##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED: June 30, 2005
 OR
 o
    
    TRANSITION REPORT UNDER 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.
  DELAWARE
    
    90-0182158(State or other jurisdiction
Of incorporation or organization)
    
    (IRS Employer
Identification No.)
 
  þ o
  o þ




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TABLE OF CONTENTS
 Special Note Regarding Forward Looking Statements
    
    
    3PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    4Consolidated Balance Sheet as of June 30, 2005 (unaudited)
    
    
    4Consolidated Statements of Operations and Comprehensive Loss for the three months ended
June 30, 2005 and 2004 (unaudited)
    
    
    5Consolidated Statements of Operations and Comprehensive Loss for the six months ended
June 30, 2005 and 2004 (unaudited)
    
    
    6Consolidated Statement of Stockholders Equity for the six months ended
June 30, 2005 (unaudited)
    
    
    7Consolidated Statements of Cash Flows for the six months ended
June 30, 2005 and 2004 (unaudited)
    
    
    8Notes to Consolidated Financial Statements (unaudited)
    
    
    10Item 2. Managements Discussion and Analysis or Plan of Operations
    
    
    34Item 3. Controls and Procedures
    
    
    52PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    54Item 6. Exhibits
    
    
    54Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  2




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   3




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##### Table of Contents



ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,596,126Short-term investments
    
    
    1,910,262Receivables
    
    
    15,605,907Inventories
    
    
    538,771Prepaid expenses
    
    
    622,730Due from joint ventures of subsidiaries
    
    
    194,763Total current assets
    
    
    24,468,559Property and equipment, net
    
    
    7,665,972Goodwill
    
    
    15,088,708Investments in joint ventures
    
    
    1,167,032Other assets
    
    
    101,377TOTAL ASSETS
    
    $
    48,491,648LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,098,174Line of credit
    
    
    1,017,764Accrued expenses
    
    
    1,893,653Current portion of due to related party
    
    
    118,061Deferred revenues
    
    
    322,848Deferred rent liability
    
    
    209,013Current portion of long-term debt
    
    
    379,509Total current liabilities
    
    
    10,039,022Long-term liabilities:Long term debt, less current portion
    
    
    2,387,259Due to related party, less current portion
    
    
    67,388TOTAL LIABILITIES
    
    
    12,493,669Commitments
and contingencies (Note 12)Minority interest
    
    
    161,881Stockholders 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,
44,072,200 issued and outstanding
    
    
    4,408Additional paid-in capital
    
    
    79,865,695Accumulated deficit
    
    
    (44,079,590
    )Accumulated other comprehensive income
    
    
    45,585Total stockholders equity
    
    
    35,836,098TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    48,491,648
  4




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2005
    
    2004Revenues
    
    $
    11,796,428
    
    
    $
    3,418,747Cost of revenues
    
    
    10,121,076
    
    
    
    3,054,924Gross profit
    
    
    1,675,352
    
    
    
    363,823Operating expenses
    
    
    2,961,564
    
    
    
    27,053,790Loss from operations
    
    
    (1,286,212
    )
    
    
    (26,689,967
    )Total non-operating income (expense), net
    
    
    324,471
    
    
    
    8,452Loss before provision for income taxes
    
    
    (961,741
    )
    
    
    (26,681,515
    )Income tax benefit
    
    
    50,485
    
    
    
    0Loss before minority interest
    
    
    (911,256
    )
    
    
    (26,681,515
    )Minority interest
    
    
    (146,483
    )
    
    
    0Net loss
    
    
    (1,057,739
    )
    
    
    (26,681,515
    )Foreign currency translation adjustments
    
    
    45,585
    
    
    
    0Unrealized gain on available for sale securities
    
    
    0
    
    
    
    13,781Total comprehensive loss
    
    $
    (1,012,154
    )
    
    $
    (26,667,734
    )Weighted average common shares outstanding:Basic and diluted
    
    
    41,774,398
    
    
    
    36,795,363Loss per share:Basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.72
    )
  5




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2005
    
    2004Revenues
    
    $
    14,339,038
    
    
    $
    7,015,325Cost of revenues
    
    
    12,269,211
    
    
    
    6,329,305Gross profit
    
    
    2,069,827
    
    
    
    686,020Operating expenses
    
    
    5,254,759
    
    
    
    41,005,374Loss from operations
    
    
    (3,184,932
    )
    
