##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 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.
  Delaware
    
    90-0182158(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. EmployerIdentification No.)3130 Fairview Park Drive, Suite 400, Falls Church,
Virginia
    
    22042(Address of principal executive offices)
    
    (Zip Code)
 703-564-2967
 o þ
 o þ
 o þ




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TABLE OF CONTENTS
 Special Note Regarding Forward-Looking Statements
    
    
    1PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    2Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2005 and 2004
    
    
    3Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 6. Exhibits
    
    
    35Exhibit 3.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   1




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##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,641,903
    
    
    $
    5,666,910Short-term investments
    
    
    
    
    
    
    18,795,143Receivables
    
    
    16,997,310
    
    
    
    2,759,756Due from Shareholder
    
    
    
    
    
    
    705,126Inventories
    
    
    679,036
    
    
    
    79,010Prepaid expenses & other current assets
    
    
    551,213
    
    
    
    882,478Total current assets
    
    
    25,869,462
    
    
    
    28,888,423Property and equipment, net
    
    
    7,775,703
    
    
    
    2,280,746Good will
    
    
    14,879,831
    
    
    
    Investments in joint ventures
    
    
    1,483,545
    
    
    
    Other assets
    
    
    676,501
    
    
    
    43,810TOTAL ASSETS
    
    $
    50,685,042
    
    
    $
    31,212,979LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,360,534
    
    
    $
    1,025,030Line of credit
    
    
    1,082,449
    
    
    
    0Accrued expenses
    
    
    2,082,435
    
    
    
    482,923Current portion due to related party
    
    
    63,630
    
    
    
    705,126Deferred revenues
    
    
    186,423
    
    
    
    228,968Provision for contract losses
    
    
    404,554
    
    
    
    148,248Deferred tax liability
    
    
    377,315
    
    
    
    Current portion of long-term debt
    
    
    386,863
    
    
    
    Total current liabilities
    
    
    11,944,203
    
    
    
    2,590,295Long-term liabilities:Long-term debt, less current portion
    
    
    2,461,826
    
    
    
    Due to related party, less current portion
    
    
    17,335
    
    
    
    Non-current deferred tax liability
    
    
    74,943
    
    
    
    TOTAL LIABILITIES
    
    $
    14,498,307
    
    
    $
    2,590,295Commitments and contingencies (Note 10)Minority interest
    
    
    98,021
    
    
    
    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,
44,072,200 and 38,969,300 issued and outstanding at September 30, 2005 and December 31, 2004
    
    
    4,407
    
    
    
    3,897Additional paid-in capital
    
    
    79,865,695
    
    
    
    69,895,120Accumulated deficit
    
    
    (44,136,378
    )
    
    
    (41,277,155
    )Accumulated other comprehensive income
    
    
    354,990
    
    
    
    822Total stockholders equity
    
    
    36,088,714
    
    
    
    28,622,684TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    50,685,042
    
    
    $
    31,212,979
  2




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3 months ended
    
    9 months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenues
    
    $
    16,819,802
    
    
    $
    3,008,950
    
    
    $
    31,158,841
    
    
    $
    10,024,275Cost of revenues
    
    
    14,735,363
    
    
    
    2,843,446
    
    
    
    27,004,576
    
    
    
    9,172,751Gross profit
    
    
    2,084,439
    
    
    
    165,504
    
    
    
    4,154,265
    
    
    
    851,524Operating expenses
    
    
    2,399,651
    
    
    
    970,200
    
    
    
    7,683,575
    
    
    
    41,975,574Loss from operations
    
    
    (315,212
    )
    
    
    (804,696
    )
    
    
    (3,529,310
    )
    
    
    (41,124,050
    )Total non-operating income (expense), net
    
    
    (185,908
    )
    
    
    114,863
    
    
    
    (713,652
    )
    
    
    110,363Loss before provision for income taxes
    
    
    (129,304
    )
    
    
    (689,833
    )
    
    
    (2,815,658
    )
    
    
    (41,013,687
    )Income tax benefit
    
    
    8,655
    
    
    
    0
    
    
    
    59,138
    
    
    
    61,330Loss before minority interest
    
    
    (120,649
    )
    
    
    (689,833
    )
    
    
    (2,756,520
    )
    
    
    (40,952,357
    )Minority interest
    
    
    (63,860
    )
    
