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<SEC-DOCUMENT>0001167687-04-000034.txt : 20040813
<SEC-HEADER>0001167687-04-000034.hdr.sgml : 20040813
<ACCEPTANCE-DATETIME>20040813161415
ACCESSION NUMBER:		0001167687-04-000034
CONFORMED SUBMISSION TYPE:	10QSB
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20040630
FILED AS OF DATE:		20040813

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			DOCUMENT SECURITY SYSTEMS INC
		CENTRAL INDEX KEY:			0000771999
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373]
		IRS NUMBER:				161229730
		STATE OF INCORPORATION:			NY
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10QSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-32146
		FILM NUMBER:		04974530

	BUSINESS ADDRESS:	
		STREET 1:		36 WEST MAIN ST
		STREET 2:		SUITE 710
		CITY:			ROCHESTER
		STATE:			NY
		ZIP:			14614
		BUSINESS PHONE:		585 232 1500

	MAIL ADDRESS:	
		STREET 1:		36 W MAIN ST
		STREET 2:		SUITE 710
		CITY:			ROCHESTER
		STATE:			NY
		ZIP:			14614

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NEW SKY COMMUNICATIONS INC
		DATE OF NAME CHANGE:	19920703

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	THOROUGHBREDS USA INC
		DATE OF NAME CHANGE:	19861118
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>dmc10qsb063004.htm
<TEXT>
<html>
  <head>
    <title>dmc10qsb063004</title>
  </head>
  <body>
    <div>
      <p align="center"><b><font size="+2">SECURITIES AND EXCHANGE COMMISSION</font><br>
      </b> <b>Washington</b><b>, D.C. 20549<br>
      <br>
       FORM 10-QSB<br>
      <br>
       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF<br>
       THE SECURITIES EXCHANGE ACT OF 1934<br>
      <br>
       For the quarterly period ended</b> <b>June 30, 2004</b></p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>0-14621</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center">Commission file number</p>
            </td>
          </tr>
        </table>
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><img width="250" height="80" src="dmc_logo.jpg" vspace="10"></p>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC.</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center">(Exact name of small business issuer as specified in its charter)</p>
            </td>
          </tr>
        </table>
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>New York</b></p>
            </td>

            <td width="20">&nbsp;</td>

            <td>
              <p align="center"><b>16-1229730</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="20">&nbsp;</td>

            <td>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center">(State of incorporation)</p>
            </td>

            <td width="20">&nbsp;</td>

            <td>
              <p align="center">(IRS Employer Identification Number)</p>
            </td>
          </tr>
        </table>
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>36 West Main Street, Suite 710</b><br>
               <b>Rochester</b><b>,</b> <b>NY</b> <b>14614</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center">(Address of principal executive office)</p>
            </td>
          </tr>
        </table>
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>(585) 697-7589</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center">(Issuer's telephone number)</p>
            </td>
          </tr>
        </table>
        <br>


        <table border="0" cellspacing="0" cellpadding="0" width="75%">
          <tr>
            <td>
              <p><b>Check whether the issuer:</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <p>(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports)<br>
               <b>Yes [X] No[ ]</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <p align="center">and</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>(2) has been subject to such filing requirements for the past 90 days.<br>
               <b>Yes [X] No [ ]</b></p>
            </td>
          </tr>
        </table>
        <br>


        <table border="0" cellspacing="0" cellpadding="0" width="75%">
          <tr>
            <td>
              <p><b>Applicable only to corporate issuers</b></p>
            </td>
          </tr>

          <tr>
            <td>
              <p>As of August 13, 2004 (the most recent practicable date), there were 10,883,818 shares of the issuer's Common Stock, $0.02 par value per share, outstanding.</p>
            </td>
          </tr>

          <tr>
            <td>
              <p><br>
               Transitional Small Business Disclosure Format (check one)<br>
               <b>Yes [ ] No [X]</b></p>
            </td>
          </tr>
        </table>
      </div>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td colspan="5">
              <p align="center"><a name="toc"></a><b>DOCUMENT SECURITY SYSTEMS, INC.<br>
               FORM 10-QSB<br>
               TABLE OF CONTENTS</b></p>
            </td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td width="10">&nbsp;</td>

            <td>&nbsp;</td>

            <td width="10">&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><b><a href="#part_1">PART I</a></b></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><b><a href="#part_1">FINANCIAL INFORMATION</a></b></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_1_item_1">Item 1</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_1_item_1">Financial Statements</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<a href="#part_1_item_1_f1">Consolidated Balance Sheets</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>F-1</p>
            </td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<a href="#part_1_item_1_f2">Consolidated Statements of Operations</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>F-2</p>
            </td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<a href="#part_1_item_1_f3">Consolidated Statements of Cash Flows</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>F-3</p>
            </td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<a href="#part_1_item_1_f4">Notes to Financial Statements</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>F-4</p>
            </td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_1_item_2">Item 2</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_1_item_2">Management's Discussion and Analysis of Financial Condition and Results of Operations</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_1_item_3">Item 3</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_1_item_3">Controls and Procedures</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><b><a href="#part_2">PART II</a></b></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><b><a href="#part_2">OTHER INFORMATION</a></b></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_2_item_1">Item 1</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_2_item_1">Legal Proceedings</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_2_item_2">Item 2</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_2_item_2">Changes in Securities and &nbsp;Small Business Issuer Purchase of Securities</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_2_item_3">Item 3</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_2_item_3">Defaults upon Senior Securities</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_2_item_4">Item 4</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_2_item_4">Submission of Matters to a Vote of Security Holders</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_2_item_5">Item 5</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_2_item_5">Other Information</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>
              <p><a href="#part_2_item_6">Item 6</a></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><a href="#part_2_item_6">Exhibits and Reports on Form 8-K</a></p>
            </td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td valign="top" nowrap>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>

          <tr>
            <td colspan="5" nowrap>
              <p><b><a href="#signatures">SIGNATURES</a></b></p>
            </td>
          </tr>
        </table>
      </div>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p align="center"><a name="part_1"></a><b>PART I<br>
       FINANCIAL INFORMATION</b><a name="part_1_item_1"></a></p>

      <p><b>ITEM 1 - FINANCIAL STATEMENTS</b></p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td colspan="9">
              <p align="center"><a name="part_1_item_1_f1"></a><b>DOCUMENT SECURITY SYSTEMS, INC.&nbsp; AND SUBSIDIARIES<br>
               Consolidated Balance Sheets</b></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <p align="center"><b>June 30,<br>
               2004</b><br>
               <b>(unaudited)</b></p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td colspan="3">
              <p align="center"><b>December 31,<br>
               2003</b></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>ASSETS</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Current assets:</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;Cash and cash equivalents</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">4,006,051</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">5,115,722</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp; Accounts receivable, net</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">134,402</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">156,900</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp; Inventory</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">57,504</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">76,644</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp; Prepaid expenses</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">105,167</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">41,457</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current assets</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">4,303,124</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">5,390,723</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Fixed assets, net</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">285,542</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">144,446</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Goodwill</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">365,291</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">365,291</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Other intangible assets, net</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">81,000</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>$&nbsp;</p>
            </td>

            <td valign="bottom">
              <p align="right">5,034,957</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;$&nbsp;</p>
            </td>

            <td valign="bottom">
              <p align="right">5,900,460</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>LIABILITIES AND STOCKHOLDERS' EQUITY</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Current liabilities:</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp; Line of credit</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>$</p>
            </td>

            <td valign="bottom">
              <p align="right">76,542</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>&nbsp;$</p>
            </td>

            <td valign="bottom">
              <p align="right">86,341</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp; Accrued expenses</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">141,709</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">158,327</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;Trade accounts payable</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">88,247</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">248,333</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;Current portion of long-term debt</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">22,800</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">22,800</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total current liabilities</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">329,298</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">515,801</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Long-tem debt&nbsp;&nbsp;</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">177,693</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">189,875</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Stockholders' equity</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;Common stock, $.02 par value;</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;200,000,000 shares authorized</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10,883,818&nbsp;shares issued and outstanding (10,868,818 in 2003)</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">217,676</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">217,376</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp; Additional paid-in capital</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">12,906,483</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">12,826,183</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp; Accumulated deficit</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(8,596,193</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(7,848,775</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total stockholders' equity</p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">4,527,966</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">5,194,784</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>$</p>
            </td>

            <td valign="bottom">
              <p align="right">5,034,957</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">5,900,460</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>
        </table>
      </div>

      <p>See accompanying notes.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-1</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td colspan="17">
              <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
              <br>
               Consolidated Statements of Operations<br>
               (unaudited)</b></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td width="18" valign="bottom">&nbsp;</td>

            <td colspan="15" valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="7" valign="bottom">
              <p align="center"><b>Three Months Ended</b></p>
            </td>

            <td width="18" valign="bottom">&nbsp;</td>

            <td colspan="7" valign="bottom">
              <p align="center"><strong>Six Months Ended</strong></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <p align="center"><b>June 30,<br>
               2004</b></p>
            </td>

            <td width="18" valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <p align="center"><b>June 30,<br>
               2003</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <p align="center"><strong>June 30,</strong><b><br>
               <strong>2004</strong></b></p>
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <p align="center"><strong>June 30,</strong><b><br>
               <strong>2003</strong></b></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Sales, net</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">342,976</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">274,248</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">675,439</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">584,292</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>Costs of sales</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">189,088</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">197,420</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;395,203</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;327,395</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Gross profit</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">153,888</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">76,828</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;280,236</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;256,897</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>Selling, general and administrative expenses</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">461,405</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">125,569</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;815,376</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;284,553</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>Research and development</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">136,347</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">48,566</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;191,120</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">77,055</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>Depreciation and amortization</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">19,491</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">15,904</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;38,075</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;30,763</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Operating expenses</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">617,243</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">190,039</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;1,044,571</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;392,371</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Loss before other income (expense) and income taxes</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(463,355</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(113,211</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(764,335</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(135,474</p>
            </td>

            <td valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>Other income (expense):</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Interest income</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">15,681</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;31,084</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Interest expense</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(7,338</p>
            </td>

            <td valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(5,273</p>
            </td>

            <td valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(11,967</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(10,123</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Loss before income taxes</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(455,012</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(118,484</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(745,218</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(145,597</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>
              <p>Income taxes</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">1,500</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;2,200</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;2,531</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Net loss</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">(456,512</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>$</p>
            </td>

            <td valign="bottom">
              <p align="right">(118,484</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(747,418</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">&nbsp;(148,128</p>
            </td>

            <td valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Net loss per share, basic and diluted</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>&nbsp;$</p>
            </td>

            <td valign="bottom">
              <p align="right">(0.04</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p>&nbsp;$</p>
            </td>

            <td valign="bottom">
              <p align="right">(0.01</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;(0.07</p>
            </td>

            <td valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">&nbsp;(0.02</p>
            </td>

            <td valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Weighted average common shares outstanding, basic and diluted</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">10,877,985</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">9,309,818</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;10,873,401</p>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;9,309,818</p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="3" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>
        </table>
      </div>

      <p>See accompanying notes.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-2</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="565" colspan="10">
              <p align="center"><a name="part_1_item_1_f3"></a><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
              <br>
               Consolidated Statements of Cash Flows</b></p>
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" colspan="2" valign="bottom">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="229" colspan="6" valign="bottom">
              <p align="center"><b>Six Months Ended</b></p>
            </td>

            <td width="9" valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="104" colspan="2" valign="bottom">
              <p align="center"><b>June 30,<br>
               2004</b><br>
               <b>(unaudited)</b></p>
            </td>

            <td width="29" colspan="3" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="center"><b>June 30,<br>
               2003</b><br>
               <b>(unaudited)</b></p>
            </td>

            <td width="9" valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="104" colspan="2" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="29" colspan="3" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="9" valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td width="298">
              <p>Cash flows from operating activities:</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp; Net loss</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">
              <p align="right">$</p>
            </td>

            <td width="96" valign="bottom">
              <p align="right">(747,418</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">
              <p align="right">$</p>
            </td>

            <td width="96" valign="bottom">
              <p align="right">(148,128</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp; Adjustments to reconcile net loss to net cash used by operating activities:</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Depreciation and amortization expense</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">38,075</p>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">30,763</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (Increase) decrease in assets:</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accounts receivable</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">22,498</p>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">34,207</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;Inventory</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">19,142</p>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(7,454</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;Prepaid expenses</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(63,710</p>
            </td>

            <td width="1" valign="bottom">
              <div align="left">
                )
              </div>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(3,186</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Increase (decrease) in liabilities:</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accounts payable and accrued expenses</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(96,104</p>
            </td>

            <td width="1" valign="bottom">
              <div align="left">
                )
              </div>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">26,958</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Net cash used by operating activities</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(827,517</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(66,840</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Cash flows from investing activities:</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Purchase of fixed assets</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(170,172</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(31,300</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Purchase of other intangible assets</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(90,000</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">0</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Net cash used by investing activities</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(260,172</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(31,300</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Cash flows from financing activities:</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">&nbsp;</td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Repayment of line of credit</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">&nbsp;(9,799</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">0</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Repayment of long-term debt</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(12,183</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(11,252</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Net cash used by financing activities</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(21,982</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(11,252</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Net decrease in cash and cash equivalents</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(1,109,671</p>
            </td>