    
    (40,319,354
    )Total other income (expense), net
    
    
    498,576
    
    
    
    (4,499
    )Loss before income tax benefit
and minority interest
    
    
    (2,686,356
    )
    
    
    (40,323,853
    )Income tax benefit
    
    
    50,485
    
    
    
    61,330Net loss before minority interest
    
    
    (2,635,871
    )
    
    
    (40,262,523
    )Minority interest
    
    
    (166,564
    )
    
    
    0Net loss
    
    
    (2,802,435
    )
    
    
    (40,262,523
    )Foreign currency translation adjustments
    
    
    45,585
    
    
    
    0Unrealized gain on available for sale securities
    
    
    0
    
    
    
    13,781Total comprehensive loss
    
    $
    (2,756,850
    )
    
    $
    (40,248,742
    )Weighted average common shares outstanding:Basic and diluted
    
    
    40,388,341
    
    
    
    27,505,843Loss per share:Basic and diluted
    
    $
    (0.07
    )
    
    $
    (1.46
    )
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AccumulatedOtherComprehensiveCommon Stock
    
    
    
    
    
    Accumulated
    
    IncomeShares
    
    Amount
    
    APIC
    
    Deficit
    
    (Loss)
    
    TotalBalances at January 1, 2005
    
    
    38,969,300
    
    
    $
    3,897
    
    
    $
    69,895,120
    
    
    $
    (41,277,155
    )
    
    $
    822
    
    
    $
    28,622,684Stock options issued
for consulting services
    
    
    
    
    
    
    
    
    
    
    1,399,026
    
    
    
    
    
    
    
    
    
    
    
    1,399,026Exercise of stock options
    
    
    2,900
    
    
    
    1
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    4,060Issuance of common stock
for acquisition of Horne Engineering
    
    
    5,100,000
    
    
    
    510
    
    
    
    8,567,490
    
    
    
    
    
    
    
    
    
    
    
    8,568,000Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (822
    )
    
    
    (822
    )Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,585
    
    
    
    45,585Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,802,435
    )
    
    
    
    
    
    
    (2,802,435
    )Balance as of June 30, 2005
    
    
    44,072,200
    
    
    $
    4,408
    
    
    $
    79,865,695
    
    
    $
    (44,079,590
    )
    
    $
    45,585
    
    
    $
    35,836,098
 Disclosure of reclassification amount:
    
    
    2005Reclassification adjustment for
losses included in net loss
    
    $
    822
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2005
    
    2004Cash flows from operating activitiesNet loss
    
    $
    (2,802,435
    )
    
    $
    (40,262,523
    )Adjustments to reconcile net loss to netCash used in operating activitiesIssuance of stock options to related party for
consulting services
    
    
    0
    
    
    
    37,258,300Investor relations expenses paid by a related party
    
    
    0
    
    
    
    2,057,500Amortization of investment bond premium
    
    
    0
    
    
    
    8,496Depreciation
    
    
    304,638
    
    
    
    72,083Accrued interest payable due to related parties
    
    
    0
    
    
    
    9,792Issuance of stock options to employees
    
    
    1,399,026
    
    
    
    125,358Deferred income taxes
    
    
    0
    
    
    
    (28,594
    )Minority interest
    
    
    161,881
    
    
    
    0Foreign exchange translation gain
    
    
    45,585
    
    
    
    0Loss on disposal of equipment
    
    
    2,015
    
    
    
    0Realized loss on the sale of bonds
    
    
    (822
    )
    
    
    0Decrease (increase) in assets:Receivables
    
    
    (5,450,599
    )
    
    
    (1,170,385
    )Inventories
    
    
    (56,890
    )
    
    
    (250,218
    )Prepaid expenses
    
    
    463,597
    
    
    
    (220,533
    )Other assets
    
    
    17,522
    
    
    
    (26,999
    )Due from joint ventures
    
    
    606,733
    
    
    
    0Income taxes receivable
    
    
    32,736
    
    
    
    0Due from shareholder
    
    
    705,126
    
    
    
    0(Decrease) increase in liabilitiesAccounts payable
    
    
    3,061,566
    
    
    
    (525,982
    )Due to stockholder
    
    
    (705,126
    )
    
    
    0Accrued expenses
    
    
    (158,293
    )
    
    
    368,557Contract deposits
    
    
    0
    
    
    
    (50,000
    )Deferred revenues
    
    
    (254,743
    )
    
