Edgar Filing: SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 2

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended: March 31, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ___to ___

Commission File Number: 000-50373

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.

(Exact name of registrant as specified in its charter)


Delaware		90-0182158

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3130 Fairview Park Drive, Suite 400,
Falls Church, Virginia		22042

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 703-564-2967

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes þ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

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

As of December 23, 2005 there were 44,072,200 shares of the issuer’s common stock outstanding.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-Q/A

Explanatory Note

This Amendment No. 2 on Form 10-Q/A (this “Amendment”) amends the Quarterly report on Form 10-QSB for the quarter ended March 31, 2005 of Spectrum Sciences & Software Holdings Corp. (the “Company”) originally filed with the Securities and Exchange Commission on May 23, 2005 and amended by Form 10-QSB/A filed on June 7, 2005. This Amendment is being filed to make the following changes to the Quarterly Report:

	•		To correct the filing to a 10-Q from a 10-QSB as originally filed. This change requires that certain additional information be added to our original filing including December 31, 2004 comparative balance sheets and market risk disclosures.

	•		To revise the financial statements to properly reflect the impact of foreign currency to the financial statements and to replace the previously filed cash flow statement.

	•		To revise the footnotes to the financial statements to summarize previously issued financial data and to include comparative financial data from prior periods.

	•		To update “Subsequent Events” through the filing date.

	•		To amend the Management’s Discussion and Analysis to conform to the segments presented in our current filings and to include historical data for comparison purposes.

	•		To add Part I, Item 3 Quantitative and Qualitative Disclosures about Market Risk.

	•		To revise the Controls and Procedures section.

This Amendment No. 2 does not modify or update disclosures presented in the original Form 10-QSB and Amendment No. 1 thereto on Form 10-QSB/A except as set forth above. Accordingly, this Amendment No. 2 should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the original filing date of the Form 10-QSB and Amendment No. 1 thereto on Form 10-QSB/A, including any amendments to those filings.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-Q/A

TABLE OF CONTENTS


Special Note Regarding Forward-Looking Statements			1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004			2

Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2005 and 2004			3

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2005			4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3. Quantitative and Qualitative Disclosures about Market Risk			27

Item 4. Controls and Procedures			28

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			29

Item 6. Exhibits			29

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-Q/A

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The matters discussed in our Quarterly Report on Form 10-Q/A may constitute forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, activity levels, performance or achievements to be materially different from any future results, activity levels, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “could” “expect” “estimate” “may” “potential” will” and “would” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. We believe it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to predict or control accurately. The factors listed in the section captioned “Risk Factors”, as well as any cautionary language in the Form 10-Q/A, provide examples of risks, uncertainties, and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, activity levels, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of the Form 10-Q/A. Subsequent events and developments may cause our views to change. However, while we may elect to update the forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	March 31			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	611,780		$	5,666,910
Short-term investments		15,223,262			18,795,143
Receivables		5,478,656			2,759,756
Due from Shareholder		705,126			705,126
Inventories		536,687			79,010
Prepaid expenses & other current assets		1,373,236			882,478

Total current assets		23,928,747			28,888,423

Property and equipment, net		5,008,742			2,280,746
Goodwill		1,715,641			—
Investments in joint ventures		761,736			—
Other assets		23,071			43,810

TOTAL ASSETS	$	31,437,937		$	31,212,979


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,558,835		$	1,025,030
Accrued expenses		508,130			482,923
Current portion due to related party		738,152			705,126
Deferred revenues		210,181			228,968
Provision for contract losses		—			148,248
Deferred tax liability		124,899			—
Current portion of long-term debt		188,960			—

Total current liabilities		3,329,157			2,590,295

Long-term liabilities:
Long-term debt, less current portion		355,988			—
Due to related party, less current portion		17,388			—
Non-current deferred tax liability		36,233			—

TOTAL LIABILITIES	$	3,738,766		$	2,590,295


Commitments and contingencies (Note 11)
Minority interest		20,081			—


Stockholders’ equity:
Preferred stock, $0.0001 par value; 20,000,000 shares authorized, none issued		—			—
Common stock, $0.0001 par value; 80,000,000 shares authorized, 38,972,200 and 38,969,300 issued and outstanding at March 31, 2005 and December 31, 2004		3,897			3,897
Additional paid-in capital		70,650,841			69,895,120
Accumulated deficit		(43,021,851	)		(41,277,155	)
Accumulated other comprehensive income		46,203			822

Total stockholders’ equity		27,679,090			28,622,684

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	31,437,937		$	31,212,979

See accompanying notes to consolidated financial statements.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)


	Three months ended
	March 31,
	2005			2004
Revenues	$	2,542,610		$	3,596,578

Cost of revenues		2,148,136			3,274,381


Gross profit		394,474			322,197

Operating expenses		2,293,195			13,951,585


Loss from operations		(1,898,721	)		(13,629,388	)

Total non-operating income (expense), net		174,106			(12,951	)


Loss before provision for income taxes		(1,724,615	)		(13,642,339	)

Income tax benefit		0			61,330


Loss before minority interest		(1,724,615	)		(13,581,009	)


Minority interest income(loss)		(20,081	)		0


Net Loss	$	(1,744,696	)	$	(13,581,009	)


Weighted average common shares outstanding:
Basic and diluted		34,941,075			19,316,934


Loss per share:
Basic and diluted	$	(0.05	)	$	(0.70	)


Net Loss	$	(1,744,696	)	$	(13,581,009	)
Foreign currency translation adjustments		68,375			0
Unrealized gain on available for sale securities		(22,994	)		0

Total comprehensive income(loss)	$	(1,699,315	)	$	(13,581,009	)

See accompanying notes to consolidated financial statements.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Consolidated Statement of Stockholders’ Equity (Unaudited)


										Accumulated
										Other
	Common Stock						Accumulated			Comprehensive
	Shares		Amount		APIC		Deficit			Income(Loss)			Total

Balance at January 1, 2005		38,969,300	$	3,897	$	69,895,120	$	(41,277,155	)	$	822		$	28,622,684
Stock options issued for consulting services		—		—		751,662		—			—			751,662
Exercise of stock options		2,900		—		4,059		—			—			4,059
Unrealized loss on investments		—		—		—		—			(22,994	)		(22,994	)
Foreign currency translation adjustments		—		—		—		—			68,375			68,375
Net loss		—		—		—		(1,744,696	)		—			(1,744,696	)


Balance at March 31, 2005		38,972,200	$	3,897	$	70,650,841	$	(43,021,851	)	$	46,203		$	27,679,090


	2005
Disclosure of reclassification amount:
Reclassification adjustment for losses included in net loss	$	822

See accompanying notes to the consolidated financial statements.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Condensed Consolidated Statements of Cash Flows (Unaudited)


	Three Months ended March 31,
	2005			2004
Cash flows from operating activities
Net loss	$	(1,744,696	)	$	(13,581,009	)
Adjustments to reconcile net loss to net Cash used in operating activities
Issuance of stock options to related party for consulting services		0			11,418,038
Investor relations expenses paid by a related party		0			2,065,000
Amortization of investment bond premium		41,801			445
Depreciation		68,837			32,327
Issuance of stock options to employees		751,662			0
Deferred income taxes		6,592			(28,594	)
Minority interest		20,081			0
Loss on disposal of equipment		1,633			0
Realized loss on the sale of bonds		(822	)		0
Changes in assets and liabilities
Receivables		629,226			(386,994	)
Accounts payable		(467,397	)		(160,273	)
Provision for contract losses		(148,248	)		0
Other balance sheet changes		129,606			122,136

Net cash used in operating activities		(711,725	)		(518,924	)

Cash flows from investing activities
Maturities (purchases) of available for sale investments, net		3,547,657			0
Acquisitions, net of cash received		(7,167,497	)		0
Purchase of property and equipment		(299,449	)		(7,817	)
Proceeds from the sale of equipment		0			0
Investments in joint ventures		5,634			0

Net cash used in investing activities		(3,913,655	)		(7,817	)

Cash flows from financing activities
Issuance (repayment) of debt, net		(557,228	)		(851,897	)
Net (repayments) borrowings on lines of credit		0			0
Advances from related party		(2,797	)		598,916
Proceeds from the exercise of stock options		4,059			1,485,000

Net cash (used in) provided by financing activities		(555,966	)		1,232,019

Foreign exchange translation		126,216			0

Net (decrease) increase in cash and cash equivalents		(5,055,130	)		705,278
Cash and cash equivalents at beginning of period		5,666,910			696,959

Cash and cash equivalents at end of period	$	611,780		$	1,402,237

Non cash acquisitions of property & equipment totaled $0 and $0 for the periods ended March 31, 2005 and 2004, respectively.

