Electronic Control Security POS AM Prospectus update (post-effective amendment)

As filed with the Securities and Exchange Commission on April 2, 2007

Registration No. 333-132075

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

POST-EFFECTIVE AMENDMENT NO. 1

FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

ELECTRONIC CONTROL SECURITY INC.

(Name of small business issuer in its charter)

New Jersey	7381	22-2138196
(State or other jurisdiction of	(Primary Standard Industrial	(IRS. Employer
incorporation or organization)	Classification Code Number)	Identification Number)

790 Bloomfield Avenue, Building C, Suite 1

Clifton, New Jersey 07012

(973) 574-8555

(Address and telephone number of principal executive offices)

Arthur Barchenko, President and

Chief Executive Officer

Electronic Control Security Inc.

790 Bloomfield Avenue

Building C, Suite 1

Clifton, New Jersey 07012

Telephone: (973) 574-8555

Telecopier: (973) 574-8562

(Name, address and telephone number of agent for service)

Copies of communications to:

JONATHAN FREEDMAN,ESQ.	DAVID ABOUDI, ESQ.
ABOUDI & BROUNSTEIN	ABOUDI & BROUNSTEIN
174 FIFTH AVENUE, SUITE 204	3 GAVISH STREET
NEW YORK, NY 10010	KFAR SABA, 44641, ISRAEL
212-202-0783	972-9-764-4833

Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

The Registration Fee was previously calculated and paid in connection with the initial filing of this Registration Statement on February 27, 2006.

EXPLANATORY NOTE

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

Subject to Completion, dated April 2, 2007

PROSPECTUS

ELECTRONIC CONTROL SECURITY INC.

4,073,956 Shares of Common Stock

This prospectus relates to the public offering, which is not being underwritten, of up to 4,073,956 shares of our common stock by the selling stockholders listed in this prospectus. The shares offered by this prospectus include 392,963 presently outstanding shares of our common stock, 1,347,829 shares of our common stock issuable upon conversion of our senior secured convertible debentures (including shares issuable in connection with the payment of interest on the debentures if interest is not otherwise paid in cash and additional shares issuable in the event of possible adjustments to the conversion price and other potential adjustments), 1,585,218 shares of our common stock issuable upon exercise of warrants to purchase shares of our common stock (including additional shares issuable upon exercise of the warrants issued in connection with our private financing in January 2006 in the event of adjustments to the exercise price and other potential adjustments), 281,250 shares of our common stock issuable in connection with the payment of dividends payable on outstanding shares of our series A convertible preferred stock, if such dividends are not otherwise paid in cash, and 466,696 shares of our common stock issuable in connection with the payment of dividends payable on outstanding shares of our 10% series B convertible preferred stock, if such dividends are not otherwise paid in cash. These shares may be sold by the selling stockholders from time to time in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, through negotiated transactions at negotiated prices or otherwise at market prices prevailing at the time of sale.

Pursuant to registration rights granted by us to the selling stockholders, we are obligated to register the shares held or to be acquired by these selling stockholders. The distribution of the shares by the selling stockholders is not subject to any underwriting agreement. We will receive none of the proceeds from the sale of the shares by the selling stockholders, except the cash exercise price upon exercise of the warrants. We will bear all expenses of registration incurred in connection with this offering, but all selling and other expenses incurred by the selling stockholders will be borne by them.

Our common stock is quoted on the OTC Bulletin Board under the symbol EKCS.OB. The last reported sale price of our shares of our common stock, as reported by the OTC Bulletin Board, on March 29, 2007, was $0.62 per share.

The selling stockholders and any broker-dealer executing sell orders on behalf of the selling stockholders may be deemed to be "underwriters" within the meaning of the Securities Act of 1933. Commissions received by any broker-dealer may be deemed to be underwriting commissions under the Securities Act of 1933.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. PLEASE CAREFULLY REVIEW THE SECTION TITLED "RISK FACTORS" BEGINNING ON PAGE 6.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is April 2, 2007

PRINCIPAL EXECUTIVE OFFICE:

Electronic Control Security Inc.

790 Bloomfield Avenue

Building C, Suite 1

Clifton, New Jersey 07012

Telephone: (973) 574-8555

TABLE OF CONTENTS

	Page
Prospectus Summary	4

The Offering	7

Risk Factors.	8

Special Note Regarding Forward-Looking Statements	14

Use of Proceeds	14

Market for our Common Stock and Related Stockholder Matters	15

Management's Discussion and Analysis or Plan of Operation	17

Business Approach	23

Management	31

Principal Stockholders	37

Certain Relationships and Related Transactions	39

Selling Stockholders	39

Plan of Distribution	45

Description of Securities	46

Shares Eligible for Future Sale	48

Legal Matters	48

Experts	48

Where You Can Find More Information	48

Index to Financial Statements	49

We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data and we do not make any representation as to the accuracy of that information.

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It is not complete and does not contain all of the information that you should consider before investing in our common stock. Before making a decision to purchase our shares, you should read this entire prospectus, including the financial statements and related notes and risk factors. "We," "our," "us" and similar phrases refer to Electronic Control Security Inc., a New Jersey corporation, together with its subsidiaries.

Our Company

We design, develop, manufacture and market technology-based integrated security systems. We also provide consulting services consisting of risk assessment and vulnerability studies to ascertain a customer's security requirements in developing a comprehensive risk management and mitigation program, as well as product design and engineering services.

We market our products domestically and internationally to:

national and local government entities, including the U.S.,

the Department of Defense (DoD) and the U.S. Department of Energy (DoE),

large chemical and petrochemical facilities, and major office complexes,

energy facilities, including nuclear power stations, power utilities and pipelines,

commercial transportation centers, such as airports and seaports, and

water and agricultural resources including reservoirs, dams, fish hatcheries and rivers.

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

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

offer technologically superior products,

are able to design, engineer and manufacture systems customized to our customers' specific requirements,

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

have established solid credentials in protecting high value targets, and

offer our customers what we believe may be the best warranty in the industry.

Recent Developments

In December 2006, we entered into a strategic alliance (the “Hyundai Strategic Alliance”) with Hyundai Syscomm Corp. (“Hyundai”). Pursuant to the Hyundai Strategic Alliance, we and Hyundai agreed to the following transactions:

A sub-contract from Hyundai to us (the “Sub-Contract”) to provide, commencing during the first calendar quarter of 2007, at least twenty five million dollars ($25,000,000) of purchase orders for security worthy assets (including video surveillance systems) on terms beneficial to both parties on or prior to June 30, 2008.

The issuance to Hyundai of a warrant (the “Warrant”) to purchase shares of our Common Stock at $0.01 per share, to purchase up to a number of shares that, when added to Funding Shares (as defined below), equals fifty percent (50%) of the then-outstanding Common Stock, with the vesting of the right to purchase shares subject to the gross profit generated from the Sub-Contract. Under the terms of the Warrant and the Sub-Contract, we are to be credited with seventy percent (70%) of such gross profits and Hyundai is credited with thirty percent (30%) of such gross profits (the “Hyundai Gross Profit Allocation”). Until such time as the aggregate Hyundai Gross Profit Allocation exceeds four million dollars ($4,000,000), the Warrant was to vest with respect to one share of Common Stock for each fifty-eight cents ($0.58) credited to Hyundai pursuant to the Hyundai Gross Profit Allocation. At such time as the aggregate Hyundai Gross Profit Allocation exceeds four million dollars ($4,000,000), the Warrant was to vest with respect to one share of Common Stock for each forty cents ($0.40) credited to Hyundai pursuant to the Hyundai Gross Profit Allocation.

The provision by Hyundai to us of $1.2 million (the “Repurchase Funding”) in order for us to repurchase our outstanding Senior Secured Convertible Debentures issued in January 2006. Under the terms of the Repurchase Funding, the Company issued into escrow 4.8 million shares of its Common Stock (the “Funding Shares”) in the name of Hyundai. Upon Hyundai’s provision of the Repurchase Funding, 3 million shares were to be delivered out of escrow to Hyundai (reflecting a per share purchase price of $0.40), and the remaining 1.8 million shares were to be delivered out of escrow to Hyundai at such time as we receive purchase orders or other indicia that shall provide our Board of Directors with the comfort, in its sole discretion, that Hyundai is living up to the terms of the Sub-Contract.