    
    (36,967
    )Deferred rent liability
    
    
    (24,115
    )
    
    
    0Provision for contract losses
    
    
    (148,248
    )
    
    
    0Net cash used in
operating
activities
    
    
    (2,800,846
    )
    
    
    (2,672,115
    )Cash flows from investing activitiesMaturities
of (Purchases of) available for sale investments
    
    
    16,884,881
    
    
    
    (22,538,101
    )Purchase of M&M, net of cash received
    
    
    (7,066,151
    )
    
    
    0Purchase of CEECO, net of cash received
    
    
    (339,612
    )
    
    
    0Purchase of Horne, net of cash received
    
    
    (4,996,448
    )
    
    
    0Purchase of property and equipment
    
    
    (315,205
    )
    
    
    (109,993
    )Proceeds from the sale of equipment
    
    
    7,500
    
    
    
    0Investments in joint ventures
    
    
    (88,727
    )
    
    
    0Net cash
provided by (used in) investing activities
    
    
    4,086,238
    
    
    
    (22,648,094
    )
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2005
    
    2004Cash
flows from financing activitiesRepayment of long term debt
    
    
    (892,686
    )
    
    
    (753,318
    )Repayment of short term debt
    
    
    0
    
    
    
    (307,726
    )Net repayments on lines of credit
    
    
    (1,045,905
    )
    
    
    0Borrowing of long term debt
    
    
    420,503
    
    
    
    0Advances from related party
    
    
    157,852
    
    
    
    672,551Repayment of due to related party
    
    
    0
    
    
    
    (52,500
    )Proceeds for the exercise of stock options
    
    
    4,060
    
    
    
    31,113,685Net cash provided by
(used in) financing
activities
    
    
    (1,356,176
    )
    
    
    30,672,692Net (decrease) increase in cash and cash equivalents
    
    
    (70,784
    )
    
    
    5,352,483Cash and cash equivalents at beginning of period
    
    
    5,666,910
    
    
    
    696,959Cash and cash equivalents at end of period
    
    $
    5,596,126
    
    
    $
    6,049,442Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    102,752
    
    
    $
    127,903Supplemental schedule of non-cash financing and investing:Issuance of restricted stock for acquisition
of Horne
    
    $
    8,568,000
    
    
    $
    0Reduction in due to related party in lieu of cash payment for
exercise of stock options
    
    $
    0
    
    
    $
    3,529,873Unrealized loss on available for sale securities
    
    $
    (822
    )
    
    
    13,781Reclassification of short-term debt to accrued expenses
    
    $
    0
    
    
    $
    0
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(A) Organization and Nature of Business
      10




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(A) Organization and Nature of Business, Continued:
  (B) Income Taxes
   (C) Earnings (Loss) Per Share
   11




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(D) Financial Instruments
   (E) Foreign Currency Translation
  12




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2.
    
    BASIS OF PRESENTATION:
   3.
    
    ACQUISITION OF M&M ENGINEERING LIMITED, COAST ENGINE AND EQUIPMENT COMPANY, INC., AND HORNE
ENGINEERING SERVICES, LLC.
   13




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3.
    
    ACQUISITION OF M&M ENGINEERING LIMITED, COAST ENGINE AND EQUIPMENT COMPANY, INC., AND HORNE
ENGINEERING SERVICES, INC., CONTINUED:
     14




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3.
    
    ACQUISITION OF M&M ENGINEERING LIMITED, COAST ENGINE AND EQUIPMENT COMPANY, INC., AND HORNE
ENGINEERING SERVICES, LLC. CONTINUED:
 For the Six Months Ended June 30,2005
    
    2004Revenue
    
    $
    37,641,826
    
    
    $
    24,890,924Net loss
    
    
    (2,778,843
    )
    
    
    (40,668,141
    )Loss per share  basic
    
    
    (0.08
    )
    
    
    (1.48
    )Loss per share  diluted
    
    
    (0.08
    )
    
    
    (1.48
    )
    Spectrum,
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalInc.
    