            <td width="1" valign="bottom">
              <p align="left">)&nbsp;</p>
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">(109,392</p>
            </td>

            <td width="9" valign="bottom">
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Cash and cash equivalents beginning of period</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">5,115,722</p>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <p align="right">456,223</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">
              <p>Cash and cash equivalents end of period</p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">
              <p align="right">$</p>
            </td>

            <td width="96" valign="bottom">
              <p align="right">4,006,051</p>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">
              <p align="right">$</p>
            </td>

            <td width="96" valign="bottom">
              <p align="right">346,831</p>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr>
            <td width="298">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td width="1" valign="bottom">
            </td>

            <td width="28" colspan="2" valign="bottom">&nbsp;</td>

            <td width="8" valign="bottom">&nbsp;</td>

            <td width="96" valign="bottom">
              <div align="center">
                <hr size="4" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="9" valign="bottom">
            </td>
          </tr>

          <tr height="0">
            <td width="298">
            </td>

            <td width="20">
            </td>

            <td width="8">
            </td>

            <td width="96">
            </td>

            <td width="1">
            </td>

            <td width="8">
            </td>

            <td width="20">
            </td>

            <td width="8">
            </td>

            <td width="96">
            </td>

            <td width="9">
            </td>
          </tr>
        </table>
      </div>

      <p>See accompanying notes.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-3</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p align="center"><a name="part_1_item_1_f4"></a><strong>DOCUMENT SECURITY SYSTEMS, INC.</strong><b><br>
       <strong>NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS</strong><br>
       <strong>June 30, 2004</strong><br>
       <strong>(Unaudited)</strong></b></p>

      <p><b>1.&nbsp;&nbsp;&nbsp;&nbsp; Basis of Presentation</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc. consolidated financial statements include the accounts of Document Security Systems, Inc. and its wholly-owned subsidiaries Lester Levin, Inc. d/b/a Patrick Printing and d/b/a The LegalStore.com; Thomas M. Wicker Enterprises, Inc.; and Document Security Consultants, Inc., as well as its 51% owned subsidiary, Imperial Encryption, Inc. There are no unconsolidated subsidiaries. All significant inter-company balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-QSB and therefore do not include some information and notes necessary to conform with annual reporting requirements. In the opinion of management, the information furnished in this Form 10-QSB reflects all adjustments necessary for a fair statement of the financial position as of June 30, 2004 and results of operations and cash flows for the three-month and six-month periods ended June 30, 2004 and 2003. All such adjustments are of a normal recurring nature.&nbsp; Operating results for the three-month and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The consolidated financial statements presented herein have been prepared by us in accordance with the accounting policies described in our December 31, 2003 Annual Report on Form 10-KSB and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report.</p>

      <p><b>2.&nbsp;&nbsp;&nbsp;&nbsp; Other Intangible Assets</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the quarter ended March 31, 2004, the Company entered into an agreement with existing shareholders and others, whereby the Company was able to terminate its payment obligations for future royalties owed to such persons. The payment obligations were terminated for a one-time payment of $90,000. The Company will be amortizing these costs over the estimated useful life of five years. Amortization expense amounted to $4,500 for the quarter ended March 31, 2004 and $4,500 for the quarter ended June 30, 2004. Amortization expense is expected to amount to $18,000 per year for 2004 through 2008.&nbsp;</p>

      <p><b>3.&nbsp;&nbsp;&nbsp;&nbsp; Common Stock&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In May 2004, we issued 15,000 shares of our common stock and 10,000 warrants to purchase our common stock in satisfaction of an outstanding obligation of $80,601 for consulting services which were rendered in 2003.</p>

      <p><b>4.&nbsp;&nbsp;&nbsp;&nbsp; Stock Options</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company accounts for employee stock options using the intrinsic value method prescribed by APB 25. Accordingly, the "disclosure only" provisions of SFAS No.123 and 148 for these options are presented. There were no employee stock options outstanding as of December 31, 2003. During the quarter ended March 31, 2004, the Board of Directors of the Company approved two separate stock option plans. The first plan is an employee stock option plan, which reserves 200,000 shares of the Company's common stock for grant to employees, including officers. The second plan reserves 100,000 of the Company's common stock for grant solely to non-executive directors. This plan allows for the grant of 5,000 options upon commencement of service as a board member and 5,000 options annually on their anniversary date. For financial statement purposes, grants under the director plan are accounted for as employee grants in accordance with APB 25. In conne
ction with the approval of the director plan, an aggregate of 7,500 options were issued to board members in the first quarter of 2004 and an additional 5,000 were deemed issued in the third quarter of 2003, pending shareholder approval of the Employee Plan. These 7,500 options are exercisable at $4.35 per share; vest upon shareholder approval; and expire in January 2009. Effective July 1, 2004, in connection with a new employment agreement, the Company's Chief Executive Officer was granted 30,000 options which vest at the rate of 10,000 immediately and 10,000 per year for the next two years. These options are exercisable at $7.25 per share; are subject to shareholder approval of the Employee Option Plan; vest in three increments and expire in July 2009.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-4</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No compensation expense for stock options was recorded in the three-month and six-month periods ended June 30, 2004 and 2003.&nbsp; SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure" requires the Company to disclose in its interim consolidated financial statements the impact if the Company had elected to recognize compensation cost on the fair value of the options granted, as prescribed by SFAS 123.&nbsp; The impact on the net loss and net loss per share for the three months and six months ended June 30, 2004 is presented below.&nbsp; There was no impact for the three months or six months ended June 30, 2003.&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td rowspan="2">&nbsp;</td>

            <td width="20">&nbsp;</td>

            <td colspan="2" valign="bottom">
              <p align="center"><b>Three months<br>
               ended</b></p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td colspan="2" valign="top">
              <p align="center"><b>Six months<br>
               ended</b></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td colspan="5" valign="bottom">
              <p align="center"><b>June 30, 2004</b></p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td colspan="5" valign="bottom">
              <hr size="2" width="100%" noshade color="gray" align="right">
            </td>
          </tr>

          <tr>
            <td>
              <p>Net loss, as reported</p>
            </td>

            <td>&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                $
              </div>
            </td>

            <td valign="bottom">
              <p align="right">(456,512)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
              <div align="right">
                $
              </div>
            </td>

            <td valign="top">
              <p align="right">(747,418)</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>Total stock based compensation expense<br>
               &nbsp;&nbsp;&nbsp;&nbsp;determined under the fair value method, net of tax</p>
            </td>

            <td>&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">
              <p align="right">(960)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">
              <p align="right">(1,920)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
            </td>

            <td valign="top">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Net loss, pro-forma</p>
            </td>

            <td>&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                $
              </div>
            </td>

            <td valign="bottom">
              <p align="right">(457,472)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
              <div align="right">
                $
              </div>
            </td>

            <td valign="top">
              <p align="right">(749,338)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
            </td>

            <td valign="top">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Net loss per share - basic and diluted, as reported</p>
            </td>

            <td>&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                $
              </div>
            </td>

            <td valign="bottom">
              <p align="right">(0.04)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
              <div align="right">
                $
              </div>
            </td>

            <td valign="top">
              <p align="right">( 0.07)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td valign="bottom">
            </td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
            </td>

            <td valign="top">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>

          <tr>
            <td>
              <p>Net loss per share - basic and diluted, pro-forma</p>
            </td>

            <td>&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                $
              </div>
            </td>

            <td valign="bottom">
              <p align="right">(0.04)</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">
              <div align="right">
                $
              </div>
            </td>

            <td valign="top">
              <p align="right">(0.07)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="top">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The fair value of each option grant is estimated on the date of grant using the Black - Scholes option pricing model. Following are the weighted average assumptions used for valuing the options granted during the six-months ended June 30, 2004:</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="325">
              <p>Expected dividend yield</p>
            </td>

            <td width="50">
              <p align="right">0</p>
            </td>

            <td valign="bottom">
              <p>%</p>
            </td>
          </tr>

          <tr>
            <td width="325">
              <p>Expected stock price volatility</p>
            </td>

            <td width="50">
              <p align="right">50</p>
            </td>

            <td valign="bottom">
              <p>%</p>
            </td>
          </tr>

          <tr>
            <td width="325">
              <p>Risk-free interest rate</p>
            </td>

            <td width="50">
              <p align="right">3.5</p>
            </td>

            <td valign="bottom">
              <p>%</p>
            </td>
          </tr>

          <tr>
            <td width="325">
              <p>Expected life of options</p>
            </td>

            <td width="50">
              <p align="right">60</p>
            </td>

            <td valign="bottom">
              <p>&nbsp;months</p>
            </td>
          </tr>
        </table>
      </div>

      <p><br>
       <b>5.&nbsp;&nbsp;&nbsp;&nbsp; Earnings/Loss per Share</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive.&nbsp; As of June 30, 2004, there were 1,480,000 stock options and warrants outstanding with exercise prices below the average share price for the period that would have been included in the calculation had the Company generated net income.</p>

      <p><b>6.&nbsp;&nbsp;&nbsp;&nbsp; Segment Information</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company's businesses are organized, managed and internally reported as three segments. The segments are determined based on differences in products, internal reporting and how operational decisions are made. All of the segments operate entirely within the United States of America and all revenue is generated from customers within the United States of America. There are no material transactions between segments. A summary of the three segments is as follows:</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="4">
          <tr>
            <td>
              <p><strong>Printing</strong></p>
            </td>

            <td valign="top">
              <p>Provide commercial printing and copying services to the metropolitan Rochester area</p>
            </td>
          </tr>

          <tr>
            <td>
              <p><strong>Document Security</strong></p>
            </td>

            <td valign="top">
              <p>License, manufacture and sale of document security technologies and safety paper products</p>
            </td>
          </tr>

          <tr>
            <td>
              <p><strong>Legal</strong></p>
            </td>

            <td valign="top">
              <p>Specialty legal supplies to lawyers and law firms located throughout the United States</p>
            </td>
          </tr>
        </table>
      </div>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-5</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p><br>
       &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Approximate information concerning the operations by reportable segment for the three months and six months ended June 30, 2004 and 2003 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results shown.</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td valign="bottom" nowrap>
              <p><strong>3 months ended&nbsp;&nbsp; June&nbsp; 30, 2004:</strong></p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Printing</strong></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Legal</strong></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">
              <p align="center"><strong>Document</strong> <b><br>
               <strong>Security</strong></b></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Administrative</strong></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Total</strong></p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td colspan="2" valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Revenues from external customers</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">156,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">111,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>$</td>

            <td colspan="2" valign="bottom" nowrap>
              <p align="right">76,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">343,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Segment profit or (loss)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">&nbsp;(19,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(10,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td colspan="2" valign="bottom" nowrap>
              <p align="right">(184,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(250,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(463,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>&nbsp;</td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td colspan="2" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p><strong>3 months ended&nbsp;&nbsp; June&nbsp; 30, 2003:</strong></p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Revenues from external customers</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">123,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">96,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td colspan="2" valign="bottom" nowrap>
              <p align="right">55,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">274,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Segment profit or (loss)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(4,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td colspan="2" valign="bottom" nowrap>
              <p align="right">(75,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(36,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(113,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>
          </tr>

          <tr height="0">
            <td>
            </td>

            <td width="10">
            </td>

            <td>
            </td>

            <td>
            </td>

            <td>
            </td>

            <td width="10">
            </td>

            <td>
            </td>

            <td>
            </td>

            <td>
            </td>

            <td width="10">
            </td>

            <td>
            </td>

            <td>
            </td>

            <td>
            </td>

            <td>
            </td>

            <td width="10">
            </td>

            <td>
            </td>

            <td>
            </td>

            <td>
            </td>

            <td width="10">
            </td>

            <td>
            </td>

            <td>
            </td>

            <td>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td valign="bottom" nowrap>
              <p><strong>6 months ended&nbsp;&nbsp; June&nbsp; 30, 2004:</strong></p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Printing</strong></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Legal</strong></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Document</strong> <b><br>
               <strong>Security</strong></b></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Administrative</strong></p>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Total</strong></p>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Revenues from external customers</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">324,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">222,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>$</td>

            <td valign="bottom" nowrap>
              <p align="right">129,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">675,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Segment profit or (loss)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">&nbsp;(62,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(5,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(310,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(387,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(764,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>&nbsp;</td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p><strong>6 months ended&nbsp;&nbsp; June&nbsp; 30, 2003:</strong></p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>

            <td width="10" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Revenues from external customers</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">228,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">202,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">154,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>$</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">584,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Segment profit or (loss)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(39,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">5,000</p>
            </td>

            <td valign="bottom" nowrap>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(30,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(71,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="left">)</p>
            </td>

            <td width="10" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(135,000</p>
            </td>