Because Hyundai did not provide the Repurchase Funding on a timely basis, in March 2007, we, Hyundai and Hirshfield Law (the “Escrow Agent”) entered into an Amendment and Mutual Release pursuant to which: (a) each of the above-named parties released the others from any potential claims arising from Hyundai’s failure to provide the Repurchase Funding; (b) the Escrow Agent returned the Funding Shares; and (c) the warrant that was previously issued to Hyundai in connection with the Hyundai Strategic Alliance (the “Warrant”) was amended so that such warrant would vest with respect to one share of Common Stock for each $0.40 of gross profit allocated to Hyundai pursuant to the Hyundai Strategic Alliance. The Amendment and Mutual Release did not otherwise affect the parties’ rights and obligations under the Sub-Contract.

Pursuant to the Hyundai Strategic Alliance, the parties also entered into a registration rights agreement pursuant to which Hyundai was granted certain “demand” and “piggyback” registration rights. In connection therewith, Hyundai agreed not to exercise its registration rights, or sell any of the shares of Common Stock acquired pursuant to the transaction, prior to June 22, 2007, without our prior written consent (not to be unreasonably withheld). Also in connection with the Hyundai Strategic Alliance, Hyundai provided Arthur Barchenko, our President and Chief Executive Officer, with a revocable proxy with respect to the voting of such shares.

About this Offering

This prospectus relates to the public offering, which is not being underwritten, of up to 4,073,956 shares of our common stock by the selling stockholders listed in this prospectus. The shares offered by this prospectus include 392,963 presently outstanding shares of our common stock, 1,347,829 shares of our common stock issuable upon conversion of our senior secured convertible debentures (including shares issuable in connection with the payment of interest on the debentures if interest in not otherwise paid in cash and additional shares issuable in the event of possible adjustments to the conversion price and other potential adjustments), 1,585,218 shares of our common stock issuable upon exercise of warrants to purchase our common stock (including additional shares issuable upon exercise of the warrants issued in connection with our private financing in January 2006 in the event of possible adjustments to the exercise price and other potential adjustments), 281,250 shares of our common stock issuable in connection with the payment of dividends payable on outstanding shares of our series A convertible preferred stock, if such dividends are not otherwise paid in cash, and 466,696 shares of our common stock issuable in connection with the payment of dividends on outstanding shares of our 10% series B convertible preferred stock, if such dividends are not otherwise paid in cash. These shares may be sold by the selling stockholders from time to time in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, through negotiated transactions or otherwise at market prices prevailing at the time of sale or at negotiated prices. We will receive none of the proceeds from the sale of the shares by the selling stockholders, except upon exercise of the warrants. We will bear all expenses of registration incurred in connection with this offering, but all selling and other expenses incurred by the selling stockholders will be borne by them.

2,013,047 shares of common stock being offered by this prospectus relate to a private financing we completed in January 2006. On January 11, 2006, we entered into an agreement for the sale of our senior secured convertible debentures in aggregate principal amount of $1,000,000. The debentures have a term of three years and come fully due on January 11, 2009. The debentures are convertible at the option of the holder at any time and from time to time into shares of our common stock. The initial conversion price of the debentures was $1.15 per share of common stock, resulting in an aggregate of 869,566 shares of common stock issuable thereunder, subject to certain adjustments. The conversion price of the debentures was decreased to $0.75 in May 2006 as a result of a factoring agreement that we entered into, resulting in an increase in the aggregate number of shares issuable thereunder to 1,333,333. We also issued common stock purchase warrants to the purchasers of the debentures to purchase up to 434,783 shares of our common stock at an initial exercise price of $2.00 per share. The exercise price of the warrants was reduced to $0.75 at the same time that the conversion price of the debentures was reduced. The conversion price of the debentures, as well as the exercise price and the number of shares issuable pursuant to the warrants, are subject to further adjustment. Pursuant to the registration rights agreement entered into in connection with the convertible debenture transaction, we were obligated to register the shares underlying the debentures and the warrants, as well as an additional number of shares of our common stock (25% of the amount the debentures and the warrants are initially convertible or exercisable, respectively, into) to cover possible adjustments. Because the number of shares issuable upon conversion of the debentures now exceeds the number of shares issuable thereunder that are included in the registration statement of which this prospectus forms a part, we intend to file an additional registration statement in the near future to cover the shares issuable upon conversion of the debentures that are not included herein.

We are also registering 260,871 shares of our common stock issuable in connection with the payment of interest on the debentures, if such interest is not otherwise paid in cash. In connection with completing the financing, we paid fees to our placement agents of $72,500 and issued warrants to our placement agents to purchase up to 121,739 shares of our common stock on substantially similar terms as the purchasers' warrants. For a more detailed discussion regarding the January 2006 transaction, see the discussion under the heading "Selling Stockholders - Description of the January 2006 Private Placement."

137,292 shares of common stock being offered by this prospectus are shares of common stock issued in connection with dividends on our 10% series B convertible preferred stock issued in June 2004. These shares are additional conversion shares that were issuable as a consequence of an addition to the stated value of our 10% series B convertible preferred stock resulting from the dividend declaration and a corresponding adjustment in the beneficial conversion price. We are also registering 466,696 shares of our common stock issuable in connection with the payment of dividends on outstanding shares of our 10% series B convertible preferred stock, if such dividends are not otherwise paid in cash. 99,378 shares of common stock being offered by this prospectus are shares of common stock issued as dividends on shares of our series A convertible preferred stock issued from January to March 2002. We are also registering 281,250 shares of our common stock issuable in connection with the payment of dividends on outstanding shares of our series A convertible preferred stock, if such dividends are not otherwise paid in cash. Of the remaining shares of common stock being offered by this prospectus, 205,192 shares of our common stock are shares that were issued to our employees or consultants on account of services rendered and 920,000 shares of our common stock are issuable upon exercise of warrants to purchase common stock.

The number of shares being offered by this prospectus represents approximately 40.58% of our outstanding shares of common stock as of March 28, 2007.

Corporate Information

Our corporate headquarters are located at 790 Bloomfield Avenue, Building C, Suite 1, Clifton, New Jersey 07012, and our telephone number is (973) 574-8555. We maintain manufacturing and administrative facilities in Madison, Alabama. Our web address is www.anti-terrorism.com. Information on our website is not part of this prospectus.

THE OFFERING

Common stock offered by the selling stockholders:

	Presently outstanding number of shares being offered by this prospectus	392,963 shares

	Number of shares that may be issued upon conversion of outstanding senior secured convertible debentures (including shares issuable in connection with the payment of interest on the debentures if interest is not otherwise paid in cash and additional shares issuable in the event of possible adjustments to the conversion price and other potential adjustments	1,347,829 shares

	Number of shares that may be issued in connection with the payment of dividends payable on outstanding shares of our series A convertible preferred stock and our 10% series B convertible preferred stock, if such dividends are not otherwise paid in cash	747,946 shares

	Number of shares that may be issued upon exercise of outstanding warrants to purchase common stock (including additional shares issuable upon exercise of warrants issued in connection with our private financing in January 2006 in the event of possible adjustments to the exercise price and other potential adjustments)	1,585,218 shares

	Total shares offered	4,073,956

Common stock outstanding		8,822,559 shares (1)

Use of proceeds		We will receive none of the proceeds from the sale of the shares by the selling stockholders, except cash for the warrant exercise price upon exercise of the warrants, which would be used for working capital purposes.

OTC Bulletin Board symbol		EKCS.OB

(1) As of March 28,, 2007. Does not include:

369,318 shares of our common stock that may be issued upon conversion of outstanding shares of series A convertible preferred stock,

934,918 shares of our common stock that may be issued upon conversion of outstanding shares of 10% series convertible B preferred stock,

1,446,875 shares of our common stock that are reserved for issuance pursuant to outstanding warrants to purchase common stock,

869,566 shares of our common stock that may be issued upon conversion of outstanding senior secured convertible debentures,

934,500 shares of our common stock that are issued and outstanding under our original Employee Incentive Stock Option Plan and our new 2006 Equity Incentive Plan,

1,548,000 shares of our common stock available for future issuance under our Incentive Stock Option Plan and our 2006 Equity Incentive Plan,

RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING MATERIAL RISKS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD LIKELY SUFFER. IN THESE CIRCUMSTANCES, THE MARKET PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

Risks Related 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.