    M&M
    
    CEECO
    
    Horne
    
    CompanyContracts
 billed
    
    $
    2,376,814
    
    
    $
    4,358,321
    
    
    $
    206,997
    
    
    $
    4,964,074
    
    
    $
    11,906,206Contracts  unbilled
    
    
    1,519,301
    
    
    
    1,040,044
    
    
    
    0
    
    
    
    642,055
    
    
    
    3,201,400Holdbacks
    
    
    0
    
    
    
    364,512
    
    
    
    0
    
    
    
    151,596
    
    
    
    516,108Other
    
    
    240
    
    
    
    (1,985
    )
    
    
    (8,787
    )
    
    
    (7,275
    )
    
    
    (17,807
    )$
    3,896,355
    
    
    $
    5,760,892
    
    
    $
    198,210
    
    
    $
    5,750,450
    
    
    $
    15,605,907
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TotalSpectrum, Inc.
    
    M&M
    
    CEECO
    
    Horne
    
    CompanyRaw materials, net
of reserve
    
    $
    68,640
    
    
    $
    359,383
    
    
    $
    39,219
    
    
    $
    0
    
    
    $
    467,242Work in process
    
    
    38,109
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    38,109Finished Goods
    
    
    0
    
    
    
    33,420
    
    
    
    0
    
    
    
    0
    
    
    
    33,4200
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total inventories
    
    $
    106,749
    
    
    $
    392,803
    
    
    $
    39,219
    
    
    $
    0
    
    
    $
    538,771
   TotalSpectrum, Inc.
    
    M&M
    
    CEECO
    
    Horne
    
    CompanyLand
    
    $
    575,000
    
    
    $
    283,462
    
    
    $
    0
    
    
    $
    0
    
    
    $
    858,462Buildings and
improvements
    
    
    3,497,529
    
    
    
    1,321,576
    
    
    
    0
    
    
    
    18,908
    
    
    
    4,838,013Furniture and fixtures
    
    
    42,150
    
    
    
    0
    
    
    
    0
    
    
    
    6,980
    
    
    
    49,130Manufacturing
equipment
    
    
    1,227,468
    
    
    
    39,321
    
    
    
    65,111
    
    
    
    0
    
    
    
    1,331,900Tools and equipment
    
    
    0
    
    
    
    289,577
    
    
    
    0
    
    
    
    23,940
    
    
    
    313,517Office equipment
    
    
    305,498
    
    
    
    141,777
    
    
    
    568
    
    
    
    160,962
    
    
    
    608,805Vehicles
    
    
    55,390
    
    
    
    160,660
    
    
    
    23,592
    
    
    
    199,984
    
    
    
    439,626Equipment under
capital leases
    
    
    0
    
    
    
    476,575
    
    
    
    0
    
    
    
    0
    
    
    
    476,575Investment property
    
    
    220,900
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    220,900Total
    
    
    5,923,935
    
    
    
    2,712,948
    
    
    
    89,271
    
    
    
    410,774
    
    
    
    9,136,928Less accumulated
depreciation
    
    
    (1,315,910
    )
    
    
    (110,090
    )
    
    
    (16,022
    )
    
    
    (28,934
    )
    
    
    (1,470,956
    )Property and
equipment, net
    
    $
    4,608,025
    
    
    $
    2,602,858
    
    
    $
    73,249
    
    
    $
    381,840
    
    
    $
    7,665,972
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TotalSpectrum, Inc.
    
    M&M
    
    CEECO
    
    Horne
    
    CompanyAccrued salaries,
payroll related taxes and related benefits
    
    $
    141,530
    
    
    $
    0
    
    
    $
    0
    
    
    $
    373,204
    
    
    $
    514,734Accrued vacation and
sick leave
    
    
    63,832
    
    
    
    17,877
    
    
    
    0
    
    
    
    541,648
    
    
    
    623,357Accrued sales and
property taxes
    
    
    16,200
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    16,200Legal Judgment
    
    
    238,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238,100Other
    
    
    
    
    
    
    87,910
    
    
    
    23,759
    
    
    
    81,588
    
    
    
    193,257Income taxes payable
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    308,005
    
    
    
    308,005Total accrued expenses
    
    $
    459,662
    
    
    $
    105,787
    
    
    $
    23,759
    
    
    $
    1,304,445
    
    
    $
    1,893,653
  M&M Engineering Limited
 Long-term debt at June 30, 2005, consists of the following:Roynat Inc. mortgage, maturing in 2008, with interest at Roynat
cost of funds plus 3.25% (6.10% at June 30, 2005) repayable in
monthly principal payments of $5,655 plus interest. The mortgage
is collateralized by land and a building.
    
    $
    219,345Capital leases and loans on equipment with interest at 0% to
14.89% repayable in monthly principal and interest payments of
$15,752.
    
