accumulated depreciation and amortization              574,523     416,369
                                                                    ----------    --------
                                                                    $  549,727    $575,136
                                                                    ==========    ========

      Equipment under capital leases included in
      property, equipment and purchased software are as follows:
       Machinery and equipment                                      $   25,694    $ 61,444
       Less: accumulated depreciation                                   22,696      33,644
                                                                    ----------    --------
                                                                    $    2,998    $ 27,800
                                                                    ==========    ========
</TABLE>

      Depreciation expense was $ 158,154 and $ 122,786 for the years ended June
      30, 2004 and 2003, respectively.

Note 5 - Bank Line Of Credit

      The Company's $500,000 revolving credit line was extended an additional
      year to November 2004. Substantially all of the Company's assets and the
      personal guarantee of an officer/shareholder collateralize the outstanding
      balances. The credit line requires the maintenance of a minimum tangible
      net worth, as defined. Interest is payable monthly at 1.0% plus the prime
      rate for a total of 5.00% at June 30, 2004. In August 2002, the Company
      obtained an additional $285,000 revolving credit line, secured by a
      Company certificate of deposit in the amount of $300,000 plus accrued
      interest. In September 2003, the additional line was repaid with the
      proceeds of the released certificate of deposit.

Note 6 - 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. The parties continue to discuss their on-going
      relationship and further investment by Fairchild in the company. This loan
      was repaid in July 2004.

Note 7 - Long-Term Debt

      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


                                      F-10
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Long-Term Debt - continued

      The annual maturities of long-term debt as of June 30, 2004 are as
      follows:

                           2005               $ 99,996
                           2006                 99,996
                           2007                 41,675
                                              --------
                                              $241,667
                                              ========

Note 8 - 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 be later than December 31, 2005, 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.

Note 9 - Income Taxes

      The provision for taxes for the year ended June 30, 2004 and 2003 includes
      the following components:

                                              2004        2003
                                              ----        ----
      Current
         Federal                            $     --    $     --
         State                                 2,500       6,000
         Foreign                                  --          --
                                            --------    --------
                                               2,500       6,000
      Deferred
         Federal                             (31,300)     (5,000)
         State                                (2,500)    (38,000)
         Foreign                                  --     (52,000)
                                            --------    --------
                                             (33,800)    (95,000)
                                            --------    --------

                                            $(31,300)   $(89,000)
                                            ========    ========


                                      F-11
<PAGE>
                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Note 9 - Income Taxes - continued

      The components of the deferred tax accounts as of June 30, 2004 and 2003
      are as follows:

                                                     2004             2003
                                                     ----             ----
      Deferred tax assets
            Net operating loss carryforward      $   751,939       $ 361,834
            Stock based compensation                 240,283         232,163
            Other                                     80,669          28,962
                                                 -----------       ---------
                                                   1,072,891         622,959
      Deferred tax liabilities
            Depreciation and amortization             47,123          46,142
                                                 -----------       ---------
      Subtotal                                     1,025,768         576,817
      Valuation allowance                           (631,968)       (216,817)
                                                 -----------       ---------

      Net deferred tax assets                    $   393,800       $ 360,000
                                                 ===========       =========

      The net change in the valuation allowance was an increase of $415,151 in
      fiscal 2004. The valuation allowance at June 30, 2002 was -0-.

      Note 9 - Income Taxes (cont)

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

                                                     2004            2003
                                                     ----            ----

      Expected federal tax at statutory rate      $(781,026)      $(311,204)
      State taxes, net of federal tax effect       (129,302)        (37,144)
      Foreign rate differential                      (8,527)         (7,729)
      Non deductible expenses                       475,682          50,712
      Change in valuation allowance                 415,151         216,817
      Other                                          (3,278)           (452)
                                                  ---------       ---------
                                                  $ (31,300)      $ (89,000)
                                                  =========       =========

      At June 30, 2004 the Company had net operating loss carryforwards for
      federal and state income tax purposes of $1,523,000 and $1,397,000
      respectively, expiring through 2024. The Company has foreign net operating
      loss carryforwards of $271,000 with no expiration date.

Note 10- 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.