SOME OF OUR ORDERS AND CONTRACTS MAY BE CANCELLED AT ANY TIME ON SHORT NOTICE WITH LITTLE OR NO PENALTY, OR MAY NOT BE FUNDED FULLY OR AT ALL.

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

BECAUSE A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES, A SUBSTANTIAL DECREASE IN ORDERS FROM THESE CUSTOMERS COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS UNLESS WE WERE ABLE TO IDENTIFY OTHER CUSTOMERS, AND 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.

For our 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 and services 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.

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

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

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

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,

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,

any representation or warranty under the financing documents that is untrue or incorrect in any material respect,

certain events of bankruptcy or insolvency of us or any of our subsidiaries,

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,

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,

if, during the effectiveness period of this registration statement, 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

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

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:

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

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

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

not to issue shares of common stock or other securities convertible or exercisable into common stock until 90 days after the effective date of this registration statement,

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

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

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

not to amend our current certificate of incorporation, and

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 AND WE COULD OVERESTIMATE OR UNDERESTIMATE OUR ACTUAL REQUIREMENTS, WHICH COULD 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 our management overestimates our component requirements, we may have excess inventory, which would increase our costs. If our management underestimates component requirements, we may have inadequate inventory, which could interrupt manufacturing and delay delivery of product to customers.

OUR PRODUCT OFFERINGS INVOLVE A LENGTHY SALES CYCLE AND OUR MANAGEMENT MAY NOT ANTICIPATE SALES LEVELS APPROPRIATELY, WHICH COULD IMPAIR OUR 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 since 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. If sales in any period fall significantly below anticipated levels, our revenues 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 our operating results, which are tied to the marketing and sale of our products, to fluctuate widely.

A PORTION OF OUR BUSINESS INVOLVES PROJECTS AND SALES OUTSIDE THE UNITED STATES, AND WE ARE THEREFORE INFLUENCED BY FACTORS AND REGULATIONS IN OTHER COUNTRIES.

During our fiscal years ended June 30, 2006 and 2005, we generated approximately 3% and 5%, respectively, of our business from projects outside the United States. The occurrence of any of the following risks could have a materially adverse effect on both the market for our products and services or our ability to provide them, and, as a result, these risks could materially adversely affect the operations and value of any of our overseas projects:

changes in, and difficulty in complying with, laws and regulations of the different countries including authority to trade our products or perform our services,

nullification, modification and renegotiation of contracts,

reversal of current policies, including favorable tax policies, encouraging foreign investment of foreign trade, or relating to the use of local agents,

restrictive actions by local governments including tariffs and limitations on imports and exports, and

difficulty in collecting accounts receivable and longer collection times.

We expect that the proportion of our business that arises from international projects will increase significantly as a result of the Hyundai Strategic Alliance.

WE DEPEND ON RELATIONSHIPS WITH STRATEGIC PARTNERS AS A SOURCE OF BUSINESS AND OUR BUSINESS 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 FINANCIAL RESOURCES THAN WE HAVE, ENABLING THEM TO RESPOND MORE QUICKLY TO CHANGES IN CUSTOMER REQUIREMENTS AND TO ALLOCATE GREATER RESOURCES TO MARKETING EFFORTS IN THIS COMPETITIVE INDUSTRY.

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 you that we will be able to distinguish ourselves in a competitive market.

WE RELY ON SUPPLIERS FOR PRINCIPAL COMPONENTS USED IN OUR PRODUCTS, AND PROLONGED DISRUPTIONS IN SUPPLY OR SIGNIFICANT INCREASES IN COMPONENT COSTS COULD MATERIALLY HARM OUR BUSINESS.

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

IF OUR SUBCONTRACTORS FAIL TO PERFORM THEIR CONTRACTUAL OBLIGATIONS, OUR PRIME CONTRACT PERFORMANCE AND OUR ABILITY TO OBTAIN FUTURE BUSINESS MAY BE SERIOUSLY HARMED.

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 PRODUCTS, SERVICES AND REPUTATION, AND ULTIMATELY OUR RESULTS OF OPERATIONS, MAY BE ADVERSELY AFFECTED BY PRODUCT DEFECTS OR INADEQUATE PERFORMANCE FOR CUSTOMERS.

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, WHO WE NEED TO SUCCEED, OR HIRE NEW QUALIFIED PERSONNEL, WHO ARE DIFFICULT TO ATTRACT, 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 Chief Executive Officer, 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 Related to Our Common Stock

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:

conditions or trends in the industry,

failure to keep pace with changing technology,

costs associated with developing new products and services,

cost associated with marketing products and services may increase significantly,

the timing of sales and the recognition of revenues from them,

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

downward pressure on prices due to increased competition,

changes in our operating expenses,

sales of common stock,

actual or anticipated variations in quarterly results, and

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.

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:

make a special written suitability determination for the purchaser,

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

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

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 46.37% of our currently outstanding shares of common stock. In addition, Arthur Barchenko, our President and Chief Executive Officer, has a revocable proxy from Hyundai to vote the shares acquired pursuant to the Hyundai Strategic Alliance. 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.

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. We are registering an aggregate of 3,580,298 shares of our common stock for resale in the public market pursuant to this registration statement. 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 are an aggregate of 5,242,261 shares of our common stock which are not being registered pursuant to this registration statement. Some or all of these shares of our common stock 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.

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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Included in this prospectus are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including matters described in the section titled "Risk Factors." Forward-looking statements include those that use forward-looking terminology, such as the words "anticipate," "believe," "estimate," "expect," "intend," "may," "project," "plan," "will," "shall," "should," and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and we cannot assure you that actual results will be consistent with these forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ from these forward-looking statements include (without limitation) the following:

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

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

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

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

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

All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. However, we could receive up to $1,502,548 from the cash exercise price upon exercise of warrants held by the selling stockholders. We expect to use the proceeds received from the exercise of the warrants, if any, for working capital and general corporate purposes. We will bear all expenses of registration incurred in connection with this offering, but all selling and other expenses incurred by the selling stockholders will be borne by them.

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Based on information furnished by our transfer agent, as of March 28, 2007, there were approximately 197 holders of record of our common stock and there were 8,8232,559 shares of our common stock outstanding. This number of holders of record does not include beneficial owners our common stock whose shares are held in the names of various security holders, dealers and clearing agencies.

Quotation of our common stock on the OTC Bulletin Board commenced in June 2001 and it is quoted on the OTC Bulletin Board under the trading symbol EKCS.OB. The following table sets forth, for the periods indicated, quotations for the high and low bid prices for our common stock for each quarter within the last two fiscal years, as reported by the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions.


	Closing Bid
	High		Low

Fiscal 2007

January 1 - March 8,, 2007	$	0.83	$	0.61
Oct. 1 - December 31, 2006	$	0.60	$	0.34
July 1 - September 30, 2006	$	0.56	$	0.40

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

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We anticipate that any earnings will be retained for development and expansion of our business and do not anticipate paying any cash dividends in the near future. Our Board of Directors has sole discretion to pay cash dividends based on our financial condition, results of operation, capital requirements, contractual obligations and other relevant factors.

Equity Compensation Plan Information

Incentive Stock Option Plan.. In 1986, we adopted our Incentive Stock Option Plan, which we renewed in 1996 for a second ten-year term. We initially had reserved 1,000,000 shares of common stock for issuance under the Incentive Stock Option Plan, which was increased to 2,000,000 shares upon the approval of the stockholders at our 2005 annual meeting. Our board of directors administers the Incentive Stock Option Plan but may delegate such administration to a committee of three persons, one of whom must be a member of the board. The board or the committee has the authority to determine the number of stock options to be granted, when the stock options may be exercised and the exercise price of the stock options, provided that the exercise price may never be less than the fair market value of the shares of the common stock on the date the stock option is granted (110% in the case of any employee who owns more than 10% of the combined voting power or value of all classes of stock). Stock options may be granted for terms not exceeding ten years from the date of the grant, except for stock options granted to any person holding in excess of 5% of our common stock, in which case the stock options may not be granted for a term not to exceed five years from the date of the grant. The Incentive Stock Option Plan expired in September 2006.