See accompanying notes to the consolidated financial statements.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements for the three month periods ended March 31, 2005 and 2004 have been prepared in accordance with United States generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of and for the periods presented.

The results of operations for the interim periods ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements should be read in conjunction with the December 31, 2004 consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004, in addition to the interim financial statements, exhibits and related notes included in the Company’s Form 8-Ks filed on February 1, 2005, February 25, 2005, and May 11, 2005, and any amendments thereto.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

Spectrum Sciences & Software Holdings Corp. (the “Company”), headquartered in Falls Church, Virginia, has three reportable segments: Security Solutions, Industrial and Offshore, and Repair and Overhaul. Security Solutions includes the design and construction of munitions ground support equipment and containers for the shipping and storage of munitions and software to assist in hazard management and weapons impact analysis. The Security Solutions segment comprises the previously reported segments of management services, manufacturing, and engineering and information technology. Industrial and Offshore operations include the Company’s engineering, mechanical contracting, and steel fabrication operations in the Province of Newfoundland, Canada. The Company’s Repair and Overhaul segment is engaged in providing specialized fabrication and maintenance for ships, lifeboats, and maritime navigation systems.

The Company acquired M&M Engineering Limited (M&M) and Coast Engine and Equipment Co., Inc. (CEECO), during the 2005 fiscal year. Details of these acquisitions are included in Note 3.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

The Company currently has a net operating loss carry forward of approximately $9,300,000, which would equate to a deferred tax asset of approximately $3,000,000 at March 31, 2005. The Company has not recorded this federal tax benefit in the accompanying consolidated financial statements, due to the possibility that the net operating loss carryforward may not be utilized, for various reasons, including the potential that we might not have sufficient profits to use the carryforward or the carryforward may be limited as a result of changes in our equity ownership.

Earnings (Loss) Per Share

The Company reports its earnings (loss) per share in accordance with Financial Accounting Standards Board (FASB) Statement No. 128, “Earnings Per Share.” Statement No. 128 requires the presentation of basic and diluted loss per share on the face of the statement of operations.

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted EPS is computed in a manner consistent with that of basic EPS while giving effect to the impact of common stock equivalents. The Company’s common stock equivalents consist of employee, director, and consultant stock options to purchase common stock. Common stock equivalents were not included in the computation of diluted earnings (loss) per share for the three months ended March 31, 2005 and 2004 as the inclusion of these common stock equivalents would be anti-dilutive as the Company is in a net loss position and including such shares would reduce the net loss per share.

Financial Instruments

The Company considers all highly liquid, interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments generally mature between three months and two years from the purchase date. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All short-term investments are classified as available for sale and are recorded at market value using the specific identification method; unrealized gains and losses are reflected in Other Comprehensive Income. Investments consist of debt instruments. Debt securities are classified as available for sale and are recorded at market using the specific identification method. Unrealized gains and losses (excluding other-than-temporary impairments) are reflected in Other Comprehensive Income.

Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. The Company employs a systematic methodology that considers available evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as our intent and ability to hold the investment. The Company also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, operational and financing cash flow factors, and rating agency actions. Once a decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis for the investment is established.

Foreign Currency Translation

The Company’s functional currency is the U.S. dollar, except that the functional currency of M&M is the Canadian dollar. In the accompanying consolidated financial statements, the monetary assets and liabilities of M&M were translated to U.S. dollars using the March 31, 2005 exchange rate of .8267 Canadian dollar to 1.00 U.S. dollar. All monetary consolidated statements of operations items of M&M were translated at the average exchange rate for the three months ended March 31, 2005 of .8223 Canadian dollar to 1.00 U.S. dollar.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. In addition, the adoption of SFAS 123R requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. We selected the Black-Scholes option-pricing model as the most appropriate fair-value method for our awards and will recognize compensation cost on a straight-line basis over our awards’ vesting periods, if any. We adopted SFAS 123R in the first quarter of 2004.

The expected adoption of the following recent accounting pronouncements in the first quarter of 2006 is not expected to have a material impact on our results of operations and financial condition:

•		SFAS No. 151, “Inventory Costs—An Amendment of ARB No. 43, Chapter 4”

•		SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29”

•		EITF Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements”

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections” (SFAS 154), which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable date, as the required method for reporting a change in accounting principle and restatement with respect to the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

3. ACQUISITIONS

M&M Engineering Limited

On February 1, 2005, the Company acquired M&M for $6,768,202 in cash; a combination of the purchase of 100% of the common stock of M&M and an issuance of 1,000 preferred shares to the Company. The purchase price for the common stock of M&M was $5,958,802 in cash. Pursuant to the Purchase Agreement, M&M redeemed 1,000 of its preferred shares held by EnerNorth Industries Inc. for $809,400 immediately prior to closing the acquisition and issued the same number of preferred shares to the Company for $809,400. The total cost of the acquisition includes approximately $297,000 of acquisition related expenses – for a total cost of $7,065,202. The primary purpose of this acquisition was to diversify the Company’s corporate customer base beyond U.S. federal government contracting and to capitalize on the growth potential in the natural resource sector to include: the offshore oil and gas industries, the hydroelectric sector, mining and the pulp and paper industries in Newfoundland and Labrador.

Coast Engine and Equipment

On February 25, 2005, the Company acquired CEECO with an initial cash payment of $300,000 plus an earn-out over the next three years. Under the terms of the Purchase Agreement, the Company will pay to the former Shareholders of CEECO a total purchase price of up to $900,000 over a three-year period. The purchase price is payable in cash and common stock of the Company and is subject to certain adjustments, including, without limitation, adjustments based on CEECO’s earnings during such three-year period. In addition to the $300,000 cash payment for CEECO, there were approximately $30,000 of acquisition related expenses. Pursuant to a security agreement executed in connection with the Purchase Agreement, the former Shareholders of CEECO will retain a security interest in all of the assets of CEECO until the total purchase price has been paid. The Company has a three-year employment contract with Louis T. Rogers, former owner of CEECO. The CEECO acquisition allows the Company to exploit other non-government customer bases in the south-central Florida region. It also provides the opportunity to pursue business opportunities within the U.S. Coast Guard and U.S. Navy by increasing the Company’s presence in that market.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

Each acquisition described above was accounted for under the purchase method of accounting; accordingly, the purchase price has been allocated to reflect the fair value of assets and liabilities acquired at the date of acquisition. For the three-month period ended March 31, 2005, the results of operations reported for the Company includes a full three months of operations for Spectrum Sciences & Software, Inc. (“SSSI”), a wholly owned subsidiary of the Company, two months of operations for M&M (February 1, 2005 through March 31, 2005) and one month of operations for CEECO (March 1, 2005 through March 31, 2005), respectively. For the three month periods ended March 31, 2004, the results of operations represent only those of SSSI.

Pro Forma Results

The results of these acquisitions, had they been consummated at the beginning of each period shown, are included in the pro forma information below. The historical revenues and earnings of M&M and CEECO for the three months ended March 31, 2005 and 2004 have been combined with the revenues and earnings of Spectrum Sciences & Software Holdings Corp. for the three months ended March 31, 2005 and 2004, respectively. This pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisitions taken place at the beginning of each of the three month periods represented and is not necessarily indicative of results that may be obtained in the future.


