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, 2006

     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:

                          $0.001 Par Value Common Stock
          -------------------------------------------------------------
                                (Title of class)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934. | |

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. __X__Yes ___No

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

Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X].

State the issuer's revenues for its most recent fiscal year:  $8,822,090

As of September 22, 2006, there were 8,723,601 outstanding shares of the
issuer's Common Stock. The aggregate market value of the shares of the issuer's
Common Stock held by non-affiliates was $2,637,437. Such market value was
calculated using the closing price of such Common Stock as of such date as
quoted on the OTC Bulletin Board.

                       DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits hereto have been specifically incorporated by reference herein
in Item 13 under Part III hereof. Certain portions of issuer's definitive proxy
statement, which will be filed with the Securities and Exchange Commission in
connection with the issuer's 2007 annual meeting of stockholders, are
incorporated by reference in Items 9-12 and 14 of Part III hereof.

Transitional Small Business Disclosure Format (Check one):
_________Yes      ___X___No


<PAGE>



                        ELECTRONIC CONTROL SECURITY INC.
                         2006 FORM 10-KSB ANNUAL REPORT



                                TABLE OF CONTENTS

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS...........................................   1

ITEM 2.  DESCRIPTION OF PROPERTY...........................................  20

ITEM 3.  LEGAL PROCEEDINGS.................................................  20

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............  20

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND SMALL
         BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES....................  21

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.........  21

ITEM 7.  FINANCIAL STATEMENTS..............................................  29

ITEM 8.  CONTROLS AND PROCEDURES...........................................  29

ITEM 8A. OTHER INFORMATION.................................................  29

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.................  30

ITEM 10. EXECUTIVE COMPENSATION............................................  30

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         AND RELATED STOCKHOLDER MATTERS...................................  30

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................  30

ITEM 13. EXHIBITS..........................................................  30

ITEM 14. PRINCIPAL ACCOUNTANT FEES & SERVICES..............................  30


                           FORWARD LOOKING STATEMENTS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-KSB. CERTAIN
STATEMENTS MADE IN THIS DISCUSSION ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING
STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD",
"EXPECTS", "INTENDS", "ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR
"CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND
INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S INTENDED
BUSINESS PLANS; EXPECTATIONS AS TO CONTINUING IN BUSINESS; EXPECTATIONS AS TO
PRODUCT PERFORMANCE; EXPECTATIONS AS TO MARKET ACCEPTANCE OF THE COMPANY'S
TECHNOLOGY; AND BELIEF AS TO THE SUFFICIENCY OF CASH RESERVES. BECAUSE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY
BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS.
MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR
THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY
IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS
REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.



<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Overview


         Electronic Control Security Inc. designs, develops, manufactures and
markets technology-based integrated security systems security systems. We also
provide consulting services consisting of risk assessment and vulnerability
studies to ascertain a customer's security requirements in developing a
comprehensive risk management and mitigation program, as well as product design
and engineering services.

         We support systems integrators and dealer installers in the context of
providing risk assessment and vulnerability studies to help ascertain a client's
security requirements and in developing a comprehensive risk management and
mitigation program, as well as offering product design and engineering support
services. We market our products domestically and internationally to:

     o    national and local government entities including the Department of
          Defense (DoD and Department of Energy (DoE);

     o    large chemical and petro chemical facilities and major office
          complexes;

     o    energy facilities, including nuclear power stations, power utilities
          and pipelines; and o commercial transportation centers, such as
          airports and seaports.

     o    Water and agricultural resources including reservoirs, dams, fish
          hatcheries and rivers.

         We believe we are one of a few comprehensive security solution
providers in the industry. We analyze security risks and develop security
solutions specifically tailored to mitigate those risks, including designing,
engineering and manufacturing individual components of a system as may be
necessary to deliver a fully integrated security system customized to a
customer'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 an integrated platform for a fully
integrated security solution to support our customers' requirements for the
completion of a given project.

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

     o    offer a complete range of solutions-driven responses to accommodate
          our customers' needs,

     o    offer technologically superior products,

     o    are able to design, engineer and manufacture systems customized to our
          customers' 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 what we believe may be the best warranty in
          the industry.



                                       1
<PAGE>


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

Security Industry Overview

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

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

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

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

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

     o    advanced electronic communications systems have created a growing need
          for information technology security to prevent the misuse of
          proprietary information and other intellectual property; and

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

Products, Systems and Technologies

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

     o    life;

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

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

     o    electronic data and information technology.


                                       2
<PAGE>


         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 solutions that incorporate
many of our systems and stand-alone systems that comprise an individual
technology.

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

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

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

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

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

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

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

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

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


                                       3
<PAGE>

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

     o    provide low nuisance and false alarm rates;

     o    are reliable in virtually any environmental condition;

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

     o    are subject to low installation and maintenance costs.

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

Consulting Support Services

         The consulting support services we provide our dealer/installers and
system integrators are an integral part of the security solution. Effective and
efficient use of technology can be achieved only if properly utilized. Toward
that end, we:

     o    assist our customers if requested to conduct risk assessment,
          vulnerability and criticality studies to ascertain their security
          requirements and develop a comprehensive risk management and
          mitigation program; and

     o    provide security system design support services.

         Our support services generally represent the first steps in assisting
the dealer/installer, systems integrator to develop a security solution. The
risk assessment, threat, vulnerability and criticality analyses the system
integrator utilizes allows us to help develop effective responses and programs
necessary to address and mitigate the range of threats, and to implement the
appropriate solutions.

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

         We also provide security system design support services involving the
evaluation, and specifications of security systems and components that meet a
client's operating and budgetary requirements. Typically, these services are
provided within the context of a comprehensive security evaluation and
implementation program in conjunction with the systems' integrator.

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


                                       4
<PAGE>

Product Design

         We design and develop new products based upon market requirements and
as deemed necessary to meet clients' specific needs. We research and assess
threat and vulnerability issues and design and engineer our products in-house,
with outside consultants as necessary, and in conjunction with joint venture
partners to meet the needs of clients based upon the results of such research.
We investigate new and emerging technologies that have application in the
security industry and seek to license these technologies which we then
incorporate into our product line.

Markets for Our Products

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

         Primary markets which we target include:

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

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

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

     o    commercial aviation and maritime facilities;

     o    rail transportation;

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

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

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

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

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


                                       5
<PAGE>

         Our open-ended contract with the General Services Administration (GSA),
which has been extended through July 31, 2009, authorizes the U.S. Government
and a network of eligible sources to purchase materials and services from us
without having to undergo a full competition. In September 2003, we announced
the finalization of a 5-year indefinite delivery/indefinite quantity contract
for the Integrated Base Defense Security System (IBDSS) with the United States
Air Force (USAF) to secure highly strategic military facilities throughout the
world. During fiscal 2006, the Company was awarded numerous orders for Tactical
Automated Sensor Systems (TASS).

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

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

         Energy Facilities, Including Nuclear Power Plants, Utilities,
Chemical-Petrochemical Pipeline Facilities. Nuclear power stations and utilities
that house sensitive information and dangerous materials represent a large and
lucrative market for our products. Chemical-petrochemical, natural gas and
pipeline companies, many of which operate in high risk environments and remote
geographic locations, invest huge sums in the assets necessary to operate those
businesses and adopt appropriate measures to protect their investments through
the acquisition of security equipment and systems. The Company just received its
first contract worth over $1.2 million from Stratos Global through Bechtel
Corporation for a chemical-petrochemical facility in Algeria.

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

         Foreign/Export Opportunities. Government operations and private
industries in foreign countries are all subject to the same security issues that
challenge similar entities in the United States. We, along with our strategic
teaming partners and international sales representatives, continue to seek
penetration of these markets.

Marketing

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


                                       6
<PAGE>

The primary goals of our marketing strategy are to:

     o    broaden the base of potential clients, and

     o    demonstrate the efficacy of our products.

         We have entered into strategic partnerships, teaming, and
representative relationships with major multi-national corporations in each of
the industries which comprise our target markets. These companies generally
enjoy a strong market presence in their respective industries and we believe
that our association with these entities affords the Company and our products
added credibility. These entities frequently subcontract our services and
purchase our products in connection with larger projects. During fiscal 2006, we
entered into teaming agreements with Lockheed Martin Transportation and Security
Solutions, Raytheon Services Division, Hudson Marine/Hudson Trident and Global
Security Advisors Inc.

         Members of our management team have many years of experience in the
security industry. Each member is assigned a corporate account and thereby
establishes relationships with government and commercial organizations in a
specific market. We attempt to maintain direct contact with key employees of the
major corporate accounts and government agencies encompassing our target
markets.

         We are projecting our international business to develop through a
network of independent sales representatives. Agreements are in place with
various entities that allow us to maintain a presence in 25 countries worldwide.
These agreements generally extend for a period of two years and provide the
dealer/installer with price discounts from current price schedules as an
incentive to market our products in their geographic area. We rely on our
dealer/installer base to represent our product line throughout the world and to
apprise us of potential projects where the products can be incorporated. In
addition, we rely on our dealers/installers to introduce our company and
products to key government and private enterprise personnel in their respective
geographic regions.

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

         A presence is maintained at the major trade conferences that address
our target markets and we advertise in the relevant conference publications.

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

Business 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    Expand our base of dealers/installers/integrators worldwide. This is
          an effective and cost efficient means of increasing sales. These
          entities serve as our local agents to market products and provide
          customer support. Furthermore, these entities are familiar with local
          laws and frequently have local contacts in government and business at
          decision-making levels.

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


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<PAGE>

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

     o    License new and emerging technologies. We will continue to identify,
          analyze and acquire new and emerging technologies for application in
          the security industry. We will seek to acquire technologies that will
          enhance our existing systems and develop new products.

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

Customers

         We provide products and services to certain customers who maintain
their own integration engineering and installation departments. During the past
five years we have provided products to approximately 50 nuclear power stations,
Department of Energy and other government agencies CONUS/OCONUS covering over
220 projects.

         Given the nature of our customers and products, we receive relatively
large orders for products and services from a relatively small number of
customers. For the fiscal year ended June 30, 2006, the United States Air Force
and Duke Energy Corporation accounted for 85% and 10%, respectively, of our net
revenues. In fiscal year 2005, the United States Air Force and Duke Energy
Corporation, accounted for 76% and 20%, respectively, of our net revenues.

Competition

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


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<PAGE>

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

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

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

o        our products address a wide range of security requirements;

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

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

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

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

Manufacturing

         We maintain manufacturing operations at our facilities in New Jersey,
Alabama and Indiana. These activities include the procurement of materials,
product assembly and component integration, product assurance, quality control
and final testing. Our manufacturing facilities in New Jersey were inadequate to
satisfy the anticipated demand for our products under the USAF contract award.
Therefore, we leased an additional 2,600 square feet of manufacturing space that
became available bordering our premises affording us the flexibility to enlarge
our manufacturing facilities, increase equipment and hire additional personnel
as required to fill orders for product without undue delay.

