**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




**x
      ANNUAL REPORT PURSUANT
      SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE**




ACT
      OF
      1934. For the fiscal year ended December 31, 2006.




**o
      TRANSITION REPORT PURSUANT TO SECTION 13
      or 15(d) OF THE SECURITIES**




EXCHANGE
      ACT OF 1934. For the transition period from ____________ to




*Commission
      file number 0-26604*




**Digital
      Descriptor Systems, Inc.**


(Name
      of
      small business issuer in its charter)


Delaware
              23-2770048(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)2150
                  Highway 35, Suite 250, Sea Girt, New Jersey
              08750(Address
                  of principal executive offices)
              (Zip
                  Code)




Registrant's
      Telephone number, including area code: (732) 359-0260




Securities
      registered under 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Act: Common Stock




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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation
      S-B is not contained herein, and will not be contained, to the best of
      Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form10-KSB.




The
      issuer had revenues of $4,528,533 for the fiscal year ended December 31,
      2006.




As
      of
      February 1, 2007, 9,568,806,218 shares of the issuer's Common Stock were
      outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




None




**Transitional
      Small Business Disclosure Format Yes o No x**










**PART
      I**




**10KSB
      December 31, 2005 Restatement**




The
      company filed an amendment to restate the year ended December 31, 2005 financial
      statements. The company increased its net loss by $1,639,849 because the company
      originally did not amortize the debt discount correctly. The adjustment was
      for
      $1,285,828. Additionally the company corrected a misposting in its books of
      $354,021 from change in accrued interest to interest expense. The errors were
      found through the company's internal controls and procedures.




**General
      Business Development**




Digital
      Descriptor Systems, Inc. ("DDSI", the "Company", "us", "we", or "our"), a
      Delaware corporation incorporated in 1994, is the successor to Compu-Color,
      Inc., an Iowa corporation. The operations of DDSI were started as a division
      of
      ASI Computer Systems, Inc. of Waterloo, Iowa in 1986. Compu-Color, Inc. was
      formed in July 1989 and as of July 1, 1989 purchased the assets of the
      Compu-Color division of ASI Computer Systems, Inc.




**ITEM
      1. Description of Business**




**Our
      Business**




During
      2005 the Company acquired CGM Security Solutions, Inc. as a wholly owned
      subsidiary and changed it name to CGM Applied Security Technologies, Inc. In
      conjunction with the acquisition the Company has changed its primary focus
      from
      the law enforcement market to the security market in general as it believes
      that
      the potential for revenue is much greater.




**Description
      of Business of CGM**




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.




**Products**




CGM
      has
      Trade Secret protection on its Secure Trac tape, super seals water gum tape,
      and
      patent protection on the Button Memory Seal and Sentry Sensor. It also has
      exclusive rights on all NAVATECH products and seals, and owns the rights to
      the
      patented Topp Clip pallet security device. In addition, CGM provides
      authentication technology and products to clients to act as brand protection
      elements to finished goods. This brand protection technology can help
      manufacturers reduce the incidences of "knock-offs" that are common in the
      garment and accessory businesses. CGM's core products are: CGM Tapes, Self-Wound
      Security Tape, Void Labels and Void Tape for Bag Closure, SUPERSEALS(R), Custom
      Coated Products, CGM Conductive Inks and Membrane Switch Components, EMAPS(R),
      Locks, Sentry Sensor(R) and other representative items.




SUPERSEAL(R)
      and self-voiding carton sealing tape known as SECURE T.R.A.C.(R) show a
      customized signature if attempts are made at removing them. If cut and resealed,
      SUPERSEAL(R) further shows an "opened" legend on the seal's center surface.
      With
      self-wound void tape, any attempt at resealing is negated by the surface coating
      on the tape. An "opened" legend is also left on the tape if removed. Since
      the
      products are manufactured in-house, CGM controls all features and has the
      ability to customize the products to the customer's needs. CGM also offers
      converted labels, seals, and money bags. CGM manufactures a variety of
      adhesives, graphics and die cut label configurations for companies whose logos
      always appear on the tape or label for security purposes. No generic product
      can
      be substituted for this product since no one makes an identical
      product.




Uses
      for
      this product and technology include such items as:






·
              Aircraft
                  and truck seals




·
            Fiber
                and Steel drum seals




·
            Motor
                Vehicle inspection seals




·
            Box
                or container closure seals




·
            Cash
                bag components




·
            Computer
                seals




·
            Validation
                devices




·
            General
                security products




1




Once
      CGM's products are applied to a particular surface, any attempt at removal
      will
      leave a sign in the form of an indelible word or legend on the tape and a
      removable or permanent legend on the enclosure. The EMAPS(R) or Electro-Magnetic
      Asset Protection System reflects entry by sending an electronic signals if
      cut.
      EMAPS(R) products function without the need to identify a cut visually. Both
      products, the labels and the scanners, are unique and only manufactured by
      CGM.




**Production
      Process**




The
      CGM
      manufacturing process can best be described as one of "converting". CGM takes
      highly processed materials, which are manufactured elsewhere, and converts
      them
      into finished products.




CGM
      purchases processed materials from 6 to 8 key suppliers, including DuPont,
      Adhesive Research, Sun Microsystems and Video Jet. For OEM products, CGM
      purchases from approximately 15 different companies. CGM has an exclusive
      distribution relationship in connection with some of these products, while
      for
      other products CGM is one of few or many resellers.




**Markets
      & Customers**




The
      primary factors behind the need for CGM's products are: (i) the escalation
      of
      cargo theft and tampering, (ii) the need for enhanced cargo security because
      of
      the fear of terrorism, (iii) damage control of freight and cargo, (iv) the
      need
      for security products, (v) brand protection and authentication requirements
      and
      (vi) governmental and regulatory requirements.




CGM
      is
      certified by the Customs-Trade Partnership Against Terrorism ("C-TPAT"), a
      joint
      initiative between government and business designed to protect the security
      of
      cargo entering the United States while improving the flow of trade. C-TPAT
      requires importers to take steps to assess, evolve and communicate new practices
      that ensure tighter security of cargo and enhanced security throughout the
      entire supply chain. In return, their goods and conveyances will receive
      expedited processing into the United States




**Principal
      Customers**




CGM's
      current client base includes over 2000 national and international companies,
      including producers of high value items such as perfumes, computers, silicon
      chips, jewelry, cash and negotiable documents. The market for tamper evidence
      includes flavors, fragrances, foodstuffs and components. CGM's products are
      used
      by major airlines, pharmaceutical clients and numerous government agencies.
      CGM's products have also been recommended by major insurance
      companies




**Sales**




CGM
      has
      three direct salespeople, two independent representatives and 5 distributors
      for
      domestic sales and over 12 representative distributors for sales abroad. CGM
      supplements its sales force with Internet advertising, trade shows, and PR
      benefits from Erik Hoffer's chairmanship of education for the International
      Cargo Security Council (ICSC) and a variety of legislators and key accounts
      targeted by an Executive level PR campaign




**Competition**




Several
      other companies manufacture products that are similar to CGM's self-voiding
      label stock. Their products are limited in scope and do not adequately address
      the issues of tampering by virtue of their inability to withstand the normal
      means of breaching adhesive products. However, new innovations and better
      sales/marketing by other companies with a product-solutions market approach
      could affect our ability to market our products. Currently, no other company
      manufactures the self-voiding label stock.




No
      other
      company competes vertically or sells the finished product in a customized tape
      or seal form like CGM does. As both a manufacturer and converter, CGM delivers
      finished goods to users in response to client's individual needs. CGM can modify
      its products through all phases of its development to make it user friendly
      and
      compatible with the needs of its desired application.




No
      other
      company in the industry offers the array of products that CGM offers. There
      are
      approximately 12 seal manufacturers that offer seals and compete with each
      other
      over price. CGM sells through a "needs based- threat-specific" assessment and
      determines final product design on the basis of functionality.




**Industry
      Trends**




It
      is
      estimated that losses from cargo theft each year reach 30-50 billion dollars
      globally and 12 billion dollars in the US, and that these numbers will continue
      to rise. (L.H. Gray, Facing the Growing Problem of Loss and Theft).




**Employees**




DDSI
      employs total of 20 full time employees, of whom 15 are employed by
      CGM.




2




DDSI
      develops, assembles, markets and installs computer systems which capture video,
      digitally captured images and scanned images, digitize the image, link the
      digitized images to text/data and store the image and text on a computer
      database which allows for transmitting the image and text by computer or
      telecommunication links to remote locations.




Imaging
      technology enables computers to record, store and retrieve both textual
      information and visual images. The common problem in imaging technology is
      how
      to record, store, process and retrieve information and images within the same
      system. DDSI's software programs utilize technology to link the textual
      information with the images so that customers can record and retrieve related
      text and images. DDSI originally developed the software to address the
      information retrieval problems of tax assessors. DDSI subsequently adapted
      the
      software for use by law enforcement agencies and management of jail facilities.
      DDSI's software also addresses different information retrieval needs such as
      reproducing line ups and producing housing badges (jails), bar coded wristbands
      for identification which facilitates movement within jails and courts and
      storing and retrieving hand written and computer generated document images
      within arrest records. Heightened sensitivity since 9/11 has caused an increase
      in awareness for software and hardware programs related to digital
      identification. This awareness is causing more resources to be allocated to
      the
      development of technologies in this field. DDSI has a strong focus on
      developing, integrating or reselling products to its client base as well as
      new
      markets.