	Three months ended
	March 31,
	2005			2004
Revenue	$	3,503,632		$	5,973,984
Net loss		(1,666,351	)		(13,575,276	)
Loss per share — Basic & Diluted	$	(0.05	)	$	(0.70	)

The decreased revenue for the three months ended March 31, 2005 as compared with the same quarter in 2004 is the lack of revenue from the Gila Bend contract that ended in late 2004 offset by an increase in first article production in the manufacturing group. The Gila Bend contract contributed approximately $2.6 million of revenue during the quarter ended March 2004. In addition to $0.7 million in stock-based compensation expense and a $95,000 loss for SSSI; the 2005 net loss reported above was also significantly impacted by merger and acquisition activity during the period including costs for accounting and legal fees, investor relations and consulting. The loss for the three months ended March 31, 2004 includes approximately $11.4 million of stock compensation expense and $2.1 million of investor relations expenses.

4. RECEIVABLES

Receivables primarily comprise amounts due to the Company for work performed on contracts directly related to commercial and government customers. The Company’s Industrial and Offshore major clients include Exxon Mobil, Petro Canada, Halliburton, Husky Energy, Inco Ltd., Iron Ore Company of Canada, North Atlantic Refining Ltd., Abitibi Consolidated and Corner Brook Pulp and Paper. The Company’s Repair and Overhaul segments customers include: the U.S. Navy, U.S. Coast Guard, Military Sealift Command, Rinker Cement and Disney Cruise Lines. The U.S. Air Force and the U.S. Navy are the major customers for the Security Solutions segment.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)


	March		December
	31, 2005		31, 2004
Receivables
Billed receivables	$	3,409,128	$	1,467,285
Unbilled receivables		1,901,072		1,165,514
Holdbacks		134,252		—
Other		34,204		126,957

Total Receivables	$	5,478,656	$	2,759,756

5. INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The major components of inventories are summarized as follows:


	March		December
	31, 2005		31, 2004
Inventories
Raw materials, net of reserve	$	439,109	$	20,483
Work in process		58,175		58,527
Finished goods		39,403		—

Total Inventories	$	536,687	$	79,010

6. PROPERTY AND EQUIPMENT


	March			December
	31, 2005			31, 2004
Property & Equipment
Land		458,462			175,000
Buildings and Improvements		2,993,806			1,698,572
Furniture & fixtures		40,381			39,541
Manufacturing Equipment		1,460,508			1,012,541
Tools & Equipment		326,215			—
Office Equipment		423,724			245,119
Vehicles		282,268			55,390
Equipment under capital Lease		319,780			—
Investment Property		220,900			220,900

Total		6,526,044			3,447,063

Accumulated Depreciation		(1,517,302	)		(1,166,317	)

Property & Equipment, net		5,008,742			2,280,746

7. BORROWINGS AND LINES OF CREDIT

The Company’s borrowings primarily consist of mortgages of $.4 million and capital leases of $.15 million. The interest rate on the mortgage is adjustable at the Royal National Bank of Canada’s cost of funds plus 3.25% (6.1% at March 31, 2005). The interest rates on the capital leases range from 0% to 14.9%.

The Company also maintains lines of credit through two of its subsidiaries. These lines of credit provide operating funds for normal business activities. These financing arrangements are described below.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

CIBC Facility

M&M maintains its own revolving line of credit facility with a commercial bank, the Canadian Imperial Bank of Commerce (“CIBC”). This credit facility (the “CIBC Facility”) was initially entered into in December 1994 and has been amended and renewed from time to time. The CIBC Facility currently allows the Company to borrow up to the lesser of i) $1.40 million Canadian, or ii) 75% of receivables from governments or large institutions and 60% of other receivables to finance working capital requirements on a revolving basis. The CIBC Facility is payable upon demand and bears interest at prime plus 2.25%. As of March 31, 2005, there was $0 outstanding under the CIBC Facility.

As security for the CIBC Facility, M&M has provided a first priority lien on i) receivables, inventory and specific equipment; ii) a second priority lien on land, buildings and immovable equipment; and iii) an assignment of insurance proceeds. M&M and M&M Offshore Limited, a wholly owned subsidiary of M&M, have provided cross-guarantees to CIBC in an unlimited amount to secure each other’s share of the CIBC Facility. The CIBC Facility also requires M&M to comply with specified financial covenants, including current ratio, debt/equity ratio and limits on capital expenditures, dividends and further encumbrances on collateral. As of March 31, 2005, M&M was in compliance with all of these covenants.

Magna Credit Facility

During 2003, Magna negotiated a credit facility in the amount of $797,871, which is repayable on demand and bears interest at the bank’s prime lending rate plus 1.50% per annum. As security, M&M has provided a $199,468 guarantee plus an agreement to postpone debt of a further $279,255. There was no outstanding balance of this demand loan as of March 31, 2005. M&M has not been liable for any guarantees under this credit facility.

8. RELATED PARTY TRANSACTIONS

Transactions related to BG Capital Group Limited, Endeavor Group, LLC and Related Stockholders

The Company had recorded a receivable from Robert Genovese, a stockholder of the Company, of $705,126 at December 31, 2004. However, the Company also recorded a payable to one of Mr. Genovese’s companies of $705,126 at December 31, 2004 primarily representing previously disallowed investor relations expenses, which were subsequently approved on the basis that satisfactory support for such expenses was provided. These receivables and payables are recorded as related party amounts in the financial statements. On April 5, 2005 the receivable of $705,126 was paid to the Company by Mr. Genovese and the payable to one of Mr. Genovese’s companies in the same amount was paid by the Company.

Transactions related to Coast Engine and Equipment Company

During the three month periods ended March 31, 2005, the Company received cash advances from two of the CEECO officers of $24,800. These advances are non-interest bearing and are expected to be repaid within six months. At March 31, 2005, the Company owed $33,206 to the CEECO officers.

In March 2005, the Company purchased two vehicles through loans from the CEECO officers totaling $25,614. One vehicle was purchased for $33,614 through a trade-in allowance of $24,500 and cash paid by the CEECO officers of $9,114, which is included in loans from CEECO officers on the accompanying balance sheet. The other vehicle was purchased for $16,500 in cash paid by the CEECO officers and is also included in loans from CEECO officers on the accompanying balance sheet. The amounts due to the CEECO officers are non-interest bearing and are to be repaid through monthly payments in the amounts of $456 through November 2006 and $458 through March 2008. Amounts repaid to the CEECO officers during the three-month period ended March 31, 2005 totaled $0. The following are the payment obligations for the years ending December 31:

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)


2005	$	8,226
2006		10,513
2007		5,500
2008		1,375

	$	25,614

CEECO leases its facilities from a company owned by a related party under a non-cancelable lease from May 1, 2004 through April 30, 2006. The following are the lease obligations for the next two years ending December 31:


2005	$	71,016
2006		23,672

	$	94,688

9. STOCK OPTION PLAN

On January 12, 2005, the Company executed stock option agreements with the directors and officers of the Company, pursuant to the Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan (the “Plan”). Pursuant to stock option agreements, the Company granted options to each of Kelvin D. Armstrong, Karl Heer, William H. Ham, Jr. and Nancy Gontarek to purchase 300,000 shares of the Company’s common stock, $0.0001 par value per share, at an exercise price of $1.65 per share. All the options become exercisable as of the date on which the Company has consummated, since January 12, 2005, the acquisition of businesses with annual revenues in the aggregate of at least $20 million. The options expire on January 12, 2008. The Company has chosen to implement FASB Statement No. 123R, Share-Based Payment, which requires options be valued at fair value at the grant date, effective January 1, 2004. The fair value of the options issued was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 2.84%; no dividend yields; volatility factors of the expected market price of our common stock of 0.67; and an expected option life of three years. This generates a price of $0.63 per option based on an exercise price of $1.65 at the grant date, January 12, 2005. As a result, $751,662 of compensation expense and additional paid-in capital was recorded at the grant date.

