##### 



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: June 30, 2006
 OR
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3130 Fairview Park Drive, Suite 400,Falls Church, Virginia
    
    22042(Address of principal executive offices)
    
    (Zip Code)
 703-564-2967
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATION
 Item 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005
    
    
    2Consolidated
Statements of Operations and Comprehensive Loss for the three- and
six-month periods ended June 30, 2006 and June 30, 2005
    
    
    3Consolidated Statement of Stockholders Equity for the six months ended
June 30, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2006 and June 30, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A.
Risk Factors
    
    
    25Item 6. Exhibits
    
    
    27




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##### 



June
    
    
    December30, 2006
    
    
    31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,329
    
    
    $
    1,813Receivables
    
    
    8,631
    
    
    
    11,638Inventories
    
    
    90
    
    
    
    258Prepaid expenses & Other current assets
    
    
    863
    
    
    
    387Current assets of discontinued operations
    
    
    
    
    
    
    11,585Total current assets
    
    
    13,913
    
    
    
    25,681Property and equipment, net
    
    
    4,810
    
    
    
    5,030Goodwill
    
    
    3,386
    
    
    
    15,222Other intangibles
    
    
    9,368
    
    
    
    Investments in joint ventures
    
    
    311
    
    
    
    311Other assets
    
    
    959
    
    
    
    81Other assets of discontinued operations
    
    
    
    
    
    
    3,079TOTAL ASSETS
    
    $
    32,747
    
    
    
    49,404LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    686
    
    
    $
    6,281Accrued expenses
    
    
    1,619
    
    
    
    1,466Deferred revenues
    
    
    390
    
    
    
    376Income taxes payable
    
    
    
    
    
    
    156Current portion of long-term debt
    
    
    77
    
    
    
    78Current liabilities of discontinued operations
    
    
    
    
    
    
    3,365Total current liabilities
    
    
    2,772
    
    
    
    11,722Long-term liabilities:Long term debt, less current portion
    
    
    1,984
    
    
    
    2,018Non-current liabilities of discontinued operations
    
    
    
    
    
    
    464TOTAL LIABILITIES
    
    
    4,756
    
    
    
    14,204Commitments and contingencies (Note 13)Minority interest of discontinued operations
    
    
    
    
    
    
    103Stockholders 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
    
    
    
    4Additional paid-in capital
    
    
    80,694
    
    
    
    79,866Treasury stock (2,800,000 and 0 shares, respectively)
    
    
    (2,374
    )
    
    
    Accumulated deficit
    
    
    (50,333
    )
    
    
    (45,264
    )Accumulated other comprehensive income
    
    
    
    
    
    
    491Total stockholders equity
    
    
    27,991
    
    
    
    35,097TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    32,747
    
    
    
    49,404
  2




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##### 



Three months ended
    
    
    Six Months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesServices
    
    $
    5,008
    
    
    $
    5,704
    
    
    $
    16,218
    
    
    $
    6,155Products
    
    
    1,225
    
    
    
    1,195
    
    
    
    2,761
    
    
    
    2,506Total
    
    
    6,233
    
    
    
    6,899
    
    
    
    18,979
    
    
    
    8,661Cost of revenuesServices
    
    
    3,990
    
    
    
    4,665
    
    
    
    13,842
    
    
    
    4,993Products
    
    
    1,333
    
    
    
    1,433
    
    
    
    2,724
    
    
    
    2,508Total
    
    
    5,323
    
    
    
    6,098
    
    
    
    16,566
    
    
    
    7,501Gross profitServices
    
    
    1,018
    
    
    
    1,039
    
    
    
    2,376
    
    
    
    1,162Products
    
    
    (108
    )
    
    
    (238
    )
    
    
    37
    
    
    
    (2
    )Total
    
    
    910
    
    
    
    801
    
    
    
    2,413
    
    
    
    1,160Operating expenses
    
    
    3,079
    
    
    
    2,342
    
    
    
    4,838
    
    
    
    4,244Loss from continuing operations
    
    
    (2,169
    )
    
    
    (1,541
    )
    
    
    (2,425
    )
    
    
    (3,084
    )Total non-operating income (expense), net
    
    
    20
    
    
    
    97
    
    
    
    36
    
    
    
    181Loss before provision for income taxes
and discontinued operations
    
    
    (2,149
    )
    