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

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

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


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<PAGE>

Intellectual Property and Other Proprietary Rights

         Proprietary protection for our technological expertise, products and
product candidates are important to our business. Currently, we rely upon trade
secrets, application experience 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
intention is not to rely primarily on patents or other intellectual property
rights to protect or establish our market position.

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

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

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

Research and Development

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

         During the years ended June 30, 2006 and 2005, we expended $207,048 and
$285,916, respectively, on research and development activities.

Product Warranty

         IPID(R) sensors are warranted for ten (10) years, under normal use,
against defects in workmanship and material from date of installation of the
system on the customer's premises. All other components are warranted for one
year from date of purchase. FOIDS(R) processors are warranted for a ten (10)
year period. For the years ended June 30, 2006 and 2005, net expenses
attributable to warranties were material. A supplier produced and delivered
defective sensor housings which were not immediately evident but were discovered
only after they were fully assembled, shipped and installed at various sites. We
replaced 800 sensors during fiscal 2006. The Company has incurred $344,000 in
direct costs for fiscal 2006. We have filed suit against the housing
manufacturer in excess of $230,000 and plan to seek additional damages. We
believe the problem has been defined and resolved.


                                       10
<PAGE>

Technology Licensing Arrangements

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

Employees

         As of September 22, 2006, we employed 27 people on a full-time basis
including six design and engineering staff, eight manufacturing and assembly
employees, four marketing employees, two project managers and seven
administrative employees. A number of employees serve in multiple capacities.
For example, Arthur Barchenko serves as our President but is also an integral
member of our marketing team. Our manufacturing staff may oversee site
installation of the products.

         We have relationships with 10 independent sales representative
organizations covering specific regions in the U.S.A., Central America, South
America, United Kingdom, India, the Middle East, and Southeast Asia.

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

                                  RISK FACTORS

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

                         Risks Relating to our Business


         We depend on government contracts for a large part of our total sales,
and therefore our business is vulnerable to fluctuations in government spending.

         Because many of our contracts are with governmental entities, our
business is subject to risks that are out of our control, including global
economic developments, wars, political instability, changes in the tax and
regulatory environments, foreign exchange rate volatility and fluctuations in
government spending. For example, the 2005 Homeland Security Appropriations Act
provided $28.9 billion in discretionary spending for the Department of Homeland
Security, $1.8 billion more than the 2004 level of funding, which may result in
increased business opportunities for us. However, because many customers are
governmental entities with variable and uncertain budgets, the amount of
business that we might receive from them may vary from year to year, regardless
of the perceived quality of our business.


                                       11
<PAGE>


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

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

         During the fiscal year ended June 30, 2006, we generated substantially
all of our revenues from goods sold and services rendered to two customers. A
substantial decrease in revenues generated from contracts for these customers
could have an adverse effect on our business unless we were able to identify
other customers.

         During the fiscal year ended June 30, 2006, two customers accounted for
substantially all of our revenues, with the United States Air Force and Duke
Energy Corporation accounting for 85% and 10%, respectively, of net revenues.
For the fiscal year ended June 30, 2005, the United States Air Force accounted
and Duke accounted for approximately 76% and 20%, respectively, of our net
revenues. If we are unsuccessful in diversifying our customer base, we may
experience a significant decrease in business resulting in a material adverse
effect on our financial condition and results of operations.

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

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

         If we were to have an event of default or breach a covenant under our
senior secured convertible debentures issued in our January 2006 private
financing, the outstanding principal amount of the debentures plus all accrued
and unpaid interest would become immediately due and payable to the holders of
the debentures, and we currently do not have the cash resources to pay these
obligations, which are secured by all of our assets including our intellectual
property and would therefore be subject to seizure by the holders of the
debentures in the event of a default or covenant breach.



                                       12
<PAGE>

         Our senior secured convertible debentures contain numerous events of
default and covenants. Events of default under the debentures include:

     o    failure to pay principal or any premium on any debenture when due,

     o    failure to pay any interest, late fees or liquidated damages on any
          debenture after a period of three trading days,

     o    failure to perform other covenants under the debenture that is not
          cured by the earlier of seven trading days after notice by holder or
          15 trading days after we are aware of such default,

     o    default under the other financing documents that is not cured by the
          earlier of five trading days after notice or ten trading days after we
          aware of such default,

     o    any representation or warranty under the financing documents that is
          untrue or incorrect in any material respect, o certain events of
          bankruptcy or insolvency of us or any of our subsidiaries, o any
          default by us or our subsidiaries under any instrument in excess of
          $150,000 that results in such obligation becoming due and payable
          prior to maturity,

     o    our becoming party to a change of control transaction, or disposing of
          greater than 40% of our assets or redeeming more than a de minimus
          number of outstanding equity securities,

     o    if, during the effectiveness period of the registration statement for
          the resale of the Common Stock underlying these securities (which
          registration statement was declared effective in March 2006), the
          effectiveness of the registration statement lapses for any reason or
          the holder shall not be permitted to resell registrable securities
          under the registration statement, in either case, for more than 30
          consecutive trading days or 60 non-consecutive trading days during any
          12-month period, subject to certain limited exceptions, and

     o    failure to deliver common stock certificates to a holder prior to the
          fifth trading day after a debenture conversion date.


                                       13
<PAGE>

         Upon an event of default, the outstanding principal of the debentures
plus all accrued and unpaid interest shall become immediately due and payable to
the holders of the debentures.

         The debentures contain various covenants that limit our ability to:

     o    incur additional debt, other than permitted debt as defined in the
          debenture,

     o    incur specified liens, other than permitted liens as defined in the
          debenture,

     o    amend our certificate of incorporation or by-laws in a material
          adverse manner to the holder, or

     o    or repay or repurchase more than a de minimus number of shares of
          common stock.

As part of the financing, we have agreed to be bound by the following covenants:

o not to assume any corporate debt which is senior to the debentures,

     o    not to repay or repurchase more than a de minimus number of shares of
          common stock,

     o    not to incur specified liens, other than certain specified permitted
          liens,

     o    not to amend our current certificate of incorporation, and

     o    not to pay cash dividends or distributions on our equity securities.

         We currently do not have the cash resources to pay these obligations,
which are secured by all of our assets including our personal and intellectual
property, and such assets would therefore be subject to seizure by the holders
of the debentures in the event of a default or covenant breach. We cannot assure
you that we will not have an event of default under the debentures or experience
a covenant breach that would trigger such an event of default.

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

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

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

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

                                       14
<PAGE>

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

Risks of doing business in foreign countries.

         During the fiscal years ended June 30, 2006 and 2005, we generated
approximately 3% and 5%, respectively, of our business from projects outside the
United States. However, we anticipate that the revenue portion from overseas
operations will significantly increase during fiscal 2007. Our international
business operations are subject, generally, to the financial and operating risks
of conducting business internationally, including, but not limited to:

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

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

     o    political instability.

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

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

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

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

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

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


                                       15
<PAGE>

         We rely on suppliers for several key components utilized in the
manufacture of our products. Our reliance on suppliers involves certain risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. To date, we
have experienced one major disruption in the supply of components which we
reported in our quarterly report on Form 10-QSB for the three months ended March
31, 2006. We cannot assure you that there will not be additional disruptions of
our supplies in the future. Disruption or termination of the supply of
components could delay shipments of products and could have a material adverse
affect on our business, operating results and financial condition.

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

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

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

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

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

         Our success greatly depends on our ability to retain existing
management and attract key technical, sales, marketing, information systems, and
financial and executive personnel. We are especially dependent on the continued
services of our senior management team, particularly Arthur Barchenko, our
President 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.

                       Risks Relating to our Common Stock.

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

         As of the date hereof, we have issued and outstanding 325,000 shares of
Series A Convertible Preferred Stock ("Series A Preferred Stock") and 791 shares
of Series B Preferred Stock (which together with the Series A Preferred Stock is
referred to as the "Preferred Stock"). The Preferred Stock affords holders a
preference to assets upon liquidation, a cumulative annual dividend and is
convertible into shares of common stock, all of which rights impact the
outstanding shares of common stock. The Preferred Stock's right to annual
dividends makes less likely the possibility that we will declare dividends on
the common stock. In the event of a liquidation of the Company's assets, holders
of Preferred Stock will have a right to receive as a liquidation payment any
remaining assets of the Company prior to any distributions to holders of the
common stock and the holders of the Preferred Stock may be able to block actions
otherwise approved by the holders of the common stock if such action is adverse
to their rights. In addition, holders of common stock will suffer dilution upon
any conversion of the Preferred Stock which could reduce the market value of the
common stock.

                                       16
<PAGE>

         Our common stock price has fluctuated considerably and may not
appreciate in value.

         Prices for our common stock has in the past, and could continue to,
fluctuate significantly 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 from them,

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

     o    downward pressure on prices due to increased competition,

     o    changes in our operating expenses,

     o    sales of common stock,

     o    actual or anticipated variations in quarterly results, and

     o    changes in financial estimates by securities analysts.

         The stock market in general has experienced extreme price and volume
fluctuations. The market prices of shares of security-related companies have
experienced fluctuations that often have been unrelated or disproportionate to
the operating results of these companies. Continued market fluctuations could
result in extreme volatility in the price of our common stock, which could cause
a decline in the value of our common stock. Price volatility might be worse if
the trading volume of our common stock is low.


                                       17
<PAGE>

         Our common stock may be considered a "penny stock" and may be difficult
to trade.

         The SEC has adopted regulations which generally define "penny stock" as
an equity security with a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock is less
than $5.00 per share, and therefore may be designated as a "penny stock"
according to SEC rules. Under these rules, broker-dealers who recommend such
securities to persons other than institutional accredited investors must:

     o    make a special written suitability determination for the purchaser,

     o    receive the purchaser's written agreement to a transaction prior to
          sale,

     o    provide the purchaser with risk disclosure documents which identify
          certain risks associated with investing in "penny stocks" and which
          describe the market for these "penny stocks" as well as a purchaser's
          legal remedies, and

     o    obtain a signed and dated acknowledgment from the purchaser
          demonstrating that the purchaser has actually received the required
          risk disclosure document before a transaction in a "penny stock" can
          be completed.

         Under these rules, broker-dealers may find it difficult to effectuate
customer transactions and trading activity in our securities may be adversely
affected. As a result, the market price of our securities may be depressed, and
you may find it more difficult to sell our securities. In addition, you may find
it difficult to obtain accurate quotations of our common stock and may
experience a lack of buyers to purchase such stock or a lack of market makers to
support the stock price.