    
    433,022652,367Less current portion
    
    
    186,103Total long-term debt
    
    $
    466,264
  2006
    
    $
    68,3932007
    
    
    68,3932008
    
    
    68,3932009
    
    
    14,1662010
    
    
    0$
    219,345
  2006
    
    $
    120,6562007
    
    
    112,7162008
    
    
    90,4022009
    
    
    60,5862010
    
    
    48,662Total
    
    
    433,022Less imputed interest
    
    
    0$
    433,022
 17




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Spectrum Sciences & Software, Inc.
  Scott Unlimited mortgage, maturing in April 2025, with interest
at 7% repayable in monthly payments of principal, interest and
insurance of $17,394. The mortgage is collateralized by land
and a building.
    
    $
    1,923,714Less current portion
    
    
    45,764Total long-term debt
    
    $
    1,877,950
 Horne Engineering Services, LLC
  Loans on vehicles with interest at 5.9% and 8.5% repayable in
monthly interest and principal payments of $2,167.
    
    $
    54,802Less current portion
    
    
    11,758Total long-term debt
    
    $
    43,044
 CIBC Facility:
   RoyNat Mortgage:
  18




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Magna Credit Facility:
  Bank of America Facility:
  Tatonka Capital Note:
  19




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Transactions related to BG Capital Group Limited, Endeavor Group, LLC and Related Stockholder
    Transactions related to Coast Engine and Equipment Company
   2005
    
    $
    8,2262006
    
    
    10,5132007
    
    
    5,5002008
    
    
    1,375$
    25,614
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Share-Based Payment
     22




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Three Months Ended2005
    
    2004Total revenues by segmentSpectrum Sciences & Software, Inc.Management Services
    
    $
    62,654
    
    
    $
    2,365,770Engineering and Information Technology
    
    
    383,668
    
    
    
    447,813Manufacturing
    
    
    1,195,733
    
    
    
    605,164M&M Engineering LimitedIndustrial and Offshore
    
    
    4,896,574
    
    
    
    N/ACoast Engine and Equipment CompanyRepair and Overhaul
    
    
    360,620
    
    
    
    N/AHorne Engineering Services, LLCEngineering Consulting
    
    
    2,613,446
    
    
    
    N/AProcurement Services
    
    
    2,283,733
    
    
    
    N/ATotal Revenues
    
    $
    11,796,428
    
    
    $
    3,418,747Operating profit (loss) by segmentSpectrum Sciences & Software, Inc.Management Services
    
    $
    (32,843
    )
    
    $
    27,462Engineering and Information Technology
    
    
    165,001
    
    
    
    277,936Manufacturing
    
    
    (239,833
    )
    
    
    58,425M&M Engineering LimitedIndustrial and Offshore
    
    
    873,151
    
    
    
    N/ACoast Engine and Equipment CompanyRepair and Overhaul
    
    
    134,612
    
    
    
    N/AHorne Engineering Services, LLCEngineering Consulting
    
    
    679,073
    
    
    
    N/AProcurement Services
    
    
    96,192
    
    
    
    N/AOperating Expenses
    
    
    (2,961,564
    )
    
    
    (27,053,789
    )Interest income (expense) net
    
    
    39,015
    
    
    
    (38,207
    )Other income
    
    
    285,456
    
    
    
    46,658Loss before provision for income taxes
    
    
    (961,741
    )
    
    
    (26,681,515
    )Income tax benefit
    
    
    50,483
    
    
    
    Minority interest
    
    
    (146,483
    )
    
    
    Net loss
    
    $
    (1,057,741
    )
    
    $
    (26,681,515
    )Identifiable AssetsManagement Services
    
    $
    586,215
    
    
    $
    1,933,389Engineering and Information Technology
    
    
    685,926
    
    
    
    513,553Manufacturing
    
    
    3,198,301
    
    
    
    983,626Industrial and Offshore
    
    
    8,636,551
    
    
    
    N/ARepair and Overhaul
    
    
    366,984
    
    
    
    N/AEngineering Consulting
    
    
    4,282,039
    
    
    
    N/AProcurement Services
    
    
    2,194,298
    
    
    
    N/ATotal identifiable assets
    
    $
    19,950,314
    
    
    $
    3,430,568Corporate and other assets
    
    
    28,541,334
    
    
    