    
    0
    
    
    
    102,703
    
    
    
    0Net Loss
    
    $
    (56,789
    )
    
    $
    (689,833
    )
    
    $
    (2,859,223
    )
    
    $
    (40,952,357
    )Weighted average common shares outstanding:Basic and diluted
    
    
    44,072,200
    
    
    
    40,069,300
    
    
    
    41,634,154
    
    
    
    31,739,682Loss per share:Basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (1.29
    )Net Loss
    
    
    (56,789
    )
    
    
    (689,833
    )
    
    
    (2,859,223
    )
    
    
    (40,952,357
    )Foreign currency translation adjustments
    
    
    309,405
    
    
    
    0
    
    
    
    354,990
    
    
    
    0Unrealized gain on available for sale securities
    
    
    0
    
    
    
    29,435
    
    
    
    0
    
    
    
    43,216Total comprehensive income(loss)
    
    $
    252,616
    
    
    $
    (660,398
    )
    
    $
    (2,504,233
    )
    
    $
    (40,909,141
    )
  3




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AccumulatedOtherCommon Stock
    
    
    
    
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    APIC
    
    Deficit
    
    Income(Loss)
    
    TotalBalance 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
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    4,059Issuance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    354,990
    
    
    
    354,990Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,859,223
    )
    
    
    
    
    
    
    (2,859,223
    )Balance at September
30, 2005
    
    
    44,072,200
    
    
    $
    4,407
    
    
    $
    79,865,695
    
    
    $
    (44,136,378
    )
    
    $
    354,990
    
    
    $
    36,088,714Disclosure of reclassification amount:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005Reclassification
adjustment for losses
included in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    822
  4




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Nine Months ended September 30,2005
    
    
    2004Cash flows from operating activitiesNet loss
    
    $
    (2,859,223
    )
    
    $
    (40,952,357
    )Adjust ments to reconcile net loss to net
Cash used in operating activities
Issuance 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
    
    
    
    33,984Depreciation
    
    
    495,301
    
    
    
    113,863Issuance of stock options to employees
    
    
    1,399,026
    
    
    
    125,358Deferred income taxes
    
    
    0
    
    
    
    (28,594
    )Minority interest
    
    
    98,021
    
    
    
    0Foreign exchange translation gain
    
    
    (352,926
    )
    
    
    0Loss on disposal of equipment
    
    
    16,245
    
    
    
    0Realized loss on the sale of bonds
    
    
    (822
    )
    
    
    5,610Changes in assets and liabilitiesReceivables
    
    
    (6,322,261
    )
    
    
    (1,018,705
    )Accounts payable
    
    
    4,550,828
    
    
    
    (461,932
    )Provision for contract losses
    
    
    256,306
    
    
    
    0Other balance sheet changes
    
    
    543,126
    
    
    
    (1,100,360
    )Net cash used in operating activities
    
    
    (2,176,379
    )
    
    
    (3,967,333
    )Cash flows from investing activitiesMaturities (purchases) of available for sale investments,net
    
    
    18,795,143
    
    
    
    (21,915,507
    )Acquisitions, net of cash received
    
    
    (12,411,884
    )
    
    
    0Purchase of property and equipment
    
    
    (2,968,537
    )
    
    
    (204,574
    )Proceeds from the sale of equipment
    
    
    74,161
    
    
    
    0Investments in joint ventures
    
    
    (341,544
    )
    
    
    0Net cash used in(provided by) investing activities
    
    
    3,147,339
    
    
    
    (22,120,081
    )Cash flows from financing activitiesIssuance (repayment) of debt, net
    
    
    1,927,826
    
    
    
    (1,073,379
    )Net (repayments) borrowings on lines of credit
    
    
    (981,220
    )
    
    
    0Advances from related party
    
    
    53,368
    
    
    
    622,551Proceeds from the exercise of stock options
    
    
    4,059
    
    
    
    31,113,685Net cash provided by financing activities
    
    
    1,004,033
    
    
    
    30,662,857Net (decrease) increase in cash and cash equivalents
    
    
    1,974,993
    
    
    
    4,575,443Cash and cash equivalents at beginning of period
    
    
    5,666,910
    
    
    