            <td valign="bottom" nowrap>
              <div align="left">
                )
              </div>
            </td>
          </tr>
        </table>
        <br>
      </div>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-6</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p><a name="part_1_item_2"></a><b>ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</b></p>

      <p><b><i>FORWARD-LOOKING STATEMENTS</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Except for the historical information contained herein, this report contains forward-looking statements (identified by the words "estimate," "project," "anticipate," "plan," "expect," "intend," "believe," "hope," "strategy" and similar expressions) which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, including, without limitation, those described below, that could cause actual results to differ materially from the results anticipated in the forward-looking statements.</p>

      <p><strong>General</strong></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In August and November 2002, we acquired businesses that were involved in the anti-counterfeiting security industry. Our management dedicated the year 2003 to obtaining the necessary capital to compete in the competitive and fast-moving technology-based industry and build a corporate infrastructure that was capable of exploiting our technologies. In December 2003, we completed a private placement offering of securities and received net proceeds of approximately $5,025,000.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The first half of 2004 was primarily a period of reinforcing our existing industry relationships and introducing our organization and our technologies to various industries and government agencies at the major tradeshows in the United States.</p>

      <p><b><i>Results of Operations for the Three Months Ending</i></b> <b><i>June 30, 2004</i></b><b><i>and</i></b> <b><i>June 30, 2003</i></b><i>&nbsp;</i></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes in this quarterly report and in our annual report on Form 10-KSB for the year ended December 31, 2003.</p>

      <p><b>Sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the fiscal quarter ending June 30, 2004, we had net sales of $342,976. This represents an increase of $68,728, or 25.1%, over sales of $274,248 for the comparable quarter ended June 30, 2003. The increase in sales resulted primarily from the commercial printing sector of our business.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our net sales from our core business segment, document security, were approximately $76,000 in the quarter ending June 30, 2004. We consider these sales to be nominal, as we are still in the start-up phase of basically a new business for which we have recently received capital to continue our research. Our sales goal for the first half of 2004 was to maintain a nominal level of sales while retaining our existing customers and developing the infrastructure to support sales growth in the future. We believe that we have accomplished this modest goal. The equivalent net sales from the document security sector for the fiscal quarter ending June 30, 2003 were approximately $55,000. This increase of approximately $21,000 is primarily attributed to a general increase in introductory sales.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We view sales from our commercial printing business segment to be essentially a means of having access to a working research and development facility and to be able to offset the costs of our research. We are pleased with any increases in revenue from this source, but we are not actively soliciting additional printing sales unless they are related to our core anti-counterfeiting technology business. Our sales in the quarter ending June 30, 2004 from our printing segment totaled approximately $156,000, compared to sales in the 2003 period of approximately $123,000. The $33,000 increase resulted from a general increase of business from existing customers and a modest overall price increase.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We view our legal forms and supplies business segment as a non-core part of our company and have attempted to simplify its operation by emphasizing e-commerce sales. Although the sales of this segment, $111,000 in the June 2004 quarter, appear to be significant as to our total sales, we do not expect that to be true in the future. Our second quarter 2003 sales from our legal supplies business were approximately $96,000. Although our legal forms and supplies business is an important outlet for sales of our basic safety paper, we are continuing to evaluate our various options as to our plans for this division.</p>

      <p><b>Costs of sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although our sales increased, our costs of sales decreased during the three months ended June 30, 2004 by $8,332, or approximately 4.2%, to $189,088 from $197,420 for the three months ended June 30, 2003.</p>

      <p><b>Gross profit</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our gross profit for the fiscal quarter ended June 30, 2004 increased $77,060 to $153,888 as compared to the gross profit of $76,828 reported in the comparable fiscal quarter of 2003. The increase is a result of the combination of the increase of sales and the reduction of the cost of sales. As we move from the early stage of our development in the document security business, we expect that reported profit margins will vary considerably from period to period.</p>

      <p><b>Expenses</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Operating expenses</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Operating expenses for the three months ended June 30, 2004 increased $427,204 to $617,243 from $190,039 in the first three months of fiscal year 2003. The difference between the expenses of the two periods was primarily the result of increases in selling, general and administrative; and research and development expenses.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Selling, General and Administrative&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Selling, general and administrative expenses increased $335,836 from $125,565 in the June 2003 quarter to $461,405 in the June 2004 quarter. Nearly all of the increase can be attributed to an increase in marketing expenses related to document security of approximately $83,000, from $15,000 in the 2003 quarter to $98,000 in the 2004 quarter; and an increase of approximately $109,000 in professional fees for auditing, legal and consulting, from $12,000 in the 2003 quarter to $121,000 in the 2004 quarter. Also in the 2004 quarter, we paid a listing fee to the American Stock Exchange of $69,000. Additionally, another significant period-to-period change was an increase of non- research and development payroll expense of $76,000. The increase in marketing expenses was directly related to our attending four major tradeshows and retaining several marketing consultants. The professional expense increase resulted primarily from initiatives add
ressing corporate governance concerns and requirements.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Depreciation and Amortization</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Depreciation and amortization expense totaled $19,491 in the second quarter of 2004, which included depreciation of fixed assets of $14,991 and amortization of acquired intangibles of $4,500. In the like period of 2003, the total of depreciation and amortization was $15,904.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Research and Development</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For the three months ended June 30, 2004, we incurred research and development expenses of $136,347, which is an increase of $87,781 over the expenditure of $48,566 in the comparable 2003 quarter. This significant increase is indicative of our current focus on improving our existing technologies and developing new technologies.&nbsp;&nbsp;</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Interest income and expense&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the second fiscal quarter of 2004, we had interest income of $15,681, which accrued primarily from investing the proceeds of our private placement. In the comparable quarter of 2003, we did not have any interest income as we did not have excess funds. Interest expense increased $2,065 from $5,273 in the 2003 quarter to $7,338 in the like 2004 quarter. <b></b></p>

      <p><b>Net loss</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our net loss after taxes, increased $338,028 to $456,512 in the quarter ending June 30, 2004, as compared to a net loss after taxes of $118,484, in the quarter ending June 30, 2003. The increase in the loss was primarily the result of an increase, in 2004 over 2003, of selling, general and administrative expenses of approximately $336,000; and an increase in research and development expenses of $88,000, which were offset by an increase of gross profit of approximately $77,000.</p>

      <p><b>Loss per share</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The basic net loss per common share was $0.04 for the quarter ended June 30, 2004 and $0.01 for the quarter ended June 30, 2003. The "basic net loss per share" is computed by dividing the net loss, by the weighted average common shares outstanding. In the 2004 quarter, the weighted average of common shares outstanding was 10,877,985 compared to 9,309,818 in the 2003 quarter.</p>

      <p><b><i>Results of Operations for the Six Months Ending</i></b> <b><i>June 30, 2004</i></b><b><i>and</i></b> <b><i>June 30, 2003</i></b><i>&nbsp;</i></p>

      <p><b>Sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the six months ending June 30, 2004, we had net sales of $675,439. This represents an increase of $91,147, or 15.6%, over sales of $584,292 for the comparable six months ended June 30, 2003. The increase in sales resulted primarily from the commercial printing sector of our business.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our net sales from our core business segment, document security, were $129,000 in the six months ending June 30, 2004. The equivalent net sales from the document security sector for the six months ending June 30, 2003 were $154,000. This decrease of $25,000 is primarily attributed to a significant order of safety paper to one customer in the first quarter of 2003 which we expect to be repeated at such time as that customer's inventory needs to be replenished.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our sales in the six months ending June 30, 2004 from our printing segment totaled $324,000, which compares to sales in the 2003 six-month period of $228,000. The increase of $96,000 resulted from a general increase of business and a modest overall price increase.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our legal forms and supplies business segment had net sales of $222,000 in the first half of 2004, which was an increase of approximately $20,000 from $202,000 in the first half of 2003. The 10% increase in this non-core business segment resulted primarily from increased website sales.</p>

      <p><b>Costs of sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As our sales increased, our costs of sales also increased during the six months ended June 30, 2004 by $67,808, or approximately 20.7%, to $395,203 from $327,395 for the six months ended June 30, 2003.</p>

      <p><b>Gross profit</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our gross profit for the six months ended June 30, 2004 increased $23,339, or 9.1%, to $280,236 as compared to the gross profit of $256,897 reported in the comparable six months of 2003. The increase is primarily the result of the increase in printing sales. Our gross profit margin for the first six months of 2004 was 41.5% compared to 44.0% in the prior period. As we move from the early stage of our development in the document security business, we expect that reported profit margins will vary considerably from period to period.</p>

      <p><b>Expenses</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Operating expenses</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Operating expenses for the six months ended June 30, 2004 increased $652,200 to $1,044,571 from $392,371 in the first six months of fiscal year 2003. The difference between the expenses of the two periods was primarily the result of increases in selling, general and administrative; and research and development expenses.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Selling, General and Administrative&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Selling, general and administrative expenses increased $530,823, from $284,553, in the June 2003 six-month period, to $815,376, in the June 2004 six-month period. Nearly all of the increase can be attributed to an increase in marketing expenses related to document security of approximately $157,000, from $26,000 in the first six months of 2003, to $183,000 in the 2004 period; an increase of approximately $194,000 in professional fees for auditing, legal and consulting, from $15,000, in the 2003 period, to $209,000, in the 2004 period. The significant marketing expense increase was due to our active participation in national trade shows and retaining several marketing consultants. The increase in our professional expenses resulted primarily from our initiatives addressing corporate governance concerns and requirements. The approval for our shares being listed on the American Stock Exchange added nearly $70,000 to our expenses for the 
2004 six-month period. Additionally, another significant period-to-period change was an increase of non-research and development related payroll expense of $107,000.&nbsp;&nbsp;&nbsp;</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Depreciation and Amortization</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Depreciation and amortization expense increased $7,312 to $38,075 in the first half of 2004, which included depreciation of fixed assets of $29,075 and amortization of acquired intangibles of $9,000. In the like period of 2003, the total of depreciation and amortization was $30,763.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Research and Development</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For the six months ended June 30, 2004, our research and development expenses were $191,120 which is an increase of more than $114,000 over the expenditure of $77,055 in the comparable 2003 six-month period. This significant increase indicates our dedication to the upgrading of our existing proprietary technologies and the origination of new technologies in the field of document security.&nbsp; <b></b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Interest income and expense&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the first half of 2004, we had interest income of $31,084 accruing from our temporary investment of the proceeds of our private placement. In the first half of 2003, we did not have any interest income as we had no excess funds. Our interest expense for the first half of 2004 totaled $11,967 which was $1,844 greater than in for the comparable period in 2003.</p>

      <p><b>Net loss</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our net loss after taxes, increased $599,290 to $747,418 in the six months ending June 30, 2004, as compared to a net loss after taxes of $148,128, in the six months ending June 30, 2003. The increase in the loss was primarily the result of an increase, in 2004 over 2003, of selling, general and administrative expenses of approximately $531,000; an increase in research and development expenses of approximately $114,000; an increase of depreciation and amortization of more than $7,000, which were offset by an increase of gross profit of approximately $23,000 and a change in net interest income of approximately $29,000.</p>

      <p><b>Loss per share</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The basic net loss per common share was $0.07 for the six months ended June 30, 2004 and $0.02 for the six months ended June 30, 2003. The "basic net loss per share" is computed by dividing the net loss, by the weighted average common shares outstanding. In the 2004 six-month period, the weighted average of common shares outstanding was 10,873,401 compared to 9,309,818 in the 2003 six-month period.</p>