    30,834,105Total assets
    
    $
    48,491,648
    
    
    $
    34,264,673
  24




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Six Months Ended2005
    
    2004Total revenues by segmentSpectrum Sciences & Software, Inc.Management Services
    
    $
    145,667
    
    
    $
    5,006,801Engineering and Information Technology
    
    
    640,842
    
    
    
    767,903Manufacturing
    
    
    2,506,298
    
    
    
    1,240,621M&M Engineering LimitedIndustrial and Offshore
    
    
    5,677,826
    
    
    
    N/ACoast Engine and Equipment CompanyRepair and Overhaul
    
    
    471,226
    
    
    
    N/AHorne Engineering Services, LLCEngineering Consulting
    
    
    2,613,446
    
    
    
    N/AProcurement Services
    
    
    2,283,733
    
    
    
    N/ATotal Revenues
    
    $
    14,339,038
    
    
    $
    7,015,325Operating profit (loss) by segmentSpectrum Sciences & Software, Inc.Management Services
    
    $
    (90,152
    )
    
    $
    45,008Engineering and Information Technology
    
    
    300,823
    
    
    
    429,728Manufacturing
    
    
    (5,351
    )
    
    
    211,284M&M Engineering LimitedIndustrial and Offshore
    
    
    909,721
    
    
    
    N/ACoast Engine and Equipment CompanyRepair and Overhaul
    
    
    179,521
    
    
    
    N/AHorne Engineering Services, LLCEngineering Consulting
    
    
    679,073
    
    
    
    N/AProcurement Services
    
    
    96,192
    
    
    
    N/AOperating Expenses
    
    
    (5,254,759
    )
    
    
    (41,005,374
    )Interest income (expense) net
    
    
    65,852
    
    
    
    (101,693
    )Other income
    
    
    432,724
    
    
    
    97,194Loss before provision for income taxes
    
    
    (2,686,356
    )
    
    
    (40,323,853
    )Income tax benefit
    
    
    50,483
    
    
    
    61,330Minority interest
    
    
    (166,564
    )
    
    
    0Net loss
    
    $
    (2,802,437
    )
    
    $
    (40,262,523
    )
  25




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##### Table of Contents



(a) Operating Leases
 (i)
    
    Lessee
  Year ending December 312005
    
    $
    10,1822006
    
    
    20,3652007
    
    
    20,0472008
    
    
    19,7292009
    
    
    18,399$
    88,722
   2006
    
    $
    111,3332007
    
    
    89,4342008
    
    
    39,8922009
    
    
    22,2272010
    
    
    14,655$
    277,541
  2005
    
    $
    71,0162006
    
    
    23,672$
    94,688
  2006
    
    $
    604,0002007
    
    
    240,000$
    844,000
 26




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##### Table of Contents



(ii)
    
    Lessor
   2005
    
    $
    228,9672006
    
    
    228,9672007
    
    
    228,9672008
    
    
    171,726$
    858,627
 (b)Legal Matters
 Harassment Suit
   27




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Section 16(b) claim
  Claim by the former President of the Company
  
    
    Spectrum has breached its obligation under an oral employment agreement for the
period from November 2002 to December 2003 by failing and refusing to pay salary or
benefits;
    
    Spectrum 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
    
    Spectrum, 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 the registration of transfer should have occurred
and the eventual date that Mr. Myrick was able to liquidate the stock in the open
market.
  28




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##### Table of Contents



Munitions Assembly Conveyor (MAC) Lawsuit
  
    
    Breach of Express Contract
    
    Breach of Implied in Fact Contract
    
    Misappropriation of Trade Secrets
   Garrison Lawsuit
  29




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##### Table of Contents




    
    Breach of Contract
    
    Violation of Uniform Trade Secrets Act
    
    Tortious Interference
    
    Conversion
    
    Civil Conspiracy
  Plum Island Claim
  SEC Investigation
  
    
    All documents concerning Robert Genovese (Genovese), Endeavor Capital Group
Ltd., and B.G. Capital Group Ltd., both of which are owned by a stockholder, Mr.
Genovese;
    
    All documents concerning any purchase or sales of the Companys stock by Genovese,
Endeavor, B.G. Capital, or any Company officer, director or manager, or any related
party;
    
    All documents concerning stock options in the Company held by Genovese, Endeavor,
B.G Capital, or any other related persons or parties;
    
    All documents concerning press releases or public announcements issued by the
Company;
    
    All documents concerning statements made by the Company to securities analysts or
in the media;
    
    All documents concerning any promotional materials concerning the Companys stock;
    
    All documents concerning the resignation of Donal Myrick.
  