While
      the
      majority of DDSI's sales are one time software based sales, DDSI does offer
      maintenance and support for their products.




**Product
      and Services**




**Compu-Capture(R)**




DDSI's
      principal product is the Compu-Capture(R) law enforcement program. This program
      combines digitized image and textual information. The system has been developed
      primarily for the criminal justice market, including law enforcement, jail
      and
      correctional facilities.




Information
      is entered into the Compu-Capture(R) system at the time a subject is booked
      or
      enters the facility, including a video image of the subject, a "mug shot".
      The
      Compu-Capture(R) system reduces the time needed to take and process mug shots
      and improves the quality of the mug shot. The booking officer can preview each
      mug shot image on the computer screen before processing and storing the image
      to
      ensure accuracy and clarity. Once an acceptable image is obtained, the booking
      officer can store the image through the computer application, along with the
      booking record, physical characteristics and other pertinent text
      material.




The
      information entered into the Compu-Capture(R) system can include names, aliases,
      physical characteristics, such as size, hair color, facial scars or physical
      deformities, and fingerprint codes.




Once
      the
      data is entered into the Compu-Capture(R) system, the visual image and textual
      material can be utilized in a variety of ways. The officer conducting a search
      can assign priorities or values to physical characteristics for the computer's
      search of the database of existing subjects. Features that are difficult to
      disguise or alter, such as facial scars, can be assigned higher values than
      other characteristics such as hair color or facial hair. Mug shots can be
      retrieved on the computer screen or printed individually, with or without
      textual information, or as part of a computer-generated line-up. The digitized
      mug shot and information can be transmitted to remote locations by telephone
      line or radio frequency or through computer networks and can be retrieved
      rapidly from central and/or remote locations.




The
      Compu-Capture(R) system produces images that meet or exceed the suggested
      requirements of the Department of Justice National Crime Information Commission
      2000 ("NCIC2000"), the standard adopted by Federal Bureau of Investigation
      for
      the quality of mug shots and their transmission. NCIC2002 does not certify
      or
      otherwise approve any mug shot systems.




The
      Compu-Capture(R) system's technology can also be used in commercial applications
      that are unrelated to law enforcement, such as for security or access control,
      identification cards with photographs for employee identification, voter
      registration cards, and national welfare identification cards, drivers'
      licenses, all with or without the use of fingerprints and/or
      signatures.




The
      following versions of the Compu-Capture(R) offered are as follows:




**Compu-Capture(R)
      32SQL**




Compu-Capture(R)
      32 is DDSI's stand alone application. This version of the Compu-Capture(R)
      product line contains its own database and can function on its own without
      integration into law enforcement existing records or a jail management system.
      The database allows for the capture of basic demographic information such as
      physical characteristics. This information can then be sorted for quick and
      easy
      retrieval of a particular record or various records with similar
      characteristics. The CPC32 can be used on a Personal Computer or networked
      together.


3


**Compu-Capture(R)
      ActiveX32SQL**




Compu-Capture(R)
      ActiveX32 is a fully functioning executable product that image-enables (the
      process by which a text-based system has images linked to its data records
      by
      some unique identifier, which eliminates the need to re-key data and/or maintain
      multiple databases) any host based records or jail management system without
      costly integration. The advantage to this product is it eliminates multiple
      databases and duplicate data entry from one system to another.




**Compu-Sketch(R)**




The
      Compu-Sketch(R) product is a composite sketching program that allows an
      individual with little to no artistic ability to draw a sketch of a persons
      face
      as described by the witness. The program contains an interactive witness module
      that asks the witness basic questions which are then used to create the
      composite face. The application consists of over 40,000 features, that when combined
      can create millions of different looking suspects. The user simply selects
      a
      description of each face part from a menu and the system will then assemble
      the
      parts to complete the composite. The user can manipulate each part and/or add
      accessories, such as hats, jewelry and facial hair.




**Compu-Scene**




The
      Compu-Scene program uses a computer aided drafting program to compose drawings
      with simple drag-n-drop technology, making accident and crime scene drawings
      easy. The user simply draws a room or intersection to scale with the CAD
      (Computer Assisted Design) program and then simply drops in the pre-drawn
      templates to complete the scene.




**Maintenance
      and Support**




In
      addition to the installation of DDSI's systems, DDSI trains the personnel of
      the
      system purchaser in the use and operation of the system. DDSI provides
      maintenance and support for a limited period of time. DDSI also offers its
      customers' ongoing maintenance and support plus updates of the software, for
      an
      annual fee.




**Marketing**




**Law
      Enforcement Applications**




DDSI
      markets and sells its law enforcement product line through an internal sales
      force, an independent dealer network and vendors of compatible software
      applications.




DDSI
      employs one (1) full-time employee in sales, marketing or sales management.
      Leads are generated and followed up by the salesmen, who sell directly to the
      end user. The employees also work with sales employees of other vendors in
      making sales calls and proposals.




Additionally,
      DDSI markets its Law Enforcement products through vendors of compatible software
      applications.




**Customers**




DDSI
      maintains a continuing relationship with its customers based upon support
      services and periodic upgrades of the Compu-Capture(R) line and Compu-Sketch(R)
      software. Although the major revenue-generating event is the initial
      installation and any significant expansion of that installation, the annual
      sales of maintenance support services, which DDSI performs subsequent to the
      installation, generates approximately 41% of the installed software license
      fee.




DDSI
      does
      not rely on any particular customers or business partners for the majority
      of
      their sales.




**Business
      Alliances**




Our
      business alliance relationships have changed over the years, however we continue
      to generate the majority (approximately 50%) of our revenue though our
      relationships with records management and jail management vendors (i.e. HTE,
      Inc. located in Lake Mary, FL and FSG Software, Inc. located in Janesville,
      WI).
      Since these vendors have written the necessary integration to use DDSI imaging
      solutions, when a customer is looking to include an imaging system in their
      program, the vendor will inform DDSI of the customers need. DDSI is responsible
      for all marketing and sales efforts of our imaging solution. DDSI believes
      that
      a substantial part of its growth will continue to come through these business
      alliances.




DDSI
      supplies to its business partners a SDK (software developers kit), which allows
      them to link our software to their software.


4


**Greater
      Penetration of Existing Customers**




In
      addition to seeking new customers, DDSI has recently established a marketing
      program to focus on the existing customer, which includes over 1,000 agencies.
      DDSI believes with addition of the CGM subsidiary that it can now capitalize
      and
      generate increased revenues from its existing customers by offering them the
      products of CGM, many of which can be used in the law enforcement
      environment.




**Seek
      Acquisitions and Alliances**




DDSI
      management plans to execute an acquisition strategy. The make-up of the targeted
      acquisitions must include products and markets which complement and expand
      its
      present client base. Profitable, niche companies will be integrated into DDSI's
      growth through acquisition strategy. DDSI plans to use funding derived from
      external investors.




On
      March
      1, 2005, DDSI and its wholly-owned subsidiary, CGM Applied Security
      Technologies, Inc. ("CGM Sub"), 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 DDSI, CGM Sub and CGM
      dated as of February 25, 2005.




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
      financial statements of the Company and CGM Sub for the fiscal years ended
      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.




**Sales
      by Geographic Area**




During
      the fiscal year ended December 31, 2006 the percentage of revenues that DDSI
      received from domestic customers has been approximately 77.3%. Foreign sales
      for
      2006 were $1,027,986.




**Competition**




DDSI
      has
      multiple solutions being sold to the Criminal Justice market with its
      competitive position varying by product.




DDSI's
      Compu-Capture(R) system (video imaging mug shot solution) currently has several
      competitors, including ImageWare Systems of San Diego, California.




The
      Compu-Sketch(R) is a computerized, non-artistic, professional composite system.
      Though there is significant competition in this field, DDSI believes that the
      Compu-Sketch(R) provides an easier system to use plus offers a larger database
      than its competitors.




DDSI's
      Compu-Scene product is packaged with other DDSI systems. DDSI carries it in
      order to provide to its customers a more complete package of
      products.




**Suppliers**




DDSI's
      hardware is compatible with the IBM AS400 and other mainframe and mini computer
      manufacturers. The peripheral equipment used in connection with DDSI's system,
      such as video equipment, can be provided with a wide range of manufacturers.
      As
      a result DDSI is not dependent on any particular supplier or raw
      material.




**Government
      Regulation or Government Approval**




Most
      law
      enforcement agencies purchasing new or upgraded or expanded systems require
      that
      the system meet the requirements of NCIC2000, ANSI-NIST standards and standards
      issued by the National Crime Information Commission and by the FBI. All DDSI
      products and solutions were required to meet these requirements.