Equity Incentive Plan. In October 2006, our Board adopted our Equity Incentive Plan, which is subject to the approval of our shareholders at our annual meeting of shareholders to be held in December 2006. The Equity Incentive Plan is intended to succeed the Incentive plan, which expired in September 2006. 2,000,000 shares are reserved for issuance under the Equity Incentive Plan. The Equity Incentive Plan will be administered by the Board of Directors or, at the discretion of the Board, by a committee consisting of at least two directors. The administrating body, whether it be the Board of Directors or a committee of the type described above, is sometimes referred to as the "Committee." The Committee is authorized from time to time to select and to grant awards under the Equity Incentive Plan to such key employees, non-employee directors, and consultants of the Company and its subsidiaries as the Compensation Committee, in its discretion, selects. The Compensation Committee is authorized to delegate any of its authority under the Equity Incentive Plan (including the authority to grant awards) to such executive officers of the Company as it thinks appropriate and is permitted by Rule 16B-3 of the Exchange Act and Section 162(m) of the Code. The Equity Incentive Plan allows for the grant of a number of different types of awards, including both incentive and non-statutory stock options, stock appreciation rights, restricted stock grants, performance units, cash payments and other stock-based awards.

Non-Statutory Stock Option Plan. We also adopted a Non-Statutory Stock Option Plan and have reserved 250,000 shares of common stock for issuance to directors, employees and non-employees. Stock options granted pursuant to this plan will be non-transferable and expire, if not exercised within five years from the date of the grant. Stock options will be granted in such amounts and at such exercise prices as our board of directors may determine.

The following table sets forth additional information as of March 28, 2007, concerning shares of our common stock that may be issued upon the exercise of stock options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements not yet approved by our stockholders. The information includes the number of shares covered by and the weighted average exercise price of, outstanding stock options and other rights and the number of shares remaining available for future grants excluding the shares to be issued upon exercise of outstanding stock options, warrants and other rights.

Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the second column)
Equity compensation plans approved by security holders (1)	1,976,500 (2)	$1.18	1,548,000

Equity compensation plans not approved by security holders	—	—	—

Total	1,976,500	$1.18	1,548,000

(1) Includes our Incentive Stock Option Plan and our Non-Statutory Stock Option Plan.

(2) Consists of stock options to purchase 1,976,500 shares of common stock

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in this prospectus beginning on page F-1. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We market our products domestically and internationally to:

national and local government entities, including DoD and DoE,

large chemical and petrochemical facilities, and major office complexes,

energy facilities, including nuclear power stations, power utilities and pipelines, and

commercial transportation centers, such as airports and seaports, and

water and agricultural resources including reservoirs, dams, fish hatcheries and rivers.

Critical Accounting Policies

Our significant accounting policies, including the assumptions and judgments underlying them, are more fully described in our "Notes to Consolidated Financial Statements" included with financial statements in this prospectus. Some of our accounting policies require the application of significant judgment by our management in the preparation of the consolidated financial statements, and as a result, they are subject to a greater degree of uncertainty. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Our management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. We have identified certain of our accounting policies as the ones that are most important to the portrayal of our consolidated financial condition and results of operations and which require our management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our critical accounting policies include the following:

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.

Results of Operations

SIX MONTHS ENDED DECEMBER 31, 2006 ( THE “2006 PERIOD”) COMPARED TO SIX MONTHS ENDED DECEMBER 31, 2005 (THE “2005 PERIOD”) AND THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2005.

REVENUES.. We had net revenues of $3,770,944 for the 2006 Period as compared to net revenues of $4,059,565 for the 2005 Period, representing a decrease in revenues of approximately 7.1%. Net revenues for the three months ended December 31, 2006 were $1,051,266 as compared to $2,536,251 for the corresponding three month period in 2005. The decrease in revenues in the 2006 Period and for the three months ended December 31, 2006 is primarily attributable to our focus on smaller private sector contracts and the current dearth of government funding to complete certain previously announced projects with the United States Air Force.

GROSS MARGINS. Gross margins for the 2006 Period were 23.30% of revenue as compared to 22.23% of revenue for the 2005 Period, and 50.92% of revenue for the three months ended December 31, 2006 as compared to 24.88% for the corresponding three-month period in 2005. The increase in gross margins for the 2006 periods as compared to the corresponding periods in 2005 is primarily attributable to our focus on smaller private sector industrial projects which includes a higher percentage of manufactured goods resulting in higher gross margins. The results for the three months ended December 31, 2006 comport with management’s objectives that we outlined in last quarterly report on Form 10-QSB for the three months ended September 30, 2006 and in the annual report for the fiscal year ended June 30, 2006.

RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of expenses incurred in designing and developing upgrades to existing products and systems as well as new product development work on the Sentinal ™ water technologies. Research and development expenses for the 2006 Period and for the three months ended December 31, 2006 were $85,588 and $42,834, respectively, as compared to $109,102 and $51,750 for the corresponding periods in 2005. The decrease in research and development expenses during each of the periods in 2006 compared to the corresponding periods in 2005 is primarily attributable to the completion or termination of certain research and development programs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the 2006 Period and for the three months ended December 31, 2006 were $837,995 and $418,269, respectively, as compared to $1,136,699 and $574,881 for each of the corresponding periods in 2005. The decrease is primarily attributable to the reduction in sales and marketing personnel in non-productive markets as well as marketing and sales support services. Approximately $157,000 of the decrease is attributable to a reduction in general and administrative as a result of cost reduction initiative that were put into place during the 2006 Period with respect to the operations of our wholly-owned subsidiary, Clarion Systems, Inc. and our operations in the Middle East.

STOCK BASED COMPENSATION. In the 2006 Period, we issued stock options to our directors and various employees valued at $215,000. The value of these options is being amortized over their two year vesting period. In the 2005 Period, we issued immediately vested stock to various consultants and to the directors that were valued at $61,087 at the time of issuance. Stock-based compensation is non-cash and, therefore, has no impact on cash flow or liquidity.

INTEREST EXPENSE. Interest expense in the 2006 Period was $162,350 as compared to $57,809 incurred during the 2005 Period. The increase in the 2006 Period is attributable to the higher average amount of outstanding debt balances. Our objectives are to reduce these costs in the second half of Fiscal 2007.

MINORITY INTEREST IN SUBSIDIARY LOSS. The minority interest in the loss attributable to the foreign subsidiary was $4,464 for the 2006 Period as compared to the $27,340 for the 2005 Period. This decrease was due to the reduction in overhead and General Operating Expenses.

NET LOSS. Net loss before deemed dividends for each of the 2006 and 2005 Period is $(229,370) and $(432,376), respectively, and $(24,814) and $(70,554) for the three months ended December 31, 2006 and 2005, respectively. The reduction in net losses was directly attributable to reduction in operating costs and sales of higher gross margin products.

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.

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.

In July 2005, we declared and paid dividends equal to $153,042 on our series A convertible preferred stock for the years ended March 31, 2004 and 2005. The dividend was paid via 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 the 2006 Period and $199,306 in the 2005 Period. In lieu of a cash payment we have elected under the terms of the agreement by which we sold these securities to add this amount to the stated value of the 10% series B convertible preferred stock.

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

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2006, we had working capital of approximately $2.5 million compared to approximately $2.37 million at June 30, 2006 Net cash provided by operating activities for the 2006 Period was $398,209 as compared to net cash used by operating activities of $199,727 for the 2005 Period.

Inventory has decreased by $122,766 during the 2006 Period, but has remained relatively high in anticipation of shipments for committed projects.

Accounts receivables as a percentage of sales has increased. Days sales outstanding (DSO) were 110 days at December 31, 2006 as compared to 97 days at June 30, 2006. This is due to certain payments and retainage on the Tinker Air Force Base work being held until final completion of projects expected to occur in the third quarter of fiscal year 2007.

Accounts payable and accrued expenses have decreased by $289,818 to $1,668,305 during the 2006 Period as payments to vendors have been increased to match the corresponding collection of accounts receivables.