         Our common stock is traded over the counter, which may result in higher
price volatility and less market liquidity for our common stock.

         Our common stock is quoted on the OTC Bulletin Board. 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, the American Stock Exchange or the Nasdaq Stock
Market. These factors may result in higher price volatility and less market
liquidity for our common stock.

         Compliance with changing regulation of corporate governance and public
disclosure may result in additional expenses.

         Keeping abreast of, and in compliance with, changing laws, regulations
and standards relating to corporate governance and public disclosure, including
the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we are
approved for listing on a registered exchange at some point, stock exchange
rules, will require an increased amount of management attention and external
resources. We intend to continue to invest all reasonably necessary resources to
comply with evolving standards, which may result in increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.

         Our principal stockholders have significant voting power and may take
actions that may not be in the best interest of other stockholders.

         Our executive officers, directors and principal stockholders control
approximately 30% of our currently outstanding shares of common stock. If these
stockholders act together, they may be able to exert significant control over
our management and affairs requiring stockholder approval, including approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control and might adversely affect
the market price of our common stock. This concentration of ownership may not be
in the best interests of all our stockholders.

         We do not anticipate paying cash dividends on our common stock in the
near future, and the lack of dividends may have a negative effect on our stock
price.


                                       18
<PAGE>


         We have never declared or paid any cash dividends or distributions on
our capital stock. We currently intend to retain our future earnings to support
operations and to finance expansion and therefore we do not anticipate paying
any cash dividends on our common stock in the near future.

         Investors in our securities will suffer dilution.

         The issuance of shares of our common stock, or shares of our common
stock underlying warrants, options, preferred stock or convertible debentures,
will dilute the equity interest of existing stockholders who do not have
anti-dilution rights and could have a significant adverse effect on the market
price of our common stock. The sale of our common stock acquired, or converted
or exercised into, at a discount could have a negative impact on the market
price of our common stock and could increase the volatility in the market price
of our common stock. In addition, we may seek additional financing which may
result in the issuance of additional shares of our common stock and/or rights to
acquire additional shares of our common stock. The issuance of our common stock
in connection with such financing may result in substantial dilution to the
existing holders of our common stock who do not have anti-dilution rights. The
sale of our common stock, or securities convertible or exercisable into shares
of our common stock, could trigger the anti-dilution rights of our outstanding
securities that have such rights, specifically our preferred stock, convertible
debentures and some of our warrants, which could result in further dilution to
the existing holders of our common stock who do not have anti-dilution rights.
With respect to the senior secured convertible debentures and warrants that we
issued in our January 2006 private financing, in the event that we issue common
stock in an equity financing at a price less than the then conversion price and
exercise price for the debentures and the warrants, respectively, (i) the
conversion price of the debentures shall be immediately adjusted to the price at
which such common stock was issued, subject to specified exempt issuances, and
(ii) the exercise price of the warrants shall be reduced to the price at which
such common stock was issued and the share amount shall be increased such that
the aggregate exercise price payable, after taking into account the decrease in
the exercise price, shall be equal to the aggregate exercise price prior to such
adjustment. Those additional issuances of our common stock and potential
triggering of existing anti-dilution rights would result in a reduction of an
existing holder's percentage interest in our company.

         A significant number of our shares will be eligible for sale, and their
sale could depress the market price of our common stock.

         Sales of a significant number of shares of our common stock in the
public market could harm the market price of our common stock.

         On February 28, 2006, we filed with the SEC a registration statement
covering 3,374,909 for resale in the public market pursuant to this registration
statement. This registration statement became effective on March 17, 2006. As
such shares of our common stock are resold in the public market, the supply of
our common stock will increase, which could decrease its price.

         In addition, there is approximately an aggregate of 8.8 million shares
of our common stock, some or all of which may also be offered from time to time
in the open market pursuant to Rule 144, and these sales may have a depressive
effect on the market for our shares of common stock. In general, a person who
has held restricted shares for a period of one year may, upon filing with the
SEC a notification on Form 144, sell into the market shares of our common stock
in an amount equal to the greater of 1% of the outstanding shares or the average
weekly number of shares sold in the last four weeks prior to such sale. Such
sales may be repeated once each three months, and any of the restricted shares
may be sold by a non-affiliate after they have been held for two years.

         We could issue "blank check" preferred stock without stockholder
approval with the effect of diluting then current stockholder interests and
impairing their voting rights.


                                       19
<PAGE>

         Our certificate of incorporation authorizes the issuance of up to an
additional 3,898,000 shares of "blank check" preferred stock with designations,
rights and preferences as may be determined from time to time by our board of
directors. Accordingly, our board of directors is empowered, without stockholder
approval, to issue a series of preferred stock with dividend, liquidation,
conversion, voting or other rights which could dilute the interest of, or impair
the voting power of, our common stockholders. The issuance of a series of
preferred stock could be used as a method of discouraging, delaying or
preventing a change in control. For example, it would be possible for our board
of directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of our company.

         The liability of our directors is limited under State of New Jersey
corporate law.

         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.

ITEM 2.  DESCRIPTION OF PROPERTIES

         Our corporate headquarters are located at 790 Bloomfield Avenue,
Clifton, New Jersey where we lease approximately 12,200 square feet of space
divided among administrative (2,600 sq. feet) and manufacturing (9,600 sq. feet)
space. We have leased this space through April 30, 2008 at a rent of $5,468 per
month increasing to $5,361 per month by the end the lease term. We also lease
approximately 2,500 square feet of manufacturing space at 102 Commerce Circle,
Madison, Alabama. We have leased this space through February, 2007 at a cost of
$2,000 per month. Our subsidiary, Clarion Sensing Systems, Inc. leases 800 sq.
ft. of office space through September 2007 at a cost of $588.00 per month.
Clarion is located at 5335 N. Tacoma Avenue, #10, Indianapolis, Indiana.

ITEM 3.  LEGAL PROCEEDINGS.

         On June 14, 2006, we initiated a lawsuit in the Superior Court of
New Jersey against a supplier of plastic housings that we utilize for our
sensors, an essential component in our security systems, alleging breach of
contract and tort claims in connection with the widespread product failure
of these plastic housings. We are seeking damages in excess of $223,000.
There can be no assurance that we will be successful in obtaining and
enforcing a judgement in the action.

      The defendant has not yet filed its answer to the complaint.


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

         No matters were submitted to a vote of stockholders during the
three-month period ended June 30, 2006.


                                       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 2006
       --------------------------------------------------------------

            April 1 - June 30, 2006         $0.95            $0.92
            January 1 - March 31, 2006       1.10             0.85
            Oct. 1 - December 31, 2005       1.38             0.93
            July 1 - September 30, 2005      1.68             1.20
       --------------------------------------------------------------
            Fiscal 2005
       --------------------------------------------------------------
            April 1 - June 30, 2005         $1.70            $1.07
            January 1 - March 31, 2005       2.50             1.30
            Oct. 1 - December 31, 2004       3.20             1.90
            July 1 - September 30, 2004      2.25             1.10
       --------------------------------------------------------------


         As of September 9, 2006, ECSI had approximately 196 holders of common
stock. This number of holders of record does not include beneficial owners of
the Company's common stock whose shares are held in the names of various
security holders, dealers, and clearing agencies.

Dividend Policy

         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.

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
the RISK FACTORS section of Item I of this Annual Report on Form 10-KSB.

Overview

         We design, develop, manufacture and market technology-based integrated
security systems. We also provide support services to system integrators
consisting of risk assessment and vulnerability studies to ascertain a client's
security requirements to develop a comprehensive risk management and mitigation
program.

         We market our products domestically and internationally to:

          o    security system integrators

          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.


                                       21
<PAGE>

         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 design, 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 customers' needs; o offer technologically
               superior products;

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

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

          o    have established solid credentials in protecting high value
               targets; and o offer customers perhaps the best warranty in the
               industry.

Critical Accounting Policies

         We prepare our 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. We routinely evaluate the composition of our inventory to identify
obsolete or otherwise impaired inventories. Inventories identified as impaired
are evaluated to determine if reserves are required. We do 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 - We record a valuation allowance to our
deferred tax assets to the amount that is more likely than not to be realized.
While we consider historical levels of income, expectations and risks associated
with estimates of future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event that we determine that we would be able to realize deferred tax assets in
the future in excess of the net amount recorded, an adjustment to the deferred
tax asset would increase income in the period such determination has been made.
Likewise, should we determine that we would not be able to realize all or part
of the net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged against income in the period such determination was made.
A valuation allowance in the amount of $1,244,112 has been recorded against our
deferred tax asset at June 30, 2006.


                                       22
<PAGE>

         We account 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.

       We use the Black-Scholes option-pricing model to estimate the fair value
of options. In order to calculate the fair value of the options, assumptions are
made for certain components of the model, including risk-free interest rate,
volatility, expected dividend yield rate and expected option life. Although we
use available resources and information when setting these assumptions, changes
to the assumptions could cause significant adjustments to the valuation.

Results of Operations

         Year Ended June 30, 2006 ("Fiscal 2005 period") Compared to Year Ended
June 30, 2005 ("Fiscal 2005 period")

         REVENUES. We had net revenues of $8,822,090 for the Fiscal 2006 period,
as compared to revenues of $5,967,469 for the Fiscal 2005 period, an increase of
approximately 48%. Of the revenues reported in the Fiscal 2006 period,
approximately 95% are attributable to domestic projects and 3% are attributable
to international projects. The increase in sales in the Fiscal 2006 period is
primarily attributable to purchase orders by the DoD, continuing work on Tinker
Air Force Base and other IBDSS projects and release of other purchase orders
that were awaiting funding and/or the approval of submittal drawings.

         GROSS MARGINS. Gross margins for the Fiscal 2006 Period were 13.42% of
revenue as compared to 40.82% of revenue for the Fiscal 2005 Period. The
decrease in gross margins is primarily attributable to an increase in the
utilization of sub-contractors related to the Tinker Air Force Base project as
well as an increase in the order mix for lower gross margin products during
Fiscal 2006. In the corresponding period in 2005 we performed a greater
percentage of higher gross profit generating activities such as design and
engineering services. The decrease in the Fiscal 2006 Period is also partially
attributable to our incurring significant repair costs for defective sensors
delivered by a principle supplier. These sensors had to be reworked and
ultimately replaced on two major installations at a cost of approximately
$350,000.