**Research
      and Development**




DDSI
      spent $107,024 and $106,505, respectively for the years ended December 31,
      2006
      and 2005 on research and development. This amount includes amounts spent on
      outside sources for assistance with Research & Development projects. None of
      these costs have been borne directly by our customers.




5




**Product
      Liability Insurance**




Although
      DDSI believes its products are safe, it may be subject to product liability
      claims from persons injured through the use of DDSI's marketed products or
      services. DDSI carries no direct product liability insurance, relying instead
      on
      the coverage maintained by its distributors and manufacturing sources from
      which
      it obtains product. There is no assurance that this insurance will adequately
      cover any liability claims brought against DDSI. There also can be no assurance
      that DDSI will be able to obtain its own liability insurance (should it seek
      to
      do so) on economically feasible terms. DDSI's failure to maintain its own
      liability insurance could materially adversely affect its ability to sell its
      products in the future. Although no product liability claims have been brought
      against DDSI to date, if there were any such claims brought against DDSI, the
      cost of defending against such claims and any damages paid by DDSI in connection
      with such claims could have a materially adverse impact upon DDSI, including
      its
      financial position, results of operations and cash flows.




**Patents,
      Trademarks and Licenses**




DDSI
      owns
      the proprietary rights to the software used in the Compu-Capture(R) programs.
      In
      addition, DDSI owns the rights to the trademarks "Compu-Capture(R)",
      "Compu-Color(R)" and "Compu-Scan(R)", all trademarks have been registered with
      the United States Patent and Trademark Office.




**ITEM
      2. Description of Property**




The
      Company operates at 2150 Highway 35, Sea Girt, New Jersey on a four-month lease
      which ends in April 2007. Future minimum lease commitment in connection with
      this lease is $1,500.




CGM
      Applied Security Technologies operates from two locations. The administrative
      offices are located in Somerset, NJ and the production facility is located
      in
      Staten Island, NY.




**ITEM
      3. Legal Proceedings**




On
      October 16, 2003, in the Court of Common Pleas of Bucks County, Pennsylvania,
      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 liability, net of the security
      deposit, is included in accrued expenses at December 31, 2006.




**ITEM
      4. Submission of Matters to a Vote of Securities Holders**




None.




**PART
      II**




**ITEM
      5. Market for Common Equity and Related Shareholder
      Matters**




DDSI's
      common stock has been quoted on the OTC Bulletin Board since July 7, 1997 under
      the symbol "DDSI". As of November 4, 1999 DDSI's shares traded on the pink
      sheets. DDSI returned to trading on the OTC Bulletin Board effective February
      23, 2001, but as of June30, 2003 began trading on the pink sheets. The following
      table sets forth, the high and low bid prices for the common stock for the
      quarters indicated. As of February 1, 2007 there were approximately 3,200
      shareholders of record.





6




Common
                  Stock Bid PriceCalendar
                  Year 2003
              
              Low
              
              HighFirst
                  Quarter
              
              $
              0.0003
              
              $
              0.0032Second
                  Quarter
              
              $
              0.0004
              
              $
              0.005Third
                  Quarter
              
              $
              0.001
              
              $
              0.0026Fourth
                  Quarter
              
              $
              0.0001
              
              $
              0.002Calendar
                  Year 2004First
                  Quarter
              
              $
              0.0010
              
              $
              0.0055Second
                  Quarter
              
              $
              0.0015
              
              $
              0.0085Third
                  Quarter
              
              $
              0.0004
              
              $
              0.0027Fourth
                  Quarter
              
              $
              0.0004
              
              $
              0.0009Calendar
                  Year 2005First
                  Quarter
              
              $
              0.0004
              
              $
              0.0026Second
                  Quarter
              
              $
              0.0011
              
              $
              0.0005Third
                  Quarter
              
              $
              0.0036
              
              $
              0.0001Fourth
                  Quarter
              
              $
              0.0009
              
              $
              0.0001Calendar
                  Year 2006First
                  Quarter
              
              $
              0.0001
              
              $
              0.0003Second
                  Quarter
              
              $
              0.0001
              
              $
              0.0002Third
                  Quarter
              
              $
              0.0001
              
              $
              0.0001Fourth
                  Quarter
              
              $
              0.0001
              
              $
              0.0001





As
      of
      February 1, 2007, 9,568,806,218 shares of the issuer's Common Stock were
      outstanding.




We
      have
      never declared nor paid cash dividends and do not expect to pay dividends in
      the
      foreseeable future.




**Recent
      Issuances of Unregistered Securities**




During
      January 2005, $2,500 of the convertible debentures issued in September 2001,
      were converted into 9,920,635 shares of common stock.




During
      January 2005, $1,400 of the convertible debentures issued in September 2001,
      were converted into 7,000,000 shares of common stock.




During
      February 2005, $3,100 of the convertible debentures issued in September 2001,
      were converted into 19,375,000 shares of common stock.




During
      February 2005, $2,520 of the convertible debentures issued in September 2001,
      were converted into 14,000,000 shares of common stock.




During
      March 2005, $3,400 of the convertible debentures issued in September 2001,
      were
      converted into 28,500,000 shares of common stock.




During
      March 2005, $3,000 of the convertible debentures issued in September 2001,
      were
      converted into 15,000,000 shares of common stock.




During
      April 2005, $1,000 of the convertible debentures issued in September 2001,
      were
      converted into 14,682,540 shares of common stock.




During
      April 2005, $1,000 of the convertible debentures issued in September 2001,
      were
      converted into 15,000,000 shares of common stock.




During
      May 2005, $1,000 of the convertible debentures issued in September 2001 were
      converted into 15,000,000 of common stock.




During
      May 2005, $3,560 of the convertible debentures issued in September 2001 were
      converted in 17,800,000 shares of common stock.




During
      June 2005 $4,600 of the convertible debentures issued in September 2001 were
      converted into 23,000,000 shares of common stock


7


During
      June 2005 $3,500 of the convertible debentures issued in September 2001 were
      converted into 17,500,000 shares of common stock.




During
      June 2005 the company issued 50,000,000 shares of stock for services rendered
      by
      New Equities Publishing for Public Relations.




During
      July 2005 $10,163 of the convertible debentures issued in September 2001 were
      converted into 48,800,000 shares of common stock




During
      July 2005 $11,871 of the convertible debentures issued in September 2001 were
      converted into 53,039,211 shares of common stock.




During
      August 2005 $29,099.80 of the convertible debentures issued in September 2001
      were converted into 221,570,000 shares of common stock.




During
      August 2005 $23,106 of the convertible debentures issued in September 2001
      were
      converted into 178,782,781 shares of common stock.




During
      September 2005 $43,586.60 of the convertible debentures issued in September
      2001
      were converted into 323,760,000 shares of common stock.




During
      September 2005 $20, 254 of the convertible debentures issued in September 2001
      were converted into 299,410,794 shares of common stock.




During
      October 2005 $46,825 of convertible debentures issued in September 201 were
      converted into 470,000,000 shares of common stock.




During
      October 2005, $13,172.28 of convertible debentures issued in September 2001
      were
      converted into 411,587,075 shares of common stock.




During
      November 2005, $14,260 of convertible debentures issued in September 2001 were
      converted into 401,500,000 shares of common stock




During
      November 2005 $16,388.33 of convertible debentures issued in September 2001
      were
      converted into 401,623,645 shares of common stock.




During
      February 2004, the Company issued two convertible debentures for an aggregate
      amount of $45,000 with simple interest at 12%. The debentures are due February
      2005. Interest shall be paid quarterly commencing March 2004. The holder shall
      have the right to convert the principal amount and interest due into 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.




On
      May 7,
      2004, we entered into a Securities Purchase Agreement, with four accredited
      investors that provides for the issuance of convertible notes payable up to
      an
      aggregate face value of $250,000 with simple interest accruing at the annual
      rate of 12% and warrants to acquire up to an aggregate 750,000 shares of our
      common stock. The convertible notes are due two years from the date of issuance.
      Interest payable on the convertible notes shall be paid quarterly commencing
      June 30, 2004. The holders shall have the right to convert the principal amount
      and interest due under the convertible notes into shares of DDS's common stock.
      The conversion price in effect on any conversion date shall be the lesser of
      (1)
      $.0045 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 warrants have an exercise price of $0.0045
      and
      expire on May 7, 2009.




During
      July 2004, $4,900 of the convertible debentures issued in September 2001, were
      converted into 7,000,000 shares of common stock.




During
      August 2004, $3,500 of the convertible debentures issued in September 2001,
      were
      converted into 14,000,000 shares of common stock and 7,222,222 shares of common
      stock were issued for liquidated damages relating to the notes issued December
      2001.




During
      September 2004, $700 of the convertible debentures issued in September 2001,
      were converted into 7,000,000 shares of common stock.


8


During
      October 2004, $1,400 of the convertible debentures issued in September 2001,
      were converted into 7,000,000 shares of common stock and 15,535,714 shares
      of
      common stock were issued for liquidated damages relating to the notes issued
      December 2001.