On February 14, 2005, the Company executed additional stock option agreements with the directors of the Company pursuant to the Plan. Pursuant to those stock option agreements, the Company granted options to each of Kelvin D. Armstrong, Karl Heer and William H. Ham, Jr. to purchase 500,000 shares of the Company’s common stock, $0.0001 par value per share, at an exercise price of $2.50 per share. All of the options issued to the directors will expire on February 14, 2008. All of the options become exercisable as of the date on which the Company certifies, based on the Company’s audited financial statements for the 2005 fiscal year as filed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for such fiscal year, that the Company has achieved earnings before interest, taxes, depreciation and amortization of $4 million for the 2005 fiscal year. No compensation expense has been recorded because it cannot reasonably be determined, at this time, if the exercise contingency associated with these options will be satisfied.

On April 7, 2005, the Company granted certain employees options to purchase an aggregate of 502,000 shares of the Company’s common stock, $0.0001 par value per share, at an exercise price of $1.95, pursuant to the Plan. All the options issued expire on April 7, 2008. The fair value of the options issued was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 3.02%; no dividend yields; volatility factors of the expected market price of our common stock of 0.73; and an expected life of the options of three years. This generates a price of $1.27 per option based on a $1.95 exercise price at the grant date, April 7, 2005. As a result, $638,901 of compensation expense and additional paid-in capital was recorded at the grant date.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

10. SEGMENT INFORMATION

Segment information has been presented on a basis consistent with how business activities are reported internally to management. Management evaluates operating profit by segment taking into account direct costs of each segment’s products and services as well as an allocation of indirect corporate overhead costs. Through its three subsidiaries, the Company has three operating segments. The Security Solutions segment as reported by Spectrum, Inc. includes operations for management services, manufacturing, and engineering and information technology predominantly in the munitions and Homeland safety arena. The Industrial and Offshore segment reported by M&M includes the Company’s engineering, mechanical contracting and steel fabrication in the Province of Newfoundland, Canada. The Repair and Overhaul segment as reported by Coast Engine and Equipment Company, Inc. is engaged in providing specialized fabrication and maintenance for ships, lifeboats and maritime navigation systems. The following is a summary of certain financial information related to the three segments during the three months ended March 31, 2005 and 2004. Results are not reported in 2004 for the Industrial and Offshore segment and the Repair and Overhaul segment as they were not part of the Company’s operations during that time period.

For the three month periods ended March 31, 2005, the segment results reported for the Company include a full three months of operations for SSSI, two months of operations for M&M (beginning February 1, 2005) and one months of operations for CEECO (beginning March 1, 2005. For the three month periods ended March 31, 2004, the segment results represent only those of SSSI. Note that the previously reported segments of management services, engineering and information technology, and manufacturing have now been consolidated into the Security Solutions segment consistent with how the Company is now being managed.


	Three months ended
	March 31,
	2005			2004
Security Solutions
Total revenue	$	1,650,752		$	3,596,578
Operating (loss)income		(165,548	)		322,197
Industrial and Offshore
Total revenue		781,252			—
Operating income		(354,144	)		—
Repair and Overhaul
Total revenue		110,606			—
Operating income		12,196			—
Headquarters
Total revenue		—			—
Operating (loss)income		(1,391,225	)		(13,951,585	)
Total
Total revenue	$	2,542,610		$	3,596,578
Operating (loss)income	$	(1,898,721	)	$	(13,629,388	)


Identifiable Assets	March 31, 2005		December 31, 2004
Security Solutions	$	5,572,190	$	3,071,143
Industrial and Offshore		5,213,735		—
Repair and Overhaul		296,001		—
Corporate Assets		20,356,011		28,141,836

Total Assets	$	31,437,937	$	31,212,979

See accompanying notes to consolidated financial statements.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

11. COMMITMENTS AND CONTINGENCIES

Legal Matters

Harassment Suit

In December 2002, three SSSI employees each filed complaints for violation of civil rights, discrimination, harassment, hostile work environment and retaliation in the United States District Court, District of Arizona. The case numbers for these complaints are: CIV ’02 2621PHX MHM; CIV ’02 2619 PHX DKD; and CIV ’02 2620 PHX FJM. In January 2003, SSSI filed answers to all three complaints, denying all allegations of wrongdoing. The plaintiffs requested the following: compensatory damages, plus special incidental damages in such a sum as may be proven at trial; punitive damages in such a sum as may be proven at trial; cost for the suit; cost of attorney’s fees; and such other relief as the court deems just and proper. The case was brought for trial on January 31, 2005 and the case was adjudicated in favor of the plaintiffs with a total award of $383,100 plus attorney’s fees. The awards were for $300,000, $80,000, and $3,100 respectively for the three plaintiffs. On March 7, 2005 the plaintiffs lodged a Form of Judgment with the court. SSSI filed an objection to the Form of Judgment on the basis that the judgment amounts exceed the statutory limits allowed under Title VII of the Civil Rights Act of 1964. SSSI asserted that under 42 U.S.C. 1981a(3) the maximum individual award should not exceed $50,000 per plaintiff as the operations in Arizona did not exceed 100 total employees during the relevant periods for the case. Upon motion by SSSI, the court reduced the individual $300,000 award down to $100,000 and brought the total to $183,100. As we believe the ruling was still based on incorrect assumptions, SSSI has petitioned the court to reconsider and has provided evidence of a $50,000 cap per claimant as the appropriate form of judgment. The court has not yet ruled on SSSI’s request for reconsideration.

Section 16 (b) Claim

In July, 2004, a complaint was filed in the United States District Court, southern District of Florida by Todd Augenbaum against Robert Genovese (“Genovese”), Endeavor Capital Group, LLC, BG Capital Group, Ltd, and SSSI. The suit alleges that Genovese and his affiliated companies beneficially owned more than 10% of the outstanding common stock of SSSI and that Genovese acted as an officer and director of the Company. Based on these assertions, the suit claims that Genovese was a statutory insider of SSSI, and as such, is presumed to have had access to material non-public information concerning the Company’s operations and future business prospects, and is therefore subject to the provisions of Section 16(b) of the Exchange Act. The action was brought by Mr. Augenbaum in order to obtain a recovery for the Company of short-swing profits alleged to have been unlawfully obtained by Genovese through the purchase and sale of Company securities. The Company is a nominal defendant in the action and has no liability for the claims asserted therein against the other defendents. The Company’s answer to the complaint was filed in the U.S. District Court, Ft. Lauderdale, FL on August 26, 2004. The plaintiff filed an Amended Complaint on October 18, 2004 and the Company filed its response as a nominal defendant November 12, 2004. The defendants filed a motion to dismiss the action and the court denied the motion on January 6, 2005. The Company cannot currently make a prediction of what the outcome of the litigation will be.

Claim by the former President of the Company, Mr. Donal R. Myrick

On August 24, 2004, the former President and CEO of the Company, Mr. Donal R. Myrick filed a complaint for alleged breach of employment contracts and damages associated with a delayed stock sale. The case was filed in the Circuit Court, First Judicial Circuit in and for Okaloosa County, Florida under case number 04CA3510. The suit alleges three counts against the Company:

	•		SSSI has breached its obligation under an oral employment agreement for the period November 2002 to December 2003 by failing and refusing to pay salary or benefits;

	•		SSSI has breached its obligation under a written employment agreement starting December 2003 by failing to fully compensate Mr. Myrick under that agreement up to the time of his resignation; and

	•		SSSI, by its failure to issue an opinion letter to allow the sale of Mr. Myrick’s stock in the open market, is liable for the damages that occurred due to the difference in value as to the date of the registration of transfer should have occurred and the eventual date that Mr. Myrick was able to liquidate the stock in the open market.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

Mr. Myrick’s suit demands of and from SSSI together with interest and costs and such other and further relief as the Court deems just and proper. The Company intends to vigorously defend its position in the case and filed its answer to Mr. Myrick’s complaint on October 25, 2004. Discovery is continuing and one deposition has been completed in advance of a court ordered attempt to mediate the claim. The Company currently does not know what the outcome of this litigation will be.

Munitions Assembly Conveyor (MAC) Lawsuit

On August 23, 2004, SSSI filed suit against the United States Government in the United States Court of Federal Claims (case number 04-1366C) based on the Government’s actions associated with the procurement of the improved Munitions assembly Conveyor (MAC). The MAC is a munitions handling and support equipment system used to build up munitions prior to loading on an aircraft. As a result of SSSI’s experience in both utilizing and producing the MAC, SSSI identified numerous areas needing improvement and upgrading to this old system. Based on SSSI’s work, the Government entered into a Cooperative Research and Development Agreement (CRADA) for the purpose of improving munitions support equipment including the MAC. As part of the CRADA negotiation, Sepctrum identified its prior development and unique modifications and improvements that constituted SSSI’s trade secrets and intellectual property associated with the MAC. Following completion of the CRADA effort and delivery of the final report, the Government made overtures to purchase SSSI’s rights in the redesigned the MAC, however, the offer was rejected as being inadequate to compensate SSSI for its efforts in redesigning the MAC and for the potential for further licensing opportunities. Following the failure of these discussions, SSSI alleges that the Government deliberately breached its obligation to SSSI under the CRADA to safeguard and protect SSSI’s intellectual property and proprietary information by improperly disclosing and widely disseminating to third parties, including SSSI competitors, SSSI’s proprietary information via a draft Request for Proposal Solicitation dated May 1, 2004. Based on the Government’s actions, SSSI filed suit in the United States Court of Federal Claims containing three counts alleging:

	•		Breach of Express Contract

	•		Breach of Implied in Fact Contract

	•		Misappropriation of Trade Secrets

SSSI has requested damages in excess of three and one half million dollars ($3,500,000) and will request the award of its costs, fees, expenses and attorney’s fees associated with this action.

The Department of Justice on behalf of the agency filed its response on December 6, 2004. Based on discovery to date, SSSI has amended its suit on March 14, 2005. Initial Rule 26 documents have been exchanged and motions on the pleadings and substantial discovery are ongoing. The Company cannot predict the outcome of this litigation but is confident of its position as set forth in this lawsuit.

Garrison Lawsuit

On February 22, 2005, SSSI filed suit against former employees Donald L. Garrison, David M. Hatfield and their current employer Control Systems Research, Inc. in the Circuit Court of the First Judicial Circuit in and for Okaloosa County, Florida (case number 2005-CA-000779 S). SSSI alleges that during their employment at SSSI, Mr. Garrison and Mr. Hatfield were actively involved with the development and application of the Safe Range project (a proprietary product) and other non-technical company information such as employee wage data and personnel files, marketing plans, bidding information, and information about other SSSI contracts and affairs. The suit alleges that Garrison and Hatfield used SSSI’s confidential and proprietary information (in violation of their signed agreements for Protection of Proprietary Information) to allow their new employer (Control Systems Research, Inc.) to improperly compete against SSSI with regards to the Safe Range program and other related government contracts. The five counts identified in the lawsuit include:

	•		Breach of Contract

	•		Violation of Uniform Trade Secrets Act

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

	•		Tortious Interference

	•		Conversion

	•		Civil Conspiracy

Total damages to SSSI were not specified and the defendants have not yet responded to the suit and deny all claims. Discovery is underway. The Company currently does not know what the outcome of this litigation will be.

SSSI is not aware of any other pending or threatened litigation.

12. INVESTMENTS IN JOINT VENTURES

M&M Engineering Limited

M&M conducts a portion of its business through two joint ventures, Newfoundland Service Alliance, Inc. (“NSA”) a 20.83% owned joint venture and Magna Services, Inc. (“Magna”) a 50% owned joint venture. These investments are accounted for using the equity method of accounting.

NSA, a Newfoundland and Labrador corporation, was incorporated in December 1996 to combine the expertise of its shareholders in providing comprehensive onshore support services to the Newfoundland and Labrador oil and gas industry. NSA is jointly owned by M&M Offshore Limited (MMO) (20.83%), G.J. Cahill & Company (1979) Limited (“Cahill”) (20.83%), New Valve Services and Consulting Inc. (20.83%), Peacock Inc. (20.83%), and Siemens Westinghouse Ltd (16.68%).

Magna, a Newfoundland and Labrador corporation, was incorporated in April 1997 to provide offshore support services to the Newfoundland and Labrador oil and gas industry including the Hibernia and Terra Nova offshore oil projects. Magna is jointly owned 50% by MMO and 50% by Jendore Limited.

Liannu is a limited partnership formed under the laws of Newfoundland and Labrador in November 2002, for the purpose of providing services in Labrador including industrial mechanical contracting, structural and steel fabrication and erection and other services including the Voisey’s Bay nickel mine development. M&M is the general partner of Liannu, and holds a .01% general partner’s interest and a 48.99% limited partner’s interest in the partnership. The remaining 51% limited partnership interests are held by two individuals unrelated to the Company. As a general partner, M&M charges a management fee equal to 5% of the contract price for contracts entered into by the partnership.

In addition, Liannu has entered into an informal teaming arrangement with a similar corporation named Mista-Shipu Constructors Limited (“Mista-Shipu”). The entity “Liannu/Mista-Shipu” was designed to be a 50/50 joint venture for the purpose of fulfilling a $3 million contract in 2004, regarding the site-wide supply and installation of cladding for the infrastructure buildings at Voisey’s Bay.

During 2004, the Industrial & Offshore segment through Liannu was awarded contracts totaling $7.79 million with Voisey’s Bay Nickel Company (“VBNC”), which produced revenue of $3.80 million during fiscal 2004. Voisey’s Bay is located in Newfoundland and Labrador, and is the site of a large nickel deposit currently being developed by INCO through its subsidiary, VBNC. The contracts awarded to Liannu to date include: the fabrication of four concentrate storage tanks; the fabrication of various pumphouses, including a port fuel unloading/dispensing system; a fire/fresh water pumphouse, a potable water pumphouse and a mill site fuel dispensing system; and the fabrication of forty-nine unique tanks to be used for various purposes in the storing and refining of ore.

As of the period ended March 31, 2005, M&M recorded $469,086 in receivables from these joint ventures and from a terminated joint venture, North Eastern Constructors Limited. The Company believes these amounts are fully collectible.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

13. SUBSEQUENT EVENTS

Horne Engineering, Inc.

On May 11, 2005, the Company acquired all of the issued and outstanding capital stock of Horne Engineering, Inc. (“Horne”), from its shareholders, Darryl K. Horne, Charlene M. Horne and Michael M. Megless (the “Horne Shareholders”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Horne was merged with and into Horne Acquisition LLC, a wholly owned subsidiary of the Company. The purchase price for the capital stock of Horne was $4.5 million in cash and 6.1 million unregistered shares of the Company’s common stock (the “Shares”). Additional shares of common stock could subsequently become issuable by the Company to the Horne Shareholders to the extent that the average closing price of the Company’s common stock on NASD OTC Bulletin Board, or other public securities market, for the trading days during the two month period ending on May 11, 2007 is less than $3.25 per share, subject to Horne (on a stand alone basis) meeting or exceeding 2005 gross revenues of $75 million with EBITDA (as defined in the merger agreement) of $3.25 million (the “2005 EBITDA”) and EBITDA of not less than $3.25 million in 2006. Pursuant to an Amendment and Waiver Agreement entered into among the parties to the Merger Agreement on May 11, 2005 (the “Amendment”), the Company held back 4.0 million of the Shares payable to the former Horne Shareholders under the Merger Agreement (the “Hold Back Shares”), with the disposition of those shares subject to two conditions. First, the Amendment requires the Company to release 3.0 million of the Hold Back Shares to the former Horne Shareholders promptly upon receiving certain third party consents relating to certain of Horne’s contracts, which are specified in the Amendment. Second, if Horne’s 2005 EBITDA is less than $3.25 million (the “EBITDA Shortfall”), the Company will be entitled to recover any remaining Hold Back Shares limited such that the value of the recovered Hold Back Shares, based on the closing price of the Company’s common stock on May 11, 2005, does not exceed three times the EBITDA Shortfall. As of November 11, 2005, the Company has received the required consents described above and intends to promptly issue three million of the Holdback shares to Horne’s former shareholders. See also subsequent events described in Note 12.