         RESEARCH AND DEVELOPMENT (R&D). R&D expenses decreased 27.6% in the
Fiscal 2006 period to $207,048 from $285,916 in the Fiscal 2005 period. R&D in
Fiscal 2006 was for upgrades to existing products and systems and for new
product development work on the Fiber Optic Intrusion Detection System
(FOIDS(R)), our Infrared Perimeter Intrusion Detection (IPID(R)) System, the
Clarion Sentinal(R) technology and the Gamma Shark(TM) product.


                                       23
<PAGE>


         SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased
about13% in the Fiscal 2006 period to $2,373,729 from $2,101,435 in the Fiscal
2005 period. The increase in the Fiscal 2006 period is primarily the result of
management's action to increase certain fixed overhead and payroll costs
commencing January 1, 2005 to support higher revenues. The increase was also
partially due to the write-off of certain accounts receivable totaling $61,000
due to projects not being funded.

         STOCK BASED COMPENSATION. In the 2006 period, we issued immediately
vested stock to various employees and consultants valued at $150,337. In the
Fiscal 2005 period, we issued immediately vested stock and stock options to
consultants valued at $120,000. 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 2006 period was
$211,238 as compared to $118,029 for the Fiscal 2005 period. The increase was
attributable to the higher average amount of outstanding debt balances and
higher interest rates.

         INTEREST AND DIVIDEND INCOME. Interest income in the Fiscal 2006 period
was $2,638 as compared to $15,498 in the Fiscal 2005 period. The decrease is
attributable to certain investments and certificates of deposit that were
converted to cash to afford the Company additional working capital.

         MINORITY INTEREST IN SUBSIDIARY LOSS. The minority interest in the loss
from the foreign subsidiaries was $37,802 for the Fiscal 2006 period and $48,899
for the Fiscal 2005 period.

         AMORTIZATION OF BENEFICIAL CONVERSION FEATURE. In accordance with EITF
No. 00-27, we recorded an additional discount in the amount of $118,748 upon the
issuance of in January 2006 of our convertible debentures to reflect the
beneficial conversion feature of the debt and the amortizing this amount to the
date of maturity. In the 2006 period the Company recorded amortization of
$18,186.

         INCOME TAX BENEFIT. We did not recognize any tax benefits from net
operating losses in fiscal 2006 or 2005.

         NET LOSS.  Net loss before dividends for the Fiscal 2006 period was
$(1,736,105) as compared to a loss of $(122,196) for the same period in Fiscal
2005.

Dividends Related to 10% Series B Convertible Preferred Stock.

         In July 2005, we declared and paid cumulative dividends equal to
$153,042 on our Series A Convertible Preferred Stock for the two years ended
March 31, 2005. The dividend was paid by the issuance of 99,378 shares of our
Common Stock.

         We also recorded dividends totaling $132,861 on our Series B
Convertible Preferred Stock in Fiscal 2006 and $199,306 in the 2005 Period. In
lieu of a cash payment we have elected under the terms of the agreement which
sold these securities to add this amount to the stated value of the Series B
Convertible Preferred Stock.


         These dividends are non-cash and, therefore, have no impact on our
net worth, or cash flow.


                                       24
<PAGE>

Liquidity and Capital Resources

         At June 30, 2006, we had working capital of $2.35 million compared to
$3.20 million at June 30, 2005. Net cash used by operating activities for Fiscal
2006 was $1,311,034 as compared to net cash used by operating activities of
$923,953 for Fiscal 2005.

         Inventory has increased by $338,388 since the beginning of fiscal 2006
and we anticipate decrease during the first half of 2007 for shipments on
committed projects that have or are being released.

         Day's sales outstanding (DSO) were 97 days at June 30, 2006 as
compared with 86 DSO at June 30, 2005. This is due to certain payments being
held until final completion of projects in fiscal 2007.

         Accounts payable and accrued expenses have increased $790,485 in the
Fiscal 2006 period as payments to vendors have been extended to match the
collection of receivables.

         Investing activities for fiscal 2006 included equipment and software
purchases totaling $93,675, primarily related to upgrade two major product
lines. We do not have any material commitments for capital expenditures going
forward. Investing activities for fiscal 2005 included the cash used for the
Clarion acquisition In connection with the acquisition, we assumed an existing
bank debt totaling $117,342. The debt is to be repaid in 34 monthly installments
in the amount of $2,750 plus interest and is secured by the former officers and
directors of Clarion Sensing Systems and ECSI International Inc.

         In January 2006, we raised net proceeds of $831,000 from the proceeds
of the private placement of $1million in principal amount of our Senior Secured
Convertible Debentures ("the Debentures"). Our obligations with respect to the
Debentures are secured by a lien on all of our assets, including our
intellectual property. The Debentures have a term of three years and are
convertible at the option of the holder at any time into shares of our Common
Stock at a conversion price of $0.75 per share, subject to certain adjustments.
Interest is payable at a rate equal to the greater of 8% per annum or the prime
rate for the applicable interest period plus 2.5%.

         A portion of the net proceeds from the private placement of the
Debentures was used to repay in full outstanding loans in the aggregate amount
of $658,339 owed to a commercial bank. In connection with the repayment of these
loans, the bank released our certificate of deposit in the amount of $255,721
that it held as collateral to secure repayment of these loan obligations.
Remaining long-term bank debt in the aggregate amount of $54,160 at June 30,
2006 is payable in monthly installments of $2,750 plus interest at the rate of
prime plus 1/2% per annum.

         We also realized net proceeds of $54,400 from the exercise of
outstanding stock options and warrants in the 2006 Period and $708,850 in the
2005 Period.

         In April 2006 we entered into a factoring, agreement with a financing
company. All borrowings are secured by outstanding receivables specifically
assigned to the financing company. Assigned receivables are at the sole
discretion of the financing company and advances are made on 95% of approved
receivables assigned. Payments on assigned receivables are received directly by
the financing company, and applied to outstanding advances. All outstanding
advances and uncollected assigned receivables are subject to fees and interest
charges ranging from 0.05 percent to 7.2 percent, with a minimum annual fee of
0.8 percent. All receivables assigned and advances made are subject to return
and recall by the financing company, respectively. The agreement may be
terminated by giving the financing company 30 days notice. As of June 30, 2006,
the Company has borrowed $3,542,000 and repaid $3,023,134. The total outstanding
advance made under the agreement is $518,866 as of June 30, 2006.


                                       25
<PAGE>

         We expect that cash on hand together with collection of accounts
receivable will be sufficient to provide for our working capital needs for the
next 12 months. However, the recent action by one of our vendors (who has been
selected by the United States Air Force as a sole source supplier under our
IBDSS contract) has put some liquidity constraints on us. While we are currently
negotiating with a finance company to enable us to meet the cash requirements to
resume the shipments from this vendor, no assurance can be given that we will be
able to conclude a financing arrangement on commercially acceptable terms (or at
all).

Discussion of Results, Business Outlook and Identifiable Industry Trends

         Spending in the security industry has increased over the last several
months as the U.S. Congress has continued to allocate money to fund homeland
security initiatives. We expect this trend will continue for the foreseeable
future. As a result, the level of new proposals continues and our committed
backlog, including the IBDSS awards from the U.S. Air Force, is the largest
backlog in our history. We cannot, however, assure you that we will complete any
or all of the orders comprising our backlog within the anticipated time frame.
Our experience has taught us that all of these anticipated releases and new
contracts are subject to cancellation or delay, thus we cannot be certain as to
the total realized revenue amount of our backlog and do not even reference the
total dollar amount of our present backlog or submitted proposals.

         Our sales dependency has shifted from our President and Chief Executive
Officer, Arthur Barchenko, to marketing and sales managers to meet our revenue
objectives. During the last year, we have sought to mitigate the concentration
of sales efforts by (i) retaining new personnel and engaging independent
contractors to market our products and generate sales opportunities and (ii)
expanding sales efforts in geographic regions on which we have not focused our
resources in years past such as the Caribbean, Latin America, Egypt and the
Middle East, and Africa, where we are developing projects that management
believes will result in ongoing revenue.

         During the Fiscal 2006 period, we submitted bids on 89 new projects for
work to be performed at our Clifton, New Jersey, Indianapolis, Indiana and
Madison, Alabama facilities. We cannot be certain that we will be successful in
winning any of the bids tendered. Even if we do receive orders, contracts are
subject to cancellation by customers upon short notice with little or no
penalty, as is typical in our industry.

         We believe these steps and others we expect to implement over the
course of fiscal year 2007 will help us to achieve revenue stability and
consistent and steady growth in the years ahead.

         We are committed to offering our customers comprehensive, integrated
security systems that employ the latest technologies and address the most
critical security requirements. The security industry continues to evolve
rapidly as new technologies are developed specifically to meet security
challenges and existing technologies are being adapted for new uses. In
addition, the public and private sectors continue to analyze and distinguish new
security risks and industry participants seek to develop technologies and
products to fill these newly discerned requirements. 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.

Business Outlook

         As global economic prospects began to change during 2006, orders and
commitments increased. Currently, purchase order commitments continue to grow.
However, our historical results have taught us that the release of funds that
support contracts and orders may never be forthcoming. Furthermore, as is
customary in the security industry, our contracts are subject to cancellation or
delay at any time with little notice or penalty. Government based orders which
are subject to legislative appropriations are particularly sensitive to economic
and political conditions. Thus we cannot be certain as to the total realized
value and revenue which we will generate from committed orders. We expect to
receive releases and task orders for a significant portion of our contract
commitments sometime within the next 8 to 12 months, although we cannot be
certain that we will complete any or all of such orders within the anticipated
time frame.


                                       26
<PAGE>


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

         We recognized this trend early in our existence and to that end, we
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 systems oriented software programmer and two
computer-oriented electronic engineers to further develop and enhance the
integrated platform for current and future projects.

Business Approach

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

         We believe we are well positioned for economic success during fiscal
2007 and beyond. A number of factors contribute to this outlook.

          o    We anticipate that the factoring agreement completed in April
               2006 will allow us to generate sales and marketing efforts with
               the U.S. Air Force and permit us to expand our strategic
               alliances.

          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, entitled us to submit proposals to
               obtain contracts to supply and install security system upgrades
               for thirty-four (34) military facilities worldwide over a five
               year period with a total value in excess of $540 million.

          o    Our estimate that orders recently received, including nuclear
               power station security upgrades, Hanscom Air Force base tactical
               equipment purchases, Israeli Defense Forces Ministry Of Defense
               purchase orders, and a million dollar chemical-petrochemical
               facility security project in Africa will amount to $4,500,000.

          o    The conclusion of agreements with new strategic partners for the
               U.S. Navy base security upgrade program will be a source of
               material orders during the next five years.


                                       27
<PAGE>

Recently Issued Accounting Pronouncements

         In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") Statement No. 154,
"Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements" (SFAS 154). SFAS 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle. SFAS
154 also provides guidance for determining whether retrospective application of
a change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The provisions of SFAS 154 are
effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The adoption of the provisions of
SFAS 154 is not expected to have a material impact on the Company's financial
position or results of operations.