On
      November 30, 2004, we entered into a Securities Purchase Agreement, with four
      accredited investors that provides for the issuance of convertible notes payable
      up to an aggregate face value of $3,500,000 with simple interest accruing at
      the
      annual rate of 12% and warrants to acquire up to an aggregate 6,195,000 shares
      of our common stock. The convertible notes are due three years and three months
      from the date of issuance. Interest payable on the convertible notes shall
      be
      paid quarterly commencing December 31, 2004. The holders shall have the right
      to
      convert the principal amount and interest due under the convertible notes into
      shares of DDS's common stock. The conversion price in effect on any conversion
      date shall be the lesser of (1) $.0005 or (2) 60% 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 warrants have an
      exercise price of $0.001 and expire on January 31, 2012.




**ITEM
      6. Management's Discussion and Analysis or Plan of
      Operations**




Except
      for historical matters contained herein, the matters discussed in this Form
      10-KSB are forward-looking and are made pursuant to the safe harbor provisions
      of the Private Securities Litigation Reform Act of 1995. Investors are cautioned
      that these forward-looking statements reflect numerous assumptions, especially
      as regarding installation schedules and product mix, and involves risks and
      uncertainties which may affect Digital Descriptor Systems, Inc.'s business
      and
      prospects and cause actual results to differ materially from these
      forward-looking statements, including sufficient funds to finance working
      capital and other financing requirements of Digital Descriptor Systems, Inc.,
      market acceptance of DDSI's products and competition in the computer
      industry.




**Critical
      Accounting Policies**




DDSI's
      critical accounting policies, including the assumptions and judgments underlying
      them, are disclosed in the Notes to the Financial Statements. These policies
      have been consistently applied in all material respects and address such matters
      as revenue recognition and depreciation methods. The preparation of the
      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 financial statements and the reported amounts
      of
      revenues and expenses during the reported period. Actual results could differ
      from those estimates.




DDSI
      derives revenue from the sale of hardware, software, post customer support
      (PCS), and other related services. PCS includes telephone support, bug fixes,
      and rights to upgrades on a when-and-if-available basis. Other related services
      include basic consulting and training. Included with the hardware is software
      that is not considered to be incidental. Revenue from transactions with
      customers where the software component is not considered to be incidental is
      allocated between the hardware and software components based on the relative
      fair value of the respective components.




DDSI
      also
      derives revenue from the sale of software without a related hardware component.
      Revenue allocable to software components is further allocated to the individual
      deliverable elements of the software portion of the arrangement such as PCS
      and
      other services. In arrangements that include rights to PCS for the software
      and/or other services, the software component arrangement fee is allocated
      among
      each deliverable based on the relative fair value of each of the deliverables
      determined using vendor-specific objective evidence, which has been established
      by the separate sales of these deliverables.




**Plan
      of Operations**




The
      short-term objective of DDSI is the following:


·
              The
                  short-term objective of DDSI is to increase the market penetration
                  of the
                  product line of its CGM subsidiary as the Company believes this
                  is the
                  area where the greatest revenue growth exists. o Additionally,
                  DDSI plans
                  to execute an acquisition strategy based upon fund
                  availability.




DDSI's
      long-term objective is as follows:




·
            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. New products include biometric devices such as FMS (Fingerprint
                Matching System) and our integrated digital image and fingerprint
                package,
                Identify on Demand.





9


DDSI
      believes that it will not reach profitability until the year 2006. 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. A recent financing has been
      obtained and the underlying shares are being registered in this registration
      statement (see "Selling Shareholders" and "Recent Financing" on page
      40).




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




· Cut
        costs
        in areas that add the least value to DDSI




· Concentrate
        on increasing the sales of the CGM product line.




· Derive
        funds through investigating business alliances with other
        companies.




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




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




· Acquire
        and effectively add management support to profitable companies complementary
        to
        its broadened target markets.




**Results
      of Operations**




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




Revenues
      for the year ended December 31, 2006 of $4,528,533 increased $1,193,002 or
      35.5%
      from the year ended December 30, 2005. During 2006, Maintenance revenues
      decreased $6,543 or 2.5% from the year ended December 31, 2005. DDSI generates
      its revenues through software licenses, hardware, post customer support
      arrangements and other services. CGM generates its revenue through the
      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.
      The increase in DDSI's revenue is attributed to the purchase of CGM Applied
      Security Technology, Inc in March, 2005 and an increase in its revenue for
      the
      comparable twelve month period.




Cost
      of
      revenue for the year ended December 31, 2006 was $1,298,970, an increase of
      $190,066 or 17% from the prior year. Cost of revenue sold as a percentage of
      revenue for the year ended December 31, 2006 was 28% of total revenues, versus
      33% the year earlier. The decrease was attributable to increased sales and
      a
      decrease in the cost of raw materials.




Operating
      expenses increased $299,527 or 12% during the year ended December 31, 2006
      versus the year ended December 31, 2005. This increase was mainly attributable
      to the purchase of CGM Applied Security Technology, Inc in March
      2005.




General
      and Administrative expenses for the year ending December 31, 2006 were
      $2,175,852 versus $2,208,216 for the prior year for a decrease of $32,364 or
      1.5%. This decrease was mainly attributable to the purchase of CGM Applied
      Security Technology, Inc in March 2005.





Sales
      and
      Marketing expenses for the year ending December 31, 2006 were $463,544 versus
      $132,172 for the prior year for an increase of $331,372 or 250%. 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 for the year ended December 31, 2006 was $107,024 compared
      to
      $106,505 for the same period prior year for an increase of $519.




The
      net
      (loss) for DDSI increased 10% or $(400,860) for the year ended December 31,
      2006
      to $(4,349,881) from $(3,949,021) for the year ended December 31, 2005. This
      was
      primarily due to the change in accounting procedures in which convertible
      debentures are treated as derivatives according to the guidance of SFAS133
      and
      EITF00.




Net
      cash
      provided by (used in) operating activities for the year ended December 31,
      2006
      and 2005 was $129,511 and ($623,204), respectively. The increase in cash
      provided by operating activities in the year ended December 31, 2006 of $752,715
      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 $(20,603) and $(1,629,630) for the years
        ended December 31, 2006 and 2005, respectively.


10




Net
      cash
      (used in) financing activities was $(12,000) and $(531,691) for the years ended
      December 31, 2006 and 2005, respectively.




**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
      December 31, 2006, DDSI had assets of $6,033,224 compared $6,212,339 on December
      31, 2005 a decrease of $179,115 and shareholder deficiency of $(12,779,283)
      on
      December 31, 2006 compared to shareholder deficiency of $(10,346,477) on
      December 31, 2005, an increase of ($2,432,806). This increase in shareholder
      deficiency for the year ended December 31, 2006 resulted from the net loss
      for
      the year ended December 31, 2006.




As
      of
      December 31, 2006, DDSI working capital was $(11,855,140), a change from
      negative working capital of $(10,095,386) at December 31, 2005. The decrease
      in
      working capital was primarily a result of an increase in the fair market value
      of the derivative liabilities.




**Recent
      Developments**




On
      March
      1, 2005, DDSI and its wholly-owned subsidiary, CGM Applied Security
      Technologies, Inc. ("CGM Sub"), 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 DDSI, CGM Sub and CGM
      dated as of February 25, 2005.




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
      financial statements of the Company and CGM Sub for the fiscal years ended
      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.




On
      December 19, 2006 a special meeting of the shareholders was held and at the
      meeting the shareholders passed a resolution to change the name of the company
      from Digital Descriptor Systems, Inc. to Applied Security Innovations, Inc.
      The
      shareholders also passed a resolution to authorize a 1 for 500 reverse stock
      split. Both of these events took place on February 5, 2007. In addition the
      2006
      Incentive Stock Option Plan adopted by The Board of Directors on October 12,
      2006 was approved by the shareholders.




**ITEM
      7. Financial Statements**




The
      report of the independent registered public accounting firm and financial
      statements are set forth in this report beginning on Page F-1.




**ITEM
      8. Changes In and Disagreements with Accountants on Accounting and Financial
      Disclosure**




(a)
      On
      January 13, 2006, Digital Descriptor Systems, Inc. ("Registrant") was notified
      by Rosenberg Rich Baker Berman & Co. ("Rosenberg") that it was resigning as
      Registrant's certifying accountant, effective immediately.




During
      the two fiscal years ended December 31, 2004 and 2003, and any subsequent period
      through January 13, 2006, (i) there were no disagreements between Registrant
      and
      Rosenberg on any matter of accounting principles or practices, financial
      statement disclosure or auditing scope or procedure which, if not resolved
      to
      the satisfaction of Rosenberg would have caused Rosenberg to make reference
      to
      the matter in its reports on Registrant's financial statements, and (ii) Rosenberg's reports on Registrant's financial statements
      did not
      contain an adverse opinion or disclaimer of opinion, and was not modified as
      to
      uncertainty, audit scope or accounting principles. During the two fiscal years
      ended December 31, 2004 and 2003 and through January 13, 2006, there were no
      reportable events as the term is described in Item 304(a)(1)(iv) of Regulation
      S-B.