    
    (1,444
    )
    
    
    (2,389
    )
    
    
    (2,903
    )Income tax benefit (expense)
    
    
    0
    
    
    
    (87
    )
    
    
    2
    
    
    
    (87
    )Loss before discontinued operations
    
    
    (2,149
    )
    
    
    (1,531
    )
    
    
    (2,387
    )
    
    
    (2,990
    )(Loss) gain from discontinued operations
    
    
    (2,413
    )
    
    
    473
    
    
    
    (2,682
    )
    
    
    188Net Loss
    
    $
    (4,562
    )
    
    $
    (1,058
    )
    
    $
    (5,069
    )
    
    $
    (2,802
    )Weighted average common shares outstanding:Basic and diluted
    
    
    44,072,200
    
    
    
    41,774,398
    
    
    
    44,072,200
    
    
    
    40,388,341Basic and
diluted loss per shareLoss from continuing operations
    
    
    (0.05
    )
    
    
    (0.04
    )
    
    
    (0.05
    )
    
    
    (0.07
    )(Loss) income from discontinued operations
    
    
    (0.05
    )
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.00Net loss
    
    $
    (0.10
    )
    
    $
    (0.03
    )
    
    $
    (0.12
    )
    
    $
    (0.07
    )
  3




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##### 



AccumulatedOtherComprehensiveCommon Stock
    

    
    
    
    
    Treasury
    
    Accumulated
    
    IncomeShares
    
    Amount
    
    APIC
    
    Stock
    
    Deficit
    
    (Loss)
    
    TotalBalance as of December 31, 2005
    
    
    44,072,200
    
    
    $
    4
    
    
    $
    79,866
    
    
    $
    
    
    
    $
    (45,264
    )
    
    $
    491
    
    
    $
    35,097Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,069
    )
    
    
    
    
    
    $
    (5,069
    )Option Issuances
    
    
    
    
    
    
    
    
    
    $
    123
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    123Foreign currency translation M&M disposition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (491
    )
    
    $
    (491
    )M&M sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,494
    )
    
    
    
    
    
    
    
    
    
    $
    (1,494
    )Augenbaum settlement
    
    
    
    
    
    
    
    
    
    $
    705
    
    
    $
    (880
    )
    
    
    
    
    
    
    
    
    
    $
    (175
    )Balance as of June 30, 2006
    
    
    44,072,200
    
    
    $
    4
    
    
    $
    80,694
    
    
    $
    (2,374
    )
    
    $
    (50,333
    )
    
    $
    
    
    
    $
    27,991
  4




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##### 



Six
months ended June 30,2006
    
    
    2005Cash flows from operating activitiesNet loss from continuing operations
    
    $
    (2,387
    )
    
    $
    (2,990
    )Adjustments to reconcile net loss to net
Cash used in operating activitiesStock compensation
    
    
    123
    
    
    
    1,399Depreciation/Amortization
    
    
    1,153
    
    
    
    194Loss on disposal of equipment
    
    
    
    
    
    
    2Realized gain on the sale of bonds
    
    
    
    
    
    
    (1
    )Decrease (increase) in balance sheet itemsReceivables
    
    
    3,906
    
    
    
    (2,887
    )Accounts payable
    
    
    (5,597
    )
    
    
    1,270Provision for contract losses
    
    
    
    
    
    
    (148
    )Other balance sheet changes
    
    
    (309
    )
    
    
    182Net cash used in
continuing
operations
    
    
    (3,111
    )
    
    
    (2,979
    )Cash flows from investing activitiesMaturities of available for sale investments, net
    
    
    
    
    
    
    16,885Acquisitions, net of cash received
    
    
    
    
    
    
    (12,412
    )Cash received from sale of subsidiary
    
    
    6,202
    
    
    
    Purchase of property and equipment
    
    
    (99
    )
    
    
    (511
    )Proceeds from the sale of equipment
    
    
    3
    
    
    
    7Net cash provided by investing activities
    
    
    6,106
    
    
    
    3,969Cash flows from financing activitiesRepayment of debt, net
    
    
    (35
    )
    
    
    (155
    )Net repayments on lines of credit
    
    
    
    
    
    
    (877
    )Legal settlement costs not included in net income
    
    
    (175
    )
    
    
    Advances and accrued interest from related parties, net
    
    
    
    
    
    
    158Proceeds for the exercise of stock options
    
    
    
    
    
    
    4Net cash used in financing activities
    
    
    (210
    )
    
    
    (870
    )Cash flows (used in) provided by discontinued operationsOperating
    
    
    (269
    )
    
    
    189Investing
    
    
    
    
    
    
    (294
    )Financing
    
    
    
    
    
    
    (86
    )Net increase(decrease) in cash and cash equivalents
    
    
    2,516
    
    
    
    (71
    )Cash and cash equivalents at beginning of period
    
    
    1,813
    
    
    
    5,667Cash and cash equivalents at end of period
    
    $
    4,329
    
    
    $
    5,596
     5




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 1. BASIS OF PRESENTATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Business
   Revenue Recognition
   6




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
   Inventory Valuation
  Income Taxes
   Loss Per Share
   7




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Impairment of Long-Lived Assets
  Foreign Currency Translation
  3. DISPOSITIONS
  
  8




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##### 



4. REVENUE AND COST OF REVENUE
  SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Services RevenueSecurity Solutions
    
    $
    74
    
    
    $
    63
    
    
    $
    148
    
    
    $
    146Repair and Overhaul
    
    
    602
    
    
    
    361
    
    
    
    840
    
    
    
    471Engineering Services
    
    
    3,266
    
    
    
    2,996
    
    
    
    6,621
    
    
    
    3,254Procurement ServicesAcquisition Services
    
    
    546
    
    
    
    
    
    
    
    2,121
    
    
    
    Material Procurement
    
    
    520
    
    
    
    2,284
    
    
    
    6,488
    
    
    
    2,284Total
    
    $
    5,008
    
    
    $
    5,704
    
    
    $
    16,218
    
    
    $
    6,155Products RevenueSecurity Solutions
    
    $
    1,102
    
    
    $
    1,195
    
    
    $
    2,079
    
    
    $
    2,506Repair and Overhaul
    
    
    123
    
    
    
    
    
    
    
    682
    
    
    
    Total
    
    $
    1,225
    
    
    $
    1,195
    
    
    $
    2,761
    
    
    $
    2,506Cost of Services RevenueSecurity Solutions
    
    $
    74
    
    
    $
    95
    
    
    $
    142
    
    
    $
    236Repair and Overhaul
    
    
    486
    
    
    
    226
    
    
    
    728
    
    
    
    292Engineering Services
    
    
    2,511
    
    
    
    2,156
    
    
    
    5,611
    
    
    
    2,277Procurement ServicesAcquisition Services
    
    
    448
    
    
    
    
    
    
    
    1,384
    
    
    
    Material Procurement
    
    
    471
    
    
    
    2,188
    
    
    
    5,977
    
    
    
    2,188Total
    
    $
    3,990
    
    
    $
    4,665
    
    
    $
    13,842
    
    
    $
    4,993Cost of Products RevenueSecurity Solutions
    
    $
    1,301
    
    
    $
    1,433
    
    
    $
    2,456
    
    
    $
    2,508Repair and Overhaul
    
    
    32
    
    
    
    
    
    
    
    268
    
    
    
    Total
    
    $
    1,333
    
    
    $
    1,433
    
    
    $
    2,724
    
    
    $
    2,508
 5. RECEIVABLES (000s)
  June
    
    
    December30, 2006
    
    
    31, 2005ReceivablesBilled receivables
    
    $
    4,359
    
    
    $
    9,538Unbilled receivables
    
    
    3,099
    
    
    
    1,871Holdbacks
    
    
    217
    
    
    
    184Other
    
    
    956
    
    
    
    45Total Receivables
    
    $
    8,631
    
    
    $
    11,638
   9




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 6. INVENTORIES (000s)
  June
    
    
    December30, 2006
    
    
    31, 2005InventoriesRaw materials, net of reserve
    
    $
    69
    
    
    $
    41Work in process
    
    
    21
    
    
    
    217Finished goods
    
    
    
    
    
    
    Total Inventories
    
    $
    90
    
    
    $
    258
 7. PROPERTY AND EQUIPMENT (000s)
 June
    
    
    December30, 2006
    
    
    31, 2005Property & EquipmentLand
    
    $
    575
    
    
    $
    575Buildings and Improvements
    
    
    3,516
    
    
    
    3,516Furniture & Fixtures
    
    
    65
    
    
    