         In February 2006, the FASB issued SFAS Statement No. 155, "Accounting
for Certain Hybrid Financial Instruments", which amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". SFAS 155 amends SFAS 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include only such
strips representing rights to receive a specified portion of the contractual
interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. The adoption of the provisions of SFAS 155 is not expected to have a
material impact on the Company's financial position or results of operations.

         In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)
an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation requires that the Company recognize in the
financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on de-recognition of a previously
recognized tax position, classification, interest and penalties, accounting in
interim periods and disclosures. The provisions of FIN 48 are effective
beginning January 1, 2007 with the cumulative effect of the change in accounting
principle recorded as an adjustment to the opening balance of retained earnings.
The Company is assessing the potential impact the adoption of this
Interpretation may have on its financial position or results of operations.

         Management does not believe that any recently issued, but not yet
effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.

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


                                       28
<PAGE>

         As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method and,
as such, generally recognizes no compensation expenses for employee stock
options. Accordingly, the adoption of SFAS 123(R)'s, fair value method will have
a significant impact on our results of operations, although it will have no
impact on our overall financial position. The impact of adoption of SFAS No.
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future, however, had the Company adopted
SFAS 123(R) in prior periods, the impact of the standard would have approximated
the impact of SFAS No. 123 as described in the disclosure of pro forma net
income (loss) and net income (loss) per share in Note 2 to the consolidated
financial statements. SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While the Company
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), there were no
operating cash flows recognized in the years ended June 30, 2006 and 2005 for
such excess tax deductions.

ITEM 7.  FINANCIAL STATEMENTS

         The information called for by this Item 7 is included following the
"Index to Financial Statements" contained in this Annual Report on Form 10-KSB.

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 President and Chief Executive 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 President and Chief
Executive Officer and has 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.

ITEM 8A. OTHER INFORMATION

         None

                                       29
<PAGE>



                                    PART III

         The information called for by Items 9, 10, 11, 12 and 14 will be
contained in the Company's definitive proxy statement which the Company intends
to file within 120 days after the end of the Company's fiscal year ended June
30, 2006 and such information is incorporated herein by reference.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>

Exhibit No.       Description                                                           Location Reference
-----------       -----------                                                           ------------------

<S>                                                                                              <C>
3.1               Certificate of Incorporation of Electronic Control Security Inc.               1

3.2               Certificate of Amendment to Certificate of Incorporation of
                  Electronic Control Security Inc.                                               2

3.3               Certificate of Amendment to Certificate of Incorporation                       3

3.4               By-Laws of Electronic Control Security Inc.                                    1

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

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

3.7               Certificate of Incorporation of ECSI International, Inc.                       1

3.8               By-Laws of ECSI International, Inc.                                            1

3.9               Certificate of Incorporation of ECSI FOIDS, Inc.                               1

3.10              By-Laws of ECSI FOIDS, Inc.                                                    1

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

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

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

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

4.1               Form of Common Stock Purchase Warrant issued June 30, 2004                    3

4.2               Form of Common Stock Purchase Warrant issued January 13, 2006                  4


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

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

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

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

10.5              Securities Purchase Agreement dated June 30, 2004.                             3

10.6              Registration Rights Agreement dated June 30, 2004.                             3

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

10.8              Assumption Agreement dated March 4, 2005, between Clarion
                  Sensing Systems Acquisition Corp. and Clarion Sensing Systems,
                  Inc.                                                                           5
</TABLE>


                                       30
<PAGE>

<TABLE>
<CAPTION>

Exhibit No.       Description                                                           Location Reference
-----------       -----------                                                           ------------------

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

14.1              Code of Ethics and Business Conduct                                            4

31                Certifications of Chief Executive Officer.                                     6

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

                                    * * * *

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 Current Report on Form 8-K filed with the
                  Commission on January 18, 2006

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

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

6.                Filed as an Exhibit hereto.
</TABLE>


                                       31
<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 Executive Officer (and
                            Principal Financial and Accounting Officer
                            Dated: September 27, 2006


         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.
<TABLE>
<CAPTION>

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

          Person            Capacity                                         Date
-------------------------------------------------------------------------------------
<S>                       <C>                                        <C>
 /s/ Arthur Barchenko     President, Chief Executive Officer (and  September 27, 2006
 Arthur Barchenko         Principal Financial and Accounting
                          Officer) and Director
-------------------------------------------------------------------------------------
 /s/ Natalie Barchenko    Treasurer and Director                   September 27, 2006
 Natalie Barchenko
-------------------------------------------------------------------------------------
 /s/ Gene Rabois          Director                                 September 27, 2006
 Gene Rabois
-------------------------------------------------------------------------------------
 /s/ Edward Snow          Director                                 September 27, 2006
 Edward Snow
-------------------------------------------------------------------------------------
 /s/ Stephen Rossetti     Director                                 September 27, 2006
 Stephen Rossetti
-------------------------------------------------------------------------------------

</TABLE>



                                       32
<PAGE>


                        ELECTRONIC CONTROL SECURITY INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
          With Report of Independent Registered Public Accounting Firm





Report of Independent Registered Public Accounting Firm              F-1

Consolidated Balance Sheets                                          F-2

Consolidated Statements of Operations                                F-3

Consolidated Statement of Changes in Shareholders' Equity            F-4

Consolidated Statements of Cash Flow                                 F-5

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




<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Electronic
Control Security, Inc. and Subsidiaries as of June 30, 2006 and 2005, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the two years in the period ended June 30, 2006.
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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Electronic Control Security, Inc. and Subsidiaries as of June 30, 2006 and 2005,
and the consolidated results of their operations and cash flows for each of the
two years in the period ended June 30, 2006 in conformity with accounting
principles generally accepted in the United States of America.




DEMETRIUS & COMPANY, L.L.C.

Wayne, New Jersey
September 8, 2006



                                      F-1
<PAGE>

<TABLE>
<CAPTION>

                        Electronic Control Security Inc.
                           Consolidated Balance Sheets
                                                                                       June 30,         June 30,
                                                                                         2006             2005
                                                                                         ----             ----
ASSETS
Current assets
<S>                                                                                <C>              <C>
      Cash and cash equivalents                                                    $        25,013  $       221,293
      Accounts receivable, current portion, net
          of allowance of  $50,000 and $100,000                                          1,360,309        1,070,267
      Accounts receivable, retainage                                                       973,967        1,018,279
      Inventories                                                                        2,303,889        1,965,501
      Other current assets                                                                 231,980          363,868
                                                                                   ---------------  ---------------

          Total current assets                                                           4,895,158        4,639,208

Property, equipment and software development costs - net                                   396,827          502,644
Intangible assets - net                                                                  1,364,857        1,438,999
Accounts receivables, non-current portion                                                  308,148          -
Certificate of deposit, pledged                                                            -                253,084
Goodwill                                                                                    50,000           50,000
Deferred income taxes                                                                      478,300          456,300
Other assets                                                                               180,627           59,827
                                                                                   ---------------  ---------------
                                                                                   $     7,673,917  $     7,400,062
                                                                                   ===============  ===============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
      Accounts payable and accrued expenses                                        $     1,958,123  $     1,185,423
      Short-term debt                                                                      518,866          -
      Current maturities of long-term debt                                                  33,000          232,992
      Payroll taxes payable                                                                 21,314           16,234
                                                                                   ---------------  ---------------

          Total current liabilities                                                      2,531,303        1,434,649

Noncurrent liabilities
      Long-term debt                                                                        21,160          437,565
      8% Convertible debentures (net of discounts of $428,230)                             546,770          -
      Due to officers and shareholders                                                     616,423          431,617
      Deferred income taxes                                                                 84,500           62,500
                                                                                   ---------------  ---------------
          Total liabilities                                                              3,800,156        2,366,331

Shareholders' equity
     Series A Convertible Preferred stock, cumulative, $.01 par value;
         $2.00 liquidation preference; 5,000,000 shares authorized,
          325,000 shares issued and outstanding, respectively                                3,250            3,250
     Series B 10% Convertible Preferred stock, cumulative, $.001 par value;
         $1,218 per share liquidation preference; 2,000 shares authorized,
          791 and 1,900 shares issued and outstanding, respectively                              1                2
      Common Stock, $.001 par value; 30,000,000 shares authorized;
          8,823,601 and 7,384,935 shares issued; 8,723,601 and 7,284,935
         shares outstanding, respectively                                                    8,823            7,385
      Additional paid-in capital                                                        11,200,712       10,344,782
      Accumulated deficit                                                               (7,333,815)      (5,311,807)
      Accumulated other comprehensive income                                                 4,790              119
      Treasury stock, at cost, 100,000 shares                                              (10,000)         (10,000)
                                                                                   ---------------  ---------------


          Total shareholders' equity                                                     3,873,761        5,033,731
                                                                                   ---------------  ---------------

                                                                                   $     7,673,917  $     7,400,062
                                                                                   ===============  ===============

                 See Notes to Consolidated Financial Statements.