11




(b)
      On
      January 13, 2006, Registrant engaged the firm of Bagell Josephs, Levine and
      Company LLC. to serve as its independent registered public accountants for
      the
      fiscal year ending December 2005.




During
      the two fiscal years ended December 31, 2004 and 2003, and through January
      13,
      2006, Registrant has not consulted with Bagell, Josephs Levine and Company
      LLC.
      regarding either:




1.
      The
      application of accounting principles to any specific transaction, either
      completed or proposed, or the type of audit opinion that might be rendered
      on
      Registrants' financial statements, and neither a written report was provided
      to
      Bagell, Josephs, Levine & Company LLC. nor oral advice was provided that
      Bagell, Josephs, Levine and Company LLC. concluded was an important factor
      considered by Registrant in reaching a decision as to the accounting, auditing
      or financial reporting issue; or




2.
      Any
      matter that was either subject of disagreement or event, as defined in Item
      304(a)(1)(iv) of Regulation S-B and the related instruction to Item 304 of
      Regulation S-B, or a reportable event, as that term is explained in Item
      304(a)(1)(iv) of Regulation S-B.




On
      January 19, 2006, Registrant provided Rosenberg with a copy of the disclosures
      it is making in response to Item 4.01 on this Form 8-K, and has requested that
      Rosenberg furnish it with a letter addressed to the Securities and Exchange
      Commission stating whether it agrees with the above statements **.**




**ITEM
      8A. Control and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      December 31, 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.




**Changes
      in Internal Controls**




There
      have been significant changes in our internal controls that could significantly
      affect those controls subsequent to the date of their last valuation.
      Specifically, we have hired a new controller and implemented a new accounting
      system to integrate our subsidiary's financials. We believe that these steps
      have enhanced our financial disclosures.




**PART
      III**




**ITEM
      9. Directors, Executive Officers, Promoters and Control Persons; Compliance
      with
      Section 16(a) of the Exchange Act**




Set
      forth
      below is certain information regarding our directors and executive officers.
      Our
      Board of Directors is comprised of four directors. There are no family
      relationships between any of our directors or executive officers. Each of our
      directors is elected to serve until our next annual meeting of our stockholders
      and until his successor is elected and qualified or until such director's
      earlier death, removal or termination.




Name
              
              Age
              
              Position
                  with CompanyAnthony
                  Shupin
              
              51
              
              Director,
                  Chief Executive Officer, PresidentMichael
                  Pellegrino
              
              57
              
              Senior
                  Vice President, CFO and DirectorRobert
                  Gowell
              
              38
              
              DirectorVincent
                  Moreno
              
              63
              
              DirectorErik
                  Hoffer
              
              59
              
              Executive
                  Vice President and Director




Anthony
      Shupin became CEO and President of DDSI in October 2003. His affiliation with
      DDSI began as a member of the Board of Directors in January 2002. His experience
      includes over 20 years of executive management, sales and marketing management
      and project and program management with technology computing, aerospace and
      professional services companies. Prior to DDSI, Mr. Shupin served in several
      capacities in the Technology and Management Consulting field. He founded TShupin
      and Associates, a management consulting firm focused on assisting clients in
      the
      areas of Sales and Marketing, New Business Start-Up, Operational Analysis and
      Business/Technology Synchronization. At Deloitte Consulting, he directed
      activities as a Business Development Executive in the Communications and Media
      practice. Mr. Shupin's background also includes a role as Director of
      International Business Development at the world's first commercial satellite
      aerospace company. A
      graduate of Colby College, Waterville, Maine, Mr. Shupin has extended his
      education at Rutgers University, Cook College in Geographic Information Systems
      and Remote Sensing training.




12




Michael
      Pellegrino became Senior Vice President & CFO in February 2005. He
      originally joined DDSI in 1995 as Vice President & Chief Financial Officer.
      In March 2002, he was appointed President, Chief Executive Officer and Chief
      Financial Officer, Secretary and a Director of DDSI. From 1984 to 1995, Mr.
      Pellegrino was Vice President and CFO of Software Shop Systems, Inc. From 1979
      to 1984, he was a regional controller for Capital Cities/ABS and from 1972
      to
      1979 as Director of Financial Systems for ADP. Mr. Pellegrino has a Bachelors
      degree in accounting from MSU and a Masters in Finance from Rutgers
      University.




Robert
      Gowell has been a director of the Company since 2001. He was the Company's
      Co-Chairman and Chief Executive Officer from January 2002 until June 2002.
      He is
      a retired Deputy U.S. Marshal who has worked out of the New York and
      Pennsylvania offices from 1991 to 2001. He earned his B.S. in Management and
      Finance from the City University of New York. He is currently working on his
      MBA
      at Kutztown University.




Vincent
      Moreno has been a director of the Company since January 2002. Mr. Moreno
      provides DDSI with over 30 years of experience from a technical and business
      environment, with the past 23 years at the executive management level. Since
      2002, Mr. Moreno has been doing consulting work for various software development
      firms. From 1998- 2002, he was President and General Manager of PayPlus
      Software, Inc., a provider of payroll software to the Professional Employer
      Organization marketplace. He served as Vice President of Operations at DDSI
      from
      1996 to 1998. From 1989 to 1995, he served as President and CEO of Mainstem
      Corporation, a national provider of software services.




Erik
      Hoffer was appointed as Executive Vice President and a director of the Company
      and President of CGM Sub in March 2005. Prior to joining the Company, Mr. Hoffer
      has been the president and chief executive officer of CGM, which he created
      in
      1977. Prior to starting CGM, Mr. Hoffer was the national sales manager of Lamart
      Corporation from 1972-1977. For the past 37 years, Mr. Hoffer has designed
      and
      patented a number of theft control, authentication, barrier and theft detection
      products. He holds many patents and a considerable amount on corporate trade
      secrets in manufacturing these products. He is considered an expert in the
      areas
      of adhesive coating, conductive inks and cargo security science. For the past
      four 4 years, Mr. Hoffer has been the chairman of educational events for the
      National Cargo Security Council and previously the co-chairman of the NCSC
      GMATS
      program. Mr. Hoffer received a B.S. in industrial psychology from Northeastern
      University. He also holds an associates degree in transportation and traffic
      management.




**Code
      of Ethics**




The
      Company has not formally adopted a written code of ethics that governs all
      of
      our officers, directors and finance and accounting employees. The draft code
      of
      ethics is filed herewith as Exhibit 14.1




Section
      16 Beneficial Ownership Compliance




Section
      16(a) of the Securities Exchange Act of 1934 requires DDSI's directors and
      executive officers, and persons who own more than 10% of a registered class
      of
      DDSI's equity securities to file with the Securities and Exchange Commission
      initial reports of ownership and reports of changes in ownership of Common
      Stock
      and other equity securities of DDSI. Officers, directors and greater than 10%
      shareholders are required by SEC regulations to furnish DDSI with copies of
      all




Section
      16(a) forms they file.




To
      DDSI's
      knowledge, based solely on its review of the copies of such reports furnished
      to
      DDSI and written representations that no other reports were required during
      the
      fiscal year ended December 31, 2002, all Section 16(a) filing requirements
      applicable to its officers, directors and greater than 10% beneficial owners
      were complied with, except that the following individuals have filed their
      Form
      3s late: Anthony Shupin, Vincent Moreno and Erik Hoffer and the following
      individuals have filed their Form 4s late: Michael Pellegrino and Robert
      Gowell.




**ITEM
      10. Executive Compensation**




The
      following table sets forth information concerning the total compensation that
      we
      have paid or that has accrued on behalf of our Chief Executive Officer and
      other
      executive officers with annual compensation exceeding $100,000 during fiscal
      2006, 2005 and 2004.





13




Long
                  Term CompensationAnnual
                  Compensation
              
              Awards
              
              PayoutsOther
              
              
              
              SecuritiesName
                  and
              
              
              
              
              
              
              
              Annual
              
              Restricted
              
              Underlying
              
              
              
              OtherPrincipal
              
              
              
              
              
              
              
              Compen-
              
              Stock
              
              Options/
              
              LTIP
              
              Compen-Position
              
              Year
              
              Salary
              
              Bonus
              
              sation
                  ($)
              
              Award
                  ($)
              
              Sar
                  (#)
              
              Payouts($)
              
              sation
                  ($)Anthony
                  Shupin
              
              
              2006
              
              $
              215,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0President
                  & CEO
              
              
              2005
              
              $
              198,539
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              02004
              
              $
              108,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              02003
              
              $
              108,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              02002
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Michael
                  J
              
              
              2006
              
              $
              174,022
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Pellegrino*
              
              
              2005
              
              $
              148,077
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              02004
              
              $
              52,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              02003
              
              $
              115,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              02002
              
              $
              115,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0




*Mr.
      Pellegrino resigned as President and Chief Executive Officer effective October
      6, 2003. In 2004, Mr. Pellegrino served as Chairman of the Board and as a
      consultant to the Company.




Appointment
      of Principal Officers; Compensatory Arrangements of Certain
      Officers.