      <p><b>LIQUIDITY AND CAPITAL RESOURCES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The most significant financial event for us in 2003 was the completion of a private placement of our common stock and warrants. In that offering, the size of which was increased due to investor demand, we sold 1,450,000 shares of common stock and 362,500 warrants, for net proceeds of approximately $5,025,000. In January 2004, we began to judiciously apply the proceeds of that offering for the purpose of developing our anti-counterfeiting business.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At June 30, 2004, we had cash and cash equivalents of $4,006,051 which was an increase of $3,659,220 over the $346,831 cash we had a year before, at June 30, 2003 and a decrease of $1,109,671 from December 31, 2003's cash balances of $5,115,722.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our total current assets at June 30, 2004 were $4,303,124 compared to $5,390,723 at the end of year 2003 and $502,444 at June 30, 2003. Our current liabilities at June 30, 2004 were $329,298 and $515,801 at December 31, 2003. As of June 30, 2003, our current liabilities were $212,638. Our working capital, which is the difference between our current assets and current liabilities, ended the June 30, 2004 quarter at $3,973,826 compared to $4,874,922 at the end of 2003 and $289,806 at June 30, 2003. The ratio of our current assets to our current liabilities, referred to as our current ratio, was 13.1:1, at June 30, 2004 compared to 10.5:1, at the 2003 year-end and 2.4:1, at June 30, 2003.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Off-Balance Sheet Arrangements</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We do not have any off-balance sheet arrangements which have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.<b>&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Use of Proceeds of Private Placement</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At June 30, 2004, we had cash and cash equivalents of $4,006,000 remaining from our private placement, which was completed in December 2003 and raised approximately $5,000,000. &nbsp;We have allocated the balance of the proceeds as follows: $800,000 for selling and marketing; $150,000 for research and development and patent applications; $100,000 for equipment leases; $100,000 for the purchase of computers and other office equipment; $340,000 for debt repayment; and the balance of approximately $2,500,000 for working capital and other corporate purposes including patent protection and patent administration.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the transition year 2003 and continuing through the first six months of 2004, we began the process of building our sales organization, both in-house and externally. We believe that allocating monies for sales and marketing is an absolute necessity to expose our products to the companies and governments that are in most need of our technologies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As a technology-based company, we must continually make expenditures to augment our intellectual property portfolio. The $150,000 that was set aside from the private placement proceeds is an amount in addition to our normal allocations for research and development. We continue to develop our technology and will incur costs in our efforts, as well as legal fees for patent and related filings, both in the United States and in foreign countries. In the six months ending June 30, 2004, we spent on direct research and development approximately $191,000, which is about $114,000 more than was spent in the comparable 2003 period.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have allotted sufficient funds to retire our long-term debt, including the current portion due in the coming year. We have two credit facilities outstanding which we may repay with the use of proceeds. The first is a credit line with approximately $77,000 outstanding as of June 30, 2004. The second is a Small Business Administration guaranteed loan, which has approximately $200,000 outstanding as of June 30, 2004. Both loans bear interest at the lender's prime rate plus 2%. This early retirement of our debt will reduce our interest expense in 2004 and beyond.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Approximately $2,500,000 of the private placement proceeds remaining has not been specifically allocated other than for working capital and other corporate purposes. We expect to use part of these funds to hire additional employees in all aspects of our operation, including a chief financial officer. We are also aware that to protect our intellectual property some proceeds may be used to protect or defend our interests in any violation of our proprietary rights or patent infringement.</p>

      <p><b>CASH FLOW&nbsp;</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Operating Activities</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We did not generate cash from operations in the first six months of fiscal year 2004. In fact, during that period, our operating activities used cash in the amount of $827,517 primarily attributed to our increase in expenditures in the research and development area and our expanded selling and marketing efforts in our document security segment. This compares to the results of the six months ending June 30, 2003 when our operating activities used $66,840, in cash.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Much of the increase of the cash used in our operations was for one-time significant events such as the American Stock Exchange listing fee. Also in light of the developments in corporate regulation, we were required to expend substantial sums for professional fees, including legal, auditing, consulting and other expenses such as transfer agency fees and premiums for directors' and officers' liability insurance.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our increased marketing expenses were necessary to expose our newly developed products including our new product to be marketed under the tradename <em>DSS 3000 Pantograph</em>. This new technology was built by us to provide authentication and security for the new generation of high-speed check processors being installed in the banking industry to accommodate the regulatory guidelines under the "Check 21" Federal Reserve Bank regulations which take effect in October 2004.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our research and development expenses were also significant but we believe necessary. As a consequence of our research, we have developed new technology which we have named the "Color Separation Multiplier" which is capable of preventing the use of scanners for counterfeiting purposes. This new technology has very broad applications including currency protection.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As a result of our termination of third-party royalty rights in exchange of one-time payments<i>,</i> we anticipate an increase in royalties from our licensing agreements with minimal ongoing costs. We also expect a significant increase in our safety paper sales as our sales and marketing efforts begin to take effect.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our net loss in the six months ending June 30, 2004 was $747,418, and included non-cash charges for depreciation and amortization of $38,075.<b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</i></b></p>

      <p><b>Investing Activities</b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our core business of developing and selling anti-counterfeiting products is more intellectually-intensive than equipment-intensive. However, we anticipate purchasing additional computers, software, copiers, scanners and printing equipment to assist us in our development activities and so we have allocated approximately $200,000 from the recently completed private placement offering proceeds for computer purchases and lease payments. In the six months ending June 30, 2004, we expended approximately $170,000 for the acquisition of fixed assets of which approximately $60,000 was for equipment to be used in our marketing efforts and approximately $45,000 for leasehold improvements to office facilities for our new corporate headquarters; and the balance for office furniture and computer equipment. In the first six months of 2003, we spent approximately $31,000 for the acquisition of fixed assets, all of which was for equipment. This incre
ase of approximately $139,000 in capital expenditure, in comparing the first half-year of 2003 to the first half-year of 2004, was in accordance with the scheduled use of the proceeds from the private placement of our securities which was completed in December 2003.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the six months ended June 30, 2004, specifically in the first quarter, we capitalized a total of $90,000 in connection with the termination of royalty payment obligations related to certain patents from members of the Wicker family and others.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Financing Activities<i>&nbsp;</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have been able to pursue our business plan primarily from the receipt of cash from financing activities. We have funded our cash needs during the last two fiscal years by issuing our securities. During fiscal years 2003 and 2002, our financing activities, primarily the proceeds of our private placements, provided us with total funds of approximately $5,025,000 and $500,000, respectively. We believe that we have sufficient cash for our needs for at least the next 12 months.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In order to support our existing and proposed operations, we may need additional financing. Although we have outstanding warrants to purchase our common stock, at exercise prices below the current market price, there is no assurance that all or any of the warrants will be exercised. If the warrants are not exercised, we may be required to raise funds, by borrowing or selling stock, to meet our cash needs and there is no guarantee that, at that time, we will be able to raise additional funds, or if we are able to, it would be at terms acceptable to us.</p>

      <p><b>INFLATION</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the three months ending June 30, 2004 and June 30, 2003.</p>

      <p><b>CRITICAL ACCOUNTING POLICIES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Please refer to our annual report on Form-10KSB for the year ended December 31, 2003 for an in depth discussion of our critical accounting policies.</p>

      <p><a name="part_1_item_3"></a><b>ITEM 3 - CONTROLS AND PROCEDURES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Within the 90&nbsp;days prior to the filing date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was accomplished under the supervision and with the participation of our chief executive officer, principal executive officer/ principal accounting officer who concluded that our disclosure controls and procedures are effective. As of June 30, 2004, and the date of this Report, Patrick White served as our Chief Executive Officer and Chief Financial Officer (which duties include that of principal accounting officer).There have been no significant or material changes in our internal controls or in other factors, which could significantly affect internal controls subsequent to the date we completed our evaluation and the date of filing of this Report on Form 10QSB.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.</p>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p align="center"><a name="part_2"></a><b>PART II<br>
       OTHER INFORMATION</b></p>

      <p><a name="part_2_item_1"></a><b>ITEM 1 - LEGAL PROCEEDINGS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; There were no significant developments during the second fiscal quarter of 2004 in connection with our intellectual property litigation against Adler Technologies and Andrew McTaggert. This litigation, commenced by us in January 2003, is described in our Form 10-KSB Annual Report for the year ended December 31, 2003 regarding intellectual property. The case is still in the early stage of discovery and it is too soon to determine how the various issues raised by the lawsuit will be resolved. There can be no assurance that we will be successful in our suit against Adler and McTaggert or that Adler's counterclaims will not be upheld. If Adler is successful in all of its counterclaims, we may be adversely affected in our ability to market certain technology.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br>
      <br>
       &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are not a party to any other proceedings which may have a material effect upon our operations or financial condition.</p>

      <p><a name="part_2_item_2"></a><b>ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS AND SMALL BUSINESS ISSUER PURCHASES OF SECURITIES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We did not sell any shares of our capital stock during the quarter ended June 30, 2004 and did not issue any shares of our capital stock during such period other than 15,000 shares issued to a consultant as described below.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Further, we did not purchase any shares of our capital stock during the period ended June 30, 2004.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> In May 2004, we issued 15,000 shares of our common stock and 10,000 warrants to purchase our common stock in satisfaction of an outstanding obligation of $80,601 for consulting services which were rendered in 2003. The consulting expense for the services was recorded as an accrued expense payable in December 2003 in the amount of $80,601, which approximated the market value of the securities at the time the liability was recorded. We relied upon Section 4(2) of the Securities Act of 1933, as amended, for an exemption from registration of these securities.</p>

      <p><a name="part_2_item_3"></a><b>ITEM 3 - DEFAULTS UPON SENIOR SECURITIES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; None</p>

      <p><a name="part_2_item_4"></a><b>ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No matters were submitted to a vote of our security holders during the fiscal quarter ended June 30, 2004. We anticipate holding a meeting of shareholders within the next three months.</p>

      <p><a name="part_2_item_5"></a><b>ITEM 5 - OTHER INFORMATION</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On April 22, 2004 our application for the listing of our common stock was accepted by the American Stock Exchange and our common stock commenced trading on the American Stock Exchange under the symbol "DMC."</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Effective June 10, 2004, we entered into an employment agreement with Patrick White, who serves as our Chairman, Chief Executive and President and interim Chief Financial Officer.&nbsp; The agreement was negotiated and approved by the Compensation Committee of the Board of Directors. The agreement is for a term of five years, with an annual base salary of $150,000, with automatic increases at the rate of 10% per year. Under the agreement, Mr. White also was granted 30,000 options which vest at the rate of 10,000 immediately and thereafter 10,000 per year. The options have been granted subject to shareholder approval of the Employee Stock Option Plan. In the event that Mr. White is terminated without cause or his duties are materially changed without his consent or there is a change of control of the Company, he will be entitled to 18 months salary.&nbsp; The agreement also provides for non-competition and non disclosure by Mr. White 
in favor of the Company.&nbsp;&nbsp;A change of control is defined as (i) the Board of Directors of the Company approves of (A) any merger, consolidation, reorganization or other business combination of Company where the pre transaction shareholders of the Company do not continue to own 50.1% of the post transaction outstanding shares of Common Stock&nbsp; having the right to vote in an election of Company's Board of Directors, (B) the sale, exchange, transfer or other disposition of all or substantially all of the assets of Company (in one transaction or a series of transactions contemplated by any party as a single plan), or (C) any plan or proposal for the liquidation or dissolution of Company; or (ii) any person or entity, together with all "affiliates" and "associates" (as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the "<i>Exchange Act</i>")) of such person or entity, shall become the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securit
ies of Company representing 50.1% or more of either (A) the combined voting power of Company's then outstanding securities having the right to vote in an election of Company's Board of Directors ("<i>Voting Securities</i>") or (B) the then outstanding shares of all classes of stock of Company.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><a name="part_2_item_6"></a><b>ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K</b> &nbsp;</p>

      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td width="50">&nbsp;</td>

          <td valign="top">
            <p>(a)</p>
          </td>

          <td width="20">&nbsp;</td>

          <td valign="top">
            <p>Exhibits</p>

            <p><a href="dmc10qsb063004ex101.htm">Exhibit 10.1</a> - Agreement of Sublease dated May 2004.</p>

            <p><a href="dmc10qsb063004ex102.htm">Exhibit 10.2</a> - Form of Employment Agreement dated as of June 10, 2004 between Registrant and Patrick White</p>

            <p><a href="dmc10qsb063004ex311.htm">Exhibit 31.1</a> - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer</p>

            <p><a href="dmc10qsb063004ex321.htm">Exhibit 32.1</a> - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer</p>
          </td>
        </tr>

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          <td>&nbsp;</td>

          <td valign="top">&nbsp;</td>

          <td>&nbsp;</td>

          <td>&nbsp;</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td valign="top">
            <p>(b)</p>
          </td>

          <td>&nbsp;</td>

          <td>
            <p>Reports on Form 8-K</p>

            <p>There were no reports filed on Form 8-K during the three months ended June 30, 2004.</p>
          </td>
        </tr>
      </table>

      <p align="center"><a name="signatures"></a><b>SIGNATURES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In accordance with the requirements of the Exchange Act, the registrant caused this report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized.</p>

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          <td>
            <p><b>DOCUMENT SECURITY SYSTEMS, INC.</b></p>
          </td>
        </tr>