Investing activities for the 2006 Period included the purchase of equipment and software required to upgrade two major product lines at a cost of $7,397. We do not have any material commitments for capital expenditures going forward.

Financing activities include the following:

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 the Company's Common Stock at a conversion price of $.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%. The agreements entered into with Hyundai in December 2006 contemplate the remittance to us of $1.2 million to redeem these securities in exchange for the 3 million shares of our common stock. We have issued into escrow 4.8 to Hyundai million shares of our common stock, of which 3 million are to be delivered to Hyundai out of escrow upon Hyundai’s furnishing to us of the funding to effect the redemption and the balance of 1.8 million to be delivered to Hyundai out of escrow upon our receipt of certain assurances relating to purchase orders that we are to receive from Hyundai (which are discussed below). We and Hyundai are currently in the process of coordinating the remittance of these amounts to us. We have been informed by Hyundai that they intend to consummate the funding by March 17, 2007. If the funds to effect the repurchase are not ultimately remitted to us, then we are entitled to recall these shares out of escrow and return them to treasury.

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 December 31, 2006, there were no outstanding advances under the program.

On December 26, 2006 we and Hyundai entered into definitive agreements pursuant to which we are to receive on or prior to June 30, 2008 at least $25 million in purchase orders. On February 12, 2007 we received from Hyundai a purchase order for surveillance equipment in the approximate amount of $6.0 million. We are currently in the process of clarifying the details relating to the purchase order. No assurance can be provided that we will be able to fill the purchase order or that we will receive additional purchase orders from Hyundai or under the agreement with Hyundai. Under the terms of the agreements with Hyundai, we are to be credited with seventy percent (70%) of the gross profits generated by these purchase orders and Hyundai is credited with thirty percent (30%) of such gross profits (the "Hyundai Gross Profit Allocation"). At its option, Hyundai is entitled to take the Hyundai Gross Profit Allocation in shares of our Common Stock. Until such time as the aggregate Hyundai Gross Profit Allocation equals four million dollars ($4,000,000), such gross profit will be valued at fifty-eight cents ($0.58) for purposes of conversion. At such time as the aggregate Hyundai Gross Profit Allocation will be valued at forty cents ($0.40) for purposes of conversion.

We expect that cash on hand together with projected collection of accounts receivable will be sufficient to provide for our working capital needs for the next 12 months.

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 seven 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 2005, orders and commitments increased. Currently, purchase order commitments continue to grow. However, our historical results have taught us that the release of funds that support contracts and orders may never be forthcoming. Furthermore, as is customary in the security industry, our contracts are subject to cancellation or delay at any time with little notice or penalty. Government based orders which are subject to legislative appropriations are particularly sensitive to economic and political conditions. Thus we cannot be certain as to the total realized value and revenue which we will generate from committed orders. We expect to receive releases and task orders for a significant portion of our contract commitments sometime within the next 8 to 12 months, although we cannot be certain that we will complete any or all of such orders within the anticipated time frame.

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

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

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 better economic results during fiscal year 2007. A number of factors contribute to this outlook.

Our selection by the U.S. Air Force, Force Protection Office, as one of four companies, among two multinational and two small businesses organizations, entitling us to submit proposals to obtain contracts to supply and install security system upgrades for 34 military facilities worldwide over a five year period with a total value in excess of $540 million.

Our estimate that orders recently received, including nuclear power station security upgrades, Hanscom Air Force Base tactical equipment purchases, Israeli Defense Forces - MOD purchase orders and IBDSS/TASS task orders, will amount to $8,500,000.

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

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

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, as of the first interim period or fiscal year beginning after December 15, 2005.

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

BUSINESS

Overview

We market our products domestically and internationally to:

national and local government entities, including the U.S.Department of Defense (DoD) and the U.S. Department of Energy (DoE),

large chemical and petrochemical facilities, and major office complexes,

energy facilities, including nuclear power stations, power utilities and pipelines, and

commercial transportation centers, such as airports and seaports, and

water and agricultural resources including reservoirs, dams, fish hatcheries and rivers.

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

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

offer technologically superior products,

are able to design, engineer and manufacture systems customized to our customers' specific requirements,

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

have established solid credentials in protecting high value targets, and

offer our customers what we believe may be the best warranty in the industry.

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

Security Industry Overview

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

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

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,

perimeter security for airports, maritime, chemical, transportation, energy and pharmaceutical facilities has been mandated by homeland security concerns,

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

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

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:

life,

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

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

electronic data and information technology.

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, turnkey security solutions that incorporate many of our systems and stand-alone systems that comprise an individual technology of a security program.

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

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

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

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.

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.

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

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

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

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

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

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

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

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

We believe that our products are qualitatively comparable to, or more effective than, those offered by our competitors because our products:

provide low nuisance and false alarm rates,

are reliable in virtually any environmental condition,

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

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 governmental sector and commercial customers that engage our services and products on a continuing basis.

Consulting Services

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

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

provide security system design services.

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

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

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

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

Product Design

We design and develop new products based upon market requirements, and as deemed necessary to meet the customers' 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 customers 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 have 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:

the U.S. government, its agencies and departments, including the U.S. Department of Defense and the U.S. Department of Energy,

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

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

commercial aviation and maritime facilities,

rail and bus transportation, and

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

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

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 U.S. 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.

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.

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

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

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

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

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

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

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

Sales and 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.

The primary goals of our marketing strategy are to:

broaden the base of potential customers, and

demonstrate the efficacy of our products.

To that end, we have entered into strategic partnerships, teaming, representative and joint venture relationships with major multinational 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 us and our products added credibility. These entities frequently subcontract our services and purchase our products in connection with larger projects. During fiscal year 2005, we entered into teaming agreements with Lockheed Martin Transportation and Security Solutions, SIGCOM, and Hudson Marine Management Services/HudsonTrident.

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

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

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

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

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:

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

Expand our base of dealers/installers/integrators worldwide. We believe 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.

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

Design and develop new systems. We will continue to develop new security systems to expand our portfolio of proprietary products. We believe this will allow us to open up new markets and retain our position as a leading-edge provider of technology-based security equipment.

License new and emerging technologies. We will continue to identify, analyze and potentially 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.

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.

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

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

Improve our telecommunications infrastructure. We expect to install a T1 telecommunications line for network connectivity between our geographically-dispersed U.S. facilities. This will permit an integrated method of communication between and among our management and key employees.

Customers

We provide products and services to 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 more than 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 U.S. Air Force and Duke Energy Corporation accounted for 95% 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.

Manufacturing

We maintain manufacturing operations at our facilities in Clifton, New Jersey and Madison, Alabama. These activities include the procurement of materials, product assembly and component integration, product assurance, quality control and final testing. We are planning to open a logistical engineering and sales support facility in Virginia to support our U.S. Air Force contract and expand our government base to cover the expected market for our products which may result from the Homeland Security Act.

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

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

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

Intellectual Property and Other Proprietary Rights

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

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

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

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

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

Research and Development

The forces that drive the design and development of our new products include the need to meet new security threats, incorporate newly developed technologies or to satisfy a customer'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 customers 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.

Product Warranty

IPID sensors and FOIDS processors are warranted for ten 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.

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.

Competition

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

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

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

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

our products address a wide range of security requirements,

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

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

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

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.

Employees

As of March 8, 2007, we employed 17 individuals on a full-time basis including 2 design and engineering staff, 4 manufacturing and assembly employees, 3 marketing employees, 3 project managers and 5 administrative employees. A number of the employees serve in multiple capacities. Our manufacturing staff may oversee site installation of the products.

We have relationships with 12 independent sales representative organizations covering specific regions in the United States, Central America, South America, the United Kingdom, India, the Middle East and Southeast Asia.

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

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 space (2,600 square feet) and manufacturing space (9,600 square feet) space. Our lease on this space runs through April 30, 2008 at a rent of $5,256 per month, increasing to $5,361 per month by the end the lease term. We also lease approximately 2,500 square feet of manufacturing space at 102 Commerce Circle, Madison, Alabama. Our lease on this space runs through February 2007 at a rent of $2,000 per month. Our foreign subsidiary in the Middle East leases approximately 2,000 square feet of office space through December 2006 at a rent of $1,170 per month. Our subsidiary, Clarion Sensing Systems, Inc., leases 1,000 square feet of office and laboratory space at 3901 W. 30th Street, Indianapolis, Indiana through December 2006 at a rent of $1,520 per month.