Effective
      November 13, 2006, Digital Descriptor Systems, Inc. (the "Company") granted
      to
      each of Anthony Shupin, its President and Chief Executive Officer and Michael
      Pellegrino, its Chief Financial Officer, 10,000 shares of newly created Series
      A
      Preferred Stock ("A Preferred") as recognition for services.




The
      shares vest in five equal monthly installments commencing November 1, 2007.
      Each
      share of A Preferred is convertible into 240,000 shares of common stock of
      the
      Company starting three years from the date of issuance, provided that the
      closing bid price of the Company's common stock is then $2.00 per share. The
      shares of A Preferred may be voted with the Company's common stock on an as
      converted basis on any matters that the common stock is entitled to vote on
      as a
      class.




Unconverted
      shares of A Preferred will automatically cease to exist, and all rights
      associated therewith will be terminated upon the earlier of (i) that person's
      termination of employment with the Company for any reason, or (ii) five years
      from the date of issuance.




On
      November 13, 2006, the Company filed with the Secretary of State of Delaware
      a
      Certificate of Designation of Preferences, Rights and Limitations of Series
      A
      Preferred Stock.




**Options/SAR
      Grants in Last Fiscal Year**




Number
                  of
              
              %
                  of TotalSecurities
              
              Options/SARSUnderlying
              
              Granted
                  toOptions/SARS
              
              Employees
                  in
              
              Exercise
                  or BaseName
              
              Granted
              
              Fiscal
                  Year
              
              Price
                  ($/Sh)
              
              Expiration
                  DateMichael
                  J. Pellegrino, CFO
              
              
              0
              
              
              N/A
              
              
              N/A
              
              
              N/AAnthony
                  Shupin, President & CEO
              
              
              0
              
              
              N/A
              
              
              N/A
              
              
              N/A


**Aggregated
      Option/SAR Exercises**




None
      exercised




**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.




14




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.




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.




**Employee
      and Director Stock Option Plans**




DDSI
      adopted the 2006 Stock Incentive Plan, (the "Plan") in order to attract and
      retain qualified personnel. This plan was adopted by the Board of Directors
      on
      October 12, 2006 and approved by the shareholders on December 19, 2006. The
      Board of Directors has initially reserved 2,500,000 shares of Common Stock
      for
      issuance under the 2006 Incentive Plan. Under the Plan, options may be granted
      which are intended to qualify as Incentive Stock Options, (ISO’s) under Section
      422 of the Internal Revenue Code of 1986 (the “Code”) or which are not
      (Non_ISO’s) intended to qualify as Incentive Stock Options
      thereunder.




The
      2006
      Incentive Plan and the right of participants to make purchases thereunder are
      intended to qualify as an “employee stock purchase plan” under Section 423 of
      the internal Revenue Code of 1986, as amended (the “Code”). The 2006 Incentive
      Plan is not a qualified deferred compensation plan under Sections 401(a) of
      the
      Internal Revenue Code and is not subject to the provisions of the Employee
      Retirement Income Security Act of 1974 (”ERISA”)




The
      number of shares reversed for issuance under the 2006 Incentive Plan accounts
      for the 1 for 500 reverse stock split.




**Compensation
      of Directors**




Directors
      do not receive compensation for their services as members of the Board of
      Directors. Directors will receive reimbursement for expenses in attending
      directors meetings where applicable.




**ITEM
      11. Security Ownership of Certain Beneficial Owners and
      Management**




The
      following table lists stock ownership of our common stock as of December 31,
      2006. The information includes beneficial ownership by (i) holders of more
      than
      5% of our common stock, (ii) each of our current directors and executive
      officers and (iii) all of our directors and executive officers as a group.
      The
      information is determined in accordance with Rule 13d-3 promulgated under the
      Exchange Act based upon information furnished by the persons listed or contained
      in filings made by them with the Commission. Except as noted below, to our
      knowledge, each person named in the table has sole voting and investment power
      with respect to all shares of our common stock beneficially owned by
      them.




Percentage
      of beneficial ownership is based upon 9,568,806,013 shares of common stock
      outstanding at December 31, 2006, together with securities exercisable or
      convertible into shares of common stock within 60 days of December 31, 2006
      for
      each stockholder. Beneficial ownership is determined in accordance with the
      rules of the Securities and Exchange Commission and generally includes voting
      or
      investment power with respect to securities. Shares of common stock that are
      currently exercisable or exercisable within 60 days of December 31, 2006 are
      deemed to be beneficially owned by the person holding such securities for the
      purpose of computing the percentage of ownership of such person, but are not
      treated as outstanding for the purpose of computing the percentage ownership
      of
      any other person.





15


Beneficial
                  OwnershipName
                  and Address
              
              
              
              of
                  Common Stockof
                  Beneficial Owner
              
              Title
              
              No.
                  of Shares
              
              Percent
                  of ClassAnthony
                  R. Shupin
              
              Chairman,
                  CEO and
              
              15,000,000
              
              .00015
              %2150
                  Hwy 35, Suite 250
              
              PresidentSea
                  Girt, NJ 08750Michael
                  Pellegrino
              
              Senior
                  Vice President,
              
              15,000,000
              
              .00015
              %2150
                  Hwy 35, Suite 250
              
              Chief
                  Financial OfficerSea
                  Girt, NJ 08750
              
              &
                  DirectorRobert
                  Gowell
              
              Director
              
              96,300
              
              *2150
                  Hwy 35, Suite 250Sea
                  Girt, NJ 08750Vincent
                  Moreno
              
              Director
              
              0
              
              *2150
                  Hwy 35, Suite 250Sea
                  Girt, NJ 08750Erik
                  Hoffer
              
              Executive
                  Vice
              
              0
              
              *2150
                  Hwy 35, Suite 250
              
              President
                  and DirectorSea
                  Girt, NJ 08750All
                  Officers & Directors As a Group
              
              
              
              30,096,300
              
              .0003
              %




*
      less
      than 1%




There
      are
      no arrangements known to DDSI that at a later date may result in a change in
      control of DDSI.




**ITEM
      12. Certain Relationships and Related Transaction**




None




**ITEM
      13. Exhibits**




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 18 U.S.C. Section
                  1350




**ITEM
      14. Principal Accountant Fees and Services**




Audit
      Fees. The aggregate fees billed by Bagell Joseph and Levine, our principal
      accountants, for professional services rendered for the audit of the Company's
      annual financial statements for the last two fiscal years and for the reviews
      of
      the financial statements included in the Company's Quarterly reports on Form
      10-QSB during the last two fiscal years 2006 and 2005 were $79,858 and $83,012,
      respectively.




Audit-Related
      Fees. The Company did not engage its principal accountants to provide assurance
      or related services during the last two fiscal years.




Tax
      Fees.
      The aggregate fees billed by the Company's principal accountants for tax
      compliance, tax advice and tax planning services rendered to the Company during
      the last two fiscal years 2006 and 2005 were $5,000 and $3,000,
      respectively.




All
      Other
      Fees. The Company did not engage its principal accountants to render services
      to
      the Company during the last two fiscal years, other than as reported
      above.





16




**Signatures**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**Digital
                  Descriptor Systems, Inc.**By:
              /s/ Anthony
                ShupinAnthony
                  Shupin, Chairman, President, andChief
                  Executive OfficerDated:


17


In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




**Signature
      Title Date**




By:
                /s/ Anthony Shupin
            
            
            Chairman, President, and Chief,Anthony
                Shupin
            
            
            Executive
              Officer




By: /s/ Michael Pellegrino
            
            
            Senior Vice President and ChiefMichael
                Pellegrino
            
            
            Financial Officer,
              Director


By:
              
              
              Executive
                Vice President andErik
                  Hoffer
              
              
              Director
  By:
                  /s/ Vincent Moreno
              
              
              DirectorVincent
                  Moreno
  By:
              
              
              DirectorRobert
                  Gowell





18




**Digital
      Descriptor Systems, Inc. and Subsidiary Contents to Financial
      Statements**


December
        31, 2006


Page(s)Report
                  of Independent Registered Public Accounting Firm - 2006
              
              
              1Audited
                  Consolidated Financial Statements:Balance
                  Sheet as of December 31, 2006
              
              
              2Statements
                  of Operations for the Years Ended December 31, 2006and
                  December 31,2005, restated
              
              
              3Statements
                  of Shareholders' Impairment for the Years EndedDecember
                  31, 2006 and December 31,2005, as restated
              
              
              4Statements
                  of Cash Flows for the Years Ended December 31, 2006and
                  December 31, 2005, restated
              
              
              5-6Notes
                  to Consolidated Financial Statements
              
              
              7-18







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Board
      of
      Directors and Stockholders


Digital
      Descriptor Systems, Inc.