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          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>&nbsp;</td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td>
            <p>August 13, 2004</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td>
            <p>/s/ Patrick White</p>
          </td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
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            </div>
          </td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <p>Patrick White<br>
             President, Chief Executive Officer and<br>
             Acting Chief Financial Officer/Principal Accounting Officer</p>
          </td>
        </tr>
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<div align="right"> Exhibit 10.1 </div>
<p align="center">AGREEMENT OF SUBLEASE</p>
<p>AGREEMENT OF SUBLEASE ("Sublease") dated as of the 22 day of March 2004, between
  MONY LIFE INSURANCE COMPANY a New York corporation, with its principal office
  located at 1740 Broadway, New York, NY 10019 ("Sublessor"), and Document Security
  Systems, Inc., a New York corporation, ("Sublessee").</p>
<p align="center">WITNESSETH:</p>
<p>WHEREAS, by that certain Office Lease Agreement dated October 1 1994, [as amended
  by a certain extension dated October 1, 1195 (the "Master Lease"), being more
  particularly described on Exhibit A attached hereto and made a part hereof,
  First Federal Savings and Loan ("Overlandlord") leased to The Mutual Life Insurance
  Company of New York, (presently known as MONY Life Insurance Company), as tenant,
  4,717 square feet of office space (the "Leased Premises") in the building commonly
  known as First Federal Plaza, located at One First Federal Plaza (28 East Main
  Street) (the "Building");</p>
<p>WHEREAS, Sublessee desires to sublet from Sublessor and Sublessor desires to
  sublet to Sublessee [the entire/a portion of the] Leased Premises consisting
  of approximately 4,717 square feet, as more particularly shown on Exhibit B
  attached hereto (the "Sublet Premises"), under the terms hereinafter set forth;</p>
<p>NOW, THEREFORE, in consideration of the mutual promises herein contained, and
  other good arid valuable consideration, the receipt and adequacy of which are
  hereby acknowledged,- but expressly contingent upon the consent of Overlandlord
  as provided below, Sublessor and Sublessee hereby agree as follows:</p>
<p><b>1. Demise and Term; Base Rent.&nbsp;</b> Sublessor hereby subleases to Sublessee
  and Sublessee hereby subleases from Sublessor the Sublet Premises, TO HAVE AND
  TO HOLD unto Sublessee, for a term commencing on June 15, 2004 (the "Commencement
  Date"),&nbsp;&nbsp; and expiring on April 30, 2006 (the "Expiration Date").
  The minimum annual rental payable by Sublessee pursuant to this Sublease shall
  be $10.00 Per Sq. Ft. Gross ("Base Rent"), payable without set-off,- deduction
  or counterclaim, in Twenty Four Months (24) monthly installments of $3,930.83.
  Rental payments shall be payable on the first day of each month during the term
  to Sublessor at the address set forth in Section 16 below, and continuing on
  the first day of each month thereafter, except for the first of such rental
  payments which shall be due and payable upon the execution of this Sublease.</p>
<p><b>2. Additional Rent.&nbsp;</b> With the Base Rent, Sublessee shall pay as
  additional rent ("Additional Rent") to Sublessor, without any set-off, deduction
  or counterclaim, Sublessee's Proportionate Share (as, defined below) of all
  operating expenses and other additional rent and estimates with respect thereto
  which Sublessor is responsible for under the Master Lease; Sublessee's Proportionate
  Share shall be equal to the ratio of the area of the Sublet Premises (__0__sq.
  ft) to the Leased Premises (__0___sq. ft.) or _0__%. Sublessor shall promptly
  forward to Sublessee all statements for such Additional Rent provided to Sublessor
  by Overlandlord. If at the time a reconciliation is made pursuant to the terms
  of the Master Lease regarding the amounts of Additional Rent paid by Sublessor
  it is determined that Sublessor, and therefore Sublessee by the terms of this
  Sublease, has either overpaid or underpaid such Additional Rent, Sublessor shall
  refund to Sublessee any overpayment and Sublessee shall pay to Sublessor any
  underpayment in the manner provided in the Master Lease.</p>
<p><b>3. Condition of Sublet Premises.</b>&nbsp; Sublessee accepts the Sublet
  Premises "as is" and Sublessor has no obligation under this Sublease to renovate
  or otherwise refurbish the Sublet Premises, Any renovation, alteration, addition
  or improvement by Sublessee to the Sublet Premises after the Commencement Date
  is subject to the prior written approval of Sublessor and Overlandlord and shall
  be carried out at Sublessee's sole cost and expense. If required by the terms
  of the Master Lease, any such addition or improvement to the Sublet Premises
  shall be removed by Sublessee and any and all costs for such removal shall be
  borne solely by Sublessee.</p>
<p><b>4. Use of the Sublet Premises</b>. Sublessee shall use and occupy the Sublet
  Premises for general and executive office purposes, as consistent with a first-class
  office building, and for no other purpose.</p>
<p><b>5. Applicability of Master Lease.&nbsp;</b></p>
<p>(a)&nbsp;&nbsp; This Sublease is subject and subordinate to, and Sublessee
  accepts this Sublease subject and subordinate to, all of the terms, covenants,
  provisions, conditions and agreements contained in the Master Lease and the
  matters to which the Master Lease is subject and subordinate. &nbsp;Sublessee
  covenants and agrees to be bound by all of the terms, conditions, rules, regulations
  and agreements contained in the Master Lease and to assume all obligations of
  Sublessor as tenant under the Master Lease (except for the Sublessor's obligation
  to pay Base Rent and Additional Rent) and to do no act nor permit any act to
  be done which would violate any of the provisions of the Master Lease. In the
  event of a breach of the Master Lease by Sublessee, Sublessor shall have all
  the rights against Sublessee as would be available to Overlandlord against Sublessor
  under the Master Lease if such breach were by Sublessor as tenant thereunder,
  and Sublessee hereby agrees to indemnify, defend and hold harmless Sublessor
  for any and all damages, including reasonable attorneys' fees, resulting from
  such breach of the Master Lease by Sublessee.</p>
<p>(b)&nbsp; This Sublease is also subject to, and Sublessee accepts this Sublease
  subject to, any amendments to the Master Lease hereafter made between Overlandlord
  and Sublessor; provided that Sublessor shall not execute any amendment to the
  Master Lease without the consent of Sublessee which (i) to a material extent
  prevents or adversely affects the use by Sublessee of the Sublet Premises in
  accordance with the terms hereof; or (ii) to a material extent increases the
  obligations of Sublessee or decreases its rights hereunder; or (iii) shortens
  the term hereof or increases the rent required to be paid by Sublessee. Sublessor
  and Sublessee respectively represent that a copy of the Master Lease and all
  amendments thereof have been delivered to and reviewed by Sublessee. A copy
  of any future amendments to the Master Lease, entered into during the term of
  this Sublease, will be delivered to Sublessee promptly after the same have been
  executed.</p>
<p>(c)&nbsp;&nbsp; The provisions of the Master Lease are incorporated herein
  by reference with the same &nbsp;force and effect as if they were fully set
  forth herein, except as otherwise specifically modified herein and except that:</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (i) any reference in the Master Lease to (A) "Landlord" or "Tenant" shall mean
  Sublessor or Sublessee, respectively, in this Sublease, unless the context otherwise
  requires; (B) the "Lease" or "this Lease" shall mean this Sublease; (C) "Term"
  shall mean the term of this Sublease; (D) "Base Rent" shall mean the Rent to
  be paid by Sublessee as provided in this Sublease; (E) "Additional Rent" shall
  .mean the Additional Rent to be paid by Sublessee as provided in this Sublease;
  (F) "Base Year" shall mean the Base Year as provided in this Sublease, if any;
  (G) the "Commencement Date" shall mean the Commencement Date hereunder; and
  (H) "Premises" shall mean the Sublet Premises; and</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  (ii) any provisions in the Master Lease pertaining to Sublessor's right to (A)
  terminate, renew, extend or otherwise affect the term of the Master Lease; or
  (B) exercise options or rights of first refusal in connection with the Master
  Lease, the Leased Premises or the Building; [option: together with paragraphs
  ____and____ of the Master Lease/Addendum to Lease] are specifically <b><u>not</u></b>
  incorporated into this Sublease and Sublessee shall have no rights in connection
  therewith.</p>
<p>(d) To the extent that the Master Lease may conflict or be inconsistent with
  the provisions of this Sublease, whether or not such inconsistency is expressly
  noted herein, the provisions of this Sublease shall prevail.</p>
<p><b>6.&nbsp; Obligations of Overlandlord and Sublessor.</b>&nbsp;&nbsp; It is
  understood and agreed that the obligations, work, repairs and services to be
  performed, made and furnished by Overlandlord in accordance with the Master
  Lease, which provisions are incorporated herein by reference, will in fact be
  performed and furnished by Overlandlord and not by Sublessor, except as expressly
  stated herein to the contrary.&nbsp;&nbsp; Sublessor shall in no event be liable
  to Sublessee nor shall Sublessee's obligations hereunder be limited or the performance
  thereof be excused because of any failure or delay on Overlandlord's part in
  performing any such obligations, &nbsp;furnishing any such work or services
  or in making any repairs. If Overlandlord shall be in default in the performance
  of any of its obligations under the Master Lease with respect to the Sublet
  Premises, and if Sublessee shall give Sublessor notice of such default, Sublessor
  agrees to cooperate and use reasonable efforts to cause Overlandlord to correct
  and remedy such default. Such reasonable efforts will include cooperation with
  Sublessee in any litigation, claim or demand brought by Sublessee against Overlandlord,
  but all of Sublessor's reasonable out-of-pocket expenses in connection therewith,
  including reasonable attorneys' fees shall be immediately reimbursed to Sublessor
  by Sublessee. Sublessee shall have no authority to make any agreement with Overlandlord
  with, regard to the Sublet Premises, this Sublease or the Master Lease.</p>
<p><b>7. Covenants of Sublessor and Sublessee.</b>&nbsp;&nbsp;</p>
<p>(a)&nbsp;&nbsp; Sublessee covenants and agrees that Sublessee shall not do
  anything in or with respect to the Sublet Premises or omit to do anything which
  Sublessee is obliged to do under the terms of this Sublease which would constitute
  a default under the Master Lease or would cause the Master Lease or the rights
  of Sublessor as Sublessee thereunder to be cancelled, terminated or forfeited
  or would make Sublessor liable for any damages, claims or penalties. &nbsp;Sublessee
  covenants and agrees to indemnify Sublessor against and hold Sublessor harmless
  from any liability, loss, damage, suits, penalties, claims and demands of every
  kind and nature (including, without limitation, reasonable attorneys' fees)
  arising out of, by reason of or resulting from (i) Sublessee's failure so to
  perform or observe any of the terms and conditions of the Master Lease agreed
  to be performed by Sublessee herein or (ii) Sublessee's use, occupancy or management
  of the Sublet Premises, or any business conducted therein, or (iii) any work
  or thing whatsoever done or any condition created by or any other act or omission
  of Sublessee, its successors or subtenants, or their respective employees, agents,
  contractors, visitors or licensees, in or about the Sublet Premises, the Leased
  Premises and the Building.</p>
<p>(b) Sublessor covenants and agrees that Sublessor shall not do anything in
  or with respect to the Sublet Premises or omit to do anything which Sublessor
  is obliged to do which would constitute a default under the Master Lease or
  would cause the Master Lease or the rights of Sublessor as tenant under the
  Master Lease to be cancelled, terminated or forfeited or would make Sublessee
  liable for any damages, claims or penalties.</p>
<p><b>8. Sublessor's Representations.</b>&nbsp;&nbsp; Sublessor represents and
  warrants that the Master Lease is in full force and effect and that to the best
  of its knowledge no material defaults are now existing thereunder. <b>And overlord
  has no right to terminate Master Lease.</b></p>
<p><b>9.&nbsp; Default.</b>&nbsp; In the event of any default by Sublessee under
  any of the terms, covenants or conditions of this Sublease, Sublessor shall
  have the same rights and remedies against Sublessee hereunder as are available
  to Overlandlord against Sublessor as tenant under the Master Lease, and Sublessee
  will have the same notice and grace periods available to Sublessor under the
  Master Lease.</p>
<p><b>10.&nbsp; Security Deposit.</b>&nbsp;&nbsp; Upon execution of this Sublease,
  Sublessee shall deposit with Sublessor the sum of $7,861.66&nbsp; ("Security
  Deposit"), which represents&nbsp; [two (2) monthly installments of the Base
  Rent] to be held by Sublessor throughout the term of the Sublease, without interest,
  as security for the performance by Sublessee of all terms, covenants and conditions
  of the Sublease. It is expressly understood and agreed that such deposit is
  not an advance rental deposit or a measure of Sublessor's damages in case of
  default by Sublessee upon the occurrence of any event of default by Sublessee
  or upon termination of this Sublease. If Sublessee defaults with respect to
  any provision of this Sublease, including, but not limited to, the provisions
  relating to the payment of rent or the obligation to repair and maintain the
  Sublet Premises or to perform any other term, covenant or condition contained
  herein, Sublessor may (but shall not be required to), without prejudice to any
  other remedy provided herein or provided by law, and without notice to Sublessee,
  apply the Security Deposit, or any portion of it, to cure the default or to
  compensate Sublessor for all damages sustained by Sublessor as a result of Sublessee's
  default. Sublessee shall immediately upon demand pay to Sublessor a sum equivalent
  to the portion of the Security Deposit so expended or applied by Sublessor as
  provided in this paragraph so as to maintain the Security Deposit in the sum
  initially deposited with Sublessor. Although the Security Deposit shall be deemed
  the property of Sublessor, if Sublessee is not in default at the expiration
  or termination of this Sublease, Sublessor shall return the Security Deposit
  to Sublessee within sixty (60) days after the expiration or termination of this
  Sublease.&nbsp; &nbsp;Upon any sale or transfer of Sublessor's interest in the
  Master Lease, Sublessor shall transfer the Security Deposit to its successor
  in interest and thereupon, Sublessor shall be released from any liability or
  obligation with respect thereto.</p>
<p><b>11. Insurance, Indemnity and Subrogation.</b>&nbsp;&nbsp;</p>
<p>(a)&nbsp; With reference to Section__ of the Master Lease (Insurance), Sublessee
  hereby agrees that the obligations for carrying insurance pertaining to "Landlord"
  described therein do not apply to Sublessor.&nbsp;&nbsp; As to liability insurance
  required to be maintained by "Tenant," Sublessee hereby agrees to include not
  only Sublessor, but also Overlandlord, as additional named insureds and to provide
  Sublessor and Overlandlord with certificates of insurance as described in said
  Section 12 of the Master Lease.</p>
<p>(b)&nbsp;&nbsp; With reference to Section 12.1 of the Master Lease (Indemnity),