Legal Proceedings

Amata Inc., v. ECSI International, Inc.

On May 16, 2006, Amata, Inc. filed suit, against ECSI International, Inc., claiming that it was owed $292,350.00 on a certain book account. On or about June 23, 2006, however, Amata dismissed this action without prejudice. Subsequently, on or about September 15, 2006, ECSI was served with a new Complaint by Amata seeking $309,046.00. An Answer and Counterclaim was filed and we believe there are valid defenses to the complaint and that we are owed substantial sums by Amata which are likely to exceed the amount which Amata claims to be due.

ECSI v. Bennett Plastics, Inc.

On June 15, 2006, ECSI filed suit against Benenett Plastics claiming that it was owed, as of that date, $223,090.37 on the basis of defective products provided by Bennett Plastics pursuant to a subcontract with ECSI. Bennett Plastics has answered, and discovery is proceeding.

ECSI v. Axsys Technologies

On August 10, 2006, ECSI filed suit against Axsys Technologies, Inc. seeking damages arising out of Axsys’ breach of a subcontract with ECSI. On August 30, 2006, Axsys filed an Answer and Counterclaim alleging certain additional moneys due under the subcontract. ECSI has filed an Answer to the Counterclaim denying that any such additional moneys are due.

MANAGEMENT

Executive Officers, Directors and Key Employees

The names, ages and positions of our executive officers, directors and key employees are as follows:

Name	Age	Position
Arthur Barchenko	73	President, Chief Executive Officer and Director

Mark Barchenko	50	Vice President-Operations

Natalie Barchenko	73	Treasurer, Secretary and Director

David J. Friedman	61	Director

Gene Rabois	62	Director

Henry J. Schweitzer	51	Director

Edward Snow	69	Director

Stephen Rossetti	56	Director

Eldon Moberg	56	Vice President

Thomas Isdanavich	57	Vice President-Project Engineering

Richard Stern	57	Vice President-Manufacturing

The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers, directors and key employees are as follows:

Arthur Barchenko has been our President since December 1976. Mr. Barchenko also participates in the management of our subsidiaries. From June 1952 to May 1972, he held various sales and marketing positions at Lightolier, Inc., a manufacturer of lighting fixtures, and served both as its vice president of sales where he was responsible for a sales and support staff of approximately 200 persons, and as a member of the board of directors and a member of the executive committee. Prior to organizing Electronic Control Security Inc., Mr. Barchenko co-founded and directed the operations of Bajer Industries, a lighting manufacturing company that was subsequently sold to the Charter Group. Mr. Barchenko is active with American Defense Preparedness Association, and American Society of Industrial Security. He also served on the RTCA Special Committee 183 for the upgrade of the Federal Aviation Regulation 107.14, focusing on access control in civil aviation facilities. Presently, he serves on the RTCA Special Commission 207, addressing FAA regulations that include access control and perimeter intrusion devices. Mr. Barchenko is married to Natalie Barchenko, a director and Secretary and-Treasurer of ECSI, and is the father of Mark Barchenko, Vice President, Operations of ECSI.

Mark Barchenko joined us in 1993 and has been our Vice President-Operations since February 2004. He has focused his marketing and business development efforts on Southeast Asian government projects and U.S. airports and maritime facilities. Mr. Barchenko spearheaded the IS0 9001:2000 quality program based on the international standard of operation, from inception through registration during 2000. Mr. Barchenko is active with the National Defense Industrial Association and the American Society for Industrial Security. He served on the Radio Technical Commission for Aeronautics Committee 183 for upgrade of FAR 107.14(a) and (b) as a member of the special access control security task force for the Federal Aviation Administration. Federal Aviation Regulation 107.14 (FAR 107.14a and b) is the document produced by RTCA committee 183 for the security upgrade of the access control system and universal access control system requirements for civilian commercial and shared civilian/military airports under U.S. jurisdiction. Mr. Barchenko holds a U.S. patent titled "Jet Propulsion Engine Assembly for Aircraft."

Natalie Barchenko has been our Treasurer and Secretary, and a member of our board of directors, since 2001. Over the last twelve years, she has been actively responsible for the day to day operations of the Company in the areas of human resources, order entry, invoicing, advertising and sales materials. Natalie is a member of the Sarbanes Oxley 404 Audit Committee. She is married to Arthur Barchenko, a director and the President and CEO of ECSI, and is the mother of Mark Barchenko, a Vice President of the Company..

David J. Friedman joined the board in July 2006 and is also a member of the Audit Committee. He heads his own investment banking firm and has over 30 years experience in commercial lending, asset based lending, venture capital and LBOs. From February, 1989 to July, 2006 Mr. Friedman was a partner with Seiden Commercial Corporation, focusing on middle market corporations' financial requirements in the Northeast. From April, 1987 to September, 1988, he held the position of Executive Vice President at The Franklin Corporation where he was responsible for the single largest deal, the LBO of Marshall Electronics. From March, 1982 to April, 1987, Mr. Friedman was a Senior New Business Development officer to Security Pacific Business Credit Inc. From January, 1974 to March, 1982 he was a vice president at Chemical Bank where he was responsible for half of the loan portfolio of a commercial district, lending to middle market companies primarily in New York City. Mr. Friedman earned his law degree from Boston University School of Law and a B.S. in Economics from The Wharton School of Commerce and Finance, University of Pennsylvania.

Gene Rabois has been a member of our board of directors since October 1989. Previously he was employed as our Chief Financial Officer. Mr. Rabois has more than 30 years' experience in accounting and finance, SEC financial reporting, installation and management of computer systems, and control and administration of corporate financial affairs. He served as controller for SJT Imaging, Inc., a printing concern, for more than the past five years to May 2004, and, since June 2004, has served as controller at e.comm Technologies, Inc.

Henry (Jim) Schweiter, whose law career spans 25 years, joined the board in August, 2006. From 1988 to 1997 Mr. Schweiter was legal advisor to the Committee on Armed Services, U.S. House of Representatives in various roles. He presently serves as Senior Counsel at McNeil Technologies, Springfield, VA, where he is assigned on a contract basis to the Commission on the National Guard and Reserves, examining the roles, missions, readiness, size, shape, equipment needs, management, and benefit structure of the military's seven reserve components. From January 2000 to September, 2005 Mr. Schweiter served as Counsel/Minority Staff Director, Committee on Armed Services, U.S. House of Representatives and legal advisor to the committee's ranking member and to the 27 other Democrat Members of Congress. From 1982 to 1988, Mr. Schweiter served as legal counsel, Judge Advocate General's Department, United States Air Force, Appellate Defense Counsel, Headquarters, USAF representing individuals on appeal before the United States Supreme Court, United States Court of Military Appeals, and Air Force Court of Military Review. Mr. Schweiter has also served on the Circuit Trial Counsel, Headquarters, USAF and Area Defense Counsel in the legal defense of service members at Randolph Air Force Base, Texas. He is a graduate of University of Toledo, College of Law and Gettysburg College, Gettysburg, PA.

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

Stephen Rossetti joined the Board in October 2004. Mr. Rossetti currently serves as the President of Zegato Solutions, Inc. and Markquest, Inc., positions he has held since 2003 and 2001, respectively. Zegato is an information technology company based in Lanham, Maryland that engages in software development and systems integration services for the U.S. Government. Markquest is a consulting and lobbying organization. He is also the chairman and chief executive officer of Government Internet Systems and is a corporate advisor of NOW Solutions, Inc., both subsidiaries of Vertical Computer Systems, Inc., a multinational provider of Web services, underpinning Web technologies, and administrative software services. >From August 2003 to January 2004, he served as president of Applied DNA Sciences, Inc., a provider of DNA-embedded security solutions that protect corporate and government intellectual property from counterfeiting and fraud. Mr. Rossetti served in the Office of the Secretary of Defense from August 2003 to January 2004 and from 1987 to 1996 served on the Professional Staff of the Armed Services Committee, U.S. House of Representatives where he had an established reputation as a strident government reform advocate. >From November 1998 through January 2001, Mr. Rossetti worked for the United States Department of Defenses as the Director of Defense Integrated Travel. As director of the Readiness Subcommittee staff, he was responsible for the oversight of the Department of Defense infrastructure and combat readiness, including special operations forces, National Guard and Reserve preparedness, chemical and biological weapons preparedness and response, and missions other than war such as counter-drug and counter-terror.