2150
      Highway 35, Suite 250


Sea
      Girt,
      New Jersey 08750




We
      have
      audited the accompanying consolidated balance sheet of Digital Descriptor
      Systems, Inc., (the “Company”) as of December 31, 2006, and the related
      consolidated statements of operations, changes in shareholders’ impairment and
      cash flows for each of the years in the two-year period ended December 31,
      2006.
      These consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Digital Descriptor Systems,
      Inc., as of December 31, 2006, and the results of its operations and its cash
      flows for each of the years in the two-year period ended December 31, 2006
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As discussed in Note 12 to the
      consolidated financial statements, the Company did not generate sufficient
      cash
      flows from revenues during the year ended December 31, 2006, to fund its
      operations. Also at December 31, 2006, the Company had negative net working
      capital of $11,855,140. This matter raises substantial doubt about the Company’s
      ability to continue as a going concern. Management’s plan in regard to these
      matters is also described in Note 12. The consolidated financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.







/s/
      BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.


Bagell,
      Josephs, Levine & Company, L.L.C.


Gibbsboro,
      NJ 08026





March
      28,
      2007


-1-


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **CONSOLIDATED
        BALANCE SHEET**
 **DECEMBER
        31, 2006**




December
                    312006**ASSETS**Current
                    AssetsCash
                    and cash equivalents
                
                $
                392,719Accounts
                    receivable, less allowance of $118,055
                
                
                559,151Inventory
                
                
                538,365Total
                    Current Assets
                
                
                1,490,235Property
                    and equipment, net ofaccumulated
                    depreciation
                
                
                317,956Other
                    AssetsDeposits
                
                
                1,730Goodwill
                
                
                4,054,998Intangible
                    assets, net ofaccumulated
                    amortization of
                
                
                168,305Total
                    Assets
                
                $
                6,033,224**LIABILITIES
                    AND STOCKHOLDERS' (IMPAIRMENT)**Current
                    LiabilitiesAccounts
                    payable
                
                $
                115,560Accrued
                    expenses
                
                
                356,570Accrued
                    payroll expenses
                
                
                32,174Accrued
                    interest
                
                
                1,441,438Deferred
                    income
                
                
                134,395Convertible
                    debentures current
                
                
                3,500,000Derivative
                    liabilities
                
                
                7,765,238Total
                    Current Liabilities
                
                
                13,345,375Note
                    payable
                
                
                3,500,000Convertible
                    debentures
                
                
                1,967,132Total
                    Liabilities
                
                
                18,812,507Shareholders'
                    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;9,568,806,218
                    issued and outstanding
                
                
                9,568,806Additional
                    paid-in capital
                
                
                9,146,598Accumulated
                    deficit
                
                
                (31,494,687
                )Total
                    Shareholders' (Impairment)
                
                
                (12,779,283
                )Total
                    Liabilities and Shareholders' (Impairment)
                
                $
                6,033,224
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  -2-
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **FOR
          THE YEARS ENDED DECEMBER 31, 2006 AND 2005
          (RESTATED)**
 December
                    31,
                
                December
                    31,2006
                
                2005As
                    restated**INCOME**Net
                    Sales
                
                $
                4,528,533
                
                $
                3,335,631Cost
                    of Revenue
                
                
                1,298,970
                
                
                1,108,904**Gross
                    Profit**
                
                
                3,229,563
                
                
                2,226,727**OPERATING
                    EXPENSES**General
                    and administrative
                
                
                2,175,852
                
                
                2,208,216Sales
                    and marketing
                
                
                463,544
                
                
                132,172Research
                
                
                107,024
                
                
                106,505**Total
                    Operating Expenses**
                
                
                2,746,420
                
                
                2,446,893**INCOME
                    (LOSS) BEFORE OTHER INCOME (EXPENSE)**
                
                
                483,143
                
                
                (220,166
                )**OTHER
                    (EXPENSE)**Interest
                
                
                (2,374,253
                )
                
                (1,826,962
                )Amortization
                    of deferred financing cost
                
                
                (264,438
                )
                
                (151,815
                )Amortization
                    of debt discount
                
                
                (1,187,147
                )
                
                (1,714,394
                )Change
                    in fair market value of derivative liability
                
                
                (896,046
                )
                
                138,672Depreciation
                    and Amortization
                
                
                (99,866
                )Other
                    income and expenses
                
                
                (11,274
                )
                
                (174,356
                )**Total
                    Other Income (Expense)**
                
                
                (4,833,024
                )
                
                (3,728,855
                )**Income
                    (Loss) before provision for income taxes**
                
                
                (4,349,881
                )
                
                (3,949,021
                )**`****Provision
                    for income taxes**
                
                
                0
                
                
                0**NET
                    INCOME (LOSS) APPLICABLE TO COMMON SHARES**
                
                
                (4,349,881
                )
                
                (3,949,021
                )**NET
                    INCOME(LOSS) PER BASIC AND DILUTED SHARES**
                
                $
                (0.00
                )
                $
                (0.00
                )Weighted
                    average shares of common stockOutstanding,
                    basic and diluted
                
                
                7,723,279,613
                
                
                756,472,931
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
  -3-
 **Digital
              Descriptor Systems, Inc. and Subsidiary**
 **CONSOLIDATED
              STATEMENT OF SHAREHOLDERS' IMPAIRMENT**
 **FOR
              THE YEARS ENDED DECEMBER 31, 2006 AND 2005 (RESTATED)**
 AdditionalCommon
                        Stock
                  
                  Paid
                      in
                  
                  Accumulated
                  
                  Shareholders'Shares
                  
                  Amount
                  
                  Capital
                  
                  Deficit
                  
                  ImpairmentBalance
                      at December 31, 2004
                  
                  
                  210,716,359
                  
                  $
                  210,716
                  
                  $
                  15,750,707
                  
                  $
                  (23,195,785
                  )
                  $
                  (7,234,362
                  )Issuance
                      of common stock for services -
                  
                  
                  50,000,000
                  
                  
                  50,000
                  
                  
                  (20,000
                  )
                  
                  -
                  
                  
                  30,000Issuance
                      of common stock in payment of damagesrelated
                      to convertible debentures
                  
                  
                  1,422,224,681
                  
                  
                  1,422,225
                  
                  
                  (1,190,151
                  )
                  
                  
                  
                  
                  232,074Conversion
                      of accrued interest related toconvertible
                      debentures to common stock
                  
                  
                  1,584,627,000
                  
                  
                  1,584,627
                  
                  
                  (1,544,232
                  )
                  
                  
                  
                  
                  40,395Benificial
                      interest recognized on common stockissuances
                  
                  
                  
                  
                  
                  
                  
                  
                  534,437
                  
                  
                  
                  
                  
                  534,437Net
                      Loss, As originally reported
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,309,172
                  )
                  
                  (2,309,172
                  )Balance
                      at December 31, 2005, as originallyreported
                  
                  
                  3,267,568,040
                  
                  $
                  3,267,568
                  
                  $
                  13,530,761
                  
                  $
                  (25,504,957
                  )
                  $
                  (8,706,628
                  )Adjustment,
                      increase in net loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,639,849
                  )
                  
                  (1,639,849
                  )Balance
                      at December 31, 2005, as restated
                  
                  
                  3,267,568,040
                  
                  $
                  3,267,568
                  
                  $
                  13,530,761
                  
                  $
                  (27,144,806
                  )
                  
                  (10,346,477
                  )Conversion
                      of accrued interest related toconvertible
                      debentures to common stock
                  
                  
                  6,301,237,973
                  
                  
                  6,301,238
                  
                  
                  (4,384,163
                  )
                  
                  
                  
                  
                  1,917,075Net
                      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,349,881
                  )
                  
                  (4,349,881
                  )Balance
                      at December 31, 2006
                  
                  
                  9,568,806,013
                  
                  
                  9,568,806
                  
                  
                  9,146,598
                  
                  
                  (31,494,687
                  )
                  
                  (12,779,283
                  )
 The
              accompanying notes are an integral part of these consolidated financial
              statements.
  -4-
 Digital
                Descriptor Systems, Inc. and Subsidiary Consolidated Statements of
                Cash
 Flows
                For
                the Years Ended December 31, 2006 and 2005 As Restated
 2006
                      
                      2005As
                          RestatedCash
                        Flows from
                        Operating ActivitiesNet
                          loss
                      
                      $
                      (4,349,881
                      )
                      $
                      (3,949,021
                      )Adjustments
                          to reconcile net loss to net cash provided by (used in)operating
                          activitiesDepreciation
                          and amortization
                      
                      
                      99,866
                      
                      
                      174,356Common
                          stock issued in payment of services
                      
                      
                      0
                      
                      
                      30,000Amortization
                          of deferred financing costs
                      
                      
                      264,438
                      
                      
                      151,815Amortization
                          of debt discount
                      
                      
                      1,187,147
                      
                      
                      1,714,394Amortization
                          of Beneficial Interest
                      
                      
                      1,917,074
                      
                      
                      534,437Change
                          in Fair Market value of derivatives
                      
                      
                      896,046
                      
                      
                      (138,672
                      )Bad
                          debt expense
                      
                      
                      65,795
                      
                      
                      15,000Changes
                          in operating assets and liabilitiesAccounts
                          receivable
                      
                      
                      (13,523
                      )
                      
                      (557,894
                      )Inventory
                      
                      
                      (124,214
                      )
                      
                      (79,398
                      )Prepaid
                          expenses, deposits and other assets
                      
                      
                      4,266
                      
                      
                      (4,266
                      )Accounts
                          payable
                      
                      
                      (109,437
                      )
                      
                      87,415Accrued
                          expenses
                      
                      
                      7,550
                      
                      
                      33,149Accrued
                          interest
                      
                      
                      355,452
                      
                      
                      1,349,471Deferred
                          Income
                      
                      
                      (71,068
                      )
                      
                      16,010Net
                          Cash Provided by (used in) Operating Activities
                      
                      $
                      129,511
                      
                      $
                      (623,204
                      )Cash
                          Flows from Investing ActivitiesPurchase
                          of equipment
                      
                      
                      (20,603
                      )
                      
                      (129,630
                      )Acquisition
                          of Business Assets
                      
                      
                      0
                      
                      
                      (1,500,000
                      )Net
                          Cash (used in) Investing Activities
                      
                      $
                      (20,603
                      )
                      $
                      (1,629,630
                      )Cash
                          Flows from Financing ActivitiesPayment
                          of convertible debentures
                      
                      
                      (12,000
                      )
                      
                      (531,691
                      )Net
                          Cash (used in) Financing Activities
                      
                      $
                      (12,000
                      )
                      $
                      (531,691
                      )Net
                          Increase (Decrease) in Cash
                      
                      
                      96,908
                      
                      
                      (2,784,525
                      )Cash
                          at Beginning of Year
                      
                      
                      295,811
                      
                      
                      3,080,336Cash
                          at End of Year
                      
                      $
                      392,719
                      
                      $
                      295,811
 The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
  -5-
 Digital
                    Descriptor Systems, Inc. and Subsidiary Consolidated Statements
                    of
                    Cash
 Flows
                    For
                    the Years Ended December 31, 2006 and 2005 As Restated
 December
                              31,2006
                          
                          2005As
                              RestatedSupplemental
                            Disclosure of Cash Flow Information:Supplemental
                              Disclosure of Non-Cash Investingand
                              Financing Activities:Debt
                              discount relating to the issuance of warrants and thebeneficial
                              conversion features of convertible debt
                          
                          $
                          310,124
                          
                          $
                          97,402Accrued
                              Interest converted into debt
                          
                          $
                          536,546
                          
                          $
                          643,340Conversion
                              of accrued interest
                          
                          $
                          -
                          
                          $
                          251,915
  The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
  -6-


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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 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.




On
      December 19, 2006 a special meeting of the shareholders was held and at the
      meeting the shareholders passed a resolution to change the name of the company
      from Digital Descriptor Systems, Inc. to Applied Security Innovations, Inc.




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





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





Use
      of
      Estimates




The
      preparation of the 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 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 $134,395 and $205,463, respectively,
      for
      the years ended December 31, 2006 and December 31, 2005, as restated. 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 $
      107,024  and
      $
      106,505 , respectively, for the years ended December 31, 2006 and December 31, 2005,
      as
      restated.





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, net of allowance was $ 559,151
      and
      $ 611,423, respectively, for the years ended December 31, 2006 and December
      31,
      2005, as restated.





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 $118,055 and $ 53,084, respectively, for the years ended
      December 31, 2006 and December 31, 2005, as restated.




-7-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 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 8.




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.





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.




**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 goods
      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 consolidated financial statements.




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.




-8-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 2005
      (Restated)**




**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 embedded 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
      #13
      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 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.




-9-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 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 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.




-10-





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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 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 December 31, 2004.





-11-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 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 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 $ 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.




-12-


**Digital
        Descriptor Systems, Inc. and Subsidiary**
 **Notes
        to the Consolidated Financial Statements**
 **For
        the Years Ended December 31, 2006 and December 31, 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.





-13-


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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 2005
      (Restated)**





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.





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.





-14-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 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.





In
      2006
      the Company converted $536,546 of accrued interest into convertible debentures;
      $310,124 was recorded as debt discount.




**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 $0
      and
      $264,438 for the years ended December 31, 2006 and December 31, 2005, as
      restated, respectively.




**Note
      6 - Income Taxes**




At
      December 31, 2006, the Company had federal net operating loss carryforwards
      of
      approximately $16,500,000 to offset future federal taxable income expiring
      in
      various years through 2026. The Company also has state net operating loss
      carryforwards in various states, which approximate the federal amount to offset
      future state taxable income expiring in various years, generally 7 to 10 years
      following the year the loss was incurred.




The
      timing and extent in which the Company can utilize future tax deductions in
      any
      year may be limited by provisions of the Internal Revenue Code regarding changes
      in ownership of corporations due to certain ownership changes of the
      Company.




The
      differences between income tax provisions in the financial statements and the
      tax expense (benefit) computed at the U.S. Federal Statutory rate are as
      follows:





Year
                Ended December 31,2006
            
            
            2005Tax
                provision at the U. S. Federal Statutory rate
            
            
            34
            %
            
            34
            %Valuation
                allowance
            
            
            (34
            )%
            
            (34
            )%Effective
                tax rates
            
            
            —
            %
            
            —




The
      tax
      effects of temporary differences that give rise to significant portions of
      deferred tax assets at December 31, 2006 and December 31, 2005 follows:




2006
            
            
            2005Deferred
                tax assetNet
                approximate operating loss carry forward
            
            $
            5,515,473
            
            $
            5,748,727Bad
                debt reserves
            
            
            —
            
            
            —Deferred
                tax assets
            
            
            5,515,473
            
            
            5,748,727Valuation
                allowance
            
            
            (5,515,473
            )
            
            (5,748,727
            )Net
                deferred tax asset
            
            $
            —
            
            $
            —




**Note
      7 - 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 in
      April
      2007.





Rental
      expense under such operating lease was approximately $36,547 and $32,790 during
      the years ended December 31, 2006 and 2005, respectively.





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.




Rental
      expense under such operating leases was approximately $122,026 and $81,595
      during the years ended December 31, 2006 and 2005, 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.




-15-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 2005
      (Restated)**




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.





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
      8 - 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
                  DirectorPlan
              
              Nonqualified
              
              TotalNumber
                  ofOptions
              
              WeightedAverageExercisePriceOutstanding
                  at December 31, 2005
              
              
              33,000
              
              
              —
              
              
              —
              
              
              33,000
              
              $
              .10
                  - $.365Outstanding
                  at December 31, 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.


-16-




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


**Notes
      to the Consolidated Financial Statements**


**For
      the Years Ended December 31, 2006 and December 31, 2005
      (Restated)**




**Note
      9 - 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 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.





**Note
      10- Related Parties**





As
      of
      December 31, 2006 and December 31 2005, the Company owes its Directors
      $0.




**Note
      11 - 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, and 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
      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.




-17-




**Note
      12 - Going Concern**




The
      accompanying 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 years
      ended December 31, 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.




**Note
      13 - Restatement 2005**




The
      company restated its financial statements for the year ended December 31, 2005.
      The company increased its (net loss) by ($1,639,849). The company originally
      did
      not amortize the debt discount correctly which has now been corrected. This
      adjustment was for $1,285,828. Additionally the company corrected a misposting
      in its books of $354,021 from change in accrued interest to interest expense.
      These errors were found through the company’s internal controls and
      procedures.





As
                Reported
            
            As
                RestatedTotal
                Assets
            
            $
            6,212,339
            
            $
            6,212,339Accrued
                Interest
            
            
            814,408
            
            
            1,168,429Convertible
                debenture, net of debt discount
            
            
            1,727,210
            
            
            2,881,888Total
                Current Liabilities
            
            
            9,912,338
            
            
            11,421.037Long
                TermConvertible
                debenture, net of debt discount
            
            
            1,506,629
            
            
            1,637,779Total
                Liabilities
            
            
            14,918,967
            
            
            16,558,816Accumulated
                deficit
            
            
            (25,504,957
            )
            
            (27,144,806
            )Total
                Shareholders Impairment
            
            
            (8,706,628
            )
            
            (10,346,477
            )Total
                Liabilities and Shareholders Impairment
            
            
            6,212,339
            
            
            6,212,339Interest
            
            
            (1,472,941
            )
            
            (1,826,962
            )Amortization
                of debt discount
            
            
            (428,566
            )
            
            (1,714,394
            )Total
                Other Income and (Expenses)
            
            
            (2,089,006
            )
            
            (3,728,855
            )Net
                Loss
            
            
            (2,309,172
            )
            
            (3,949,021
            )Net
                loss per share
            
            
            (.00
            )
            
            (.00
            )




**Note
      14 - Subsequent Event**




On
      December 19, 2006 a special meeting of the shareholders was held and at the
      meeting the shareholders passed a resolution to change the name of the company
      from Digital Descriptor Systems, Inc. to Applied Security Innovations, Inc.
      The
      shareholders also passed a resolution to authorize a 1 for 500 reverse stock
      split. Both of these events took place on February 5, 2007. In addition the
      2006
      Incentive Stock Option Plan adopted by The Board of Directors on October 12,
      2006 was approved by the shareholders.





-18-