  Sublessee hereby agrees that the obligations of indemnity of the "Tenant" described
  therein shall be for .the benefit of both Sublessor and Overlandlord, it being
  intended that any reference to "Landlord" in said Section__ for the purposes
  of this Sublease shall mean "Sublessor and/or Overlandlord."</p>
<p>(c)&nbsp;&nbsp; With reference to Section 19 of the Master Lease (Waiver of
  Subrogation), Sublessor hereby agrees that the waiver(s) described therein as
  they pertain to Sublessee shall be for the benefit of both Sublessor and Overlandlord.</p>
<p><b>12.&nbsp; Assignment.</b>&nbsp; Sublessee will not attempt to assign this
  Sublease, or sublet or permit all or part of the Sublet Premises to be used
  by others without the consent of Sublessor, which consent may be withheld by
  Sublessor in its sole discretion, or without the consent of Overlandlord which
  must be obtained in accordance with the provisions of the Master Lease.&nbsp;&nbsp;
  In the event Sublessor consents to such an assignment or further sublease, in
  consideration therefore, Sublessee shall pay Sublessor one-hundred percent (100%)
  of the amount by which the rental thereunder exceeds the Base Rent under this
  Sublease.</p>
<p><b>13.&nbsp; Intentionally Blank.</b></p>
<p><b>14.&nbsp; Deleted.</b></p>
<p><b>15.&nbsp; Brokers.</b>&nbsp;&nbsp; Sublessee represents that it has dealt
  with no broker in connection with this Sublease, other than Pyramid Brokerage
  Co. ("Broker"). Sublessee shall indemnify and hold Sublessor harmless from any
  cost, expense or liability (including costs of suit and reasonable attorneys'
  fees) for any compensation, commission or fees claimed by any other real estate
  broker or agent in connection with this Sublease or its negotiation by reason
  of any act of Sublessee. Further, Sublessee agrees that Sublessor shall not
  be responsible for, and Sublessee shall indemnify and hold Sublessor harmless
  from and such liability for compensation, commission or fees claimed by any
  real estate broker or agent representing Sublessee in other matter relating
  to this Sublease.</p>
<p><b>16. Notice.</b>&nbsp;&nbsp; Any notice, request or demand permitted or required
  to be given by the terms and provisions of this Sublease either by Sublessor
  to Sublessee or by Sublessee to Sublessor shall be in writing. Any such notice,
  request or demand shall be personally delivered or addressed to the parties
  at the addresses hereinabove stated and sent by pre-paid, certified U.S. mail,
  return receipt requested, or national overnight courier service with return
  receipt, and shall be deemed to have been served and given by one party and
  received by the other party upon actual receipt or refusal. Notice to Sublessor
  will be to,the attention of Edward J. Zebrowski, MONY Life Insurance Company,
  1740 Broadway, MD-9-48,New York, NY 10019.&nbsp;&nbsp;&nbsp; Notice to Sublessee
  will be to Sublessee at the address hereinabove stated. Either party may, by
  notice as aforesaid, designate a different address or addresses for notices,
  requests or demands to it.</p>
<p><b>17.&nbsp; Entire Understanding of the Parties.</b>&nbsp; This Sublease,
  contains all of the covenants, agreements, terms, provisions, conditions and
  understandings relating to the leasing of the Sublet Premises and Sublessor's
  obligations in connection therewith, and neither Sublessor nor any agent or
  representative of Sublessor has made or is making, and Sublessee, in executing
  and delivering this Sublease, is not relying upon, any warranties, representations,
  promises or statements whatsoever, except to the extent expressly set forth
  in this Sublease.</p>
<p><b>18.&nbsp; Governing Law.</b> This Sublease is made and executed under and
  in all respects is to be governed by and construed in accordance with the laws
  of the State in which the Sublet Premises are situate.</p>
<p><b>19. Consent of Overlandlord.</b> This Sublease shall be and become effective
  only when it is approved and consented to by Overlandlord, as evidenced by its
  execution of the Consent to Sublease hereinbelow attached or such other form
  as may provided by Overlandlord. Sublessor agrees to use all reasonable efforts
  to obtain such approval and consent from Overlandlord as soon hereafter as is
  practicable, but will not be liable to Sublessee if Overlandlord fails to consent,
  in which case this Sublease shall be null and void.</p>
<p><b>20. Corporate Authority.</b>&nbsp;&nbsp;&nbsp; If Sublessee is a corporation
  or other entity, Sublessee warrants that it has legal authority to operate and
  is authorized to do business in the state of New York. Sublessee and the person
  executing this Sublease on behalf of Sublessee warrant that the person or persons
  executing this Sublease on behalf of Sublessee have authority to do so and to
  fully obligate Sublessee to all terms and provisions of this Sublease and the
  Master Lease. Sublessee shall, upon request from Sublessor or Overlandlord,
  furnish Sublessor or Overlandlord with a certified copy of resolutions of Sublessee's
  Board of Directors or Managers authorizing this Sublease and granting authority
  to execute it to the person or persons who have executed it on Sublessee's behalf.</p>
<p>[(b) Sublessor warrants that it has legal authority to operate and is authorized
  to do business in the state of New York. Sublessor and the person executing
  this sublease on behalf of Sublessor warrant that the person or persons executing
  this Sublease on behalf of Sublessor have authority to do so and to fully obligate
  Sublessor to all terms and provisions of this Sublease.</p>
<p><b>21. Quiet Enjoyment.</b> &nbsp;&nbsp;Sublessee, upon paying the Base Rent
  and Additional rent, and any and all other sums and charges provided for in
  this Sublease, and upon keeping all terms, covenants and conditions of this
  Sublease on its part to be performed, shall quietly have and enjoy the Sublet
  Premises during the term of this Sublease without hindrance or molestation by
  anyone claiming by, through or under Sublessor, subject however, to the exceptions,
  reservations and conditions hereof.]</p>
<p align="center">[This Space is Intentionally Left Blank.]</p>
<p>IN WITNESS WHEREOF, Sublessor and Sublessee have duly executed this Sublease
  as of the day and year first above written.</p>
<p>SUBLESSOR:</p>
<p>MONY LIFE INSURANCE COMPANY</p>
<p>By: /s/ Edward J. Zebrowski</p>
<p>Edward J. Zebrowski</p>
<p>Assistant Vice President</p>
<p>SUBLESSEE:</p>
<p>Document Security Systems, Inc</p>
<p>By: /s/ Patrick White</p>
<p>Patrick White President 585-232-1500</p>
<p>STATE OF NEW YORK&nbsp;&nbsp;&nbsp; )</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ss.:</p>
<p>COUNTY OF NEW YORK)</p>
<p>On this 19th day of April, 2004, before me personally came Edward J. Zebrowski,
  to me known, who, being duly sworn, did depose and say that he is an Assistant
  Vice President of</p>
<p>MONY Life Insurance Company, the corporation described in and which executed
  the foregoing instrument; and that he signed his name thereto by authority of
  the board of directors of said corporation.</p>
<p>/s/ Nadine Agree</p>
<p>Notary Public</p>
<p>NAD1NE AGREE</p>
<p>Notary Public, State of New York No. 01AG6047129 Qualified in New York County
  Commission Expires August 28, 2006</p>
<p>STATE OF NEW YORK</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  ss.:</p>
<p>COUNTY OF MONROE</p>
<p>On this 11th day of May, &nbsp;2004, before me personally came Patrick White
  to me&nbsp; known,&nbsp;&nbsp; who,&nbsp;&nbsp; being&nbsp;&nbsp; duly&nbsp;&nbsp;
  sworn,&nbsp;&nbsp; did depose&nbsp; and&nbsp; say&nbsp; that&nbsp; he&nbsp;&nbsp;
  is&nbsp;&nbsp; the&nbsp;&nbsp; President&nbsp;&nbsp; of ______________, the
  corporation described in and which executed the foregoing installment; and that
  he/she signed his/her name thereto by authority of the board of directors of
  said corporation.</p>
<p>Notary Public</p>
<p>MAXINE D. ELLIOTT</p>
<p>No O1EL6033332&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
<p>Notary Public, State of New York</p>
<p>Qualified in Monroe County</p>
<p>My Commission Expires Nov 15, 2005</p>
<p align="center">CONSENT TO SUBLEASE</p>
<p>The undersigned hereby consents to the foregoing Agreement of Sublease dated&nbsp;
  April&nbsp;14th 2004 between MONY LIFE INSURANCE COMPANY, as Sublessor, and
  Document Security Systems, Inc., as Sublessee, dated effective March 22, 2004.</p>
<p>Overlord hereby confirms that to its knowledge there is no existing default
  under the lease, and Overlord has no existing grounds to declare a default or
  to terminate their Master Lease.</p>
<p>Document Security Systems, Inc. as a subleasee shall have the right to have
  its name on the building directory or otherwise provided in article 17 of the
  Master Lease.</p>
<p>During the term of this sublease, Document Security Systems, Inc. shall have
  2 parking spaces on a monthly basis in accordance with Overlandlord's then current
  parking rates.</p>
<p>OVERLANDLORD:</p>
<p>Reynolds II LLC</p>
<p>By: /s/ Robert Gorom</p>
<p>Its: President</p>
<p>Schedule A</p>
<table border="0" cellspacing="0" cellpadding="4">
  <tr>
    <td width="118" valign="top"> <p>YEAR</p></td>
    <td width="167" valign="top"> <p>BASE RENT (PSF)</p></td>
    <td width="195" valign="top"> <p>MONTHLY RENT</p></td>
    <td width="176" valign="top"> <p>ANNUAL RENT</p></td>
  </tr>
  <tr>
    <td width="118" valign="top"> <p>1</p></td>
    <td width="167" valign="top"> <p>$10.00 Gross</p></td>
    <td width="195" valign="top"> <p>$3,930.83</p></td>
    <td width="176" valign="top"> <p>$47,170.00</p></td>
  </tr>
</table>
<p><u>Exhibit A</u></p>
<p>Description of Master Lease:</p>
<p><u>Exhibit B</u></p>
<p>Sublet Premises</p>
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<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>3
<FILENAME>dmc10qsb063004ex102.htm
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
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<div>
  <hr noshade>
  <div align="right"> Exhibit 10.2 </div>
  <p align="center"><b>EMPLOYMENT AGREEMENT</b></p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This <b>EMPLOYMENT
    AGREEMENT</b> (the "<b><i>Agreement</i></b>") is effective as of June 10 2004&nbsp;
    (the "<b><i>Effective Date</i></b>"), between <b>DOCUMENT SECURITY SYSTEMS,
    INC.</b>, a New York corporation with an office at 36 West Main Street, Rochester,
    New York 14614 ("<b><i>Company</i></b>") and <b>PATRICK WHITE</b>, who resides
    at 58 Bosworth Field, Mendon, New York&nbsp;&nbsp; 14506 ("<b><i>Executive</i></b>").</p>
  <p align="center"><b><i>R E C I T A L S :</i></b></p>
  <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS</b>,
    Company is in the business of developing, licensing and selling anti- counterfeiting
    technology and products;</p>
  <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS</b>,
    Executive has served as Company's Chief Executive Officer and President since
    approximately August 5, 2002; and</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>WHEREAS</b>,
    Company desires to continue the engagement of Executive as the Chief Executive
    Officer and President of Company and Executive wishes to continue serving
    in such capacity on the terms and conditions set forth below.</p>
  <p><b><i>P R O V I S I O N S :</i></b></p>
  <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; NOW,
    THEREFORE</b>, in consideration of the mutual promises and covenants set forth
    herein, the parties agree as follows:</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Employment; Duties</u></i></b>.&nbsp; Company hereby agrees to employ
    Executive as its Chief Executive Officer, President, Chairman of the Board
    and temporary Chief Financial Officer. The parties acknowledge and agree that
    it is the intention of the Company to hire and employ a new Chief Financial
    Officer within the next six months if possible.&nbsp; The Executive hereby
    accepts such employment.&nbsp; Executive will report to Company's Board of
    Directors and will perform those duties and have such authority and powers
    as are customarily associated with the positions of Chief Executive Officer
    and President of a company engaged in a business similar to the Business,
    including, without limitation, leading Company's management, overseeing and
    implementing Company's business development efforts, preparing business plans,
    raising capital, and such other duties and responsibilities as the Board of
    Directors may reasonably request.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Term</u></i></b>.&nbsp; The term of this Agreement shall commence
    on the Effective Date and shall continue for (5) five years from the Effective
    Date unless otherwise terminated as provided herein (together with any Renewal
    Term, as hereafter defined, shall be referred to as the "<b><i>Term</i></b>").
    This Agreement shall automatically be extended for successive one (1) year
    terms pursuant to the terms and conditions of this Agreement (each, a "<b><i>Renewal
    Term</i></b>"), unless otherwise terminated by written notice from one party
    to the other no less than sixty (60) days prior to the end of the Term or
    any subsequent Renewal Term.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Compensation</u></i></b>.&nbsp;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Annual Salary</u>.&nbsp;
    In consideration for the services rendered by Executive on behalf of Company
    during the Term of this Agreement, Company shall pay Executive, commencing
    on the Effective Date, an annual salary equal to One Hundred Fifty Thousand
    Dollars ($150,000.00), payable in accordance with Company's regular payroll
    practices.&nbsp; Effective as of January 1 of each year during the Term, Executive's
    annual salary shall be increased as determined by Company's Board of Directors,
    but in no event less than ten percent (10%) annually from the prior year's
    annual salary.&nbsp; All forms of compensation referred to in this Agreement
    are subject to reduction to reflect applicable withholding and payroll taxes.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Bonuses</u>.&nbsp; Executive
    shall be eligible to receive a cash bonus, based upon the Company's financial
    performance and as determined in the discretion of Company's Board of Directors.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Stock Options</u>.&nbsp;
    Company's Board of Directors has previously approved that certain Document
    Security Systems, Inc. 2003 Executive Stock Incentive Plan (the "<b><i>Incentive
    Plan</i></b>") pursuant to which 200,000 shares of Company's common stock
    (the "<b><i>Company Option Shares</i></b>") are available for grant to Company's
    employees.&nbsp; Upon executing this Agreement, Executive shall receive incentive
    stock options to purchase an aggregate of 30,000 options, vesting in increments
    of 10,000 per year commencing on the date hereof with an exercise price based
    upon the closing price of the Company's Common Stock as of June 10, 2004 ("<b><i>Executive's
    Stock Options</i></b>") as reported on the American Stock Exchange.&nbsp;
    These grants shall be subject to the terms and conditions of the Incentive
    Plan and applicable rules and regulations of the Internal Revenue Service.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Immediately prior to the
    consummation of any transaction constituting a "Change in Control" (as defined
    in Section 10(a) below) any Executive Stock Options that remain unvested shall
    immediately vest, and subject to any provisions in the Incentive Plan or applicable
    Internal Revenue Service ("IRS") regulations, the&nbsp; Executive shall have
    a period equal to the greater of (i) one (1) year following the Change of
    Control or the unexpired term of the Executive's Stock Options to exercise
    his Executive Stock Options.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Benefits</u></i></b>.&nbsp; In addition to the compensation set forth
    above, Company shall provide Executive with the following benefits:</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive and Executive's family,
    as applicable, shall be entitled to participate in all employee benefit plans
    and programs from time to time whenever sponsored by Company, including, without
    limitation, any group disability, life, major medical and accidental death
    and dismemberment insurance plans and/or benefits and profit sharing, retirement
    or pension plans to the full extent available to any of the Company's other
    employees through the Term of this Agreement.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company will obtain, and maintain
    during the term of this Agreement, on Executive's life an additional term
    life insurance policy for his benefit, at Company's sole cost, in the amount
    of $800,000.&nbsp; Executive shall designate a beneficiary or beneficiaries
    from time to time.&nbsp; If Executive fails to designate a beneficiary, the
    beneficiary shall be Executive's estate.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall be entitled
    to four (4) weeks of vacation each year that he is employed hereunder during
    which vacation his annual salary shall be paid in full.&nbsp; Any vacation
    not taken by Executive shall carryover into the succeeding year or in accordance
    with the Company's executive employee policies in effect from time to time.&nbsp;
    All unused and accrued vacation shall be paid to Executive (or Executive's
    estate) upon Executive's termination of employment.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company shall provide Executive
    with up to 5 days of paid sick leave each year; unused sick days shall not
    carryover into the succeeding year.&nbsp; Company also shall provide Executive
    with holiday pay, as provided by Company to its other executives.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Expenses</u></i></b>.&nbsp; Executive will be entitled to be paid
    or reimbursed for all expenses incurred by Executive in connection with Executive's
    responsibilities to Company, including, without limitation, administrative,
    travel, lodging, food, and entertainment.&nbsp;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Confidential Information</u></i></b>. Executive shall not, during
    the Term, disclose, except as required or necessary in the course of his employment
    by Company or as otherwise authorized by Company, any Confidential Information
    (as defined herein).&nbsp; "<b><i>Confidential Information</i></b>" shall
    mean any information existing as of the date of this Agreement, or thereafter
    developed, in which Company has a proprietary interest, including, but not
    limited to, information relating to its patents, technology, research and
    development, technical data, trade secrets, know-how, products, services,
    finances, operations, sales and marketing, customers and customer information,
    licenses, orders for the purchase or sale of products, personnel matters and/or
    other information relating to Company, whether communicated orally, electronically
    or in writing, or obtained by <b></b>Executive as a result of his employment,
    or through observation or examination of the Business.&nbsp; Company and Executive
    agree that the foregoing confidentiality obligations shall not apply to information
    that (i) was known to Executive prior to the receipt of such information,
    (ii) was publicly available at the time of disclosure or subsequently becomes
    available through no fault of Executive, or (iii) was disclosed to Executive
    by a third party who is under no obligation of confidentiality with Company.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><u>Non-Competition Covenant; Non Solicitation Covenant</u></b>&nbsp;&nbsp;&nbsp;&nbsp;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the term of his employment
    and for a period of the longer of (i) one year thereafter or (ii) the period
    of time that Executive is receiving any severance payments under Section 9(ii)
    hereof, Executive agrees that he will not directly or indirectly engage in
    any business, that sells develops software, manufactures or distributes products
    or provides services in the anti- counterfeiting and document security businesses
    or that are engaged in businesses that the same as those sold or provided
    by Company at such time.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Notwithstanding anything herein
    to the contrary, Executive shall not be prevented or limited from (i) investing
    in the stock or other securities of any corporation whose stock or securities
    are publicly owned and regularly traded on any public exchange, (ii) serving
    as a director, officer or member of professional, trade, charitable and civic
    organizations, or (iii) passively investing (not to exceed being a beneficial
    owner of more than 3% of the outstanding Common Stock)&nbsp; his assets in
    such a form and manner as will not conflict with the terms of this Agreement
    and will not require services on the part of Executive in the operation of
    the business of the entities in which such investments are made.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (c)&nbsp; In furtherance of the foregoing, Executive shall not, during the
    aforesaid period of non-competition, directly or indirectly, in connection
    with any business involved in the manufacture, development and/or distribution
    of anti-counterfeiting technology and document security businesses, or any
    business similar to the business in which the Company was engaged, or in the
    process of developing during Executive's tenure with the Company, solicit
    any customer or employee of the Company who was a customer or employee of
    the Company during the tenure of his employment.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (d) If any court shall hold that the duration of non-competition or any other
    restriction contained in this Section 7 is unenforceable, it is our intention
    that same shall not thereby be terminated but shall be deemed amended to delete
    therefrom such provision or portion adjudicated to be invalid or unenforceable
    or, in the alternative, such judicially substituted term may be substituted
    therefor.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Termination of Agreement</u></i></b></p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement shall terminate
    upon Executive's death.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company may terminate this Agreement
    upon Executive's "total disability" ("Disability"), which shall mean his incapacity
    due to physical or mental illness or disability, which renders him absent,
    or unable to perform, his duties hereunder on a full time basis for a period
    of six (6) months, whether consecutive or cumulative, within any twelve (12)
    month period.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company may terminate this Agreement
    for "Good Cause" as defined below upon thirty (30) days prior written notice
    to Executive, which notice shall specify the reason(s) for termination.&nbsp;
    For purposes of this Agreement, "<b><i>Good Cause</i></b>" means (i) willful
    disobedience by the Executive of a material and lawful instruction of the
    Board of Directors of the Company; (ii) conviction of the Executive of any
    misdemeanor involving fraud or embezzlement or similar crime or any felony;
    (iii) an order is entered by the Securities and Exchange Commission, a state
    regulatory agency&nbsp; or an exchange on which the Company's securities are
    traded finding that Executive has violated the securities laws; (iv)&nbsp;
    breach by the Employee of any material term, condition or covenant of this
    Agreement; (v)&nbsp; fraud or&nbsp; gross negligence in the performance of
    his duties to the Company; or (vi)&nbsp; excessive absences from work, other
    than for illness or Disability, in the case of breach which is capable of
    being cured, is not cured within thirty (30) days after Company has provided
    Executive with written notice thereof.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive may terminate this
    Agreement upon sixty (60) days prior written notice to the Company.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive may terminate this
    Agreement at any time, on 30 days advance written notice to Company, for "<b><i>Good
    Reason</i></b>" which shall mean the occurrence of one or more of the following
    events without Executive's prior written consent:</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; a Change in Control occurs
    with respect to Company;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; excluding the role or title
    of Chief Financial Officer which the Parties expect to occur,&nbsp; any change
    in Executive's status, title, authorities or responsibilities (including reporting
    responsibilities) which represents a demotion from Executive's status, title,
    position or responsibilities (including reporting responsibilities) as of
    the date of this Agreement ); or any removal of Executive from, any of such
    positions, except in the event of Executive's death or Disability;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; the failure by Company to continue
    in effect any incentive, bonus or other compensation plan in which Executive
    participates, unless an equitable arrangement (embodied in an ongoing substitute
    or alternative plan) has been made with respect to the failure to continue
    such plan, or the failure by Company to continue Executive's participation
    therein, or any action by Company which would directly or indirectly materially
    reduce his participation therein or reward opportunities thereunder;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (iv)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; the failure of Company to obtain
    a satisfactory agreement from any successor or assignee of the Company to
    fully assume and agree to perform this Agreement; or</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (v)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; any breach by Company of any
    material term, condition or covenant of this Agreement, which is not cured
    within thirty (30) days after Executive has provided Company with notice thereof.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (f)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    This Agreement may be terminated upon the mutual agreement of Company and
    Executive.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Obligations Following Termination of Agreement</u></i></b>.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If this Agreement is terminated
    pursuant to Section 8(a), (b), (c), (d) or (f), Company shall have no obligation
    to pay any Severance Pay (as defined below) or benefits to Executive; provided,
    however, Company shall be obligated to pay Executive (or in the case of his
    death, his spouse, estate or representative) all unpaid salary, earned bonuses,
    vacation and other benefits accrued through the date of termination of this
    Agreement and shall provide such other benefits, such as health insurance
    continuation coverage under COBRA, as may be required by law.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If this Agreement is terminated
    pursuant to Section 8(e) or otherwise by Company without "Good Cause":</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall be paid
    all unpaid salary, earned bonuses, vacation and other benefits accrued through
    the date of termination and shall receive such other benefits, such as health
    insurance continuation coverage under COBRA, as may be required by law;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall receive as
    severance payment an amount equal to eighteen (18) months of Executive's annual
    salary at the rate in effect as of the date of Executive's termination, payable
    at Executive's sole discretion in either a lump sum at the time of termination
    or on normal pay dates in accordance with the Company's pay policies in effect
    prior to the termination date.&nbsp; In addition, for the eighteen (18) month
    period immediately after the termination of this Agreement, Company shall
    continue to provide and pay the premium for the health insurance provided
    to Executive (and his family, if applicable) immediately prior to the termination
    of this Agreement;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall not be required
    to mitigate damages of the amount of any salary continuation payments provided
    for under this Section by seeking other employment or otherwise, nor shall
    the amount of any payments provided for under this Section be reduced by any
    compensation earned by Executive as the result of employment by another employer
    or by any self employment after the date of termination;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (iv)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All options for Company capital stock
    granted to Executive pursuant to the Incentive Plan including, without limitation,
    Executive's Stock Options, or otherwise, that remain unvested shall immediately
    vest, and Executive shall have a period of one (1) year following termination
    to exercise his vested options, subject to the provisions of the Incentive
    Plan and applicable IRS regulations.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Upon the termination of this
    Agreement for any reason, any and all restrictions (other than restrictions
    which are the result of applicable federal securities laws and regulations
    and those restrictions which Executive has entered into with a third party
    on a contractual basis) on the transfer of shares of Company's capital stock
    then owned by Executive (which shall include any and all option shares unvested
    at the time of the termination) shall be terminated as of the date of termination
    of this Agreement.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company represents and warrants
    to Executive that this Agreement (including the Severance Compensation) have
    been duly approved and authorized by Company's Board of Directors and, therefore,
    the payments to be made hereunder shall not under any circumstances be subject
    to Section 4999 of the Code. Should, however, any of the payments, singly,
    in any combination or in the aggregate, that are provided for hereunder to
    be paid to or for the benefit of Executive be determined or alleged to be
    subject to an excise or similar purpose tax pursuant to Section 4999 of the
    Code, or any successor or other comparable federal, state or local tax law
    by reason of being a "parachute payment" (within the meaning of Section 280G
    of the Code), Company shall pay to Executive such additional compensation
    as is necessary (after taking into account all federal, state and local taxes
    payable by Executive as a result of the receipt of such additional compensation)
    to place Executive in the same after-tax position (including federal, state
    and local taxes) he would have been in had no such excise or similar purpose
    tax (or interest or penalties thereon) been paid or incurred.&nbsp; Without
    limiting the obligation of Company hereunder, Executive agrees to negotiate
    with Company in good faith (at Company's sole cost and expense including attorney's
    fees) with respect to procedures reasonably requested by Company which would
    afford Company the ability to contest the imposition of such excise or similar
    purpose tax.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Change in Control</u></i></b>.&nbsp;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For purposes of this Agreement,
    a "<b><i>Change in Control</i></b>" will be deemed to have occurred with respect