In connection with the Merger Agreement, the Company and the Horne Shareholders entered into a Registration Rights Agreement, dated May 11, 2005 (the “Rights Agreement”), pursuant to which the Company agreed to prepare and file a registration statement pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), covering the resale from time to time of all of the shares of the Company’s common stock issued to the Shareholders pursuant to the Merger Agreement.

Upon the closing of the Merger Agreement, Messrs. Horne and Megless were appointed to the Company’s Board of Directors. In connection with the Merger Agreement, Messrs. Horne and Megless executed Employment Agreements with the Company, dated as of May 11, 2005 (the “Employment Agreements”), pursuant to which such individuals were appointed Chief Executive Officer (“CEO”), and Chief Financial Officer (“CFO”), respectively. Pursuant to a Stock Option Agreement executed in connection with the Merger Agreement, Mr. Horne received an option to purchase 1.0 million shares of the Company’s common stock at an exercise price of $1.65 per share, subject to Horne meeting the revenue and EBITDA targets for 2005 as described above. The Company also reserved 2.0 million shares of the Company’s common stock for the issuance of stock options to be granted to the employees of Horne at the discretion of Mr. Horne.

Required Consents Received

In connection with the Company’s acquisition of Horne Services, Inc. on May 11, 2005, the Company held back four million shares of the Company’s common stock payable to the former shareholders of Horne pending the receipt of certain third party consents relating to certain of Horne’s contracts and the determination of Horne’s 2005 EBITDA, as defined in Note 3 of these financial statements. As of November 11, 2005, the Company has received each of such required consents and, accordingly, intends to promptly issue three million shares of the Company’s common stock to Horne’s former shareholders. The Company will continue to hold back one million shares of the Company’s common stock that is payable to Horne’s former shareholders pending the audited financial results of the Company and the determination of Horne’s 2005 EBITDA. The three million shares of the Company’s common stock held back in connection with the required consents are shown as issued in the Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2005.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
Notes to the Consolidated Financial Statements (Unaudited)

Stock Option Activity

On June 6, 2005, the Company executed stock option agreements with certain employees pursuant to the Plan. Pursuant to the agreements a total of 13,750 shares of the Company’s common stock, $0.0001 par value per share, at an exercise price of $1.28 per share. All the options issued will expire on June 6, 2008. The fair value of the options issued was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 3.30%; no dividend yields; volatility factors of the expected market price of our common stock of 0.73; and an expected life of the options of three years. This generates a price of $0.62 per option based on a strike price of $1.28 at the grant date, which was June 6, 2005. As a result, $8,462 of compensation expense and additional paid-in capital was recorded at the grant date.

On June 8, 2005, the Company executed stock option agreements, pursuant to the Plan, with Darryl K. Horne and Michael M. Megless, who were appointed as directors of the Company on May 11, 2005. Pursuant to the stock option agreements, the Company granted, to each of Messrs. Horne and Megless, options to purchase 500,000 shares of the Company’s common stock, $0.0001 par value per share, at an exercise price of $2.50 per share. All of the options issued to Messrs. Horne and Megless will expire on June 8, 2008. All of the options will become exercisable if and as of the date on which the Company certifies, based on the Company’s audited financial statements for the 2005 fiscal year as filed in the Company’s Annual Report on Form 10-K filed with the SEC for such fiscal year, that the Company has achieved earnings before interest, taxes, depreciation and amortization of $4 million for the 2005 fiscal year. No compensation expense has been recorded because it cannot reasonably be determined at this time that the exercise contingency associated with these options will be satisfied.

Legal Update

The Company resolved or received clarification on several open legal issues on November 17, 2005. The Company has been notified by the Securities and Exchange Commission that the informal investigation into the Company has been terminated with no resulting enforcement proceedings against the Company or any current director or officer of the Company. Also on November 17, 2005, the Company entered into a Stipulation and Agreement of Compromise (the “Stipulation”) for the Section 16(b) Augenbaum case. The Defendants agreed to make settlement payments of $3,250,000 with $975,000 in cash and the remainder in stock. This agreement was approved by the court on December 1, 2005.

In connection with the Stipulation, the Company has agreed to a Settlement and Standstill Agreement with Robert Genovese and the BG Capital Group, LTD. pursuant to which the Company will receive a $800,000 cash payment and one million shares of the Company stock. In return, Mr. Genovese and BG Capital have agreed not to engage in certain actions with respect to the Company until December 31, 2008.

The Company has settled its harassment suit for a total payment of $188,000 during the third quarter of 2005. The Company also settled its claim with Donal Myrick, the former President and CEO of the Company. The Company paid Mr. Myrick $155,000 in full settlement.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANAYLYIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DESCRIPTION OF THE COMPANY

Spectrum Sciences & Software Holdings Corp. (the “Company”) provides a variety of goods and services through its wholly-owned subsidiaries SSSI, M&M and CEECO. The following section details the business for each segment, major customers and key operational issues. The segments depicted, with the exception of Industrial and Offshore, are predominantly involved in U.S. Government contracting.

The Security Solutions segment specializes in engineering, manufacturing, and technological support services, as well as the production of specialized and standard ground support equipment for the United States Department of Defense and other governmental and commercial contractors. The manufacturing operation concentrates on munitions transport and packaging equipment under contracts for AMRAAM missile support, Navy launch tubes and plane maintenance equipment. The engineering group provides a variety of services including modeling and simulation, range planning, environmental analyses, the development of the Safe-Range program and “Weapon Safety Footprint” development. The technological support services group provides various services for military installations ranging from all base operations to specific tasks within a base.

The Repair and Overhaul segment provides a full array of electrical and electronic repair, equipment and machinery repair and overhaul, HVAC and refrigeration servicing and repair, pipe fabrication and installation, certified welding services, metal and sheet metal fabrication and installation, custom insulation services, custom flooring services and machinery to the maritime industry. Major customers include Rinker Cement, U.S. Navy, U.S. Coast Guard and Disney Cruise Lines.

The Industrial and Offshore segment is an industrial mechanical contracting company that provides maintenance services to major industries such as oil refineries, mining, pulp and paper, power generation plants, and offshore oil platforms. Its subsidiary, M&M Offshore Limited, is a steel fabrication company that provides module fabrication, pipe spooling, and specialized welding services to the offshore oil and heavy industries. The segment also contains the Liannu joint venture. This venture provides industrial mechanical contracting, structural and steel fabrication and erection. Major clients include Halliburton, ExxonMobil, Petro Canada, Husky Energy, Inco Ltd., Iron Ore Company of Canada, North Atlantic Refining Ltd., Abitibi Consolidated, and Corner Brook Pulp and Paper.

The new senior management of the Company has begun to integrate the subsidiaries into a cohesive organization that will capitalize on the strengths of the individual subsidiaries and provide synergistic and focused solutions for our clients. As part of this effort, the Company has formed a transition team comprised of members from each organization. Its objective is to identify synergies in operations, products and services, its clients and administration processes that will result in a more efficient Company better able to focus on its core strengths by optimizing and aligning all of its resources. The recommendations of the transition team will be a very important factor in determining the Company’s future direction.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. On an ongoing basis, we evaluate our estimates and assumptions, including those related to long-term contracts, product returns, bad debts, inventories, fixed asset lives, income taxes, environmental matters, litigation and other contingencies. We based our estimates and assumptions on historical experience and on various factors that are believed to be reasonable under the circumstances, including current and expected economic conditions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ materially from our estimates under different assumptions or conditions.

We believe that the following critical accounting policies, among others, require us to make significant estimates and judgments in the preparation of our financial statements:

Revenue Recognition

We recognize revenue and profit on substantially all of our fixed price contracts using the percentage-of-completion method of accounting, which relies on estimates of total expected contract revenues and costs. We follow this method since reasonably dependable estimates of the revenues and costs applicable to various stages of the contracts can be made. Recognized revenues and profit are subject to revisions as the projects progress to completion. Revisions to the profit estimates are charged to income in the period in which the facts that give rise to the revisions become known. Revenue from cost-plus contracts is recognized on the basis of direct costs plus indirect costs incurred and an allocable portion of the fixed fee. Revenue from time and material contracts is recognized based on fixed hourly rates for direct labor hours expended. The fixed rate includes direct labor, indirect expenses and profit. Materials or other specified direct cost are recorded at actual cost.

Inventory Valuation

We review our inventory balances to determine if inventories can be sold at amounts equal to or greater than their carrying value. The review includes identification of slow-moving inventories, obsolete inventories, and discontinued products or lines of products. The identification process includes analysis of historical performance of the inventory and current operational plans for the inventory as well as industry and customer-specific trends. If our actual results differ from management expectations with respect to the selling of our inventories at amounts equal to or greater than our carrying amounts, we would be required to adjust our inventory values accordingly.

Foreign Currency Translation

Net Operating Loss Carryforwards

We have not recognized the benefit in our financial statements with respect to the approximately $9,300,000 net operating loss carryforward for federal income tax purposes as of March 31, 2005. This benefit was not recognized due to the possibility that the net operating loss carryforward would not be utilized, for various reasons, including the potential that we might not have sufficient profits to use the carryforward or the carryforward may be limited as a result of changes in our equity ownership. We intend to use this carryforward to offset our future taxable income. If we were to use any of this net operating loss carryforward to reduce our future taxable income and the Internal Revenue Service were to then successfully assert that our carryforward is subject to limitation as a result of capital transactions occurring in 2002 or otherwise, we may be liable for back taxes, interest and, possibly, penalties prospectively.

Impairment of Long Lived Assets

We assess the impairment of long-lived assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable based upon an estimate of future discounted cash flows. Factors we consider that could trigger an impairment review include the following: (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and (iii) significant negative industry or economic trends.

When we determine that the carrying value of any long-lived asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure impairment based on the difference between an asset’s carrying value and an estimate of fair value, which may be determined based upon quotes or a projected discounted cash flow, using a discount rate determined by our management to be commensurate with our cost of capital and the risk inherent in our current business model, and other measures of fair value.

Off Balance Sheet Risk

The Company currently has no off balance sheet arrangements.

The following discussion and analysis should be read in conjunction with the unaudited financial statements (and notes thereto) and other financial information of the Company appearing elsewhere in this report. For the three month periods ended March 31, 2004, the segment results represent only those of SSSI.

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004

Consolidated Overview

For the three month period ended March 31, 2005, the revenues reported for the Company include a full three months of operations for SSSI, two months for M&M and one month for CEECO.


	For the three months ended March 31,
	2005				2004
Revenues	$	2,542,610	100.0	%	$	3,596,578	100.0	%
Cost of revenue		2,148,136	84.5	%		3,274,381	91.0	%

Gross profit	$	394,474	15.5	%	$	322,197	9.0	%

Total revenues for the three months ended March 31, 2005 decreased compared with the same period in 2004, primarily as a result of the decreased revenue from the Gila Bend contract partially offset by the acquisition of M&M and CEECO. The revenue associated with the Gila Bend contract decreased by $2.6 million. Gross profit as a percentage of revenue was 15.5% for the three months ended March 31, 2005 as compared with 9% for the prior year period. These increased margins are due primarily to the profitability of the three subsidiaries acquired during 2005 and the reduction in revenue on the Gila Bend contract that had a 1% gross profit margin during the first quarter of 2004.

Security Solutions

The following section depicts Security Solutions operating results for the three months ended March 31, 2005 and the three months ended March 31, 2004.


	For the three months ended March 31,
	2005				2004
Revenue	$	1,650,752	100.0	%		3,596,578	100.0	%
Cost of revenue		1,337,758	81.1	%		3,274,381	91.0	%

Gross profit	$	312,994	18.9	%		322,197	9.0	%

The Security Solutions segment, comprised of manufacturing, software engineering and management services, had a decrease in revenue due to the loss of the Gila Bend contract that provided approximately $2.6 million of revenue in the first quarter of 2004. The segment witnessed continued growth in its manufacturing operations while software engineering had minimal change in revenue between the periods. Overall, gross margin is up due to the reduction in low margin Gila Bend revenue when compared to the same quarter in 2004.

The manufacturing group increased their revenue by 106% to $1.3 million for the first quarter of 2005. The work performed for government approved First Article verification has resulted in the revenue growth for the quarter.

Industrial and Offshore Segment

The following section depicts the Industrial and Offshore operating results for the three month period ended March 31, 2005. There are no comparisons with the same period in 2004, as this segment was not acquired by the Company until February 2005.


	For the two months ended March 31,
	2005				2004
Revenue	$	781,252	100.0	%		N/A	N/A
Cost of revenue		744,682	95.3	%		N/A	N/A

Gross profit	$	36,570	4.7	%		N/A	N/A

Revenue was driven by two projects including INCO and NARL, a duct and stacks fabrication project. Combined these projects contributed approximately 90% of the revenue for the period. The revenue and gross margins for the quarter are consistent with the segment’s contributions for this time of year given the seasonality of the business.

The segment is currently engaged in a substantial contract with INCO to construct an ore-processing facility in Canada based on an experimental hydromet process. This facility is a prototype, with plans to construct a larger operation in the near future should the prototype prove economically feasible.

Repair and Overhaul Segment

The following section depicts operating results for the three month period ended March 31, 2005. There are no comparisons with the same period in 2004, as this segment was not acquired by the Company until March 2005.


	For the one month ended March 31,
	2005				2004
Revenue	$	110,606	100.0	%		N/A	N/A
Cost of revenue		65,697	59.4	%		N/A	N/A

Gross profit	$	44,909	40.6	%		N/A	N/A

This segment continues to show substantial margins with a gross profit of 40.6% of segment revenues. This segment provides major servicing to one of its prime customers, Rinker Cement.

Operating Expenses


	March 31, 2005		March 31, 2004		Decrease
Selling, General & Administrative	$	2,293,195	$	13,951,585		83.5	%

During the three months ended March 31, 2005, selling, general, and administrative expenses were significantly less than the expense incurred in the same period ended March 31, 2004. This is primarily due to $11.4 million of stock-based compensation expense incurred during the second quarter of 2004. The Company recorded $0.7 million of stock-based compensation during the quarter ended March 31, 2005 as compared with $11.4 million of stock-based compensation expense for consulting fees during the quarter ended March 31, 2004. The Company also recorded $2.1 million of investor relations expenses during the first quarter of 2004 with no comparable expenses during 2005. These reductions in expense are partially offset by the increased expenses associated with the newly acquired subsidiaries. The quarterly selling, general and administrative expense associated with the acquired companies including both costs associated with the acquisitions and the overhead costs associated with these units.

Other Income and Expenses

Non-operating income increased $187,000 from the comparable prior year period as a result of the joint venture earnings from M&M and a positive change in interest income of approximately $90,000. The M&M joint ventures provided approximately $87,000 of income that was not present in the prior period.

Liquidity and Capital Resources

Total liquidity, consisting of cash equivalents and short-term investments, decreased by $7.6 million as of March 31, 2005, as compared with December 31, 2004. The majority of the funds expended were utilized for the acquisitions of M&M and CEECO. At March 31, 2005, cash and cash equivalents totaled $611,780 as compared with $5,666,910 at December 31, 2004. At December 31, 2004, the Company had $18,795,143 in money market accounts and short-term government-backed securities as a result of investing funds received from the exercise of stock options. The balance in these investments at March 31, 2005 was $15,223,262.

Accounts receivable represent our largest working capital requirement. We bill most of our clients monthly or at the completion of a milestone. Our overall cash flow is predicated on the timely collection of our outstanding receivable balances. We have no indication that there will be any collectability issues regarding our outstanding receivables.