    
    All information relating to the Companys decision to list on any foreign exchange;
    
    All documents relating to the listing of the Companys stock on any foreign exchange;
    
    Any information relating to any transfers of stock that the Company may be aware
that were directed overseas.
 30




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31




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M&M Engineering Limited
         32




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33




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 CRITICAL ACCOUNTING POLICIES
       34




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Description of the Company
   COMPARISON OF THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
 Consolidated Overview:
  For the three months ended June 302005
    
    2004Revenues
    
    $
    11,796,428
    
    
    
    100.0
    %
    
    $
    3,418,747
    
    
    
    100.0
    %Cost of revenue
    
    
    10,121,076
    
    
    
    85.8
    %
    
    
    3,054,924
    
    
    
    89.4
    %Gross profit
    
    $
    1,675,352
    
    
    
    14.2
    %
    
    $
    363,823
    
    
    
    10.6
    %
  35




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##### Table of Contents



Spectrum Sciences & Software, Inc.
  Management Services
 For the three months ended June 302005
    
    2004Revenue
    
    $
    62,654
    
    
    
    100.0
    %
    
    $
    2,365,770
    
    
    
    100.0
    %Cost of revenue
    
    
    95,497
    
    
    
    152.4
    %
    
    
    2,338,308
    
    
    
    98.8
    %Gross profit (loss)
    
    $
    (32,843
    )
    
    
    (52.4
    %)
    
    $
    27,462
    
    
    
    1.2
    %
  Engineering and Information Technology Services
 For the three months ended June 302005
    
    2004Revenues
    
    $
    383,668
    
    
    
    100.0
    %
    
    $
    447,813
    
    
    
    100.0
    %Cost of revenue
    
    
    218,667
    
    
    
    57.0
    %
    
    
    169,877
    
    
    
    37.9
    %Gross profit
    
    $
    165,001
    
    
    
    43.0
    %
    
    $
    277,936
    
    
    
    62.1
    %
  36




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Manufacturing Segment
 For the three months ended June 302005
    
    2004Revenue
    
    $
    1,195,733
    
    
    
    100.0
    %
    
    $
    605,164
    
    
    
    100.0
    %Cost of revenue
    
    
    1,435,566
    
    
    
    120.1
    %
    
    
    546,739
    
    
    
    90.3
    %Gross profit (loss)
    
    $
    (239,833
    )
    
    
    -20.1
    %
    
    $
    58,425
    
    
    
    9.7
    %
 37




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M&M Engineering Limited
  38




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Industrial and Offshore Segment
 For the three months ended June 302005
    
    2004Revenue
    
    $
    4,896,574
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    4,023,423
    
    
    
    82.2
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    873,151
    
    
    
    17.8
    %
    
    
    N/A
    
    
    
    N/A
   Coast Engine and Equipment Company, Inc.
  Repair and Overhaul Segment
 For the three months ended June 302005
    
    2004Revenue
    
    $
    360,620
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    226,008
    
    
    
    62.7
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    134,612
    
    
    
    37.3
    %
    
    
    N/A
    
    
    
    N/A
  39




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Horne Engineering Services, LLC
  Engineering Consulting
 For the two months ended June 302005
    
    2004Revenue
    
    $
    2,613,446
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    1,934,373
    
    
    
    74.0
    %
    
    NA
    
    NAGross profit (loss)
    
    $
    679,073
    
    
    
    26.0
    %
    
    NA
    
    NA
     40




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th
      41




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Procurement Services
 For the two months ended June 302005
    
    2004Revenues
    
    $
    2,283,733
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    2,187,541
    
    
    
    95.8
    %
    
    NA
    
    NAGross profit
    
    $
    96,192
    
    
    
    4.2
    %
    
    NA
    
    NA
     Operating Expenses
 June 30, 2005
    
    June 30, 2004
    
    DecreaseSelling, general and
administrative expenses
    
    $
    2,961,564
    
    
    $
    27,053,789
    
    
    
    89.1
    %
 Selling, general and administrative expenses 
 42




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##### Table of Contents



Other Income and Expenses
 Interest income and expense, net 
 Other income and expense, net 
 COMPARISON OF SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
 Consolidated Overview:
  For the six months ended June 302005
    
