Form 10QSB for ELECTRONIC CONTROL SECURITY INC.

Clifton, NJ - May 19, 2005
Quarterly Report Nine Months March 31, 2005
Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Nine Months Ended March 31, 2005 (2005 period) Compared to Nine Months ended March 31, 2004 (2004 Period) and Three Months Ended March 31, 2005 (2005 Quarter) Compared to Three Months Ended March 31, 2004 (2004 Quarter).

REVENUES. We had net revenues of $ 3,353,819 for the 2005 period, as compared to revenues of $1,465,251 for the 2005 period, an increase of about 129%. Revenues for the 2005 quarter were $1,396,227 as compared to $449,264 for the 2004 quarter. Of the revenues reported in the 2005 period, approximately 98% was domestic and 2% was related to international projects. The increase in sales in the 2005 period is primarily attributable to the IBDSS contract award on Tinker AFB and nuclear facility security upgrades.

GROSS MARGINS. Gross margins for the 2005 period were 44.79% of revenue as compared to 55.24% of revenue for the 2004 period. Gross margins for the 2005 quarter were 54.66% as compared to 42.32% for the 2004 quarter. This is primarily due to a greater mix of ECSI product in relationship to subcontractor costs. The decrease in the 2005 period is primarily due to an increase in the Company's use of sub-contractors in connection with projects it was performing, and also in the 2004 period the Company performed a greater percentage of higher gross profit generating activities such as design and engineering services.

RESEARCH AND DEVELOPMENT (R&D). R&D expenses was $234,556 in the 2005 period compared to $238,611 in the 2004 period and $72,727 for the 2005 quarter as compared to $66,502 for the 2004 quarter. R&D in the 2005 period was for upgrades to existing products and systems, and for new product development work.

SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A expenses increased in the 2005 period to $1,432,486 as compared to $1,103,091in the 2004 period. For the quarter 2005 quarter SG&A increased to $626,080 as compared to $230,134 in the 2004 quarter. The increases were primarily the result of hiring of additional marketing and sales personnel, as well as strengthening the administrative and financial aspect of the business. In addition, the Clarion acquisition which occurred on March 4, 2005, accounted for one month of expenses which were included in this quarter's financial statements.

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

INTEREST EXPENSE. Interest expense in the 2005 period was $84,973 as compared to $63,536 for the 2004 period. The increase was attributable to the higher average amount of outstanding debt balances.

MINORITY INTEREST IN SUBSIDIARY LOSS. The minority interest in the loss from the foreign subsidiaries was $40,691 for the 2005 period and $39,703 for the 2004 period.

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

NET INCOME (LOSS). Net income (loss) before deemed dividends for the nine months of fiscal 2005 and 2004 periods was $(307,046) and $(639,525), respectively. Net income was $57,052 for the third quarter of 2005 vs. a loss of $(156,000) for the third quarter of 2004.

Discussion and Analysis of Quarterly Results and Outlook

Although ECSI will not meet its projected sales figures for the first nine months of fiscal 2005, the Company will achieve sales of $3,353,819 as compared to $1,465,251 for the same nine month period of fiscal 2004 or a 229% increase. Still, the question is why the shortfall from our original projections? There are two primary factors which we believe will be mitigated going forward.

First factor: we depended on a commitment under the U.S DoD IBDSS contract which did not materialize. The original IBDSS ID/IQ contract called for thirteen major bases to be upgraded in 2004 and 2005. Only three major bases were upgraded and we were selected as the prime contractor for one of the three bases. Thus, ECSI achieved 33-1/3rd % of the win. It is our understanding that funding for the other nine bases was allocated instead to expendables for Afghanistan and Iraq.

Second factor: we depended on a commitment from the InteSec Group, a government oriented marketing organization with which we contracted in the first fiscal quarter of 2005, to generate $3 million in sales in 2005, which did not happen although the Company expended over $180,000 for this program. With that said, it is anticipated that substantial sales will ultimately result from InteSec effort in 2006 and beyond. The Company received a three year ID/IQ contract from Lockheed Martin Transportation and Security Solutions to supply technology and services on specific Lockheed Martin projects.

Despite these two adverse factors which had a negative impact on sales of over $4 million for the nine months of fiscal `05, the Company still achieved sales of $3,353,819 for nine months of operation. Sales for the third quarter of fiscal '05 amounted to $1,396,227 as compared to $449,264 for the same period in fiscal '04 with an operating profit of $57,052 as compared to an operating loss of $156,000 after adjusting for stock based compensation and stock based dividends.

Liquidity and Capital Resources
At March 31, 2005, we had working capital of $2.9 million compared to $3 million at June 30, 2004. Net cash used by operating activities for the 2005 period was $919,893 as compared to net cash used by operating activities of $742,796 for the 2004 period.

Inventory has increased by $358,417 for the nine months ended March 31, 2005 in anticipation of shipments for committed projects during the fourth quarter of fiscal ’05 and first quarter of ’06.

Investing activities for the 2005 period include the cash used for the Clarion acquisition in the amount of $529,894. In addition a portion of the proceeds of the June private placement was invested in marketable securities and we purchased $74,665 of equipment and software required to upgrade two major product lines.

We realized net proceeds of $708,850 from the exercise of outstanding stock options and warrants in the 2005 period.

FORWARD-LOOKING STATEMENTS
Our company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other company filings with the Securities and Exchange Commission and in our reports to shareholders. Statements that relate to other than strictly historical facts, such as statements about our plans and strategies, expectations for future financial performance, new and existing products and technologies, and markets for our products are forward-looking statements. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "will" and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on our management's then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors including, but not limited to, our company's current and future capital needs, uncertainty of capital funding, our clients' ability to cancel contracts with little or no penalty, government initiatives to implement Homeland Security measures, the likelihood of completing transactions for which we have entered into letters of intent, the state of the worldwide economy, competition, our customer's ability to pay our invoices within our standard credit terms, and other risks detailed in our company's most recent Annual Report on Form 10-KSB and other Securities and Exchange Commission filings. We undertake no obligation to publicly update or revise any forward-looking statements.