    51Manufacturing Equipment
    
    
    1,122
    
    
    
    1,077Tools & Equipment
    
    
    325
    
    
    
    314Office Equipment
    
    
    551
    
    
    
    463Vehicles
    
    
    251
    
    
    
    136Investment Property
    
    
    221
    
    
    
    221Total
    
    $
    6,626
    
    
    $
    6,353Accumulated Depreciation
    
    
    (1,816
    )
    
    
    (1,323
    )Property & Equipment, net
    
    $
    4,810
    
    
    $
    5,030
 8. GOODWILL AND OTHER INTANGIBLES (000s)
  Intangible
    
    Value
    
    Useful LifeCustomer Relationships
    
    $
    4,849.4
    
    
    15 yearsTrademarks
    
    
    3,365.2
    
    
    IndefiniteNon-Compete/Employment Agreements
    
    
    1,090.6
    
    
    5 yearsOrder Backlog
    
    
    906.3
    
    
    5 years
    Intangible
Amortization
    

Q3-Q42006
    

2007

    

2008

    

2009

    

2010Customer Relationships
    
    
    162
    

    
    
    323
    

    
    
    323
    

    
    
    323
    

    
    
    323Non-Compete/Employment Agreements
    

    
    109
    

   
    
    218
    
   
    
    218
    
   
    
    218
    
   
    
    218Order Backlog
    
    
    91
    
    


    
    181
    

    
    181
    



    
    181
    

    
    181Total
    
    
    362
    
    

    722
    
    

    722
    
    

    722
    
    

    722
 10




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 9. BORROWINGS AND LINES OF CREDIT
 5.9% to 7.1%.
  Bank of America Facility
  10. RELATED-PARTY TRANSACTIONS
 Transactions related to Coast Engine and Equipment Company
  11. STOCK-BASED COMPENSATION
   11




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
  Number of Shares
    
    Option PriceOutstanding 12/31/2005
    
    
    5,837,800
    
    
    
    1.28 - 1.95Granted
    
    
    1,061,230
    
    
    
    0.50 - 1.55Exercised
    
    
    Cancelled
    
    
    Outstanding 6/30/2006
    
    
    6,899,030
    
    
    
    0.50 - 1.95
  Options Exercisable & OutstandingExercise
    
    Shares
    
    Shares
    
    Weighted AveragePrice
    
    Outstanding
    
    Exercisable
    
    Remaining Life (yrs)0.50
    
    
    45,000
    
    
    
    15,000
    
    
    
    9.91.28
    
    
    13,750
    
    
    
    13,750
    
    
    
    2.01.40
    
    
    588,850
    
    
    
    588,850
    
    
    
    1.51.55
    
    
    1,016,230
    
    
    
    1,016,230
    
    
    
    1.91.65
    
    
    1,811,500
    
    
    
    1,811,500
    
    
    
    0.71.95
    
    
    3,423,700
    
    
    
    3,423,700
    
    
    
    0.76,899,030
    
    
    
    6,869,030
 12.
SEGMENT INFORMATION (000s)
    12




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Security SolutionsTotal revenue
    
    $
    1,176
    
    
    $
    1,258
    
    
    $
    2,227
    
    
    $
    2,652Operating loss
    
    
    (454
    )
    
    
    (542
    )
    
    
    (761
    )
    
    
    (790
    )Repair and OverhaulTotal revenue
    
    
    725
    
    
    
    361
    
    
    
    1,522
    
    
    
    471Operating income
    
    
    87
    
    
    
    74
    
    
    
    254
    
    
    
    87Engineering
ServicesTotal revenue
    
    
    3,266
    
    
    
    2,996
    
    
    
    6,621
    
    
    
    3,254Operating income
    
    
    271
    
    
    
    331
    
    
    
    154
    
    
    
    414Procurement ServicesTotal revenue
    
    
    1,066
    
    
    
    2,284
    
    
    
    8,609
    
    
    
    2,284Operating income
    
    
    92
    
    
    
    61
    
    
    
    1,063
    
    
    
    61HeadquartersTotal revenue
    
    
    
    
    
    
    
    
    
    
    Operating loss
    
    
    (2,165
    )
    
    
    (1,465
    )
    
    
    (3,135
    )
    
    
    (2,856
    )TotalTotal revenue
    
    $
    6,233
    
    
    $
    6,899
    
    
    $
    18,979
    
    
    $
    8,661Operating loss
    
    $
    (2,169
    )
    