    to Company if:</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; the Board of Directors
    of the Company approves of (A) any merger, consolidation, reorganization or
    other business combination of Company where the pre transaction shareholders
    of the Company do not continue to own 50.1% of the post transaction outstanding
    shares of Common Stock&nbsp; having the right to vote in an election of Company's
    Board of Directors, (B) the sale, exchange, transfer or other disposition
    of all or substantially all of the assets of Company (in one transaction or
    a series of transactions contemplated by any party as a single plan), or (C)
    any plan or proposal for the liquidation or dissolution of Company; or</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; any person or entity, together
    with all "affiliates" and "associates" (as defined in Rule 12b-2 of the Securities
    Exchange Act of 1934 (the "<b><i>Exchange Act</i></b>")) of such person or
    entity, shall become the "beneficial owner" (as defined in Rule 13d-3 of the
    Exchange Act), directly or indirectly, of securities of Company representing
    50.1% or more of either (A) the combined voting power of Company's then outstanding
    securities having the right to vote in an election of Company's Board of Directors
    ("<b><i>Voting Securities</i></b>") or (B) the then outstanding shares of
    all classes of stock of Company.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Personal Guaranty of Indebtedness</u></i></b>.&nbsp; Company and
    Executive acknowledge that Executive has personally guaranteed the following
    Company indebtedness: (a) Line of Credit with Fleet Bank in the amount of
    approximately $80,000; (b) a business loan from CIT, in the principal amount
    of $215,000; and (c) equipment leases with outstanding amounts of approximately
    $78,000 (collectively, the "<b><i>Personally Guaranteed Debts</i></b>").&nbsp;
    Company covenants and agrees to use its best efforts to obtain the release
    of Executive from all of the Personally Guaranteed Debts as soon as practicable.&nbsp;
    If prior to or after the release of the Personally Guaranteed Debts, Executive
    incurs any liability as a result of the Personally Guaranteed Debts, Company
    shall defend, hold harmless and indemnify Executive (or Executive's estate)
    from any and all liability, cost or expense incurred or which will likely
    be incurred by Executive, including, without limitation, principal, interest,
    late fees and attorneys' fees.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 12.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Indemnification.</u></i></b> Company shall, to the maximum extent
    permitted by law, indemnify Executive against all expenses, including, without
    limitation, reasonable attorneys' fees, judgments, fines, settlements, and
    other amounts actually and reasonably incurred in connection with any proceeding
    arising by reason of Executive's employment by Company.&nbsp; Company shall,
    to the maximum extent permitted by law, advance to Executive any expenses
    incurred in defending any such proceeding.&nbsp; Company agrees to obtain
    Directors and Officers Liability insurance, and to include Executive in the
    coverage of this policy.&nbsp; In addition, Company agrees to amend its Certificate
    of Incorporation, as necessary, to authorize Company to indemnify Executive
    as set forth in this Section 12.<b><i><u></u></i></b></p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 13.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Work-for Hire</u></i></b>.&nbsp; Except as otherwise may be agreed
    by the Company in writing, in consideration of the employment of Employee
    by the Company, and free of any additional obligations of the Company to make
    additional payment to Employee, Employee agrees to irrevocably assign to the
    Company any and all inventions, software, manuscripts, documentation, improvements
    or other intellectual property whether or not protectible by any state or
    federal laws relating to the protection of intellectual property, relating
    to the present or future business of the Company that are developed by Employee
    prior to the termination of his/her employment with the Company, either alone
    or jointly with others, and whether or not developed during normal business
    hours or arising within the scope of his/her duties of employment.&nbsp; Employee
    agrees that all such inventions, software, manuscripts, documentation, improvement
    or other intellectual property shall be and remain the sole and exclusive
    property of the Company and shall be deemed the product of work for hire.&nbsp;
    Employee hereby agrees to execute such assignments and other documents as
    the Company may consider appropriate to vest all right, title and interest
    therein to the Company and hereby appoints the Company Employee's attorney-in-fact
    with full powers to execute such document itself in the event employee fails
    or is unable to provide the Company with such signed documents.&nbsp; This
    provision does not apply to an invention for which no equipment, supplies,
    facility, or trade secret information of the Company was used and which was
    developed entirely on Employee's own time, unless (a) the invention relates
    (i) to the business of the Company, or (ii) to the Company's actual or demonstrably
    anticipated research or development, or (b) the invention results from any
    work performed by Employee for the Company.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <b><i><u>Miscellaneous</u></i></b>.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement:</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; shall constitute the entire
    agreement between the parties hereto and supersedes all prior agreements,
    written or oral, concerning the subject matter herein and there are no oral
    understandings, statements or stipulations bearing upon the effect of this
    Agreement which have not been incorporated herein.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; may be modified or amended
    only by a written instrument signed by each of the parties hereto.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; shall bind and inure to the benefit
    of the parties hereto and their respective heirs, successors and assigns.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (iv)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; may not be assigned by either party
    without a written agreement signed by all parties hereto.&nbsp; Any assignment
    not signed by all parties is null and void.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If any provision of this Agreement
    shall be held invalid or unenforceable by competent authority, such provision
    shall be construed so as to be limited or reduced to be enforceable to the
    maximum extent compatible with the law as it shall then appear.&nbsp; The
    total invalidity or unenforceability of any particular provision of this Agreement
    shall not affect the other provisions hereof and this Agreement shall be construed
    in all respects as if such invalid or unenforceable provision were omitted.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement shall be construed
    in accordance with and governed by the laws of the State of New York without
    reference to conflict of laws principles.&nbsp; Any litigation involving this
    Agreement shall be adjudicated in a court with jurisdiction located in Monroe
    County, New York and the parties irrevocably consent to the personal jurisdiction
    and venue of such court.</p>
  <p>(d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All notices and other communications
    under this Agreement must be in writing and must be given by personal delivery
    or first class mail, certified or registered with return receipt requested,
    and will be deemed to have been duly given upon receipt if personally delivered,
    five (5) days after mailing, if mailed, to the respective persons named below:</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    If to Executive:</p>
  <p>Mr. Patrick White<br>
    58 Bosworth Field<br>
    Mendon, New York 14506 &nbsp;&nbsp;&nbsp;&nbsp;</p>
  <p>Any party may change such party's address for notices by notice duly given
    pursuant to this Section.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the event of litigation to
    enforce the terms and conditions of this Agreement, the losing party agrees
    to pay the substantially prevailing party's costs and expenses incurred including,
    without limitation, reasonable attorneys' fees.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (f)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company agrees that it
    will indemnify and hold Executive harmless to the fullest extent permitted
    by applicable law from and against any loss, cost, expense or liability resulting
    from or by reason of Executive's employment hereunder, whether as an officer,
    executive, agent, fiduciary, director or other official of Company, except
    to the extent of any expenses, costs, judgments, fines or settlement amounts
    which result from conduct which is determined by a court of competent jurisdiction
    to be knowingly fraudulent or to constitute some other type of willful misconduct.</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    (g)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement may be executed
    simultaneously in one or more counterparts, each one of which shall be deemed
    an original, but all of which together shall constitute one and the same instrument.</p>
  <p align="center"><b>[SIGNATURE PAGE FOLLOWS]</b></p>
  <br clear="all">
  <p align="center">[Signature Page to Employment Agreement]</p>
  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>IN
    WITNESS WHEREOF</b>, the parties have executed this Agreement on the day and
    year first above written.</p>
  <p><b>COMPANY</b>:&nbsp;&nbsp; <b>Document Security Systems, Inc.</b></p>
  <p>By: <u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</u></p>
  <p>Name: Alan Harrison<br>
    Title: Chairman of Compensation Committee</p>
  <p><b>Executive</b>:</p>
  <p>Patrick White</p>
</div>
<p>&nbsp;</p>
</body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>4
<FILENAME>dmc10qsb063004ex311.htm
<TEXT>
<html>
<head>
<title>dmc10qsb063004ex311</title>
</head>
<body>
<div align="center">
  <hr size="2" width="100%" noshade color="gray" align="center">
</div>
<div align="right"> Exhibit 31.1 </div>
<p align="center"><b>CERTIFICATION PURSUANT TO<br>
  18 U.S.C. SECTION 1350,<br>
  AS ADOPTED PURSUANT TO<br>
  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002</b></p>
<p align="center"><b><u>CERTIFICATION</u></b></p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; I, Patrick
  White, Chief Executive Officer and Chief Financial Officer/Principal Accounting
  Officer of Document Security Systems, Inc. certify that:</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  I have reviewed this quarterly report on Form 10-QSB of Document Security Systems,
  Inc.</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  Based on my knowledge, this quarterly report does not contain any untrue statement
  of a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this quarterly report;</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  Based on my knowledge, the financial statements, and other financial information
  included in this report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this report;</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  I am responsible for establishing and maintaining disclosure controls and procedures
  (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
  and have:</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; designed
  such disclosure controls and procedures, or caused such disclosure controls
  and procedures to be designed under my supervision, to ensure that material
  information relating to the registrant, including its consolidated subsidiaries,
  is made known to me by others within those entities, particularly during the
  period in which this report is being prepared;</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; [reserved]</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; evaluated
  the effectiveness of the registrant's disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the disclosure
  controls and procedures, as of the end of the period covered by this report
  based on such evaluation; and</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; disclosed
  in this report any change in the registrant's internal control over financial
  reporting that occurred during the registrant's most recent fiscal quarter&nbsp;
  that has materially affected, or is reasonably likely to materially affect,
  the registrant's internal control over financial reporting; and</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  I have disclosed, based on our most recent evaluation of internal control over
  financial reporting, to the registrant's auditors and the audit committee of
  the registrant's board of directors (or persons performing the equivalent functions):</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; all significant
  deficiencies and material weaknesses in the design or operation of internal
  control over financial reporting which are reasonably likely to adversely affect
  the registrant's ability to record, process, summarize and report financial
  information; and</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the registrant's internal control over financial reporting.</p>
<p>Date: August 13, 2004</p>
<table border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td> <p>/s/ Patrick White</p></td>
  </tr>
  <tr>
    <td> <hr size="2" width="200" noshade color="gray" align="left"> </td>
  </tr>
  <tr>
    <td> <p>Patrick White, President<br>
        &nbsp;&nbsp; Chief Executive Officer and<br>
        &nbsp;&nbsp; Acting Chief Financial Officer/Principal Accounting Officer</p></td>
  </tr>
</table>
</body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>5
<FILENAME>dmc10qsb063004ex321.htm
<TEXT>
<html>
<head>
<title>dmc10qsb063004ex321</title>
</head>
<body>
<div align="center">
  <hr size="2" width="100%" noshade color="gray" align="center">
  <div align="right"> Exhibit 32.1 </div>
</div>
<p align="center"><b>CERTIFICATION PURSUANT TO<br>
  18 U.S.C. SECTION 1350,<br>
  AS ADOPTED PURSUANT TO<br>
  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</b></p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In connection
  with the Quarterly Report of Document Security Systems, Inc. (the "Company")
  on Form 10-QSB for the three months ending June 30, 004 as filed with the Securities
  and Exchange&nbsp;Commission on the date hereof (the "Report"),&nbsp;I, Patrick
  White, President,&nbsp;certify,&nbsp;pursuant&nbsp;to 18 U.S.C. Section 1350,&nbsp;as&nbsp;adopted
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1)&nbsp;
  The Report fully complies with the requirements of Section 13(a) or 15(d) of
  the Securities Exchange Act of 1934; and</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (2)&nbsp;
  The information contained in the Report fairly presents, in all material respects,
  the financial condition and result of operations of the Company.</p>
<p>Date: August 13, 2004</p>
<table border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td> <p>/s/ Patrick White</p></td>
  </tr>
  <tr>
    <td> <hr size="2" width="200" noshade color="gray" align="left"> </td>
  </tr>
  <tr>
    <td> <p>Patrick White<br>
        Principal Executive Officer and<br>
        Acting Chief Financial Officer/Principal Accounting Officer</p></td>
  </tr>
</table>
</body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>GRAPHIC
<SEQUENCE>6
<FILENAME>dmc_logo.jpg
<TEXT>
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end

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