</TABLE>

                                       F-2
<PAGE>
<TABLE>
<CAPTION>
                        Electronic Control Security Inc.
                      Consolidated Statements of Operations


                                                                                                 Year
                                                                                                 Ended
                                                                                                June 30,
                                                                                         2006             2005
                                                                                         ----             ----


<S>                                                                                <C>              <C>
Revenues                                                                           $     8,822,090  $     5,967,469
Cost of revenues                                                                         7,638,097        3,531,312
                                                                                   ---------------  ---------------

          Gross profit                                                                   1,183,993        2,436,157
                                                                                   ---------------  ---------------

 Research and development                                                                  207,048          285,916
 Selling, general  and administrative expenses                                           2,373,729        2,101,435
 Stock based compensation                                                                  150,337          120,000
                                                                                   ---------------  ---------------

          Loss from operations                                                          (1,547,121)         (71,194)

Other (income) expense
     Interest expense                                                                      211,238          118,029
     Interest income                                                                        (2,638)         (15,498)
     Minority interest in subsidiary loss                                                  (37,802)         (48,899)
     Amortization of beneficial conversion feature on convertible debt                      18,186          -
     Gain on sale of marketable securities                                                 -                 (2,630)
                                                                                   ---------------  ---------------

Total other (income) expense                                                               188,984           51,002
                                                                                   ---------------  ---------------

Loss before income taxes                                                                (1,736,105)        (122,196)

Income taxes                                                                               -                -
                                                                                   ---------------  ---------------

Net loss before dividends                                                               (1,736,105)        (122,196)

Dividends related to convertible preferred stock                                           285,903          199,306
                                                                                   ---------------  ---------------

Net loss attributable to common shareholders                                       $    (2,022,008) $      (321,502)
                                                                                   ===============  ===============


Net loss per share:
     Basic                                                                         $         (0.24) $         (0.05)
                                                                                   ===============  ===============
     Diluted                                                                       $         (0.24) $         (0.05)
                                                                                   ===============  ===============

Weighted average number of
        common shares and equivalents:
     Basic                                                                               8,384,312        6,450,739
                                                                                   ===============  ===============
     Diluted                                                                             8,384,312        6,450,739
                                                                                   ===============  ===============



                 See Notes to Consolidated Financial Statements.
</TABLE>

                                       F-3

<PAGE>
                        Electronic Control Security Inc.
            Consolidated Statements of Changes in Shareholders Equity
<TABLE>
<CAPTION>
                                                 Series A Convertible   Series B 10% Convertible
                                                  Preferred Stock        Preferred Stock   Common Stock
                                                   res      Amount     Shares      Amount     Shares        Amount
                                                   ------- --------- -----------  --------- -----------   ----------
<S>              <C>                               C>      <C>            <C>    <C>        <C>           <C>
Balances at July 1, 2004                           87,500  $  5,875       2,000  $       2  5,555,707     $   5,556
Conversion of preferred stock                      62,500)   (2,625)       (100)        (0)   399,994           400
Common stock dividend on preferred stock
Issuance of Common Stock for services                                                          82,192            82
Issuance of Common Stock for Clarion Aquisition                                               394,682           395
Exercise of stock options                                                                      88,088            88
Exercise of  warrants                                                                         864,272           864
Net loss
Foreign currency translation adjustments
                                                   --------  ------ ------------ ---------- ----------    ----------
Balances at June 30, 2005                          25,000     3,250       1,900          2  7,384,935         7,385
Conversion of preferred stock                                            (1,109)        (1) 1,246,288         1,246
Common stock dividend on preferred stock                                                       99,378            99
Issuance of stock and warrants for services                                                    38,000            38
Issuance of stock options for services
Exercise of stock options                                                                       5,000             5
Exercise of  warrants                                                                          50,000            50
Issuance of warrants in
      connection with convertible debentures
Beneficial conversion feature of debentures issued
Net loss
Foreign currency translation adjustments
                                                   ------- -------- ------------ ---------- ----------    ----------
Balances at June 30, 2006                          25,000  $  3,250         791  $       1  8,823,601    $    8,823
                                                   ======= ======== ============ ========== ==========    ==========
<CAPTION>
                                                                             Accumulated
                                                     Additional                  Other                              Comprehensive
                                                      Paid-in     Accumulated Comprehensive Treasury                  Income
                                                      Capital      Deficit       Income      Stock         Total      (Loss)
                                                     ---------  -----------  ---------- ------------ -------------- ------------
<S>              <C>                                <C>         <C>            <C>      <C>         <C>             <C>
Balances at July 1, 2004                            $ 8,577,764 $ (4,990,305)  $ 13,842 $   (10,000) $    3,602,734
Conversion of preferred stock                             2,225                                             -
Common stock dividend on preferred stock                199,306     (199,306)                               -
Issuance of Common Stock for services                   119,918                                             120,000
Issuance of Common Stock for Clarion Aquisition         662,671                                             663,066
Exercise of stock options                                 4,862                                               4,950
Exercise of  warrants                                   778,036                                             778,900
Net loss                                                            (122,196)                              (122,196)   ($122,196)
Foreign currency translation adjustments                                        (13,723)                    (13,723)     (13,723)
                                                     ---------- ------------ ----------  ----------  --------------  -----------
Balances at June 30, 2005                            10,344,782   (5,311,807)       119     (10,000)      5,033,731    ($135,919)
                                                                                                                     ===========
Conversion of preferred stock                            (1,245)                                            -
Common stock dividend on preferred stock                285,804     (285,903)                               -
Issuance of stock and warrants for services              89,212                                              89,250
Issuance of stock options for services                   61,087                                              61,087
Exercise of stock options                                 4,395                                               4,400
Exercise of  warrants                                    49,950                                              50,000
Issuance of warrants in
      connection with convertible debentures            247,979                                             247,979
Beneficial conversion feature of debentures issued      118,748                                             118,748

Net loss                                                          (1,736,105)                            (1,736,105) ($1,736,105)
Foreign currency translation adjustments                                          4,671                       4,671        4,671
                                                    ----------- ------------ ---------- -----------  --------------  -----------
Balances at June 30, 2006                           $11,200,712 $ (7,333,815)$    4,790 $   (10,000) $    3,873,761  ($1,731,434)
                                                    =========== ============ ========== ===========  ==============  ===========
</TABLE>
                See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>

<TABLE>
<CAPTION>

                        Electronic Control Security Inc.
                      Consolidated Statements of Cash Flows
                                                                                                 Year
                                                                                                 Ended
                                                                                                June 30,
                                                                                         2006               2005
                                                                                         ----               ----

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities:
<S>                                                                                <C>              <C>
     Net loss before deemed dividends                                              $    (1,736,105) $      (122,196)
     Adjustments to reconcile loss
      to net cash used by operating activities:
          Depreciation and amortization                                                    337,502          222,336
          Allowance for bad debts                                                          (50,000)
          Stock based compensation                                                         150,337          120,000
          Minority interest in subsidiary loss                                             (37,802)         (48,899)
          Amortization of beneficial conversion feature on convertible debt                 18,186          -
          Gain on sales marketable securities                                              -                 (2,630)
          Foreign currency translation adjustments                                           4,671          (13,723)
          Increase (decrease) in cash attributable
           to changes in assets and liabilities
               Accounts receivable                                                        (503,878)      (1,359,478)
               Inventory                                                                  (338,388)        (330,196)
               Other current assets                                                         13,942            3,826
               Other assets                                                                 34,948           24,882
               Accounts payable and accrued expenses                                       772,700          571,403
               Income taxes payable                                                        -                 (2,500)
               Payroll taxes payable                                                         5,080           13,222
                                                                                   ---------------  ---------------

        Net cash used in operating activities                                           (1,328,807)        (923,953)

Cash flows from investing activities:
     Investment in marketable securities                                                   -                  2,630
     Investment in Clarion                                                                 -               (572,327)
     Acquisition of property, equipment and software development                           (93,765)         (95,683)
                                                                                   ---------------  ---------------

          Net cash used in investing activities                                            (93,765)        (665,380)

Cash flows from financing activities:
     Proceeds from exercise of stock options and warrants                                   54,400          783,850
     Proceeds from short-term debt                                                       3,542,000          -
     Repayment of short-term borrowing                                                  (3,023,134)        (250,000)
     Certificate of deposit redeemed (purchased)                                           253,084         (151,361)
     Net proceeds on 8% convertible debenture                                              831,534          -
     Payments on long-term debt                                                           (616,398)        (164,609)
     Payments on lease obligations                                                         -                 (4,396)
     Loan officers and shareholders - net                                                  184,806           44,567
                                                                                   ---------------  ---------------

          Net cash provided by financing activities                                      1,226,292          258,051
                                                                                   ---------------  ---------------

          Net decrease in cash and cash equivalents                                       (196,280)      (1,331,282)

Cash and cash equivalents at beginning of period                                           221,293        1,552,575
                                                                                   ---------------  ---------------

          Cash and cash equivalents at end of period                               $        25,013  $       221,293
                                                                                   ===============  ===============

Supplemental disclosures of cash flow information
  Cash paid during the period for:
          Interest                                                                 $       185,613  $       118,029
                                                                                   ===============  ===============
          Taxes                                                                    $         4,968  $         4,510
                                                                                   ===============  ===============
                 See Notes to Consolidated Financial Statements.
</TABLE>



                                      F-5
<PAGE>



                        ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Nature of Operations

       Electronic Control Security, Inc. (the "Company") is engaged in the
       design, manufacture and marketing of electronic security and lighting
       systems for high threat environments. The Company also performs
       consulting services, which consists principally of designing security
       system solutions in support of their technologies to system integrators,
       for medium to large government and commercial facilities worldwide.

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

Note 2 - Summary of Significant Accounting Policies

       Principles of Consolidation

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

       Reclassifications

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

       Accounts Receivable

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

       Inventories

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

       Property and Equipment and Depreciation

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

       Software Development Costs

       Software development costs are expensed as incurred until technological
       feasibility is established. Software development costs incurred
       subsequent to establishing technological feasibility are capitalized and
       amortized. Amortization is provided based on the greater of the ratios
       that current gross revenues for a product bear to the total of current
       and anticipated future gross revenues for that product, or the
       straight-line method over the estimated useful life of the product. The
       estimated useful life for the straight-line method is determined to be 5
       years. Approximately $19,500 and $57,000 of software development costs
       have been capitalized for the years ended June 30, 2006 and 2005,
       respectively.

       Earnings per Share

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

                                      F-6
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

                                                     2006             2005
Stock options                                        1,504,500         1,110,000
Warrants                                             2,803,397         1,496,875
Convertible debentures                               1,333,333
Convertible Preferred Stock                          1,654,327         2,269,318

       Foreign Currency Translation

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

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

       Cash and Cash Equivalents

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

       Use of Estimates

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

       Long-lived assets

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

       Revenue Recognition

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

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

                                      F-7
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       Research and Development

       Research and development expenditures are expensed as incurred. Research
       and development costs for the years ended June 30, 2006 and 2005 amounted
       to $207,048 and $285,916, respectively.

       Income Taxes

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

       Intangible Assets

       The cost of licenses, patents, and trademarks are being amortized on the
       straight-line method over their useful lives, ranging from 5 to 20 years.
       Amortization expense charged to operations was $83,752 and $31,570 for
       the years ended June 30, 2006 and 2005, 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, 2006 and 2005
       were approximately $46,000 and $23,000, respectively.

       Stock Based Compensation

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

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

                                                                            Year Ended June 30
                                                                          2006            2005
                                                                          ----            ----
<S>                                                                 <C>            <C>
Net loss, as reported                                               $  (2,022,008) $       (321,502)
Add: Stock based compensation
           expense, as reported, net of related tax effects                     -                 -
Deduct: Total stock-based compensation
  expense determined under the fair value based
  method for all awards, net of related tax effects                    (1,199,069)         (107,571)
                                                                    -------------  ----------------
Pro forma net loss                                                  $  (3,221,077) $       (429,073)
                                                                    ============== ================
Basic and diluted loss per share, as reported                       $        (.24) $           (.05)
Basic and diluted loss per share, pro forma                         $        (.38) $           (.07)
</TABLE>

                                      F-8
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The weighted average per share fair value of options granted during
       fiscal 2006 and 2005 was $1.02 and $2.28, respectively. The fair value of
       each option granted was estimated using the Black-Scholes option-pricing
       model with the following weighted average assumptions:

                                                2006                2005
                                                ----                ----

       Expected volatility                     140.6%             151.12%
       Risk free rate                           4.39%               3.65%
       Expected life of option                   5                  6.5
       Dividend yield                            0%                 0%


       On December 9, 2005, the Board of Directors voted to exchange 565,000
       options issued in January 2005 at an exercise price of $2.40 for 282,500
       options with an exercise price of $1.20. The Board also voted to
       accelerate the vesting on these options to become immediately
       exercisable. The acceleration and repricing of the options had no effect
       on the Company's financial position. The accelerated amortization expense
       and incremental value recognized due to the changes are included in the
       disclosure above.