    $
    (1,541
    )
    
    $
    (2,425
    )
    
    $
    (3,084
    )
 13. COMMITMENTS AND CONTINGENCIES
 Legal Matters
  14. STOCKHOLDERS EQUITY
   15. SUBSEQUENT EVENTS
  13




---



##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  FORWARD-LOOKING STATEMENTS
   DESCRIPTION OF THE COMPANY
     14




---



##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
  CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
     15




---



##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Net Operating Loss Carry-Forwards
  Impairment of Long-Lived Assets
  Off-Balance-Sheet Risk
  COMPARISON OF THREE MONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005
  FISCAL
QUARTER ENDED JUNE 30, 2006 COMPARED WITH FISCAL QUARTER ENDED JUNE 30, 2005
 Consolidated Overview (000s)
  For the quarter ended June 30,2006
    
    2005Revenue
    
    
    6,233
    
    
    
    100.0
    %
    
    
    6,899
    
    
    
    100.0
    %Cost of Revenue
    
    
    5,323
    
    
    
    85.4
    %
    
    
    6,098
    
    
    
    88.4
    %Gross profit
    
    
    910
    
    
    
    14.6
    %
    
    
    801
    
    
    
    11.6
    %Operating profit
    
    
    (2,169
    )
    
    
    -34.8
    %
    
    
    (1,541
    )
    
    
    -22.3
    %
  16




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
   Security Solutions (000s)
  For the quarter ended June 30,2006
    
    2005Revenue
    
    
    1,176
    
    
    
    100.0
    %
    
    
    1,258
    
    
    
    100.0
    %Cost of Revenue
    
    
    1,375
    
    
    
    116.9
    %
    
    
    1,528
    
    
    
    121.5
    %Gross profit
    
    
    (199
    )
    
    
    -16.9
    %
    
    
    (270
    )
    
    
    -21.5
    %Operating profit
    
    
    (454
    )
    
    
    -38.6
    %
    
    
    (542
    )
    
    
    -43.1
    %
  Repair and Overhaul Segment (000s)
 For the quarter ended June 30,2006
    
    2005Revenue
    
    
    725
    
    
    
    100.0
    %
    
    
    361
    
    
    
    100.0
    %Cost of Revenue
    
    
    518
    
    
    
    71.4
    %
    
    
    226
    
    
    
    62.6
    %Gross profit
    
    
    207
    
    
    
    28.6
    %
    
    
    135
    
    
    
    37.4
    %Operating profit
    
    
    87
    
    
    
    12.0
    %
    
    
    74
    
    
    
    20.5
    %
   17




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Engineering Services Segment (000s)
  For the quarter ended June 30,2006
    
    2005Revenue
    
    
    3,266
    
    
    
    100.0
    %
    
    
    2,996
    
    
    
    100.0
    %Cost of Revenue
    
    
    2,511
    
    
    
    76.9
    %
    
    
    2,156
    
    
    
    72.0
    %Gross profit
    
    
    755
    
    
    
    23.1
    %
    
    
    840
    
    
    
    28.0
    %Operating profit
    
    
    271
    
    
    
    8.3
    %
    
    
    331
    
    
    
    11.0
    %
   Procurement Services Segment (000s)
  For the quarter ended June 30,2006
    
    2005Revenue
    
    
    1,066
    
    
    
    100.0
    %
    
    
    2,284
    
    
    
    100.0
    %Cost of Revenue
    
    
    919
    
    
    
    86.2
    %
    
    
    2,188
    
    
    
    95.8
    %Gross profit
    
    
    147
    
    
    
    13.8
    %
    
    
    96
    
    
    
    4.2
    %Operating profit
    
    
    92
    
    
    
    8.6
    %
    
    
    61
    
    
    
    2.7
    %
  18




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Operating Expenses (000s)
 June 30, 2006
    
    
    June 30, 2005
    
    
    IncreaseSelling, General & Administrative
    
    $
    2,165
    
    
    $
    1,465
    
    
    
    48
    %
  COMPARISON OF SIX MONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005
  SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
 Consolidated Overview (000s)
 For the six months ended June 30,2006
    
    2005Revenue
    
    
    18,979
    
    
    
    100.0
    %
    
    
    8,661
    
    
    