                                      F-12
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10- Shareholders' Equity - continued

      Series A Convertible Preferred Stock - continued

      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. The Warrants are exercisable for a period of
      three years from the date of issuance at an exercise price per share of
      $3.00 per share and the Company may redeem them for $.05 per Warrant, once
      the underlying shares are registered, if the common shares have traded at
      or above $5.00 for a period of twenty consecutive trading days. The
      Company has valued the warrants issued at $792,482 using the Black-Scholes
      pricing model. In connection with the private placement, the Company
      issued unit warrants to a placement agent to purchase up 3.75 Units
      identical to the Units in the offering. The unit warrants are exercisable
      at a price of $50,000 per unit for up to three years.

      The Company has recorded a deemed dividend and an offsetting increase in
      additional paid-in capital totaling $1,008,861 to reflect the beneficial
      conversion price of the Series A Preferred as compared to the prevailing
      market price of the common stock. The deemed dividend was amortized over
      120 days, commencing from the date of closing to the date the Series A
      Preferred first become convertible.

      As of June 30, 2004, 412,500 shares of Series A Preferred were converted
      into a like amount of common stock.

      On March 5, 2003, and again 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 98,125 and 61,500, additional
      shares of the Company's common stock, respectively. Cumulative but
      undeclared dividends at June 30, 2004 totaled approximately $29,000

      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.


                                      F-13
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10- Shareholders' Equity - continued

      Series B Convertible Preferred Stock - continued

      The Company may call the Warrants if the volume weighted average trading
      price per share of 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-14
<PAGE>

                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10- Shareholders' Equity (cont)

      Stock Option Plans (cont)

      Option activity for 2003 and 2004 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                           Weighted
                                                                                           Average
                                              Options                                      Exercise
                                                Plan         Nonplan         Total          Price
                                                ----         -------         -----          -----
<S>                                           <C>             <C>           <C>            <C>
      Options outstanding, July 1, 2002        585,000         45,000        630,000       $   2.18
      Granted                                       --             --             --             --
      Exercised                                     --             --             --             --
      Forfeited                                (10,000)            --        (10,000)          2.70
                                              --------                      --------       --------

      Options outstanding, June 30, 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
                                              ========       ========       ========       ========

      Shares of common stock available
        for future grant under the plans       410,000
                                              ========
</TABLE>

      The following table summarizes information about stock options outstanding
      at June 30, 2004.

<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>
      $.05 -.10              40,000       3.63        $0.08       40,000      $0.08
      $.25-.39               65,000       7.15        $0.31       65,000      $0.31
      $.50-.88              110,000       5.49        $0.66      110,000      $0.66
      $1.00-1.10            155,000       9.51        $1.01      155,000      $1.01
      $2.70-2.97            220,000       2.62        $2.95      220,000      $2.95
                            -------       ----        -----      -------      -----

      $.05-$2.97            590,000       5.53        $1.53      590,000      $1.53
                            =======       ====        =====      =======      =====
</TABLE>


                                      F-15
<PAGE>
                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Concentrations and Economic Dependency

      The Company had three customers that accounted for 11%, 11% and 10%,
      respectively of net revenues for year ended June 30, 2004 and three
      customers that accounted for 17%, 25% and 29% of net revenues for year
      ended June 30, 2003. Two customers accounted for 45% of the accounts
      receivables as of June 30, 2004. At June 30, 2004 approximately 15% 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.

      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 12 - Commitments and Contingencies

      Lease Agreements

      Future minimum annual rental payments required under non-cancelable
      operating leases for years after June 30, 2004 are as follows:

                           2005               $121,000
                           2006                104,000
                           2007                 90,000
                           2008                 55,000
                                              --------
                                              $370,000
                                              ========

      Rent expense under all operating leases was $84,249 and $89,316 for the
      years ended June 30, 2004 and 2003.

      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)).

Note 13 - 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, 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%

      For the year ended
        June 30, 2003
           Revenue                  $ 4,317,953       99.34%      $    28,863        0.66%
           Operating loss              (456,251)      71.44%         (182,363)      28.56%
           Identifiable assets        3,760,378       94.46%          220,554        5.54%
</TABLE>


                                      F-16
<PAGE>
                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 - Related Party Transactions

      The Company earned revenues totaling $234,225 from a Company in which one
      of the Company's Directors is the president and CEO. This amount is
      included in accounts receivable at June 30, 2004.

      The Company made non-interest bearing advances that are due on demand to
      an officer and director of the Company. The balances outstanding at June
      30, 2004 and 2003 were $37,655 and $35,566, respectively.


                                      F-17