       Fair Value of Financial Instruments

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

       Recent Pronouncements

       In May 2005, the Financial Accounting Standards Board ("FASB") issued
       Statement of Financial Accounting Standards ("SFAS") Statement No. 154,
       "Accounting Changes and Error Corrections, a replacement of APB Opinion
       No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting
       Changes in Interim Financial Statements" (SFAS 154). SFAS 154 provides
       guidance on the accounting for and reporting of accounting changes and
       error corrections. It establishes, unless impracticable, retrospective
       application as the required method for reporting a change in accounting
       principle in the absence of explicit transition requirements specific to
       the newly adopted accounting principle. SFAS 154 also provides guidance
       for determining whether retrospective application of a change in
       accounting principle is impracticable and for reporting a change when
       retrospective application is impracticable. The provisions of SFAS 154
       are effective for accounting changes and corrections of errors made in
       fiscal periods beginning after December 15, 2005. The adoption of the
       provisions of SFAS 154 is not expected to have a material impact on the
       Company's financial position or results of operations.

       In February 2006, the FASB issued SFAS Statement No. 155, "Accounting for
       Certain Hybrid Financial Instruments", which amends SFAS No. 133,
       "Accounting for Derivative Instruments and Hedging Activities" and SFAS
       No. 140, "Accounting for Transfers and Servicing of Financial Assets and
       Extinguishment of Liabilities". SFAS 155 amends SFAS 133 to narrow the
       scope exception for interest-only and principal-only strips on debt
       instruments to include only such strips representing rights to receive a
       specified portion of the contractual interest or principle cash flows.
       SFAS 155 also amends SFAS 140 to allow qualifying special-purpose
       entities to hold a passive derivative financial instrument pertaining to
       beneficial interests that itself is a derivative instrument. The adoption
       of the provisions of SFAS 155 is not expected to have a material impact
       on the Company's financial position or results of operations.

                                      F-9
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
       Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
       48) an interpretation of FASB Statement No. 109, Accounting for Income
       Taxes, which clarifies the accounting for uncertainty in income taxes.
       FIN 48 prescribes a recognition threshold and measurement attribute for
       the financial statement recognition and measurement of a tax position
       taken or expected to be taken in a tax return. The Interpretation
       requires that the Company recognize in the financial statements, the
       impact of a tax position, if that position is more likely than not of
       being sustained on audit, based on the technical merits of the position.
       FIN 48 also provides guidance on de-recognition of a previously
       recognized tax position, classification, interest and penalties,
       accounting in interim periods and disclosures. The provisions of FIN 48
       are effective beginning January 1, 2007 with the cumulative effect of the
       change in accounting principle recorded as an adjustment to the opening
       balance of retained earnings. The Company is assessing the potential
       impact the adoption of this Interpretation may have on its financial
       position or results of operations. Management does not believe that any
       recently issued, but not yet effective, accounting standards if currently
       adopted would have a material effect on the accompanying financial
       statements.

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

       As permitted by SFAS No. 123, the Company currently accounts for
       share-based payments to employees using APB No. 25's intrinsic value
       method and, as such, generally recognizes no compensation expenses for
       employee stock options. Accordingly, the adoption of SFAS 123(R)'s, fair
       value method will have a significant impact on our results of operations,
       although it will have no impact on our overall financial position. The
       impact of adoption of SFAS No. 123(R) cannot be predicted at this time
       because it will depend on levels of share-based payments granted in the
       future, however, had the Company adopted SFAS 123(R) in prior periods,
       the impact of the standard would have approximated the impact of SFAS No.
       123 as described in the disclosure of pro forma net income (loss) and net
       income (loss) per share in Note 2 to the consolidated financial
       statements. SFAS No. 123(R) also requires the benefits of tax deductions
       in excess of recognized compensation cost to be reported as a financing
       cash flow, rather than as an operating cash flow as required under
       current literature. This requirement will reduce net operating cash flows
       and increase net financing cash flows in periods after adoption. While
       the Company cannot estimate what those amounts will be in the future
       (because they depend on, among other things, when employees exercise
       stock options), there were no operating cash flows recognized in the
       years ended June 30, 2006 and 2005 for such excess tax deductions.


                                      F-10
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Non-cash Investing and Financing Activities


       Non-cash investing and financing activities are excluded from the
       consolidated statement of cash flows. For the year ended June 30, 2005,
       non-cash activities included the following items:

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

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

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

Note 4 - Acquisition

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

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

       In addition to the initial cost of the acquisition, the Company agreed to
       assume $438,959 of certain liabilities of Clarion on a contingent basis .
       The Subsidiary will be obligated to pay the Contingent Liabilities, if at
       all, only if the Subsidiary achieves (A) sales in excess of $3,000,000
       ("$3,000,000 in Sales") and/or (B) net earnings before taxes in excess of
       $600,000 ("$600,000 in Net Earnings") in one of its fiscal years
       beginning within three (3) years of March 4, 2005. In the event
       $3,000,000 in Sales are achieved but $600,000 in Net Earnings are not
       achieved, then 10% of the Subsidiary's net earnings before taxes earned
       during such fiscal year shall be utilized to pay the Contingent
       Liabilities. In the event $600,000 in Net Earnings are achieved (whether
       or not $3,000,000 in Sales are achieved), then (I) all net earnings
       before taxes in excess of $600,000 earned during such fiscal year plus
       (II) 10% of the Subsidiary's net earnings before taxes earned during such
       fiscal year, shall be utilized to pay the Contingent Liabilities. If the
       Contingent Liabilities are not paid in full and $3,000,000 in sales or
       $600,000 in net earnings occurs in one or more subsequent fiscal years,
       then net earnings before taxes with respect to such fiscal years shall be
       utilized to pay the Contingent Liabilities in the manner set forth in the
       preceding two sentences until such time, if ever, the Contingent
       Liabilities are paid in full. Any amounts shall be payable in cash or
       shares of common stock (valued as of the closing ask price on the date of
       issuance) as the recipient shall direct.

       The Company anticipates the contingent payments made, if any, will be
       treated as additional purchase price and included as an addition to the
       identifiable intangible assets. As of June 30, 2006, the Company is not
       liable for any contingent payments and, therefore, has not accrued any at
       this time. The Company will continue to asses its liability under the
       contingent payment arrangement in each successive quarter, and will
       record additional purchase price through an increase to intangible
       assets, if and when a liability is realized.

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

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

                                                                  June 30,
                                                                    2005
                                                                    ----
Revenue                                                        $   5,975,914
                                                               =============
Net loss                                                       $    (664,263)
                                                               =============
     Net loss per share, basic and diluted                     $        (.10)

Note 5 - Inventories

       Inventories at June 30, 2006 and 2005 consist of the following:
<TABLE>
<CAPTION>

                                                                           2006              2005
                                                                           ----              ----
<S>                                                                 <C>               <C>
        Raw materials                                               $         415,590 $         322,958
        Work-in-process                                                       343,361           402,045
        Finished goods                                                      1,544,938         1,240,498
                                                                    ----------------- -----------------
                                                                    $       2,303,889 $       1,965,501
                                                                    ================= =================
</TABLE>


Note 6 - Property, Equipment and Software Development Costs

       Property, equipment and software development costs consist of the
following:
<TABLE>
<CAPTION>

                                                                             2006             2005
                                                                             ----             ----
<S>                                                                   <C>               <C>
        Furniture and fixtures                                        $          70,551 $        93,087
        Machinery and equipment                                                 645,854         579,561
        Improvements                                                             23,008           9,296
        Software                                                                104,613          96,761
        Software development costs                                              508,573         489,228
                                                                      ----------------- ---------------
                                                                              1,352,599       1,267,933
            Less: accumulated depreciation and amortization                     955,772         765,289
                                                                      ----------------- ---------------
                                                                      $         396,827 $       502,644
                                                                      ================= ===============
</TABLE>

       Depreciation expense was $192,945 and $190,766 for the years ended June
30, 2006 and 2005, respectively.

Note 7 - Intangibles
<TABLE>
<CAPTION>
                                                                       June 30, 2006                   June 30, 2005
                                                                       -------------                   -------------
                                                                 Gross                              Gross
                                                                Carrying        Accumulated        Carrying      Accumulated
                                                                 Amount         Amortization        Amount      Amortization
                                                            --------------  ------------------  ------------  ----------------
                              Amortized intangible assets:
<S>                                                         <C>             <C>                 <C>           <C>
                                  Licenses                  $       74,000  $           44,733  $     74,000  $         39,000
                                  Patent                           852,793              62,496       843,692            15,624
                                  Trademarks                       577,263              38,484       577,263             9,621
                                  Other                              8,881               2,368         8,881               592
                                                            --------------  =-----------------  ------------  ----------------
                                                            $    1,512,937  $          148,080  $  1,503,836  $         64,837
                                                            ==============  ==================  ============  ================
</TABLE>

                                      F-12
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8 - Short-Term Borrowing

       The Company entered into a Factoring, Loan and Security Agreement (the
       "Agreement") with a financing company in April 2006. The Company may
       terminate the agreement by giving the financing company 30 days notice.
       All borrowings are secured by outstanding receivables specifically
       assigned to the financing company. Assigned receivables are at the sole
       discretion of the financing company. Advances are made on 95% of Approved
       receivables assigned. Payments on assigned receivables are received
       directly by the financing company, and applied to outstanding advances.
       All outstanding advances and uncollected assigned receivables are subject
       to fees and interest charges ranging from 0.05 percent to 7.2 percent,
       with a minimum annual fee of 0.8 percent. All receivables assigned and
       advances made are subject to return and recall by the financing company,
       respectively. As such, the advances have been classified as short-term
       secured borrowings in accordance with FAS 140 "Accounting for Transfer
       and Servicing of Financial Assets and Extinguishments of Liabilities". As
       of June 30, 2006, the Company has borrowed $3,542,000 and repaid
       $3,023,134. The total outstanding advance made under the agreement is
       $518,866 as of June 30, 2006, which is presented as short-term debt. The
       weighted average rate of interest for borrowings made under the Agreement
       was 8.5% for the year ended June 30, 2006.