    696,959Cash and cash equivalents at end of period
    
    $
    7,641,903
    
    
    $
    5,272,402
  5




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1. BASIS OF PRESENTATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Business
   Income Taxes
  6




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Earnings (Loss) Per Share
   Financial Instruments
   Foreign Currency Translation
  7




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Recent Accounting Pronouncements
   
    
    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 and
    
    EITF Issue No. 05-06, Determining the Amortization Period for Leasehold Improvements
  3. ACQUISITIONS
 M&M Engineering Limited
  8




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Coast Engine and Equipment
  Horne Services, Inc.
   9




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Pro Forma Results
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenue
    
    $
    16,819,802
    
    
    $
    13,958,132
    
    
    $
    54,446,030
    
    
    $
    36,338,950Net loss
    
    
    (56,789
    )
    
    
    (223,456
    )
    
    
    (2,714,419
    )
    
    
    (39,768,530
    )Loss per share  Basic & Diluted
    
    $
    
    
    
    $
    (0.01
    )
    
    $
    (0.07
    )
    
    $
    (1.25
    )
  10




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4. RECEIVABLES
  September
    
    
    DecemberReceivables
    
    30, 2005
    
    
    31, 2004Billed receivables
    
    $
    14,203,789
    
    
    $
    1,467,285Unbilled receivables
    
    
    1,493,284
    
    
    
    1,165,514Holdbacks
    
    
    1,242,075
    
    
    
    Other
    
    
    58,162
    
    
    
    126,957Total Receivables
    
    $
    16,997,310
    
    
    $
    2,759,756
 5. INVENTORIES
  September
    
    
    DecemberInventories
    
    30, 2005
    
    
    31, 2004Raw materials , net of reserve
    
    $
    443,386
    
    
    $
    20,483Work in process
    
    
    163,061
    
    
    
    58,527Finished goods
    
    
    72,589
    
    
    
    Total Inventories
    
    $
    679,036
    
    
    $
    79,010
 6. BORROWINGS AND LINES OF CREDIT
   11




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CIBC Facility
   Magna Credit Facility
  Bank of America Facility
  7. RELATED PARTY TRANSACTIONS
 Transactions related to BG Capital Group Limited, Endeavor Group, LLC and Related Stockholders
  Transactions related to Coast Engine and Equipment Company
  12




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2005
    
    $
    8,2262006
    
    
    10,5132007
    
    
    5,5002008
    
    
    1,375$
    25,614
  2005
    
    $
    71,0162006
    
    
    23,672$
    94,688
  8. STOCK OPTION PLAN
 Share-Based Payment
  13




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9. SEGMENT INFORMATION
   14




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Security SolutionsTotal revenue
    
    $
    1,479,457
    
    
    $
    3,008,950
    
    
    $
    4,772,264
    
    
    $
    10,024,275Operating
(loss) income
    
    
    (455,135
    )
    
    
    165,504
    
    
    
    (1,026,452
    )
    
    
    851,524Industrial and OffshoreTotal revenue
    
    
    7,764,540
    
    
    
    
    
    
    
    13,442,367
    
    
    
    Operating income
    
    
    291,113
    
    
    
    
    
    
    
    160,539
    
    
    
    Repair and OverhaulTotal revenue
    
    
    378,838
    
    
    
    
    
    
    
    850,064
    
    
    
    Operating income
    
    
    47,006
    
    
    
    
    
    
    
    133,479
    
    
    
    Engineering ConsultingTotal revenue
    
    
    3,754,704
    
    
    
    
    
    
    
    6,368,150
    
    
    
    Operating income
    
    
    229,382
    
    
    
    
    
    
    
    426,425
    
    
    
    Procurement ServicesTotal revenue
    
    
    3,442,263
    
    
    
    
    
    
    
    5,725,996
    
    
    
    Operating income
    
    
    258,512
    
    
    
    
    
    
    
    319,201
    
    
    
    HeadquartersTotal revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
(loss) income
    
    
    (686,090
    )
    
    
    (970,200
    )
    
    
    (3,542,502
    )
    
    
    (41,975,574
    )TotalTotal revenue
    
    $
    16,819,802
    
    
    $
    3,008,950
    
    
    $
    31,158,841
    
    
    $
    10,024,275Operating
(loss) income
    
    $
    (315,212
    )
    
    $
    (804,696
    )
    
    $
    (3,529,310
    )
    
    $
    (41,124,050
    )
 Identifiable Assets
    
    September 30, 2005
    
    December 31, 2004Security Solutions
    
    $
    7,530,283
    
    
    $
    3,071,143Industrial and Offshore
    
    
    12,323,352
    
    
    
    Repair and Overhaul
    
    
    448,821
    
    
    
    Engineering Consulting
    
    
    3,268,725
    
    
    
    Procurement Services
    
    
    1,925,607
    
    
    
    Corporate Assets
    
    
    25,188,254
    
    
    
    28,141,836Total Assets
    
    $
    50,685,042
    
    
    $
    31,212,979
  10. COMMITMENTS AND CONTINGENCIES
 Legal Matters
 Section 16(b) Claim
  15




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Claim by the Former President of the Company
  Harassment Suit
  Garrison Lawsuit
   Plum Island Claim
  16




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11. INVESTMENTS IN JOINT VENTURES
 M&M Engineering Limited
         17




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12. SUBSEQUENT EVENTS
 Required Consents Received
  18




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
 DESCRIPTION OF THE COMPANY
        19




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CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
  Inventory Valuation
  Foreign Currency Translation
  20




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Net Operating Loss Carryforwards
  Impairment of Long Lived Assets
  Off Balance Sheet Risk
   21




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COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
 Consolidated Overview
  For the three months ended September 30,2005
    
    
    2004Revenues
    
    $
    16,819,802
    
    
    
    100.0
    %
    
    $
    3,008,950
    
    
    
    100.0
    %Cost of revenue
    
    
    14,735,363
    
    
    
    87.6
    %
    
    
    2,843,446
    
    
    
    94.5
    %Gross profit
    
    $
    2,084,439
    
    
    
    12.4
    %
    
    $
    165,504
    
    
    
    5.5
    %
  Security Solutions
  For the three months ended September 30,2005
    
    
    2004Revenue
    
    $
    1,479,457
    
    
    
    100.0
    %
    
    
    3,008,950
    
    
    
    100.0
    %Cost of revenue
    
    
    1,577,666
    
    
    
    106.6
    %
    
    
    2,843,446
    
    
    
    94.5
    %Gross profit
    
    $
    (98,209
    )
    
    
    (6.6
    %)
    
    
    165,504
    
    
    
    5.5
    %
    22




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Industrial and Offshore Segment
  For the three months ended September 30,2005
    
    
    2004Revenue
    
    $
    7,764,540
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    6,944,769
    
    
    
    89.4
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    819,771
    
    
    
    10.6
    %
    
    
    N/A
    
    
    
    N/A
   Repair and Overhaul Segment
  For the three months ended September 30,2005
    
    
    2004Revenue
    
    $
    378,838
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    280,829
    
    
    
    74.1
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    98,009
    
    
    
    25.9
    %
    
    
    N/A
    
    
    
    N/A
  23




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Engineering Consulting
  For the three months ended September 30,2005
    
    
    2004Revenue
    
    $
    3,754,704
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    2,860,820
    
    
    
    76.2
    %
    
    NA
    
    NAGross profit (loss)
    
    $
    893,884
    
    
    
    23.8
    %
    
    NA
    
    NA
    Procurement Services
 For the three months ended September 30,2005
    
    
    2004Revenues
    
    $
    3,442,263
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    3,071,279
    
    
    
    89.2
    %
    
    NA
    
    NAGross profit
    
    $
    370,984
    
    
    
    10.8
    %
    
    NA
    
    NA
  24




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##### Table of Contents



Operating Expenses
 September 30, 2005
    
    
    September 30, 2004
    
    
    IncreaseSelling, General & Administrative
    
    $
    2,399,651
    
    
    $
    970,200
    
    
    
    147
    %
  Other Income and Expenses
  COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
 Consolidated Overview
  For the nine months ended September 30,2005
    
    
    2004Revenues
    
    $
    31,158,841
    
    
    
    100.0
    %
    
    $
    10,024,275
    
    
    
    100.0
    %Cost of revenue
    
    
    27,004,576
    
    
    
    86.7
    %
    
    
    9,172,751
    
    
    
    91.5
    %Gross profit
    
    $
    4,154,265
    
    
    
    13.3
    %
    
    $
    851,524
    
    
    
    8.5
    %
  25




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##### Table of Contents



Security Solutions
  For the nine months ended September 30,2005
    
    
    2004Revenue
    
    $
    4,772,264
    
    
    
    100.0
    %
    
    $
    10,024,275
    
    
    
    100.0
    %Cost of revenue
    
    
    4,665,154
    
    
    
    97.7
    %
    
    
    9,172,75
    
    
    
    91.5
    %Gross profit (loss)
    
    $
    107,110
    
    
    
    2.3
    %
    
    $
    851,524
    
    
    
    8.5
    %
  Industrial and Offshore Segment
  For the eight months ended September 30,2005
    
    
    2004Revenue
    
    $
    13,442,367
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    11,712,875
    
    
    
    87.1
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    1,729,492
    
    
    
    12.9
    %
    
    
    N/A
    
    
    
    N/A
  26




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##### Table of Contents



Repair and Overhaul Segment
  For the seven months ended September 30,2005
    
    
    2004Revenue
    
    $
    850,064
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    572,534
    
    
    
    67.4
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    277,530
    
    
    
    32.6
    %
    
    
    N/A
    
    
    
    N/A
  Engineering Consulting
  For the five months ended September 30,2005
    
    
    2004Revenue
    
    $
    6,368,150
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    4,795,083
    
    
    
    75.3
    %
    
    NA
    
    NAGross profit (loss)
    
    $
    1,573,067
    
    
    
    24.7
    %
    
    NA
    
    NA
  Procurement Services
  For the five months ended September 30,2005
    
    
    2004Revenues
    
    $
    5,725,996
    
    
    
    100.0
    %
    
    NA
    
    NACost of revenue
    
    
    5,258,930
    
    
    
    91.8
    %
    
    NA
    
    NAGross profit
    
    $
    467,066
    
    
    
    8.2
    %
    
    NA
    
    NA
 27




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##### Table of Contents



Operating Expenses
 September 30, 2005
    
    
    September 30, 2004
    
    
    DecreaseSelling, General & Administrative
    
    $
    7,683,575
    
    
    $
    41,975,574
    
    
    
    81.7
    %
   Other Income and Expenses
  Liquidity and Capital Resources
     28




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##### Table of Contents



Commitments
  2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011+Operating Leases
    
    $
    835,188
    
    
    $
    380,816
    
    
    $
    67,772
    
    
    $
    42,016
    
    
    $
    3,710
    
    
    
    Capital Leases
    
    
    266,727
    
    
    
    153,740
    
    
    
    125,673
    
    
    
    102,367
    
    
    
    62,219
    
    
    
    13,646Mortgages Payable
    
    
    280,481
    
    
    
    280,481
    
    
    
    280,481
    
    
    
    223,591
    
    
    
    208,728
    
    
    
    208,728Total Lease Commitments
    
    $
    1,382,396
    
    
    $
    815,037
    
    
    $
    473,926
    
    
    $
    367,974
    
    
    $
    274,657
    
    
    $
    222,374
 Risk Factors
  We may not receive the full amount of our contract awards.
  We may not be able to integrate our new management and the acquired companies successfully to
achieve the expected benefits of these acquisitions.
  Increased raw material prices may adversely affect contract profitability.
  29




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##### Table of Contents



Loss of bonding may adversely impact our Canadian operations.
  Our 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.
  
    
    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.
  Our business commitments require our employees to travel to potentially dangerous places, which
may result in injury to our employees.
  30




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##### Table of Contents



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.
   31




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   Foreign Exchange Risk
  
 32




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
     33




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##### Table of Contents



PART II - OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Section 16(b) Claim
   Claim by the Former President of the Company
  Harassment Suit
  Garrison Lawsuit
   34




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##### Table of Contents



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Bylaws of Spectrum Sciences & Software
Holdings Corp., as amended.*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 35




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##### Table of Contents



SIGNATURES
  SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Date: November 14,
2005By:
    
    /s/ DARRYL K. HORNEDarryl K. HornePresident and Chief Executive OfficerDate: November 14,
2005By:
    
    /s/ MICHAEL M. MEGLESSMichael M. MeglessChief Financial Officer
 36




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Bylaws of Spectrum Sciences & Software
Holdings Corp., as amended.*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 37