Available cash, cash equivalents and short term investments combined with cash provided by operations anticipated through December 31, 2005 should provide sufficient operating capital to fund operations. In addition, available lines of credit currently in place will provide for additional working capital as necessary.

Commitments

The Company, during the normal course of business, enters into agreements with subcontractors and vendors to provide products and services that we consume in our operations or that are delivered to our customers. These products and services are not considered unconditional obligations until the products and services are actually delivered. We do not record a liability until that criterion is met. The table below summarizes our contractual obligations under operating leases, capital leases and debt.


	2006		2007		2008		2009		2010		2011+
Operating Leases	$	164,211	$	122,348	$	56,534	$	42,016	$	3,710		—
Capital Leases		93,458		75,421		55,849		47,367		27,219		13,646
Mortgages Payable		67,200		64,320		—		—		—		—

Total Lease Commitments	$	324,869	$	262,089	$	112,383	$	89,383	$	30,929	$	13,646

Risk Factors

The Company is subject to several risk factors that could have a direct and material impact on the operations of the Company. These risk factors are described below.

We may not receive the full amount of our contract awards.

The Company receives many government contract awards that include both funded and unfunded amounts. While the Company believes that most contracts will become fully funded and executed, there are occasions where the final executed amount of the contract may be substantially less than the contract award. Congress often appropriates funds for our clients on a yearly basis, even though our contracts may call for services over a number of years. As a result, Congress may elect not to fund a particular contract in future years. Additionally, the funded amounts on contracts may not be fully recognized in revenue as the priorities of the contract issuing agencies may change and funding may be reappropriated for other uses.

We may not be able to integrate our new management and the acquired companies successfully to achieve the expected benefits of these acquisitions.

In 2005, the Company acquired three new subsidiaries and had a change in executive management. If we are unable to successfully integrate the existing companies and the new management, our revenue and operating results could suffer. The difficulties of integration may be increased by the necessity of coordinating a diverse set of businesses that are both geographically and operationally disparate. Integrating these operations and related personnel may result in increased attrition, including but not limited to key employees of acquired companies, that could adversely affect our future revenue and profitability.

Increased raw material prices may adversely affect contract profitability.

The Company has experienced significant increases in both steel and aluminum raw material prices. Continued increases in the price of raw materials could have a negative impact on the profitability of the Company. Many of our contracts in our manufacturing components are fixed price contracts and are not automatically repriced when raw material costs increase. We aggressively pursue our contract rights to receive compensation for these increased costs, where available, but not all contracts have price adjustment clauses that allow the Company to recover those cost increases.

Loss of bonding may adversely impact our Canadian operations.

The Company has obtained bonding in Canada through posting a cash deposit with a Canadian surety company. This was the only vehicle available for securing adequate bonding for M&M to continue its operations. The loss of such bonding could have a material adverse impact on the revenues and related profitability of M&M. The Company is currently seeking non-cash secured bonding. Failure to obtain such bonding could adversely impact the Company through reduced revenue and profit.

Quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

Revenue and operating results could vary significantly from quarter to quarter. In addition, we cannot predict with certainty our future revenue or results of operations. As a consequence, our operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include:

•		fluctuations in revenue earned on contracts;

•		commencement, completion, or termination of contracts during any particular quarter;

•		variable purchasing patterns under GSA schedule contracts and agency-specific indefinite delivery/indefinite quantity contracts;

•		providing services under a share-in-savings or performance-based contract;

•		additions and departures of key personnel;

•		strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business strategy;

•		contract mix, the extent of use of subcontractors, and the level of third-party hardware and software purchases for customers;

•		changes in presidential administrations and senior federal government officials that affect the timing of technology procurement;

•		changes in policy or budgetary measures that adversely affect government contracts in general; and

•		the seasonality of our business.

Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our expenses are fixed in the short-term. We may incur significant operating expenses during the start-up and early stages of large contracts and may not receive corresponding payments or revenue in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and administration approval in a timely manner.

Our business commitments require our employees to travel to potentially dangerous places, which may result in injury to our employees.

Our business involves providing services that require our employees to operate in various countries around the world, including Iraq. These countries may be experiencing political upheaval or unrest, and in some cases war or terrorism. Certain senior level employees or executives may, on occasion, be part of the teams deployed to provide services in these countries. As a result, it is possible that certain of our employees or executives will suffer injury or bodily harm in the course of these deployments. It is also possible that we will encounter unexpected costs in connection with additional risks inherent with sending our employees to dangerous locations, such as increased insurance costs, as well as the repatriation of our employees or executives for reasons beyond our control. These problems could cause our actual results to differ materially from those anticipated.

Unfavorable government audit results could force the Company to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.

A significant portion of our revenue comes from payments made by the U.S. government on prime contracts and subcontracts. The costs of these contracts are subject to audit by the Defense Contract Audit Agency (DCAA). Disallowance of these contract costs by DCAA could adversely affect the Company’s financial statements. Management periodically reviews its estimates of allowable and unallowable costs based on the results of government audits and makes adjustments, if any, as required.

If the government discovers improper or illegal activities, by the Company or its employees, the Company may be subject to civil and criminal penalties and administrative sanctions, including contract termination, forfeiture of profits, suspension of payments, fines, and suspension or disbarment from conducting future business with the government. In addition, the Company could suffer serious harm to our reputation if allegations of impropriety were made against it, whether or not true. The Company is not aware of any instances of improper or illegal activities of its employees.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

At March 31, 2005, only our M&M subsidiary had no amounts outstanding under a revolving credit facility. We have not historically mitigated our exposure to fluctuations in interest rates by entering into interest rate hedge agreements nor do we have any plans to do so in the immediate future.

Cash and cash equivalents, as of March 31, 2005, were $0.6 million and are primarily invested in money market interest bearing accounts. A hypothetical 10% adverse change in the average interest rate on our money market cash investments would have had no material effect on net income for the three months ended March 31, 2005.

Foreign Exchange Risk

We are exposed to foreign currency risks due to both transactions and translations between functional and reporting currencies in our Canadian subsidiaries. We are exposed to the impact of foreign currency fluctuations due to the operations of and net monetary asset and liability positions in our Canadian subsidiaries.

In addition, we estimate that an immediate 10% change in foreign exchange rates would impact reported net income or loss by an immaterial amount. We do not currently utilize any derivative financial instruments to hedge foreign currency risks.

ITEM 4. CONTROLS AND PROCEDURES

We evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2005. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of March 31, 2005, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were not effective for the reasons described in the following paragraph.

We filed our quarterly reports for the quarter ended March 31, 2005 on Form 10-QSB as a small business issuer. In connection with the preparation of the quarterly report for the quarter ended September 30, 2005, we determined that pursuant to Item 10(a)(2) of Regulation S-B we ceased to qualify as a small business issuer as of January 1, 2005 because our public float exceeded $25 million as of the end of the last two years. As a result, we were not eligible to file our 2005 quarterly reports on Form 10-QSB, but were instead required to file them on Form 10-Q. Consequently, we are amending this quarterly report on Form 10-Q/A to replace our previously filed Form 10-QSB.

The Company’s current chief executive officer and chief financial officer joined the Company in June 2005. Internal controls and procedures in place during the second quarter 10-Q process included a Form 10-QSB applicability review by senior management together with outside legal and accounting professionals. Internal control reviews by senior management and outside consultants for the third quarter 10-Q process determined that the Company incorrectly filed Form 10-QSB for the quarters ended March 31 and June 30, 2005. Steps we have taken to enhance our disclosure controls and procedures include hiring a new controller with SEC reporting experience, appointing a chairman of the audit committee and hiring an internal general counsel.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See full description of “Legal Matters” in footnote 11 and updates in “Subsequent Events” in footnote 13.

ITEM 6. EXHIBITS


Exhibit
Number		Description
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


*		Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 23^rd day of December, 2005.

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.


		Date: December 23, 2005

		By:		/s/ Darryl K. Horne

		Darryl K. Horne
		President and Chief Executive Officer

		Date: December 23, 2005

		By:		/s/ Michael M. Megless

		Michael M. Megless
		Chief Financial Officer