Note 9 - Long-Term Debt

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

       The annual maturities of long-term debt as of June 30, 2006 are as
follows:

          2007                        $  33,000
          2008                           21,160
                                      ---------
                                      $  54,160
                                      =========

Note 10 - Convertible Debentures

       In January 2006, the Company completed a private placement of $1million
       in principal amount of its Senior Secured Convertible Debentures ("the
       Debentures"). At closing, the Company received net proceeds of
       approximately $831,000 from the proceeds of the Debentures, after the
       payment of offering related fees and expenses. The Company's obligations
       with respect to the Debentures are secured by a lien on all of the assets
       of the Company, including its intellectual property. The Debentures have
       a term of three years and were convertible at the option of the holder at
       any time into shares of the Company's common stock, par value $0.001 per
       share (the "Common Stock") at a conversion price of $1.15 per share at
       issuance, subject to certain adjustments. Interest is payable on a
       quarterly basis at a rate equal to the greater of 8% per annum or the
       prime rate for the applicable interest period plus 2.5%. At the option of
       the Company, interest payments are payable either in cash or in shares of
       Common Stock (provided there is an effective registration statement at
       the time of payment), subject to certain conditions. The Company elected
       to pay the interest in cash for the periods ending March 31, 2006 and
       June 30, 2006.

       Investors in the private placement received three-year warrants to
       purchase up to an aggregate of 434,783 shares of the Company's Common
       Stock at a per share exercise price of $2.00 (the "Warrants"). The
       Warrants may be exercised on a cashless basis following the first
       anniversary of issuance if a registration statement covering the Common
       Stock issuable upon exercise of the Warrants is not in effect at the time
       of exercise.

                                      F-13
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       In connection with the financing the Company paid to two placement
       agents, a cash fee in the aggregate amount of $72,500 and also to such
       persons three-year warrants to purchase an aggregate of 121,739 shares of
       common Stock at a per share exercise price of $2.00 and otherwise on
       substantially the same terms as the Warrants issued to the investors,
       including without limitation, expiration date, potential adjustments and
       cashless exercise rights.

       For financial reporting purposes, the Company recorded a discount of
       $223,096 to reflect the value of the Warrants and a discount of $193,350
       to reflect the value of issuance costs and will be amortizing this amount
       to the date of maturity. In addition, in accordance with EITF No. 00-27,
       the Company recorded additional discount on the debentures of $118,748 to
       reflect the beneficial conversion feature of the debt and is amortizing
       this amount to the date of maturity. The amortization of the discounts
       and beneficial conversion amounted to $63,776 and $18,186, respectively,
       for the period ended June 30, 2006.

       In May 2006, in connection with the execution of the factoring agreement
       the conversion price and exercise price of the Debentures and Warrants
       were reduced to $0.75

       At June 30, 2006, 21,176,399 shares of common stock were reserved for
       issuance upon the conversion of the Debentures

Note 11 - Due to Officers and Shareholders

       These amounts represent interest bearing advances and are due on demand.
       At the present time, the officers and shareholders do not contemplate
       requesting repayment of these loans within the next fiscal year .

Note 12 - Income Taxes

       The provision for taxes for the year ended June 30, 2006 and 2005
includes the following components:
<TABLE>
<CAPTION>

                                                                        2006         2005
                                                                        ----         ----
Current
<S>                                                              <C>            <C>
   Federal                                                       $        -     $        -
   State                                                                  -              -
   Foreign                                                                -              -
                                                                 -------------- -------------
                                                                          -              -
Deferred
   Federal                                                                -              -
   State                                                                  -              -
   Foreign                                                                -              -
                                                                 -------------- -------------
                                                                          -              -
                                                                 -------------- -------------

                                                                 $        -         $    -
                                                                 ============== =============
</TABLE>

                                      F-14
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       The components of the deferred tax accounts as of June 30, 2006 and 2005
are as follows:
<TABLE>
<CAPTION>

                                                                        2006              2005
                                                                        ----              ----
Deferred tax assets
<S>                                                              <C>               <C>
      Net operating loss carryforward                            $       1,603,405  $        919,353
      Stock based compensation                                              73,575            31,140
      Other                                                                 27,948            21,448
                                                                 -----------------  ----------------
                                                                         1,704,928           971,941
Deferred tax liabilities
      Depreciation and amortization                                         67,016            62,588
                                                                 -----------------  ----------------
Subtotal                                                                 1,637,912           909,353
Valuation allowance                                                     (1,244,112)         (515,553)
                                                                 -----------------  ----------------

Net deferred tax assets                                          $         393,800  $        393,800
                                                                 =================  ================
</TABLE>

       The valuation allowance at June 30, 2004 was $631,968.

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

<TABLE>
<CAPTION>

                                                                      2006           2005
                                                                      ----           ----

<S>                                                              <C>            <C>
Expected federal tax at statutory rate                           $   (700,336)  $  (125,936)
State taxes, net of federal tax effect                               (116,028)      (12,444)
Foreign rate differential                                              (7,560)       (9,780)
Non deductible expenses                                               159,283        86,873
Change in valuation allowance                                         617,391        51,126
Other                                                                  47,250        10,161
                                                                 ------------  ------------
                                                                 $    -         $      -
                                                                 ============  ============
</TABLE>

       At June 30, 2006 the Company had net operating loss carryforwards for
       federal and state income tax purposes of $3,287,626 and $2,907,104
       respectively, expiring through 2026. The Company has foreign net
       operating loss carryforwards of $559.933 with no expiration date.

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

Note 13- Shareholders' Equity

       Series A Convertible Preferred Stock

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

       As of June 30, 2006, 675,000 shares of Series A Preferred were converted
       into a like amount of common stock.

       On July 28, 2005, the Company's board of Directors declared dividends
       totaling $99,378 on the Series A Convertible Preferred Stock. The
       dividend was paid by the issuance of 100,628 additional shares of the
       Company's common stock. Cumulative but undeclared dividends at June 30,
       2006 total approximately $65,000.

       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 have preference to any payments to the Preferred A
       shareholders. Each preferred share is convertible at the option of the
       holder into 1,000 shares of common stock. The conversion price is subject
       to anti-dilution adjustments, including, among other things, in the event
       that the Company sells common stock during the next three years for a
       price of less than one dollar per share. The Company may require the
       conversion of all (but not less than all) of the then outstanding shares
       of Series B Preferred Stock, if at any time the volume weighted average
       trading price per share of common stock for each of 20 consecutive
       trading days prior to a conversion notice is greater than $2.50 (subject
       to adjustment), and the daily trading volume of the common stock is at
       least 100,000 shares. In addition all shares of common stock underlying
       the Series B Preferred Stock must be covered by an effective registration
       statement.

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

       In May 2006, in connection with the reset of the conversion and exercise
       price of the Debentures and Warrants discussed in Note 9 above, the
       conversion and exercise prices of the Series B Preferred and the
       accompanying warrants were reduced to $.75

       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 increased to 2,000,000 shares of common stock and 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.



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

<TABLE>
<CAPTION>


                                                                                         Weighted
                                                                                          Average
                                                                                         Exercise
                                                                            Options        Price
                                                                           ---------     ---------
<S>                                                                       <C>          <C>
Options outstanding, July 1, 2004                                            590,000      $1.53
Granted                                                                      565,000       2.40
Exercised                                                                    (45,000)       .07
                                                                            -------       -----

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

Granted                                                                      702,000      $1.07
Exercised                                                                     (5,000)       .88
Forfeited                                                                   (302,500)      2.29
                                                                           ---------
Options outstanding, June 30, 2006                                         1,504,500      $1.31

Shares of common stock available
  for future grant under the plans           495,500
                                             =======
</TABLE>

       The following table summarizes information about stock options
outstanding at June 30, 2006.
<TABLE>
<CAPTION>

                                                                            Options Exercisable
                                             Weighted Average                            Weighted
                                         Remaining                                        Average
                           Number       Contractual      Exercise         Number         Exercise
Ranges of price         Outstanding        Life            Price        Exercisable        Price
---------------        -------------   -------------    ------------   -------------   -------------
<S>                    <C>               <C>            <C>            <C>              <C>
$.25-.39                      55,000            5.48           $0.31          55,000           $0.31
$.50-.80                      90,000            4.37           $0.62          90,000           $0.62
$1.00-1.20                 1,139,500            8.96           $1.09       1,139,500           $1.09
$2.70-2.97                   220,000             .62           $2.95         220,000           $2.95
                       -------------   -------------    ------------   -------------   -------------
$.05-$2.97                 1,504,500            7.34           $1.31       1,504,500           $1.31
                       =============   =============    ============   =============   =============
</TABLE>

Note 14 - Concentrations and Economic Dependency

       The Company had two customers that accounted for 85% and 10%,
       respectively of net revenues for year ended June 30, 2006 and two
       customers that accounted for 76% and 20%, of net revenues for year ended
       June 30, 2005. Two customers accounted for 82% of the accounts
       receivables as of June 30, 2006. At June 30, 2006 approximately 12% 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.


                                      F-17
<PAGE>
                       ELECTRONIC CONTROL SECURITY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   Note 15 - Commitments and Contingencies

       Lease Agreements

       Future minimum annual rental payments required under non-cancelable
       operating leases for years after June 30, 2006 are as follows:

         2007                               $  109,454
         2008                                   94,611
         2009                                   22,950
         2010                                   23,970
         2011                                   12,240
                                            $  360,703
                                            ==========

       Rent expense under all operating leases was $133,896 and $125,309 for the
       years ended June 30, 2006 and 2005.

       License Agreement

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

       Loss Contingencies

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

   Note 16 - 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
                                       ---------------  --------------   --------------  -----------
     For the year ended
       June 30, 2006
<S>                                    <C>                      <C>       <C>                  <C>
          Revenue                      $     8,782,908          99.56%    $     39,182         .44%
          Operating loss                    (1,425,346)         92.13%        (121,775)       7.87%
          Identifiable assets                7,294,438          95.33%         357,479        4.67%

     For the year ended
       June 30, 2005
          Revenue                      $     5,898,503          98.84%    $     68,966        1.16%
          Operating loss                        89,516        -125.74%        (160,710)     225.74%
          Identifiable assets                7,046,418          95.41%         339,144        4.59%
</TABLE>


   Note 17 - Related Party Transactions

       The Company made non-interest bearing advances that are due on demand to
       a former officer and director of the Company. The balances outstanding at
       June 30, 2006 and 2005 were $85,995 and $73,030, respectively.


                                      F-18