    2004Revenues
    
    $
    14,339,038
    
    
    
    100.0
    %
    
    $
    7,015,325
    
    
    
    100.0
    %Cost of revenue
    
    
    12,269,211
    
    
    
    85.6
    %
    
    
    6,329,305
    
    
    
    90.2
    %Gross profit
    
    $
    2,069,827
    
    
    
    14.4
    %
    
    $
    686,020
    
    
    
    9.8
    %
  43




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##### Table of Contents



Spectrum Sciences & Software, Inc.
  Management Services
 For the six months ended June 302005
    
    2004Revenue
    
    $
    145,667
    
    
    
    100.0
    %
    
    $
    5,006,801
    
    
    
    100.0
    %Cost of revenue
    
    
    235,819
    
    
    
    161.9
    %
    
    
    4,961,793
    
    
    
    99.1
    %Gross profit (loss)
    
    $
    (90,152
    )
    
    
    (61.9
    %)
    
    $
    45,008
    
    
    
    0.9
    %
  Engineering and Information Technology Services
 For the six months ended June 302005
    
    2004Revenues
    
    $
    640,842
    
    
    
    100.0
    %
    
    $
    767,903
    
    
    
    100.0
    %Cost of revenue
    
    
    340,019
    
    
    
    53.1
    %
    
    
    338,175
    
    
    
    44.0
    %Gross profit
    
    $
    300,823
    
    
    
    46.9
    %
    
    $
    429,728
    
    
    
    56.0
    %
  44




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Manufacturing Segment
 For the six months ended June 302005
    
    2004Revenue
    
    $
    2,506,298
    
    
    
    100.0
    %
    
    $
    1,240,621
    
    
    
    100.0
    %Cost of revenue
    
    
    2,511,649
    
    
    
    100.2
    %
    
    
    1,029,337
    
    
    
    83.0
    %Gross profit (loss)
    
    $
    (5,351
    )
    
    
    -0.2
    %
    
    $
    211,284
    
    
    
    17.0
    %
  45




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##### Table of Contents



M&M Engineering Limited
  46




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##### Table of Contents



Industrial and Offshore Segment
 For the five months ended June 302005
    
    2004Revenue
    
    $
    5,677,826
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    4,768,105
    
    
    
    84.0
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    909,721
    
    
    
    16.0
    %
    
    
    N/A
    
    
    
    N/A
   Coast Engine and Equipment Company, Inc.
  Repair and Overhaul Segment
 For the four months ended June 302005
    
    2004Revenue
    
    $
    471,226
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    291,705
    
    
    
    61.9
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    179,521
    
    
    
    38.1
    %
    
    
    N/A
    
    
    
    N/A
  Horne Engineering Services, LLC
  47




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##### Table of Contents



Engineering Consulting
 For the two months ended June 302005
    
    2004Revenue
    
    $
    2,613,446
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    1,934,373
    
    
    
    74.0
    %
    
    NA
    
    NAGross profit (loss)
    
    $
    679,073
    
    
    
    26.0
    %
    
    NA
    
    NA
       48




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##### Table of Contents



th
       49




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##### Table of Contents



Procurement Services
 For the two months ended June 302005
    
    2004Revenues
    
    $
    2,283,733
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    2,187,541
    
    
    
    95.8
    %
    
    NA
    
    NAGross profit
    
    $
    96,192
    
    
    
    4.2
    %
    
    NA
    
    NA
     Operating Expenses
 June 30, 2005
    
    June 30, 2004
    
    DecreaseSelling, general and
administrative expenses
    
    $
    5,254,759
    
    
    $
    41,005,374
    
    
    
    87.2
    %
 Selling, general and administrative expenses 
 50




---



##### Table of Contents



Other Income and Expenses
 Interest income and expense, net 
 Other income and expense, net 
 Capital and Liquidity
     CIBC Facility:
   51




---



##### Table of Contents



RoyNat Mortgage:
  Magna Credit Facility:
  Bank of America Facility:
  Tatonka Capital Note:
  
 52




---



##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 53




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal Matters
 
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    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. 54




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##### Table of Contents



Date: August 19, 2005By :
    
    /s/ Darryl K. HorneDarryl K. HornePresident and Chief Executive Officer
  Date: August 19, 2005By :
    
    /s/ Michael M. MeglessMichael M. MeglessChief Financial Officer
 55




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    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. 56