Key Employees

Eldon Moberg joined us in 1996 as Vice President-Manufacturing of our FOIDS product division and, subsequently, has been our Vice President since July 1999. Mr. Moberg is responsible for establishing the FOIDS manufacturing and test facility in Madison, Alabama. His duties include planning and coordinating manufacturing schedules and resources and the provision of technical data for security system design and project cost analysis. Prior to joining us, Mr. Moberg was the Production Supervisor for Mason & Hanger National, Inc., a company engaged in the manufacture and marketing of our FOIDS product line, where he initially was a production support technician and performed optical/electronic fabrication and testing of a fiber optic-based security system and components. Thereafter, as Production Supervisor, he was responsible for planning and scheduling personnel, materials and equipment to support product manufacture. Other duties included procurement, product acceptance testing, quality assurance and quality control, inventory control and MRP system operation. Before entering private industry, Mr. Moberg served for twenty years in the U.S. Army where he gained experience as senior radar repair technician for several Army air defense systems, team leader for missile system direct support maintenance and training developer for newly acquired Army missile systems.

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

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

Ashok Saxena, who joined the Company in June, 2005 has extensive technology knowledge that includes satellite and launch vehicle engineering, internet and telecommunications network solutions, information technology including software development and flight computer operating systems and applications. From August 2002 to February 2005, Mr. Saxena was with L-3 Communications serving in various capacities as well as program manager where he was instrumental in the awards to the company of the IBDSS contract and the Force Protection Airborne Surveillance System (FPASS II) program. Also during that time, he was involved in the development of highly advanced security technologies including a video compression device and portable radar system for aircraft. Prior to joining L-3, Mr. Saxena was a principal with Startec Global Communications in Maryland where he led efforts to win the company's first government contract and played a role in the development of IP strategies for Startec's global network. From 1986 to 1999 he headed his own companies involved in internet software development services.

All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the board of directors and serve at the discretion of the board.

Arthur Barchenko and Natalie Barchenko are married. Mark Barchenko is their son. Otherwise, there are no family relationships among our directors and executive officers. No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. No director or officer has been found by a court to have violated a federal or state securities or commodities law.

None of our directors or executive officers or their respective immediate family members or affiliates is indebted to us. As of the date of this prospectus, there is no material proceeding to which any of our directors, executive officers or affiliates is a party or has a material interest adverse to us.

Advisory Board

During fiscal year 2005, we established an advisory board to provide expert analysis and information to us regarding security issues and technologies applicable to the industry. Our advisory board is comprised of representatives from government, academia and industry. Our advisory board is composed of the following persons:

Mark R. Barchenko, Vice President Operations, was appointed Chairman of the Advisory Board in 2006. Information pertaining to Mr. Barchenko is stated above.

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

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

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

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

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

Lieutenant General Gordon E. Fornell, USAF (Ret.) retired from active duty in the USAF in 1993. He has joined the Advisory Board in October, 2006. Gen. Fornell has been a private consultant since retiring. He is a member of the Defense Support Initiative of the Okaloosa County Economic Development Council, President of the Air Force Armament Museum Foundation, and member of the Mid Bay Bridge Authority. He served in senior acquisition leadership positions in AF Systems Command and AF Materiel Command. Those positions included two commands; one as Commander, Armament Division at Eglin AFB, FL, from 1985-1987; and second as Commander, Electronic Systems Center at Hanscom AFB, MA from 1988-1993. He served both Secretary Casper W. Weinberger and Secretary Frank C. Carlucci in this capacity. He advised the Secretary on a wide range of national security issues and coordinated the office activities of a large staff. Relationships with nations around the world were established covering the full spectrum of national priorities.

Committees of Board of Directors

Our board of directors does not have a nominations and governance committee or a compensation committee as yet, but we will establish such committees if we move to list our company on the American Stock Exchange or the Nasdaq Stock Market in the future. The selection of nominees for the board of directors is made by the entire board of directors. Compensation of our management is determined by the entire board of directors.

Audit Committee. In 2002, we established an audit committee of the board of directors, which consists of Mr. Rabois, who is chairman of the committee, Mr. Snow, and Mr. Friedman, all of whom are independent directors. The audit committee meets at least quarterly with our management and our independent registered public accounting firm to review and help ensure the adequacy of our internal controls and to review the results and scope of the auditors' engagement and other financial reporting and control matters. Messrs. Rabois and Snow are financially literate, and Mr. Rabois is a financial expert, as such term is defined under the Sarbanes-Oxley Act of 2002.

Our audit committee has adopted a formal written charter specifying: (i) the scope of the audit committee's responsibilities and how it is to carry out those responsibilities, including structure, processes and membership requirements; (ii) the audit committee's responsibility for ensuring its receipt from the outside auditor of a formal written statement delineating all relationships between the auditor and the company, consistent with Independence Standards Board Standard 1, adopted in January 1999 by the Independence Standards Board (the private sector standard-setting body governing the independence of auditors from their public company clients) and the committee's responsibility for actively engaging in communications with the auditor with respect to any relationships or services that may impact the objectivity and independence of the auditor and for taking, or recommending that the entire board of directors take, appropriate action to oversee the independence of the outside auditor; and (iii) the outside auditor's ultimate accountability to the board of directors and the audit committee, as representatives of our company's stockholders, and these stockholder representatives' ultimate authority and responsibility to select, evaluate and, where appropriate, replace the outside auditor (or to nominate the outside auditor for stockholder approval). Our audit committee will review and reassess the adequacy of our written charter on an annual basis.

Our audit committee has adopted guidelines and procedures: (i) making it directly responsible for the appointment, compensation and oversight of the work of any public accounting firm engaged by it (including resolution of any disagreements between management and the firm regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such public accounting firm will report directly to the audit committee; (ii) providing for the (a) receipt, retention and treatment of complaints received by our company regarding accounting, internal accounting controls or auditing matters and (b) confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; (iii) affording it the authority to engage independent counsel and other advisers, as it may determine to be necessary to carry out its duties; and (iv) providing for appropriate funding for payment of: (a) the public accounting firm engaged by us for the purpose of rendering or issuing an audit report and (b) any advisers engaged by the audit committee as described under clause (iii) above.

Sarbanes-Oxley 404 Committee

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

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

Mark Barchenko, Vice President-Operations

Natalie Barchenko, Director, Treasurer

Gene Rabois, Director, Audit Committee Chairman, and

Edward Snow, Director, Audit Committee Member.

Code of Conduct and Ethics

We have adopted a code of conduct and ethics that applies to our directors, officers and all employees. The code of conduct and ethics has been posted on our website at www.ecsi@anti-terrorism.com in the near future. The code of conduct and ethics may also be obtained free of charge by writing to Electronic Control Security Inc., Attn: Arthur Barchenko, 790 Bloomfield Avenue, Building C, Suite 1, Clifton, New Jersey 07012.

Director Compensation

In addition to reimbursing non-employee directors for travel and related expenses for attending meetings of the board or committees of the board, we pay our directors a fee of $1,000 for each board meeting attended in person and $500 for each board meeting attended telephonically. During the year ended June 30, 2006, in consideration for service on its board of directors the Company issued to four directors options for a total of 100,000 shares of Common Stock..

Executive Compensation

The table below summarizes the compensation earned for services rendered to us in all capacities for the year ended June 30, 2006, by Arthur Barchenko, our chief executive officer. No other individuals employed by us received a salary and bonus in excess of $100,000 during fiscal year 2006.