    100.0
    %Cost of Revenue
    
    
    16,566
    
    
    
    87.3
    %
    
    
    7,501
    
    
    
    86.6
    %Gross profit
    
    
    2,413
    
    
    
    12.7
    %
    
    
    1,160
    
    
    
    13.4
    %Operating profit
    
    
    (2,425
    )
    
    
    -12.8
    %
    
    
    (3,084
    )
    
    
    -35.6
    %
   19




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Security Solutions (000s)
  For the six months ended June 30,2006
    
    2005Revenue
    
    
    2,227
    
    
    
    100.0
    %
    
    
    2,652
    
    
    
    100.0
    %Cost of Revenue
    
    
    2,598
    
    
    
    116.7
    %
    
    
    2,744
    
    
    
    103.5
    %Gross profit
    
    
    (371
    )
    
    
    -16.7
    %
    
    
    (92
    )
    
    
    -3.5
    %Operating profit
    
    
    (761
    )
    
    
    -34.2
    %
    
    
    (790
    )
    
    
    -29.8
    %
   Repair and Overhaul Segment (000s)
  For the six months ended June 30,2006
    
    2005Revenue
    
    
    1,522
    
    
    
    100.0
    %
    
    
    471
    
    
    
    100.0
    %Cost of Revenue
    
    
    996
    
    
    
    65.4
    %
    
    
    292
    
    
    
    62.0
    %Gross profit
    
    
    526
    
    
    
    34.6
    %
    
    
    179
    
    
    
    38.0
    %Operating profit
    
    
    254
    
    
    
    16.7
    %
    
    
    87
    
    
    
    18.5
    %
  Engineering Services Segment (000s)
  20




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 For the six months ended June 30,2006
    
    2005Revenue
    
    
    6,621
    
    
    
    100.0
    %
    
    
    3,254
    
    
    
    100.0
    %Cost of Revenue
    
    
    5,611
    
    
    
    84.7
    %
    
    
    2,277
    
    
    
    70.0
    %Gross profit
    
    
    1,010
    
    
    
    15.3
    %
    
    
    977
    
    
    
    30.0
    %Operating profit
    
    
    154
    
    
    
    2.3
    %
    
    
    414
    
    
    
    12.7
    %
   Procurement Services Segment (000s)
  For the six months ended June 30,2006
    
    2005Revenue
    
    
    8,609
    
    
    
    100.0
    %
    
    
    2,284
    
    
    
    100.0
    %Cost of Revenue
    
    
    7,361
    
    
    
    85.5
    %
    
    
    2,188
    
    
    
    95.8
    %Gross profit
    
    
    1,248
    
    
    
    14.5
    %
    
    
    96
    
    
    
    4.2
    %Operating profit
    
    
    1,063
    
    
    
    12.3
    %
    
    
    61
    
    
    
    2.7
    %
  Operating Expenses (000s)
 June 30, 2006
    
    
    June 30, 2005
    
    
    IncreaseSelling, General & Administrative
    
    $
    3,135
    
    
    $
    2,856
    
    
    
    10
    %
  21




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##### 



SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 Liquidity and Capital Resources
    Contractual Obligations and Commitments (000s)
  Total
    
    Current
    
    1-3 Years
    
    3-5 Years
    
    6+ YearsOperating Leases
    
    
    2,775
    
    
    
    857
    
    
    
    1,400
    
    
    
    518
    
    
    
    Capital Leases
    
    
    140
    
    
    
    35
    
    
    
    94
    
    
    
    11
    
    
    
    Mortgages Payable
    
    
    1,921
    
    
    
    42
    
    
    
    140
    
    
    
    150
    
    
    
    1,589Total
    
    
    4,836
    
    
    
    934
    
    
    
    1,634
    
    
    
    679
    
    
    
    1,589
 22




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   Foreign Exchange Risk
  
 23




---



##### 



ITEM 4. CONTROLS AND PROCEDURES
   24




---



##### 



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  Item 1A. Risk Factors.
  Increased corporate overhead structure combined with a reduced operating base may impact the
ability of the Company to operate at a profit.
   We may not receive the full amount of our contract awards.
  Increased raw material prices may adversely affect contract profitability.
  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;
    
    Provision of 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 procurements;
    
    Changes in policy or budgetary measures that adversely affect government contracts in
general;
    
    The seasonality of our business; and
    
    Our Procurement Services revenue varies significantly from quarter-to-quarter and
year-to-year based on the volume of material procurements we perform.
  25




---



##### 



Our business commitments require our employees to travel to potentially dangerous places, which may
result in injury to our employees.
  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.
    26




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##### 



ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger among Silva Bay
International, Inc., SSS Acquisition Company and
Spectrum Sciences & Software, Inc., dated April 2, 2003
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on August 11, 2003).2.2
    
    Stock Purchase and Sale Agreement, dated as of January
28, 2005, by and among Spectrum Sciences & Software
Holdings Corp., Coast Engine and Equipment Co., Inc.,
Louis T. Rogers and Marilyn G. Rogers (previously filed
on Form 8-K, filed with the Securities and Exchange
Commission on March 3, 2005).2.3
    
    Share Purchase Agreement, dated as of February 1, 2005,
by and among Spectrum Sciences & Software Holdings
Corp., EnerNorth Industries Inc. and M&M Engineering
Limited (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on February 7, 2005).2.4
    
    Letter Agreement, dated as of February 2, 2005, by and
between Spectrum Sciences & Software Holdings Corp. and
EnerNorth Industries Inc. (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on
February 7, 2005).2.5
    
    Agreement and Plan of Merger, dated as of April 14,
2005, by and among Spectrum Sciences & Software Holdings
Corp., Horne Acquisition LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne and
Michael M. Megless (previously filed on Form 8-K, filed
with the Securities and Exchange Commission on March 17,
2005).2.6
    
    Amendment and Waiver Agreement, dated as of May 11,
2005, by and among Spectrum Sciences & Software Holdings
Corp., Horne Acquisition LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne and
Michael M. Megless (previously filed on Form 8-K, filed
with the Securities and Exchange Commission on March 17,
2005).2.7
    
    Stock Purchase Agreement by and
among Spectrum Holdings Corp., the sole stockholder of M&M
Engineering Ltd., and 53341 Newfoundland and Labrador Limited, dated June 21, 2006, (Previously
filed on Form 8-K, filed with
the Securities and Exchange Commission on June 26, 2006).3.1
    
    Certificate of Incorporation, filed August 28, 1998
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003).3.2
    
    Certificate of Renewal and Revival, filed March 24, 2003
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003).
 27




---



##### 



ExhibitNumber
    
    Description3.3
    
    Certificate of Amendment of Certificate of
Incorporation, filed April 8, 2003 (previously filed in
registration statement on Form 10-SB File No. 1-31710,
filed with the Securities and Exchange Commission on
June 10, 2003).3.4
    
    Certificate of Merger filed with the Delaware Secretary
of State (previously filed in registration statement on
Form 10-SB File No. 1-31710, filed with the Securities
and Exchange Commission on June 10, 2003).3.5
    
    Articles of Merger filed with the Florida Secretary of
State (previously filed in registration statement on
Form 10-SB File No. 1-31710, filed with the Securities
and Exchange Commission on June 10, 2003).3.6
    
    Amended and Restated Bylaws of Spectrum Sciences &
Software Holdings Corp., dated March 24, 2003, as amended by
First Amendment thereto, dated May 11, 2005 and Second
Amendment thereto, dated October 4, 2005 (previously filed on
Form 10-Q, filed with the Securities and Exchange
Commission on November 14, 2005).3.7
    
    Third Amendment, dated
April 28, 2006, to the Amended and Restated Bylaws of Spectrum
Sciences & Software Holdings Corp. (previously filed on
Form 8-K, filed with the Securities and Exchange Commission on
April 11, 2006).4.1
    
    Specimen Certificate of Common Stock (previously filed
in registration statement on Form 10-SB File No.
1-31710, filed with the Securities and Exchange
Commission on June 10, 2003).4.2
    
    Registration Rights Agreement, dated as of May 11, 2005,
by and among Spectrum Sciences & Software Holdings
Corp., Darryl K. Horne, Charlene M. Horne and Michael M.
Megless (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on May 17, 2005).
 Exhibit Number
    
    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.**
    
    Furnished herewith. 28




---



##### 



SIGNATURES
 th
 SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 By:
    /s/ Darryl K. HorneDarryl K. HornePresident and Chief Executive OfficerBy:
    /s/ Michael M. MeglessMichael M. MeglessChief Financial Officer 29