**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Condensed
        Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**
 **(Unaudited)**


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Condensed
        Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**
 **(Unaudited)**
  Condensed
                  Consolidated Unaudited Financial Statements:Condensed
                  Consolidated Balance Sheet at June 30, 2006Condensed
                  Consolidated Statements of Operations for the Six andThree
                  Months Ended June 30, 2006 and June 30, 2005 (restated)Condensed
                  Consolidated Statements of Cash Flows for theSix
                  Months Ended June 30, 2006 and June 30, 2005 (restated)Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
  
 1
 
  **Digital
            Descriptor Systems, Inc. and Subsidiary**
 **CONDENSED
            CONSOLIDATED BALANCE SHEET**
 **JUNE
            30, 2006**
 **(UNAUDITED)**
  June
                      302006**ASSETS**Current
                      AssetsCash
                      and cash equivalents
                  
                  $
                  129,313Restricted
                      cash
                  
                  
                  0Accounts
                      receivable, less allowance of $34,550
                  
                  
                  667,730Inventory
                  
                  
                  474,429Prepaid
                      expenses
                  
                  
                  6,325Total
                      Current Assets
                  
                  
                  1,277,797Property
                      and equipment, net ofaccumulated
                      depreciation of $19,875
                  
                  
                  360,598Other
                      AssetsDeposits
                  
                  
                  1,730Goodwill
                  
                  
                  4,054,998Intangible
                      assets, net ofaccumulated
                      amortization of $5,055
                  
                  
                  175,889Deferred
                      financing costs, net
                  
                  
                  194,591Total
                      Assets
                  
                  $
                  6,065,603**LIABILITIES
                      AND STOCKHOLDERS' (IMPAIRMENT)**Current
                      LiabilitiesAccounts
                      payable
                  
                  $
                  285,997Accrued
                      expenses
                  
                  
                  317,299Accrued
                      interest
                  
                  
                  1,150,030Deferred
                      income
                  
                  
                  180,744Convertible
                      debentures current
                  
                  
                  3,505,716Derivative
                      liabilities
                  
                  
                  7,888,224Total
                      Current Liabilities
                  
                  
                  13,328,010Note
                      payable
                  
                  
                  3,500,000Convertible
                      debentures
                  
                  
                  1,654,010Total
                      Liabilities
                  
                  
                  18,482,020Shareholders'
                      deficitPreferred
                      stock, $.001 par value1,000,000
                      shares authorized, -0- issued and outstanding
                  
                  
                  -0-Common
                      stock, par value $.001; authorized 9,999,000,000 shares;9,243,406,000
                      issued and outstanding
                  
                  
                  9,243,406Additional
                      paid-in capital
                  
                  
                  9,406,917Accumulated
                      deficit
                  
                  
                  (31,066,740
                  )Total
                      Shareholders' Impairment
                  
                  
                  (12,416,417
                  )Total
                      Liabilities and Shareholders' Impairment
                  
                  $
                  6,065,603
 
 The
            accompanying notes are an integral part of these condensed consolidated
            financial statements.
   2
 **Digital
            Descriptor Systems, Inc. and Subsidiary**
 **CONDENSED
            CONSOLIDATED STATEMENTS OF OPERATIONS**
 **FOR
            THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND 2005
            (RESTATED)**
 **(UNAUDITED)**
 
  Three
                      Months
                  
                  Three
                      Months
                  
                  Six
                      Months
                  
                  Six
                      MonthsEnded
                  
                  Ended
                  
                  Ended
                  
                  Ended30-Jun-06
                  
                  30-Jun-05
                  
                  30-Jun-06
                  
                  30-Jun-05(Restated)
                  
                  
                  
                  (Restated)**INCOME**Net
                      Sales
                  
                  $
                  1,233,729
                  
                  $
                  875,513
                  
                  $
                  2,104,693
                  
                  $
                  1,024,388Cost
                      of Revenue
                  
                  
                  334,538
                  
                  
                  447,460
                  
                  
                  627,880
                  
                  
                  492,161**Gross
                      Profit**
                  
                  
                  899,191
                  
                  
                  428,053
                  
                  
                  1,476,813
                  
                  
                  532,227**OPERATING
                      EXPENSES**General
                      and administrative
                  
                  
                  677,406
                  
                  
                  555,080
                  
                  
                  1,367,629
                  
                  
                  775,453Sales
                      and marketing
                  
                  
                  
                  
                  
                  60,585
                  
                  
                  
                  
                  
                  79,070Research
                  
                  
                  
                  
                  
                  26,512
                  
                  
                  
                  
                  
                  51,606**Total
                      Operating Expenses**
                  
                  
                  677,406
                  
                  
                  642,177
                  
                  
                  1,367,629
                  
                  
                  906,129**LOSS
                      BEFORE OTHER INCOME (EXPENSE)**
                  
                  
                  221,785
                  
                  
                  (214,124
                  )
                  
                  109,184
                  
                  
                  (373,902
                  )**OTHER
                      (EXPENSE)**Interest
                  
                  
                  (1,202,312
                  )
                  
                  (298,726
                  )
                  
                  (1,934,505
                  )
                  
                  (599,298
                  )Amortization
                      of deferred financing cost
                  
                  
                  (32,621
                  )
                  
                  (37,225
                  )
                  
                  (69,846
                  )
                  
                  (77,365
                  )Amortization
                      of debt discount
                  
                  
                  (323,029
                  )
                  
                  (602,975
                  )
                  
                  (646,058
                  )
                  
                  (1,043,730
                  )Change
                      in fair market value of derivative liability
                  
                  
                  (668,136
                  )
                  
                  (655,070
                  )
                  
                  (1,329,156
                  )
                  
                  (1,285,771
                  )Depreciation
                      and Amortization
                  
                  
                  (18,699
                  )
                  
                  
                  
                  
                  (41,606
                  )
                  
                  (24,930
                  )Other
                      income and expenses
                  
                  
                  (1,050
                  )
                  
                  
                  
                  
                  (9,947
                  )**Total
                      Other (Expense)**
                  
                  
                  (2,245,847
                  )
                  
                  (1,593,996
                  )
                  
                  (4,031,118
                  )
                  
                  (3,031,094
                  )**NET
                      (LOSS) APPLICABLE TO COMMON SHARES**
                  
                  
                  (2,024,062
                  )
                  
                  (1,808,120
                  )
                  
                  (3,921,934
                  )
                  
                  (3,404,996
                  )**NET
                      (LOSS) PER BASIC AND DILUTED SHARES**
                  
                  
                  (2,024,062
                  )
                  
                  (1,808,120
                  )
                  
                  (3,921,934
                  )
                  
                  (3,404,996
                  )**WEIGHTED
                      AVERAGE NUMBER OF COMMON****SHARES
                      OUTSTANDING**
                  
                  
                  (0.00
                  )
                  
                  (0.00
                  )
                  
                  (0.00
                  )
                  
                  (0.01
                  )Weighted
                      average shares of common stockOutstanding,
                      basic and diluted
                  
                  
                  7,814,385,941
                  
                  
                  371,637,947
                  
                  
                  5,881,322,478
                  
                  
                  311,343,819
  The
            accompanying notes are an integral part of these condensed consolidated
            financial statements.
  3
 **Digital
            Descriptor Systems, Inc. and Subsidiary**
 **CONDENSED
            CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **FOR
            THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (RESTATED)**
 **(UNAUDITED)**
 Six
                        Months Ended June 30,2006
                    
                    2005(Restated)Net
                        (loss)
                    
                    $
                    (2,024,062
                    )
                    $
                    (1,808,120
                    )Adjustments
                        to reconcile net (loss) to net cashprovided
                        by (used in) operating activities:Depreciation
                        and amortization
                    
                    
                    41,606
                    
                    
                    24,930Common
                        stock issues for settlement of vendorpayables
                    
                    
                    0
                    
                    
                    30,000Amortization
                        of deferred financing cost
                    
                    
                    (32,621
                    )
                    
                    (37,225
                    )Amortization
                        of debt discount
                    
                    
                    323,029
                    
                    
                    602,975Amortization
                        of benefical interest
                    
                    
                    798,271
                    
                    
                    (42,443
                    )Change
                        in fair market value of derivatives
                    
                    
                    668,136
                    
                    
                    655,070Bad
                        debt expense
                    
                    
                    7,500
                    
                    
                    0**Changes
                        in operating assets and liabilities:**(Increase)
                        in inventory
                    
                    
                    48,370
                    
                    
                    95,944(Increase)
                        Accounts receivable
                    
                    
                    (131,772
                    )
                    
                    (192,674
                    )(Increase)
                        Prepaid expense, deposits and other assets
                    
                    
                    0
                    
                    
                    (15,579
                    )Accounts
                        payable
                    
                    
                    784
                    
                    
                    59,647(Decrease)
                        Increase Accured expenses
                    
                    
                    701
                    
                    
                    (1,176
                    )Accured
                        interest
                    
                    
                    343,345
                    
                    
                    214,545(Decrease)
                        Deferred Income
                    
                    
                    8,224
                    
                    
                    (30,809
                    )**Net
                        cash provided by (used in) operating activities**
                    
                    $
                    51,511
                    
                    $
                    (444,915
                    )**CASH
                        FLOWS FROM INVESTING ACTIVITIES**Purchase
                        fixed assets
                    
                    
                    (22,907
                    )
                    
                    (50,492
                    )Purchase
                        assets from CGM Security Solutions
                    
                    
                    0
                    
                    
                    (1,500,000
                    )**Net
                        cash (used in) investing activities**
                    
                    
                    (22,907
                    )
                    
                    (1,550,492
                    )**CASH
                        FLOWS FROM FINANCING ACTIVITIES**Payment
                        of financing costs
                    
                    
                    0
                    
                    
                    (502,041
                    )Due
                        to officer and director
                    
                    
                    0
                    
                    
                    (13,830
                    )**Net
                        cash provided by (used in) financing activities**
                    
                    
                    0
                    
                    
                    (515,871
                    )**NET
                        INCREASE (DECREASE) IN****CASH
                        AND CASH EQUIVALENTS**
                    
                    $
                    28,604
                    
                    $
                    (2,511,278
                    )**CASH
                        AND CASH EQUIVALENTS -****BEGINNING
                        OF PERIOD**
                    
                    
                    100,709
                    
                    
                    3,080,336**CASH
                        AND CASH EQUIVALENTS - END OF PERIOD**
                    
                    $
                    129,313
                    
                    $
                    569,058
  The
            accompanying notes are an integral part of these condensed consolidated
            financial statements.


4


**Digital
      Descriptor Systems, Inc. and Subsidiary**


**Notes
      to the Condensed Consolidated Financial Statements
      (Unaudited)**


**For
      the Six Months Ended June 30, 2006 and 2005 (Restated)**





**Note
      1 - Description of Business**





Digital
      Descriptor Systems, Inc., incorporated in Delaware in 1994, develops, assembles
      and markets computer installations consisting of hardware and software, which
      capture video and scanned images, link the digitized images to test and store
      the images and text on a computer database and transmit this information to
      remote locations. The principal product of the Company is the Compu-Capture
      Law
      Enforcement Program, which is marketed to law enforcement agencies and jail
      facilities and generates the majority of the Company's revenues. Substantially
      all of the Company's revenues are derived from governmental agencies in the
      United States.


CGM
      is a
      manufacturer and distributor of indicative and barrier security seals, security
      tapes and related packaging security systems, protective security products
      for
      palletized cargo, physical security systems for tractors, trailers and
      containers as well as a number of highly specialized authentication products.





**Note
      2 - Summary of Significant Accounting Policies**





Significant
      accounting policies followed by the Company in the preparation of the
      accompanying condensed consolidated financial statements are summarized below:





Use
      of
      Estimates


The
      preparation of the condensed consolidated financial statements in conformity
      with generally accepted accounting principles requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the condensed consolidated financial statements and the reported amounts of
      revenues and expenses during the reported period. Actual results could differ
      from those estimates.





Revenue
      Recognition


The
      Company derives revenue from the sale of hardware, software, post customer
      support, and other related services. Post customer support includes telephone
      support, bug fixes, and rights to upgrades. Other related services include
      basic
      training.





The
      Company recognizes revenue upon delivery of the product to the end-user, when
      the fee is determinable and collectibility is probable. Revenue allocable to
      post customer support is recognized on a straight-line basis over the period
      which the service is to be provided. Revenue collected for future services
      is
      recorded as deferred income and totaled $ 180,744 and $  158,644 , respectively, for the six months ended June 30, 2006 and 2005. Revenue allocable
      to other services is recognized as the services are provided.





Software
      Development Costs


All
      costs
      incurred in the research and development of new software products and costs
      incurred prior to the establishment of a technologically feasible product are
      expensed as incurred. Research and development of software costs were
      $  53,654


and
      $51,606, respectively, for the six months ended June 30, 2006 and
      2005.





Cash
      and
      Cash Equivalents


For
      the
      purpose of the statement of cash flows, cash and cash equivalents include time
      deposits, certificates of deposits, restricted cash, and all highly liquid
      debt
      instruments with original maturities or three months or less.





Accounts
      Receivable


Accounts
      receivable are uncollateralized customer obligations due under normal trade
      terms requiring payment within 30 days from the invoice date. No interest is
      charged on any past due accounts. Accounts receivable are stated at the amount
      billed to the customer. Accounts receivable was $ 667,730 and $261,206,
      respectively, for the six months ended June 30, 2006 and 2005.





The
      carrying amount of accounts receivable is reduced by a valuation allowance
      that
      reflects management's best estimate of the amount that will not be collected.
      Management reviews all accounts receivable balances that exceed 90 days from
      invoice date and based on assessment of current creditworthiness, estimates
      the
      portion, if any, of the balance that will not be collected. The allowance for
      doubtful accounts was $68,084 and 34,550, respectively, for the six months
      ended
      June 30, 2006 and 2005.





5


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


Income
      Taxes


The
      Company provides for income taxes under the liability method. Deferred income
      taxes reflect the net tax effects of temporary differences between carrying
      amounts of assets and liabilities for financial reporting purposes and the
      amounts used for income tax purposes. Such differences result from differences
      in the timing of recognition by the Company of net operating loss carry
      forwards, certain expenses, and differences in the depreciable lives and
      depreciation methods for certain assets.





Accounting
      for Stock Options


Financial
      Accounting Standards Board issued Statement No. 123 (SFAS 123), "Accounting
      for
      Stock-Based Compensation" which provides companies with a choice to follow
      the
      provisions of SFAS 123 in determination of stock-based compensation expense
      or
      to continue with the provisions of Accounting Principles Board Opinion No.
      25
      (APB 25). The Company has elected to follow the provisions of APB 25. Under
      APB
      25, if the exercise price of the Company stock options equals or exceeds the
      market price of the underlying Common Stock on the date of grant, no
      compensation expense is recognized. The effect of applying SFAS 123 to the
      Company's stock-based awards results in net loss and net loss per common share
      that are disclosed on a pro forma basis in Note 7


.





Net
      Loss
      Per Common Share


Basic
      loss per share is calculated by dividing the net loss by the weighted average
      common shares outstanding for the period. Diluted loss per share is calculated
      by dividing the net loss by the weighted average common shares outstanding
      of
      the period plus the dilutive effect of common stock equivalents. Common stock
      equivalents were not included in the computation of diluted earnings per share
      when the Company reported a loss because to do so would be antidilutive for
      the
      periods presented.





Concentration
      of Credit Risk


Financial
      instruments which potentially subject the company to a concentration of credit
      risk principally consist of cash and accounts receivable. Concentration of
      credit risk, with respect to accounts receivable, is limited due to the
      Company's credit evaluation process. The Company does not require collateral
      from its customers. The Company sells its principal products to end users and
      distributors principally in the United States.





Fair
      Value of Financial Instruments


The
      carrying value of cash and cash equivalents, accounts receivable, accounts
      payable, accrued expenses and convertible debentures approximates their fair
      value based on the liquidity of these financial instruments and based on their
      short-term nature.





Reclassification


Certain
      amounts at June 30, 2005 have been reclassified to conform to the presentation
      of the June 30, 2006 amounts.





**Note
      3 - Impact of Recent Accounting Pronouncements**





In
      December of 2004 the FASB issued a revision to Statement No. 123, Accounting
      for
      Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
      Accounting for Stock Issued to Employees, and its related implementation
      guidance. This Statement establishes standards for the accounting for
      transactions in which an entity exchanges its equity instruments for good or
      services. It also addresses transactions in which an entity incurs liabilities
      in exchange for goods or services that are based on the fair value of the
      entity's equity instruments or that may be settled by the issuance of those
      equity instruments. This Statement focuses primarily on accounting for
      transactions in which an entity obtains employee services in share-based payment
      transactions. This Statement does not change the accounting guidance for
      share-based payment transactions with parties other than employees as provided
      in Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting
      for
      Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
      in
      Conjunction with selling, Goods or Services." This Statement does not address
      the accounting for employee share ownership plans, which are subject to AICPA
      Statement of Position 93-6, Employers Accounting for Employee Stock Ownership
      Plans. The revisions of this statement did not have a material impact upon
      the
      Company's condensed consolidated financial statements.




6


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


The
      Company reviews the carrying value of intangibles and other long-lived assets
      for impairment at least annually or whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable.
 Recoverability of long-lived assets is measured by comparison of its
      carrying amount to the undiscounted cash flows that the asset or asset group
      is
      expected to generate.  If such assets are considered to be impaired, the
      impairment to be recognized is measured by the amount by which the carrying
      amount of the property, if any, exceeds its fair market value.  Goodwill
      represents the excess of the cost of the Company’s acquired subsidiaries or
      assets over the fair value of their net assets at the date of acquisition.
       Under Statement of Financial Accounting Standards (“SFAS”) No. 142,
      goodwill is no longer subject to amortization over its estimated useful life;
      rather, goodwill is subject to at least an annual assessment for impairment
      applying a fair-value based test.




**Note
      4 - Convertible Debentures**





**Based
      on the guidance in SFAS133 and EITF00-19, the Company concluded that the
      conversion features of it convertible debentures were required to be accounted
      for as derivatives. The imbedded derivative feature was bi-furcated and the
      fair
      market value was determined using a convertible bond valuation model. The
      derivative instruments are recorded at fair market value with changes in value
      recognized during the period of change. For further discussion, see footnote
      #11
      regarding restatement.**





During
      May 2001, the Company issued three convertible notes for an aggregate amount
      of
      $20,000. The debentures are collateralized by substantially all of the company's
      assets. The debentures accrue interest at the rate of 10% per annum.





The
      holders have the right to convert the principal amount plus accrued interest
      into shares of the Company's common stock. The conversion price in effect on
      any
      Conversion Date shall be an amount equal to 50% of the mean average price of
      the
      common stock for the ten trading days prior to notice of conversion.





We
      recorded a derivative liability related to this convertible debenture. The
      initial fair market value of the conversion option in the amount of $ 4,992
      was
      recorded as a debt discount and is being amortized over the stated maturities
      of
      the notes using the effective interest method. The fair market value of the
      conversion feature is also shown as a derivative liability on the company’s
      balance sheet and is being adjusted to fair market value each reporting period
      with the change being reported as “other income and expenses” in the statement
      of operations.





During
      September 2001, the Company issued two convertible debentures for an aggregate
      amount of $400,000. The debentures are collateralized by substantially all
      of
      the company's assets. These debentures are in default as they were due on
      September 30, 2002. The debentures accrue interest at the rate of 12% per annum.
      A late fee equal to 15% of the accrued and unpaid interest is also assessed
      during the default period. Interest on the debentures was not paid quarterly
      and
      accordingly accrued interest and late fees payable related to the notes totaling
      $187,600 is included in the accompanying condensed consolidated financial
      statements.





The
      holders have the right to convert the principal amount plus accrued interest
      into shares of the Company's common stock at anytime after issuance. The
      conversion price in effect on any Conversion Date shall be the lesser of $.08
      per share or 50% of the average of the lowest three inter-day sales prices
      during the ten trading days immediately preceding the applicable Conversion
      Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      800,000 shares of common stock of the Company at an exercise price per share
      equal to the lesser of $.36 or the average of the lowest three closing sales
      prices for the common stock during the twenty Trading Days immediately prior
      to
      exercise. The estimated fair value of the warrants of $48,000 was allocated
      to
      paid-in capital. This resulting debt discount plus $90,000 of financing charges
      were amortized on a straight-line basis over the term of the debentures, and
      were fully amortized at December 31, 2002.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 59,407 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.





7


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


During
      2004, $10,500 of the debenture was converted into 35,000,000 shares of common
      stock and during 2003; $3,164 of the debenture was converted into 15,818,010
      shares of common stock.





In
      December, 2001 the Company issued three convertible debentures for an aggregate
      amount of $500,000. The debentures are collateralized by substantially all
      of
      the company's assets. The debentures are in default as they were due December
      31, 2002. Interest accrues at the rate of 12% per annum through maturity, and
      increased to 15% per annum during the default period. Quarterly interest
      payments were not made, and accordingly accrued interest payable related to
      the
      notes totaling $210,000 is included in the accompanying condensed consolidated
      financial statements.





The
      holders have the right to convert the principal amount plus accrued interest
      into shares of the Company's common stock at any time. The conversion price
      in
      effect on any Conversion Date shall be the lesser of $.043 per share or 50%
      of
      the average of the lowest three inter-day sales prices during the twenty Trading
      Days immediately preceding the applicable Conversion Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      1,500,000 shares of common stock of the Company at an exercise price per share
      equal to the lesser of $.02 or the average of the lowest three inter-day sales
      prices during the twenty Trading Days immediately prior to exercise. The
      estimated fair value of the warrants of $90,000 was allocated to paid-in
      capital. This resulting debt discount plus $77,500 of financing charges were
      amortized on a straight-line basis over the term of the debentures, and were
      fully amortized at December 31, 2002.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 388,800 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.





In
      June
      2002, a 12% convertible promissory note for $75,000 was issued to two investors.
      The debentures are collateralized by substantially all of the company's assets.
      The debentures are in default as they were due in August 2003. The debentures
      accrue interest at the rate of 12% per annum. A late fee equal to 15% of the
      accrued and unpaid interest is also assessed during the default period.
      Quarterly interest on the debentures was not paid and accordingly accrued
      interest and late fees payable related to the notes totaling $29,071 is included
      in the accompanying condensed consolidated financial statements.





The
      holders have the right to convert the principal amount plus unpaid accrued
      interest into shares of the Company's common stock at any time through
      repayment. The conversion price is equal to fifty percent of the average of
      the
      lowest three (i) inter-day trading prices, or (ii) if the common stock is traded
      on the OTC Bulletin Board or Pink Sheets, the prices asked by any person or
      entity acting as a market maker in the common stock during the twenty trading
      days immediately preceding the relevant date upon which a conversion is
      effected.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 59,430 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.





In
      September 2002, the Company issued secured convertible debentures in the
      aggregate principal amount of $100,000. The debentures are collateralized by
      substantially all of the company's assets. The debentures are in default as
      they
      were due on September 30, 2003. The debentures accrue interest at the rate
      of
      12% per annum. A late fee equal to 15% of the accrued and unpaid interest is
      also assessed during the default period. Quarterly interest on the debentures
      was not paid, and accordingly accrued interest and late fees payable related
      to
      the notes totaling $30,000 are included in the accompanying condensed
      consolidated financial statements.





8


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of common stock. The conversion price in effect
      on
      any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
      of the lowest three inter-day sales prices of the common stock during the twenty
      Trading Days immediately preceding the applicable conversion date.





The
      Company also issued common stock purchase warrants for the right to purchase
      300,000 shares of common stock of the Company at an exercise price per share
      equal to $.01. The estimated fair value of the warrants was zero. Debt issuance
      costs of $27,500 were also amortized on a straight-line basis over the term
      of
      the debentures and were fully amortized at December 31, 2003.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 79,190 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      January, 2003 the Company issued three convertible debentures for an aggregate
      amount of $250,000, with simple interest accruing at the annual rate of 10%.
      The
      debentures are collateralized by substantially all of the company's assets.
      These debentures are in default as they were due January 10, 2004. Quarterly
      interest was not paid and accordingly, accrued interest of $61,415 is included
      in the condensed consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of common stock. The conversion price in effect
      on
      any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
      of the lowest three inter-day sales prices of the common stock during the twenty
      Trading Days immediately preceding the applicable Conversion Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      750,000 shares of common stock of the Company at an exercise price per share
      equal to $0.01. The estimated fair value of the warrants was zero. Financing
      costs incurred of $56,750 were fully amortized at December 31,
      2003.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 92,225 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      February, 2003, the Company issued three convertible debentures for an aggregate
      amount of $125,000, with simple interest accruing at the annual rate of 10%.
      The
      debentures are collateralized by substantially all of the company's assets.
      The
      debentures are in default as they were due February 27, 2004. Quarterly interest
      due was not paid and accordingly accrued interest of $28,125 is included in
      the
      condensed consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of common stock. The conversion price in effect
      on
      any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
      of the lowest three inter-day sales prices of the common stock during the twenty
      Trading Days immediately preceding the applicable Conversion Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      375,000 shares of common stock of the Company at an exercise price per share
      equal to $0.01. The estimated fair value of the warrants was zero. Debt issuance
      costs of $10,843 were also amortized on a straight-line basis over the term
      of
      the debentures. Amortization expense during 2004 was $24,307 and the costs
      were
      fully amortized as of December31, 2004.





9


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 47,850 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      April,
      2003, The Company issued three convertible debentures for an aggregate amount
      of
      $125,000, with simple interest accruing at the annual rate of 10%. The
      debentures are collateralized by substantially all of the company's assets.
      The
      debentures are in default as they were due March 31, 2004. Quarterly interest
      was not paid and accordingly accrued interest of $15,834 is included in the
      condensed consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of common stock. The conversion price in effect
      on
      any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
      of the lowest three inter-day sales prices of the common stock during the twenty
      Trading Days immediately preceding the applicable Conversion Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      375,000 shares of common stock of the Company at an exercise price per share
      equal to $0.01. The estimated fair value of the warrants was zero. Debt issuance
      costs of $20,844 were also amortized on a straight-line basis over the term
      of
      the debentures. Amortization expense during 2004 was $38,591 and the costs
      were
      fully amortized as of December31, 2004.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 68,250 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      October, 2003, the Company issued two convertible debentures for an aggregate
      amount of $165,000, with simple interest accruing at the annual rate of 12%.
      The
      debentures are collateralized by substantially all of the company's assets.
      The
      debentures are in default as they were due October 1, 2004. Quarterly interest
      was not paid and accordingly accrued interest of $25,988 is included in the
      condensed consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of the Company's common stock. The conversion price
      in effect on any Conversion Date shall be the lesser of (1) $.005 or (2) 40%
      of
      the average of the lowest three inter-day sales prices of the common stock
      during the twenty Trading Days immediately preceding the applicable Conversion
      Date.





The
      debenture holders also received warrants to purchase 1,505,000 shares at an
      exercise price of $0.01 per share. The estimated fair value of the warrants
      was
      zero. Amortization expense during 2004 was $147,469 and the costs were fully
      amortized as of December31, 2004.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 326,733 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




10


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


In
      November, 2003, the Company issued two convertible debentures for an aggregate
      amount of $45,000, with simple interest accruing at the annual rate of 10%.
      The
      debentures are in default as they were due November 27, 2004. Quarterly interest
      was not paid and accordingly accrued interest of $9,453 is included in the
      condensed consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of the Company's common stock. The conversion price
      in effect on any Conversion Date shall be the lesser of (1) $.005 or (2) 40%
      of
      the average of the lowest three inter-day sales prices of the common stock
      during the twenty Trading Days immediately preceding the applicable Conversion
      Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      315,000 shares of common stock of the Company at an exercise price per share
      equal to $0.01. The estimated fair value of the warrants was zero. Amortization
      expense during 2004 was $47,469 and the costs were fully amortized as of
      December 31, 2004.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 72,572 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      December, 2003, the Company issued three convertible debentures for an aggregate
      amount of $45,000, with simple interest accruing at the annual rate of 12%.
      The
      debentures are collateralized by substantially all of the company's assets.
      These debentures are in default as they were due by December 3, 2004. Quarterly
      interest was not paid and accordingly accrued interest of $5,694 is included
      in
      the condensed consolidated financial statements.




The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of the Company's common stock. The conversion price
      in effect on any Conversion Date shall be the lesser of (1) $.005 or (2) 40%
      of
      the average of the lowest three inter-day sales prices of the common stock
      during the twenty Trading Days immediately preceding the applicable Conversion
      Date.





The
      Company also issued common stock purchase warrants for the right to purchase
      750,000 shares of common stock of the Company at an exercise price per share
      equal to $0.01. The estimated fair value of the warrants was zero. .
      Amortization expense during 2004 was $42,349 and the costs were fully amortized
      as of December 31, 2004.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 72,527 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      February, 2004, the Company issued two convertible debentures for an aggregate
      amount of $45,000, with simple interest accruing at the annual rate of 12%.
      The
      debentures are collateralized by substantially all of the company's assets.
      These debentures are due in February, 2005. Quarterly interest was not paid
      and
      accordingly accrued interest of $4,906 is included in the condensed consolidated
      financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of the Company's common stock. The conversion price
      in effect on any conversion date shall be the lesser of (1) $.005 or (2) 67%
      of
      the average of the lowest three inter-day sales prices of the common stock
      during the twenty trading days immediately preceding the applicable conversion
      date. In addition the debenture holders also received warrants to purchase
      315,000 shares at an exercise price of $0.005 per share anytime before February
      28, 2009. The estimated fair value of the warrants was $504, which was also
      recorded as a debt discount. The total debt discount is being amortized on
      a
      straight line basis which approximates the effective interest method, over
      the
      life of the note. $20,317 of this amount was charged to interest expense during
      2004. Additional costs of $12,819 incurred with the issuance of the convertible
      debentures were recorded as deferred financing cost and are being amortized
      on a
      straight-line basis, which approximates the effective interest method, over
      the
      term of the debentures. Unamortized costs as of December 31, 2004 amounted
      to
      $1,068.





11


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $172,265 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      May,
      2004, the Company issued four convertible debentures for an aggregate amount
      of
      $250,000, with simple interest accruing at the annual rate of 12%. The
      debentures are collateralized by substantially all of the company's assets.
      These debentures are due in May 2005. Quarterly interest was not paid and
      accordingly accrued interest of $19,555 is included in the condensed
      consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of the Company's common stock. The conversion price
      in effect on any conversion date shall be the lesser of (1) $.005 or (2) 67%
      of
      the average of the lowest three inter-day sales prices of the common stock
      during the twenty trading days immediately preceding the applicable conversion
      date. In addition the debenture holders also received warrants to purchase
      750,000 shares at an exercise price of $0.005 per share anytime before May
      31,
      2009. The estimated fair value of the warrants was $5,175, which was also
      recorded as a debt discount. The total debt discount is being amortized on
      a
      straight line basis which approximates the effective interest method, over
      the
      life of the note. $35,911 of this amount was charged to interest expense during
      2004.




Additional
      costs of $55,244 incurred with the issuance of the convertible debentures were
      recorded as deferred financing cost and are being amortized on a straight-line
      basis, which approximates the effective interest method, over the term of the
      debentures. Unamortized costs as of December 31, 2004 amounted to $36,829.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $327,750 was recorded as a debt discount and is being amortized over the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.




In
      November, 2004, the Company issued four convertible debentures for an aggregate
      amount of $3,500,000, with simple interest accruing at the annual rate of 12%.
      The debentures are collateralized by substantially all of the company's assets.
      These debentures are due in November, 2005. Quarterly interest was not paid
      and
      accordingly accrued interest of $36,151 is included in the condensed
      consolidated financial statements.





The
      holders have the right to convert the principal amount and interest due under
      the debentures into shares of the Company's common stock. The conversion price
      in effect on any conversion date shall be the lesser of (1) $.0005 or (2) 67%
      of
      the average of the lowest three inter-day sales prices of the common stock
      during the twenty trading days immediately preceding the applicable conversion
      date. In addition the debenture holders also received warrants to purchase
      10,500,000 shares at an exercise price of $0.005 per share anytime before
      November 30, 2009. The estimated fair value of the warrants was $5,250, which
      was also recorded as a debt discount. The total debt discount is being amortized
      on a straight line basis which approximates the effective interest method;
      over
      the life of the note $71,828 of this amount was charged to interest expense
      during 2004.





12


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


Additional
      costs of $391,569 with the issuance of the convertible debentures were recorded
      as deferred financing cost and are being amortized on a straight-line basis
      which approximates the effective interest method, over the term of the
      debentures. Unamortized costs as of December 31, 2004 amounted to $376,509.





In
      addition, we recorded a derivative liability related to this convertible
      debenture. The initial fair market value of the conversion option in the amount
      of $ 2,519,300 was recorded as a debt discount and is being amortized over
      the
      stated maturities of the notes using the effective interest method. The fair
      market value of the conversion feature is also shown as a derivative liability
      on the company’s balance sheet and is being adjusted to fair market value each
      reporting period with the change being reported as “other income and expenses”
in the statement of operations.





In
      2005
      the Company converted $643,340 of accrued interest into convertible debentures;
      $97,402 was recorded as debt discount. In March 2005, $513,431 was repaid on
      convertible debentures.





**Note
      5 - Deferred Financing Costs**





Deferred
      financing costs represent cost incurred in connection with the issuance of
      the
      convertible debentures. Deferred financing costs are being amortized over the
      life of the convertible debentures on the straight-line basis, which
      approximates the effective interest method. The net financing costs were
      $194,591 and $338,888 for the six months ended June 30, 2006 and 2005,
      respectively.





**Note
      6 - Commitments and Contingencies**





Operating
      Lease


The
      Company rents office facilities under a rental agreement that is automatically
      renewable every four months. The most recent renewal period will expire on
      August 31, 2006.





CGM
      leases two facilities, one in Somerset NJ and the other in Staten Island New
      York under non-cancelable lease agreements that end in December 2007 and
      December 2008, respectively.





**Employment
      Agreements**





Anthony
      R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was
      re-appointed as Chairman, President and Chief Executive Officer effective
      February, 2005. On February 25, 2005, DDSI entered into a five-year employment
      agreement with Mr. Shupin, which entitled him to a base salary of $215,000
      per
      year, which may at the Board of Directors discretion adjust his base salary
      (but
      not below $215,000 per year). Mr. Shupin is also entitled to participate in
      the
      Annual Management Bonus Plan. As a participant in the Annual Management Bonus
      Plan, Mr. Shupin will be eligible to receive bonuses, based on performance,
      in
      any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall
      participate in the Management Equity Incentive Plan. As a participant in the
      Management Equity Plan, Mr. Shupin will be eligible to receive options, which
      vest over a period of time from the date of the option's issue, to purchase
      common shares of DDSI. The Company may grant Mr. Shupin, following the first
      anniversary of the date hereof and at the sole discretion of the Board of
      Directors, options to purchase common shares of the Company (subject to the
      vesting and the satisfaction of the other terms and conditions of such options).
      Mr. Shupin will be entitled to 25 vacations days per year at such times as
      may
      be mutually agreed with the Board of Directors. DDSI will provide Mr. Shupin
      a
      monthly car allowance of Six Hundred Dollars ($600.00) along with related car
      expenses.





Michael
      J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino
      was appointed as Senior Vice President and Chief Financial Officer effective
      February 25, 2005. On February 25, 2005, DDSI entered into a five-year
      employment agreement with Mr. Pellegrino, which entitled him to a base salary
      of
      $175,000 per year which may at the Board of Directors discretion adjust his
      base
      salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to
      participate in the Annual Management Bonus Plan. As a participant in the Annual
      Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses,
      based
      on performance, in any amount from 10% to 200% of the Base Salary. In addition,
      Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As
      a
      participant in the Management Equity Incentive Plan, Mr. Pellegrino will be
      eligible to receive options, which vest over a period of time from the date
      of
      the option's issue, to purchase common shares of DDSI. DDSI may also grant
      to
      the Employee, following the first anniversary of the date of the Agreement
      and
      at the sole discretion of the Board of Directors, options to purchase common
      shares of the Company (subject to the vesting and the satisfaction of the other
      terms and conditions of such options). Mr. Pellegrino will be entitled to 25
      vacation days per year at such times as may be mutually agreed with the Board
      of
      Directors. DDSI shall also furnish Mr. Pellegrino with monthly car allowance
      of
      Six Hundred Dollars ($600.00) and related car expenses.





13


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


DDSI
      has
      an employment agreement with Erik Hoffer, pursuant to which Mr. Hoffer will
      be
      employed as Executive Vice President of the Company for an initial term of
      three
      years, which may be extended, and President of CGM Sub for an initial term
      of
      one year, which may be renewed for successive one-year terms. Pursuant to the
      Employment Agreement, Mr. Hoffer will receive a base salary of $200,000, a
      bonus
      of 5% of the gross margin sales increase over the prior year's gross margin
      sales of CGM products and customary benefits and reimbursements.








**Note
      7 - Stock Option and Other Plans**





The
      Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant
      to which the Company reserved 5,000,000 shares of common stock. The options
      granted have a term of ten years and are issued at or above the fair market
      value of the underlying shares on the grant date. The Company also maintains
      the
      1996 Director Option Plan (the Director Plan) pursuant to which the Company
      reserved 200,000 shares of common stock. Options granted under the Director
      Plan
      are issued at or above the fair market value of the underlying shares on the
      grant date. A portion of the first option vests at the six-month anniversary
      of
      the date of the grant and continues over a four-year period. Subsequent options
      vest on the first anniversary of the grant date. The options expire ten years
      from the date of the grant or 90 days after termination of employment, whichever
      comes first.





The
      following is a summary of option activity under all plans:





1994
                Plan
            
            1996
                Director Plan
            
            Nonqualified
            
            Total
                Number of Options
            
            Weighted
                Average Exercise PriceOutstanding
                at June 30, 2005
            
            
            33,000
            
            
            --
            
            
            --
            
            
            33,000
            
            $
            .10-$.365Outstanding
                at June 30, 2006
            
            
            33,000
            
            
            
            
            
            
            
            
            33,000
            
            $
            .10-.365




Net
      loss
      and net loss per common share determined as if the Company accounted for stock
      options granted under the fair value method of SFAS 123 would result in the
      same
      amounts reported.





14


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**


**Note
      8 - Contingency**





There
      were two holders of convertible notes dated December 31, 2001 who could
      potentially seek similar damages from the Company. Should they seek these
      damages, the Company could incur additional expense of $71,668. Management
      feels
      however, that the likelihood that the other holders will seek the damages is
      remote, and therefore, no provision for this expense has been made in the
      accompanying condensed consolidated financial statements.





On
      October 16, 2003, a judgment was entered against the Company by its landlord,
      BT
      Lincoln L.P. for breach of lease in the amount of $184,706.76. The Company
      intends to negotiate a settlement.





**Note
      9 - Related Parties**





A
      Director of the Company provided consulting services during 2006 and 2005 that
      amounted to $0 and $4,000 respectively. As of June 30, 2006, the Company owes
      this Director $0.




**Note
      10 - Purchase of CGM Applied Security Technology, Inc.**





On
      March
      1, 2005, the Company acquired substantially all of the assets of CGM Security
      Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash
      and
      (ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000,
      subject to adjustment (the "Acquisition"). The assets of CGM were acquired
      pursuant to an Asset Purchase Agreement among the Company and CGM dated as
      of
      February 25, 2005. In connection with the acquisition, the Company and CGM
      each
      entered into an employment agreement with Erik Hoffer (the "Employment
      Agreement"). CGM is a manufacturer and distributor of barrier security seals,
      security tapes and related packaging security systems, protective security
      products for palletized cargo, physical security systems for tractors, trailers
      and containers.





The
      principal amount of the Note is subject to adjustment based upon the average
      of
      (i) the gross revenues of CGM for the fiscal year ending December 31, 2007
      and
      (ii) an independent valuation of CGM Sub based upon the consolidated audited
      condensed consolidated financial statements of the Company and CGM Sub for
      the
      fiscal years ending December 31, 2006 and 2007. In addition, the Company has
      granted CGM a secondary security interest in substantially all of its assets
      and
      intellectual property.





In
      connection with the Acquisition, the Company entered into a letter agreement
      with certain of its investors (the "Investors") which extended the maturity
      date
      of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
      the conversion price of the debt that is held by the Investors to the lower
      of
      (i) $0.0005 or (ii) 40% of the average of the three lowest intraday trading
      prices for the Company's common stock during the 20 trading days before, but
      not
      including, the conversion date. In addition, the exercise price of the warrants
      held by the Investors was amended to $.001 per share.




**Note
      11 - Restatement**




We
      have
      restated the condensed consolidated financial statements for the six months
      ended June 30, 2005. Based upon the guidance in SFAS133 and EITF00-19, the
      Company concluded that the conversion features of it convertible debentures
      were
      required to be accounted for as derivatives. The imbedded derivative feature
      was
      bi-furcated and the fair market value was determined using a convertible bond
      valuation model. The derivative instruments are recorded at fair market value
      with changes in value recognized during the period of change.




The
      impact on the condensed consolidated financial statements is summarized below.






15


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Condensed Consolidated Financial Statements
        (Unaudited)**
 **For
        the Six Months Ended June 30, 2006 and 2005 (Restated)**





June
                30, 2005As
                Reported
            
            As
                RestatedDebt
                discount and deferred financing costs, net
            
            $
            2,186,504
            
            
            338,888Total
                Assets
            
            
            7,976,131
            
            
            6,128,515Accumulated
                deficit
            
            
            (22,615,854
            )
            
            (30,134,466
            )Total
                Liabilities and Shareholders Deficit
            
            
            7,976,131
            
            
            6,128,515Interest
                and amortization of deferred debt costs
            
            
            894,963
            
            
            599,298Total
                Other Expenses
            
            
            919,893
            
            
            3,031,094Net
                Loss
            
            
            (1,294,575
            )
            
            (3,404,896
            )Net
                loss perShare
            
            
            (.00
            )
            
            (.01
            )




**Note
        12 - Going Concern**
 
 The
        accompanying condensed consolidated financial statements have been prepared
        in
        accordance with accounting principles generally accepted in the United States
        of
        America, which contemplates continuation of the Company as a going concern.
        The
        Company has sustained operating losses and has accumulated large deficits
        for
        the six months ended June 30, 2006 and 2005. These factors raise substantial
        doubt about its ability to continue as a going concern.
 
 Management
        has formulated and is in the process of implementing its business plan intended
        to develop steady revenues and income, as well as reducing expenses in the
        areas
        of operations. This plan includes the following management
        objectives:
 
 ·
            Soliciting
                new customers in the U.S. ·
            Expanding
                sales in the international market ·
            Expanding
                sales through E-commerce ·
            Adding
                new distributor both in the U.S and
                internationally ·
            The
                introduction of new products into the
                market ·
            Seeking
                out possible merger candidates 
 
 Presently,
        the Company cannot ascertain the eventual success of management’s plan with any
        degree of certainty. The accompanying consolidated financial statements do
        not
        include any adjustments that might result from the eventual outcome of the
        risks
        and uncertainties described above.


16


**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**




The
      following is management's discussion and analysis of certain significant factors
      that will have affected our financial condition and results of operations.
      Certain statements under this section may constitute "forward-looking
      statements". The following discussion should be read in conjunction with our
      condensed consolidated financial statements and notes thereto included in this
      report.







**RESULTS
      OF OPERATIONS**




**THREE
      MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30,
      2005**




Revenues
      for the three months ended June 30, 2006 were $1,233,729 compared to $875,513
      for the three months ended June 30, 2005 (restated), an increase of $358,216
      or
      409%. DDSI generates its revenues through software licenses, hardware, post
      customer support arrangements and other services. The increase in DDSI's revenue
      is attributed to the purchase of CGM Applied Security Technology, Inc in March,
      2005.




Cost
      of
      revenue for the three months ended June 30, 2006 was $334,538 compared to
      $447,460 for the three months ended June 30, 2005 (restated), a (decrease)
      of
      ($112,922) or (25%). The decrease was attributable more efficient purchasing
      procedures of raw material and more efficient production procedures put into
      place. Cost of revenue sold as a percentage of revenue for the three months
      ended June 30, 2006 was 27% of total revenues.




Operating
      expenses for the three months ended June 30, 2006 were $677,406 compared to
      $642,177 for the three months ended June 30, 2005 (restated), an increase of
      $35,229 or 5%. This increase was mainly attributable management’s controls over
      spending.




General
      and Administrative expenses for the three months ended June 30, 2006 were
      $555,264 compared $555,080 for the three months ended June 30, 2005 (restated)
      for an increase of $184. This increase was mainly attributable management’s
      controls over spending.




Sales
      and
      Marketing expenses for the three months ended June 30, 2006 were $95,011
      compared $60,585 for the three months ended June 30, 2005 (restated) for an
      increase of $34,426 or 57%. This increase was mainly attributable to the company
      increasing its advertising budget due to the purchase of CGM Applied Security
      Technologies, Inc.




Research
      and development expenses for the three months ended June 30, 2006 were $27,131
      compared to $26,512 for the three months ended June 30, 2005 (restated) for
      an
      increase of $619 or 2%.




The
      net
      (loss) for DDSI increased ($215,942) or 12% for the three months ended June
      30,
      2006 to $(2,024,062) from $(1,808,120) for the three months ended June 30,
      2005
      (restated). This was primarily due to the change in accounting procedures in
      which convertible debentures are treated as derivative according to the guidance
      of SFAS133 and EITF00-19.




**SIX
      MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30,
      2005**




Revenues
      for the six months ended June 30, 2006 of $2,104,693 compared to $1,024,388
      for
      the six months ended June 30, 2005 (restated), an increase of $1,080,305 or
      106%. DDSI generates its revenues through software licenses, hardware, post
      customer support arrangements and other services. The increase in DDSI's revenue
      is attributed to the purchase of CGM Applied Security Technology, Inc in March,
      2005.




Cost
      of
      revenue for the six months ended June 30, 2006 was $627,880 compared to $492,161
      for the six months ended June 30, 2005 (restated), an increase of $135,719
      or
      28%. The increase was attributable to the purchase of CGM Applied Security
      Technology, Inc in March 2005. Cost of revenue sold as a percentage of revenue
      for the six months ended June 30, 2006 was 34% of total revenues.




Operating
      expenses for the six months ended June 30, 2006 was $1,367,628 compared to
      $906,129 for the six months ended June 30, 2005 (restated), an increase of
      $461,499 or 51%. This increase was mainly attributable to the purchase of CGM
      Applied Security Technology, Inc in March 2005.




17


General
      and Administrative expenses for the six months ended June 30, 2006 were
      $1,095,926 compared $775,453 for the six months ended June 30, 2005 (restated)
      for an increase of $320,473 or 41%. This increase was mainly attributable to
      the
      purchase of CGM Applied Security Technology, Inc in March 2005.




Sales
      and
      Marketing expenses for the six months ended June 30, 2006 were $218,048 compared
      $79,070 for the six months ended June 30, 2005 (restated) for an increase of
      $138,978 or 176%. This increase was mainly attributable to the company
      increasing its advertising budget due to the purchase of CGM Applied Security
      Technologies, Inc.




Research
      and development expenses for the six months ended June 30, 2006 were $53,654
      compared to $51,606 for the six months ended June 30, 2005 (restated) for an
      increase of $2,048 or 4%. This increase was due in part to upgrades necessary
      to
      keep current.




The
      net
      (loss) for DDSI increased ($516,937) or 15% for the six months ended June 30,
      2006 to $(3,921,933) from $(3,404,996) for the six months ended June 30, 2005
      (restated). This was primarily due to the change in accounting procedures in
      which convertible debentures are treated as derivative according to the guidance
      of SFAS133 and EITF00-..




Net
      cash
      provided by (used in) operating activities for the six months ended June 30,
      2006 and the six months ended June 30, 2005 (restated) was $51,511 and
      ($444,915), respectively. The increase in cash provided by (used in) operating
      activities for the six months ended June 30, 2006 of $496,426. This increase
      was
      due in part to less expenditures for infrastructure necessary after the purchase
      of CGM Applied Security Technology, Inc. in March 2005.




Net
      cash
      (used in) investing activities was ($22,907) and ($1,550,492) for the six months
      ended June 30, 2006 and June 30, 2005 (restated), respectively. This increase
      was due in part to less expenditures for infrastructure necessary after the
      purchase of CGM Applied Security Technology, Inc. in March 2005.




Net
      cash
      provided by (used in) financing activities was $(0) and $($515,871) for the
      six
      months ended June 30, 2006 and the six months ended June 30, 2005, respectively.
      This increase was due to repayment of officers for monies owed.




**LIQUIDITY
      AND CAPITAL RESOURCES**




DDSI's
      revenues have been insufficient to cover the cost of revenues and operating
      expenses. Therefore, DDSI has been dependent on private placements of its common
      stock and issuance of convertible notes in order to sustain operations. In
      addition, there can be no assurances that the proceeds from private or other
      capital will continue to be available, or that revenues will increase to meet
      DDSI's cash needs, or that a sufficient amount of DDSI's common stock or other
      securities can or will be sold or that any common stock purchase
      options/warrants will be exercised to fund the operating needs of
      DDSI.




Over
      the
      next twelve months, management is of the opinion that sufficient working capital
      will be obtained from operations and external financing to meet DDSI's
      liabilities and commitments as they become payable. DDSI has in the past relied
      on private placements of common stock securities, and loans from private
      investors to sustain operations. However, if DDSI is unable to obtain additional
      funding in the future, it may be forced to curtail or terminate
      operations. At June
      30, 2006, DDSI had assets of $6,065,603 compared to $6,128,515 on June 30,
      2005
      a decrease of ($62,912) and shareholder (deficit) of $(12,416,417) on June
      30,
      2006 compared to shareholder (deficit) of $(10,399,406) on June 30, 2005, an
      increase of ($1,897,871). This increase in shareholder (deficit) for the six
      months ended June 30, 2006 resulted from the net loss for the six months ended
      June 30, 2006.




**Plan
      of Operations**




**Acquisition
      of CGM**




On
      March
      1, 2005, DDSI and CGM Sub acquired substantially all of the assets of CGM,
      for
      (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in the
      principal amount of $3,500,000, subject to adjustment (the "Acquisition").
      The
      assets of CGM were acquired pursuant to an Asset Purchase Agreement among DDSI,
      CGM Sub and CGM dated as of February 25, 2005.




18


The
      principal amount of the Note is subject to adjustment based upon the average
      of
      (i) the gross revenues of CGM Sub for the fiscal year ending December 31, 2007
      and (ii) an independent valuation of CGM Sub based upon the consolidated audited
      condensed consolidated financial statements of the Company and CGM Sub for
      the
      fiscal years ending December 31, 2006 and 2007. In addition, the Company has
      granted CGM a secondary security interest in substantially all of its assets
      and
      intellectual property.




In
      connection with the Acquisition, the Company entered into a letter agreement
      with certain of its investors (the "Investors") which extended the maturity
      date
      of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
      the conversion price of the debt that is held by the Investors to the lower
      of




(i)
      $0.0005 or (ii) 60% of the average of the three lowest intraday trading prices
      for the Company's common stock during the 20 trading days before, but not
      including, the conversion date. In addition, the exercise price of the warrants
      held by the Investors was amended to $.001 per share.




The
      short-term objective of DDSI is the following:




The
      Company plans to spend the majority of it's time and efforts on increasing
      the
      revenue and marketplace of its wholly owned subsidiary, CGM Applied Security
      Technologies, as it feels that there is a much greater potential for growth
      of
      the product line of CGM. In order to accomplish this, the Company has hired
      additional sales people and is increasing its marketing budget in order to
      expand the awareness of CGM's product line. In addition, the Company has begun
      a
      complete revamping of the company's infrastructure in order to make it better
      able to respond to the need of its customers and to give management the
      reporting it needs on a timely basis.




Additionally,
      DDSI plans to execute an acquisition strategy based upon the availability of
      financing.




We
      also
      plan to add additional product lines as a Value Added Reseller. Technologies
      related to DDSI's core business can bring additional cash flow with relatively
      small internal development capital outlay.




DDSI's
      long-term objective is as follows:




To
      enhance its sales of the product line acquired with the acquisition of CGM
      both
      domestically and internationally, though the addition of sales representative
      and distributors




To
      seek
      additional products to sell into its basic business market - Criminal Justice
      -
      so that DDSI can generate sales adequate enough to allow for profits.




DDSI
      believes that it will not reach profitability in
      the foreseeable future due to its debt service .
      Over
      the next twelve months, management is of the opinion that sufficient working
      capital will be obtained from operations and external financing to meet DDSI's
      liabilities and commitments as they become payable. DDSI has in the past
      successfully relied on private placements of common stock securities, bank
      debt,
      loans from private investors and the exercise of common stock warrants in order
      to sustain operations. If DDSI is unable to obtain additional funding in the
      future, it may be forced to curtail or terminate operations.




DDSI
      is
      doing the following in its effort to reach profitability:




o
      The
      Company is putting a great deal of effort to increase the sales of the CGM
      subsidiary. The Company believes at this time that the most significant growth
      in revenue will come from CGM and its product lines.




o
      Cutting
      costs in areas that add the least value to DDSI.




o
      Deriving funds through investigating business alliances with other companies
      who
      may wish to license the FMS SDK (software developer's kit).




o
      Increasing revenues through the introduction of Compu-Capture(R), specifically
      towards kindergarten through twelfth grades, for the creation of ID
      cards.




19


o
      Increasing revenues through the introduction of a scaled down version of our
      Compu-Capture(R) product.




o
      Increasing revenues through the addition of innovative technologies as a Value
      Added Seller.




o
      Acquiring and effectively adding management support to profitable companies
      complementary to its broadened target markets.




**Liquidity
      and Capital Resources**




We
      had
      net losses of ($3,921,933) and ($3,404,996) during the six months ended June
      30,
      2006 and 2005, respectively. As of June 30, 2006, we had a cash balance in
      the
      amount of $129,313 and current liabilities of $13,328,010. The total amount
      of
      notes payable and debentures is $8,659,726. We may not have sufficient cash
      or
      other assets to meet our current liabilities. In order to meet these
      obligations, we may need to raise cash from the sale of securities or from
      borrowings.




The
      Company's revenues have been insufficient to cover the cost of revenues and
      operating expenses. Therefore, the Company has been dependent on private
      placements of its Common Stock and issuance of convertible notes in order to
      sustain operations. In addition, there can be no assurances that the proceeds
      from private placements or other capital will continue to be available, or
      that
      revenues will increase to meet the Company's cash needs, or that a sufficient
      amount of the Company's Common Stock or other securities can or will be sold
      or
      that any Common Stock purchase options/warrants will be exercised to fund the
      operating needs of the Company.




The
      Company has contractual obligations of $10,413,052 as of June 30, 2006. These
      contractual obligations, along with the dates on which such payments are due
      are
      described below:





Contractual
                Obligations
            
            Total
            
            One
                Year of Less
            
            More
                Than One YearDue
                to Related Parties
            
            $
            0
            
            $
            0
            
            $
            0Accounts
                Payable and Accrued Expenses
            
            
            603,296
            
            
            603,296
            
            
            0Accrued
                interest on loans
            
            
            1,150,030
            
            
            1,150,030
            
            
            0Note
                payable
            
            
            3,500,000
            
            
            0
            
            
            3,500,000Convertible
                Debentures
            
            
            5,159,726
            
            
            3,505,716
            
            
            1,654,010Total
                Contractual Obligations
            
            $
            10,413,052
            
            $
            5,259,042
            
            $
            5,154,010




The
      Company is currently in default on several of the convertible debentures that
      are included in current liabilities. Below is a discussion of our sources and
      (uses) of funds for the six months ended June 30, 2006 and 2005 (restated),
      respectively.




**Off
      Balance Sheet Arrangements**




We
      do not
      have any off balance sheet arrangements as of June 30, 2006 or as of the date
      of
      this report.




**Item
      3. Control and Procedures**




(a)
      Evaluation of Disclosure Controls and Procedures




As
      of
      June 30, 2006, we carried out an evaluation, under the supervision and with
      the
      participation of our Chief Executive Officer and Chief Financial Officer, of
      the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Based on this evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in ensuring that information required to be disclosed by us in our
      periodic reports is recorded, processed, summarized and reported, within the
      time periods specified for each report and that such information is accumulated
      and communicated to our management, including our principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required disclosure.






( b)
      Changes in Internal Controls.




There
      was
      no change in our internal controls over financial reporting that has materially
      affected, or is reasonable likely to materially affect, our internal
      control  over financial reporting during the quarter covered by this
      Report.






20




**PART
      II. OTHER INFORMATION**




**Item
      1. Legal Proceedings**




None.




**Item
      2. Changes in Securities and Use of Proceeds**




None.




**Item
      3. Defaults Upon Senior Securities:**




The
      Company is in default of $1,733,478 of outstanding debentures. Although the
      debenture holders have not pursued their rights under such debentures, there
      can
      be no assurances that such rights will not be exercised.




**Item
      4. Submission of Matters to a Vote of Security Holders**




None.




**Item
      5. Other Information**




None.




**Item
      6. Exhibits**





4.1
            Security
                Agreement dated February 25, 2005 by and between CGM Applied Security
                Technologies, Inc. and CGM Security Solutions, Inc. (incorporated
                herein
                by reference to the Current Report on Form 8-K, dated March 3,
                2005)4.2
            Intellectual
                Property Security Agreement dated February 25, 2005 by and between
                CGM
                Applied Security Technologies, Inc and CGM Security Solutions, Inc.
                (incorporated herein by reference to the Current Report on Form 8-K,
                dated
                March 3, 2005)4.3
            Letter
                Agreement, by and among the Company, AJW Partners, LLC, New Millennium
                Capital Partners II, LLC, AJW Offshore, Ltd. and AJW Qualified Partners,
                LLC, dated January 31, 2005 (incorporated herein by reference to
                the
                Current Report on Form 8-K, dated March 3, 2005)4.4
            2.86%
                Secured Convertible promissory Note in the name of CGM Security Solutions,
                Inc. dated February 25, 2005 (incorporated herein by reference to
                the
                Current Report on Form 8-K, dated March 3, 2005)10.1
            Asset
                Purchase Agreement dated February 25, 2005 by and among the Company,
                CGM
                Applied Security Technologies, Inc. and CGM Applied Security Solutions.
                (incorporated herein by reference to the Current Report on Form 8-K,
                dated
                March 3, 2005)10.2
            Employment
                Agreement, dated February 25, 2005, by and among the Company, CGM
                Applied
                Security Technologies, Inc. and CGM Security Solutions, Inc. and
                Eric
                Hoffer (incorporated herein by reference to the Current Report on
                Form
                8-K, dated March 3, 2005)10.3
            Employment
                Agreement dated February 25, 2005 by and among the Company and Anthony
                Shupin (incorporated herein by reference to the Current Report on
                Form
                8-K, dated April 15, 2005)10.4
            Employment
                Agreement dated February 25, 2005 by and among the Company and Michael
                J.
                Pellegrino (incorporated herein by reference to the Current Report
                on Form
                8-K, dated April 15, 2005)31.1
            Certification
                by Chief Executive Officer pursuant to Sarbanes-Oxley Section
                30231.2
            Certification
                by Chief Financial Officer pursuant to Sarbanes-Oxley Section
                30232.1
            Certification
                by Chief Executive Officer pursuant to 18 U.S.C., Section
                135032.2
            Certification
                by Chief Financial Officer pursuant to Sarbanes-Oxley Section
                1350






21


**SIGNATURES**




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




**DIGITAL
                DESCRIPTOR SYSTEMS, INC.**
              (Registrant)Date: August    
              , 2006
            By:
            /s/ ANTHONY
              SHUPINAnthony
              Shupin
              (President,
                Chief Executive Officer)
              (Chairman)


Date: August    
                , 2006
              By:
              /s/ MICHAEL
                J. PELLEGRINOMichael
                  J. Pellegrino
                Senior
                  Vice President & CFO
                (Director)
 
 22