SUMMARY COMPENSATION TABLE

Long Term Compensation

Annual Compensation

Awards

Payouts

Name and

Principle

Position

Year

Bonus

($)

Other Annual

Compensation

($)

Restricted

Stock

Award(s)

($)

Securities

Underlying

Options/SARs

(#)

LTIP Payouts

($)

All Other

Compensation

($)

Arthur Barchenko,

President

2006

$ 130,000

375,000 (1)

2005

$130,000

250,000 (2)

2004

$96,000

50,000

(1) Includes options for 125,000 shares of common stock issuable upon exercise of options issued in the previous year and that were repriced and accelerated in December 2005. See "Repricing of Options" below.

(2) The shares issuable upon exercise of this option (originally granted in January 2005) at a per share exercise price of $2.40 were exchanged in December of 2005 for a grant of 125,000 immediately vested options at a per share exercise price of $1.20.

Option Grants in the Last Fiscal Year

The following table presents certain information concerning stock options granted to Arthur Barchenko, the executive named above, under our various stock option plans during the 2006 fiscal year.


OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Name	Number of Securities Underlying Options/sars Granted (#)	% of Total Options/SARS Granted to Employees in Fiscal Year	Exercise or Base Price ($/Sh)	Expiration Date
Arthur Barchenko	275,000 (1)	22%	.75	December 8, 2015

(1) Includes options for 125,000 shares at a per share exercise price of $1.20 that were exchanged for options issued in the previous fiscal for 250,000 shares at $2.40.

Aggregated Option Exercises in the Last Fiscal Year and Year-End Option Values

The following table sets forth information concerning unexercised options held by Arthur Barchenko, the executive named above, as of June 30, 2006. No options were exercised by the named executive officer during fiscal year 2005 or 2006 through the date of this prospectus.


Aggregate Option/sar Exercises in Last Fiscal Year and Fy-end Option/sar Values
	Shares Acquired On Exercise	Value Realized	Number of Securities Underlying Unexercised Options/sars At Fy-end (#)	Value of Unexercised In-the Money Options/sars At Fy-end ($)
Name	(#)	($)	Exercisable/unexercisable	Exercisable/unexercisable
Arthur Barchenko	-0-	-0-	525,000/0	$0/$0

Employment Agreements

We have not entered into any employment agreements with any of our officers or employees.

Stock Option Plans

Incentive Stock Option Plan. In 1986, we adopted an Incentive Stock Option Plan, which we renewed in 1996 for a second ten-year term. We initially had reserved 1,000,000 shares of common stock for issuance under the Incentive Stock Option Plan, which was increased to 2,000,000 shares upon the approval of the stockholders at our 2005 annual meeting. Our board of directors administers the Incentive Stock Option Plan but may delegate such administration to a committee of three persons, one of whom must be a member of the board. The board or the committee has the authority to determine the number of stock options to be granted, when the stock options may be exercised and the exercise price of the stock options, provided that the exercise price may never be less than the fair market value of the shares of the common stock on the date the stock option is granted (110% in the case of any employee who owns more than 10% of the combined voting power or value of all classes of stock). Stock options may be granted for terms not exceeding ten years from the date of the grant, except for stock options granted to any person holding in excess of 5% of our common stock, in which case the stock options may not be granted for a term not to exceed five years from the date of the grant. The Incentive Stock Option Plan expired in September 2006.

Non-statutory Stock Option Plan. We also adopted a Non-Statutory Stock Option Plan and have reserved 250,000 shares of common stock for issuance to directors, employees and non-employees. Stock options granted pursuant to this plan will be non-transferable and expire, if not exercised within five years from the date of the grant. Stock options will be granted in such amounts and at such exercise prices as our board of directors may determine.

PRINCIPAL STOCKHOLDERS

Security Ownership of Certain Beneficial Owners and Management

The table and accompanying footnotes set forth information as of March 8, 2007 with respect to the ownership of our common stock by:

each person or group who beneficially owns more than 5% of our common stock,

each of our executive officers and directors, and

all of our executive officers and directors as a group.

Applicable percentage of ownership for each holder is based on 8,822,559 shares of common stock outstanding on March 8,, 2007.

A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the exercise of stock options and warrants or the conversion of convertible securities. Accordingly, common stock issuable upon exercise of stock options and warrants that are currently exercisable or exercisable within 60 days after the date of this prospectus, and common stock issuable upon conversion of convertible preferred stock or senior secured convertible debentures, have been included in the table with respect to the beneficial ownership of the person owning the stock options, warrants, convertible preferred stock or senior secured convertible debentures, but not with respect to any other persons.

Unless otherwise indicated, we believe that all persons named in the table above have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

NAME BENEFICIAL OWNER (1)	NUMBER OF SHARES	PERCENT OF CLASS (2)

Arthur Barchenko (3)	1,137,784	12.89%

Richard Stern (4)	55,000	*

Eldon Moberg (5)	75,000	*

Thomas Isdanavich (6)	50,000	*

Mark Barchenko (8)	160,825	*

Natalie Barchenko (9)	1,504,079	17.04%

Gene Rabois (7)	127,703	1.44%

Edward Snow (10)	47,500	*

Stephen Rossetti (11)	32,500	*

David Friedman (12)	20,000	*

Henry J. Schweiter (13)	20,000

Directors and officers as a group (9 persons)(14)	3,210,391	36.38%

* Less than 1%.

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

(2) Based on 8,822,559 shares outstanding as of March 8, 2007.

(3) Consists of 597,467 shares of common stock, including 265,317 shares not registered in Mr. Barchenko's name but over which he has dispository power and control, and options to purchase 275,000 shares of common stock.

(4) Consists of 30,000 shares of common stock and options to purchase 25,000 shares of common stock.

(5) Consists of 20,000 shares of common stock and options to purchase 55,000 shares of common stock.

(6) Consists of 20,000 shares of common stock and options to purchase 30,000 shares of common stock.

(7) Consists of 95,203 shares of common stock and options to purchase 32,500 shares of common stock.

(8) Consists of 100,825 shares of common stock and options to purchase 60,000 shares of common stock.

(9) Consists of 1,379,078 shares of common stock and options to purchase 125,000 shares of common stock.

(10) Consists of 15,000 shares of common stock and options to purchase 32,500 shares of common stock.

(11) Consists of options to purchase 32,500 shares of common stock.

(12) Consists of options to purchase 20.000 shares of common stock

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

(14) Includes options to purchase an aggregate of up to 607,500 shares of common stock which are held by all directors and officers.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

Until the Company achieves profitability, we rely on loans from officers, directors, shareholders and their affiliates to assist in the funding of our operations. At June 30, 2006 and 2005 related party debt consisted of $616,423 and $431,617, respectively. The loans are repayable with interest at rates varying from no interest through 12% interest per annum. All interest for the Fiscal years 2004 and 2003 has been paid. The Company is not restricted from repaying the principal amount of the loans as long as at the time of any such repayment, holders of Series B Preferred Stock are entitled to sell their shares under an effective registration statement.

In connection with the Hyundai Strategic Alliance, Hyundai has granted Arthur Barchenko, our President and Chief Executive Officer, a revocable proxy to vote all of its shares of Common Stock.

SELLING STOCKHOLDERS

Description of January 2006 Private Placement

On January 11, 2006, we entered into a Securities Purchase Agreement for the sale of our senior secured convertible debentures in the aggregate principal amount of $1,000,000. The transaction closed on January 13, 2006. We also entered into a Security Agreement, dated as of January 11, 2006, pursuant to which the debentures are secured by all of our assets, including our intellectual property. Interest is payable on the debentures at a rate equal to the greater of 8% per annum or the prime rate for the applicable interest period plus 2.5%. Quarterly principal and interest payments on the debentures begin on April 1, 2006. At our option, interest payments on the debentures are payable either in cash or in registered shares of common stock, subject to certain conditions as specified in the debentures.

The debentures have a term of three years and come fully due on January 11, 2009. The debentures were initially convertible at the option of the holder at any time and from time to time into shares of our common stock at a conversion price of $1.15 per share of common stock, or initially 869,566 shares of common stock, subject to certain adjustments. In the event that we issue common stock in an equity financing at a price less than the then conversion price, the conversion price shall be immediately adjusted to the price at which such common stock was issued, subject to specified exempt issuances. In May 2006, the conversion price of the debentures was decreased to $0.75 per share in connection with a factoring agreement that we entered into.

Events of default under the debentures include: